Summary
stating that sale of all or substantially all of corporation's assets occurs in "usual and regular course of business" when the inherent nature of the corporation's business and the methods used to conduct that business are such that the corporation in the normal course of events sells all or substantially all of its assets and holding that sale in question was not in the usual and regular course of business because the corporation's business was to rent real estate
Summary of this case from Rudisill v. Arnold White DurkeeOpinion
SC 447, SC 447-A.
April 25, 1974. Rehearing Denied May 23, 1974.
Appeal from the Circuit Court, Madison County, John D. Snodgrass, J.
Watts, Salmon, Roberts, Manning Noojin, Huntsville, for appellant.
Where a code or statute creates a new right or liability that did not exist at common law or under prior statutes, and also provides a specific remedy for the enforcement thereof, as a general rule such statutory remedy is exclusive. Hallock v. Smith, 207 Ala. 567, 93 So. 588; Chandler v. Hanna, 73 Ala. 390; Ex parte Spence, 271 Ala. 151, 122 So.2d 594. Matters of evidence alleged in a pleading need not be stricken on motion unless their allegation is prejudicial. Shirley v. Shirley, 261 Ala. 100, 73 So.2d 77. In eminent domain cases, the narrow issue for the jury's determination, i. e., the amount of the award to the landowners, should not be broadened nor the verdict of the jury influenced by the interjection of immaterial matters, especially matters calculated to be prejudicial. Southern Generating Company v. Leibacher, 269 Ala. 9, 110 So.2d 308. A dissenting stockholder does not have the right to obtain appraisal and payment of his shares where a particular corporate change is made unless the legislature has provided for such right. 19 C.J.S. Corporations § 1586, pp. 1345-1346; Opdyke v. Security Savings and Loan Company, 157 Ohio St. 121, 47 Ohio Ops. 97, 105 N.E.2d 9; In re Miglietta, 287 N.Y. 246, 39 N.E.2d 224, reh. den. 288 N.Y. 661, 42 N.E.2d 749. The Model Business Corporation Act is in accord with the majority of jurisdictions in providing for dissent and payment in the case of merger or consolidation and the sale of assets, and in not providing for dissent and payment in the case of amendment of articles and other corporate changes. Comment to § 73 of Model Business Corporation Act, 1957 Revision, Model Business Corporation Act Annotated, p. 389, published for American Bar Foundation, by West Publishing Company, 1960. The Model Business Corporation Act does not provide for payment to a minority dissenting stockholder for his shares upon a merger of a wholly owned subsidiary into the parent. In such event, the change is formal only, the shareholder's essential position is unchanged, and there is no logical reason for granting appraisal rights. Comment to § 73 of Model Business Corporation Act, 1957 Revision, pp. 389-390. Generally, a corporation which is a going concern cannot dispose of all of its assets unless all stockholders agree to the sale, or unless the sale is authorized by statute or by charter. Forsyth v. Alabama City, G A Railroad Company, 207 Ala. 488, 93 So. 401; 19 C.J.S. Corporations § 1040, p. 536; 14 Am.Jur., Corporations, § 428, 9 A.L.R.2d 1307. If parties exchange one article for another, the price or value not being measured in money terms, the transaction is an exchange or barter, and not a sale. Forsyth v. Alabama City, G A Railroad Company, et al. (1922), 207 Ala. 488, 93 So. 401; Hillyard v. Leonard (Mo.), 391 S.W.2d 211, 220; Bartlett v. Slater, 211 Mass. 334, 97 N.E. 991; Gaunt Harris v. United States, C.C.A.Ky., 6 Cir., 110 F.2d 651, 652; Blau v. Mission Corporation, C.C.A.N.Y., 2 Cir., 212 F.2d 77, 80; C. I. R. v. Lincoln-Boyle Ice Company, C.C.A., 7 Cir., 93 F.2d 26, 28. The rule forbidding a sale of all of the corporate property without the consent of the majority stockholders does not apply where the power to make such sale is conferred by the charter of the corporation, or by statute. Geddes v. Anaconda Copper Mining Company, 157 C.C.A. 417, 245 F. 225, rev. on other grounds, 254 U.S. 590, 41 S.Ct. 209, 65 L.Ed. 425; Lange v. Reservation Mining and Smelting Company, 48 Wn. 167, 93 P. 208; Epstein v. Gosseen, 235 App. Div. 33, 256 N.Y.S. 49; Jeppi v. Brockman Holding Company, 34 Cal.2d 11, 206 P.2d 847, 9 A.L.R.2d 1297; Fontaine v. Brown County Motors Company, 251 Wis. 433, 29 N.W.2d 744, 174 A.L.R. 694; Peoples Trust Company v. Consumers Ice and Coal Company, 283 Pa. 76, 128 A. 723, Anno. 60 A.L.R. 1210; Anno. 9 A.L.R.2d 1312-1315; 18 C.J.S. Corporations § 515a, p. 1195. A corporation which has charter powers to dispose of its property and to dissolve its corporate existence has power to accept stock in another corporation in payment of the purchase price, provided the transaction is bona fide. Metcalf v. American School Furniture Company (1903), C.C.N.Y., 122 F. 115. A sale of most of the corporation's assets does not need stockholder consent when the corporation will continue in the same business. Corporation Guide, § 2703 (published by Prentice-Hall, Inc.); Frankel v. Tremont Norman Motors Corporation (1960), 8 N.Y.2d 901, 204 N.Y.S.2d 146, 168 N.E.2d 823. A transfer of assets of one corporation to another, newly organized corporation, in a reorganization, is not a sale of assets. United States v. Niagara Hudson Power Corporation, D.C.N.Y., 53 F. Supp. 796; Craddock-Terry Company v. Powell, 180 Va. 242, 22 S.E.2d 30, 35; United States v. Brown Fence and Wire Company, D.C. Ohio, 9 F. Supp. 1008.
Ford, Caldwell, Ford Payne and William T. Galloway, Jr., Huntsville, for appellees.
The Alabama Code gives dissenting stockholders the right of appraisal not only in a sale or exchange of all or substantially all of the assets of a corporation but also in cases of corporate mergers or consolidations. Code of Alabama, Title 10, Section 21(62); Code of Alabama, Title 10, Section 21(73). In most jurisdictions, if the parent corporation is merged into the subsidiary, the dissenting shareholders of each corporation have a right to appraisal and buy-out. Cavitch, Business Organizations, Vol. 6, Sec. 112.02(1) and statutes cited therein. Shareholders cannot, as a rule, be forced into a new enterprise; nor can they be compelled to take in payment for their stock, the stock of the consolidated company. 19 Am.Jur.2d Sec. 1514; 19 C.J.S. Corporations § 1615, pp. 1376-1377; Clearwater v. Meredith, 1 Wall. (U.S.) 25, 17 L.Ed. 604; Moy v. Colonial Finance Corp., 283 Pa. 323, 129 A. 115, 40 A.L.R. 271. Statutory provisions giving to dissenting stockholders in cases of merger, consolidation, reorganization, or sale of corporate assets, the right to have the stock appraised and sold to the corporation are construed liberally in favor of such stockholders. 19 Am.Jur.2d Sec. 511, p. 50; Bache Co. v. General Instrument Corp., 42 N.J. 44, 198 A.2d 759; Bohrer v. U.S. Lines Co., 92 N.J. 592, 224 A.2d 348. A distribution of all assets is a "winding up of the affairs" of the corporation and is synonymous with "liquidation". Craddock-Terry Co. v. Powell (1943), 181 Va. 417, 25 S.E.2d 363; 19 Am.Jur.2d Sec. 1586, p. 593. The theory of appraisal statutes appears to be that dissenting stockholders are entitled to the value of their stock as the corporation was originally constituted, in compensation for the carrying out, over their objection, of a radical change in the enterprise. 48 A.L.R.3d 430, at p. 436 (1973). Alleged erroneous admission of evidence does not constitute ground for reversal where such evidence does not affect the sole question at issue in the action. Burgin v. Phillips (1961), 272 Ala. 78, 128 So.2d 491; Aetna Insurance Co. v. Kacharos (1933), 226 Ala. 504, 147 So. 438; Decker v. Hays (1968), 282 Ala. 93, 209 So.2d 378. The rule against pleading matters of evidence must be taken with the qualification that facts essential to show a cause of action, and therefore necessary to be pleaded, are often evidentiary in character. 71 C.J.S. Pleadings § 12, p. 33; Small v. Small (1920), 107 Kan. 122, 190 P. 623. It is well settled in Alabama that motions to strike out irrelevant portions of pleadings are directed to the sound discretion of the trial court and may be overruled without injury. Gulf American Fire Casualty Company v. A. R. Gowan (1969), 283 Ala. 480, 218 So.2d 688; Clements v. Olive (1962), 274 Ala. 210, 147 So.2d 818; Gaines v. Stephens (1946), 248 Ala. 572, 28 So.2d 789; Holloway v. Davis (1967), 44 Ala. App. 346, 208 So.2d 794; cert. den. 282 Ala. 726, 208 So.2d 799. As to (attorneys') opening statements, the rule in Alabama is that the parties are entitled to outline what they expect to prove unless it is manifest that such proof is incompetent. Mazer v. Brown (1953), 259 Ala. 449, 66 So.2d 561; Atlanta Life Insurance Co. v. Canady (1932), 225 Ala. 377, 143 So. 561; Prudential Ins. Co. v. Calvin (1933), 227 Ala. 146, 148 So. 837. A corporation cannot sell all of its property, or even a part thereof so integral as to be essential for the transaction of its ordinary business, because such a sale is wholly or partly an act of self-destruction and a practical dissolution without compliance with law. In Re Timmis (1910), 200 N.Y. 177, 93 N.E. 522; In Re Kunin (1954), 306 N.Y. 967, 120 N.E.2d 228; Stiles v. Aluminum Products Co. (1949), 338 Ill. App. 48, 86 N.E.2d 887. Stockholders who do not consent to a proposed reorganization to be effectuated through a new corporation cannot be compelled to participate; they cannot be compelled to take new securities in the proposed corporation in exchange for their stock, and this even though the reorganization involved a sale of all the assets of the old corporation to the new under statutory authority. Such stockholders are, however, entitled to such relief as the circumstances warrant. They may recover the value of their stock as of the time of the sale and reorganization, but values added to the stock by reason of the reorganization are not to be considered. 19 C.J.S. Corporations § 1586, p. 1342.
These suits were filed in the Circuit Court of Madison County, pursuant to the provisions of Title 10, § 21(62), Code of Alabama 1940, Recompiled 1958. They were begun by summons and complaint, were consolidated for trial, and were tried before a jury. The jury returned a verdict assessing the fair value of Cummings' 200 shares of capital stock in Huntsville at $445.50 per share. The trial court entered judgment against Huntsville in the amount of $102,655.40 as the fair value of Cummings' 200 shares of stock as of December 22, 1969, as found and assessed by the jury, plus interest at 6% from December 22, 1969, to July 5, 1972, the date of the judgment. Huntsville filed a motion for new trial which was denied by the trial court. Huntsville appeals to this court. The controversy arose out of the following facts.
Huntsville Industrial Associates, Inc. was incorporated in Alabama on February 23, 1957, primarily as a real estate investment company. Its immediate purpose was investing in property formerly owned and operated by Lincoln Mills as a cotton mill. It used the property for a short period as a cotton warehouse. Subsequently the property was converted for use by tenants for light manufacturing and office space. Huntsville acquired other real estate for rental purposes. In early 1969, Huntsville's board of directors appointed a committee to study the feasibility of reorganizing the company as a real estate investment trust. Subsequently an Alabama Business Trust was organized by the management of Huntsville under the name and style of Huntsville Real Estate Investment Trust. On November 25, 1969, Huntsville's board of directors and the trustees of the Trust entered into an agreement for the reorganization of Huntsville whereby all of its assets would be conveyed to the Trust, which was to assume the liabilities of Huntsville; shares of beneficial interest in the Trust would be issued to Huntsville in consideration of the assets transferred to the Trust, and Huntsville liquidated and dissolved as a corporation; shares of beneficial interest in the Trust received by Huntsville in exchange for its property would be issued to stockholders of Huntsville according to their proportionate interest. On December 23, 1969, the agreement was ratified and approved by the majority of Huntsville's stockholders at a special meeting of stockholders called for that purpose. Cummings, who owned 200 shares in Huntsville, dissented from the action taken at the stockholders meeting. He made a demand in writing that Huntsville pay him the fair value of his stock. He and Huntsville were unable to agree on a fair value of his stock, whereupon he filed his suit by summons and complaint, demanding a trial by struck jury and claiming of Huntsville the sum of $150,000.00. A paragraph in Cummings' complaint which was amended alleged:
"Prior to or at the meeting of the stockholders at which the sale or exchange was authorized, the plaintiff filed written notice of his objection thereto and did not vote in favor thereof. Within ten (10) days after the date on which the vote was taken, plaintiff made written demand on defendant, Huntsville Industrial Associates, Inc., a corporation, to pay him the fair value of his shares as of the day prior to the date on which the vote was taken. Instead of offering to plaintiff the fair value of his stock, to-wit: One hundred fifty thousand 00/100 ($150,000.00 Dollars or Seven hundred fifty 00/100 ($750.00) Dollars per share, the defendant corporation offered plaintiff the purported book value of plaintiff's shares, or Forty thousand seven hundred twenty-eight 00/100 ($40,728.00) Dollars at Two hundred three 64/100 ($203.64) Dollars per share."
Huntsville filed a plea in abatement on the ground that the suit should be by petition rather than summons and complaint; a motion to strike the allegations of the offer noted above as being irrelevant, frivolous, and calculated to influence and prejudice the jury; a motion to strike the demand of trial by jury. A demurrer to the plea in abatement was sustained and the motions were denied by the trial court. The demurrers to the complaint as amended were overruled. Huntsville filed a plea of general denial, a plea admitting the board of directors and stockholders authorized and approved a sale or exchange of Huntsville's assets but said the sale or exchange of the assets and property were in connection with the dissolution and liquidation of Huntsville and "therefore, by the express terms of the provisions of Section 21(62) of Title 10, of the Code of Alabama 1940 (Recompiled 1958) the Plaintiff is not entitled to the relief sought in his complaint." A further plea said that the complaint "did not state the number and the class of the shares of the corporation which were owned at the time by plaintiff." Issue was joined and the trial began.
During the opening statement the attorney for Cummings, over the objection of Huntsville, was allowed to read to the jury the portion of the complaint referring to the offer made by Huntsville to Cummings to buy his stock at its book value.
The issues by which this appeal may be decided are classified as follows:
I. Whether Cummings, a minority stockholder, is entitled to the benefit of Title 10, § 21(62), Code of Alabama 1940, Recompiled 1958, under the facts of this case.
II. Whether it was error to deny motion to strike the matter relating to the offer alleged in the complaint, coupled with the fact that the trial judge allowed Cummings to read this allegation in the complaint to the jury in his opening statement.
I.
Act No. 414, Acts of Alabama, Volume 2, 1959, known as the "Alabama Business Corporation Act" became effective on November 13, 1959. Section 62 has been codified at Title 10, § 21(62), Code of Alabama 1940, Recompiled 1958.
§ 62. Rights of dissenting stockholders upon sale or exchange of assets. — In the event that a sale or exchange of all or substantially all of the property and assets of a corporation otherwise than in the usual and regular course of its business, or in connection with the dissolution and liquidation of the corporation, is authorized by a vote of the stockholders of the corporation, any stockholder who shall have filed with the corporation a written objection thereto, prior to or at the meeting of stockholders at which the sale or exchange is authorized, and who shall not have voted in favor thereof, may, within ten days after the date on which the vote was taken, make written demand on the corporation for the payment to him of the fair value of his shares as of the day prior to the date on which the vote was taken. If the sale or exchange is effected, the corporation shall pay to such stockholder, upon surrender of his certificate or certificates representing such shares, the fair value thereof. Such demand shall state the number and class of the shares owned by such dissenting stockholder. Any stockholder failing to make demand within the ten-day period shall be bound by the terms of the sale or exchange.
Within ten days after the sale or exchange is effected, the corporation shall give notice thereof to each dissenting stockholder who has made demand as herein provided for the payment of the fair value of his shares.
If within thirty days after the date on which the sale or exchange was effected the value of such shares is agreed upon between the dissenting stockholder and the corporation payment therefor shall be made within ninety days after the date on which the sale or exchange was effected, upon the surrender of his certificate or certificates representing such shares. Upon payment of the agreed value, the dissenting stockholder shall cease to have any interest in such shares or in the corporation.
If within such period of thirty days the stockholder and the corporation do not so agree, then the dissenting stockholder may, within sixty days after the expiration of the thirty-day period, file a petition in any circuit court or court exercising like jurisdiction asking for a finding and determination of the fair value of such shares, and shall be entitled to judgment against the corporation for the amount of such fair value as of the day prior to the date on which such vote was taken approving such sale or exchange, together with interest thereon to the date of such judgment. The judgment shall be payable only upon and simultaneously with the surrender to the corporation of the certificate or certificates representing such shares. Upon payment of the judgment, the dissenting stockholder shall cease to have any interest in such shares or in the corporation. Unless the dissenting stockholder shall file such petition within the time herein limited, such stockholder and all persons claiming under him shall be bound by the terms of the sale or exchange.
The right of a dissenting stockholder to be paid the fair value of his shares as herein provided shall cease if and when the corporation shall abandon the sale or exchange or the stockholders shall revoke the authority to make such sale or exchange.
Shares acquired by the corporation pursuant to the payment of the agreed value thereof or to payment of the judgment entered therefor, as in this section provided, may be held and disposed of by the corporation as in the case of other treasury shares.
We are called upon to construe the meaning of this section of the Act. In this regard this is a case of first impression. In construing a legislative act the court must try to give effect to the true legislative intent. The court should give the act before it a liberal and reasonable construction.
The first sentence of this section provides, in the event that a sale or exchange of all or substantially all of the corporation property and assets otherwise than in usual and regular course of its business, or in connection with the dissolution and liquidation of the corporation, a dissenting stockholder may, within ten days after vote of the stockholders in favor of the sale or exchange, make written demand on the corporation for payment of the fair value of his shares. The words, "usual and regular course of business" must be construed within the context of their common usage. "Usual" is defined by Webster's Third New International Dictionary, Unabridged, as an occurrence in ordinary practice or in the ordinary course of events. "Usual" describes that which happens frequently or in the normal course of events. "Regular course of business" as stated by Mr. Justice Douglas in Palmer v. Hoffman, 318 U.S. 109, 63 S.Ct. 477, 87 L.Ed. 645 (1943) must find its meaning in the inherent nature of the business in question and in the methods systematically employed for the conduct of the business as a business.
We are of the opinion that the legislature intended by this Act to give a dissenting stockholder the right to demand payment of the fair value for his shares of stock in the corporation where the sale or exchange includes the transfer of all or substantially all of the corporation's capital or fixed assets as opposed to the sale or exchange of all or substantially all of merchandise inventory or stock in trade. Here the primary purpose of Huntsville was the rental of real estate. Its land and buildings were capital assets held by the corporation for the production of income. Its "boiler plate" objects consisted of the corporation's having the power to buy and sell real and personal property, mortgage, pledge, lease, or "otherwise dispose of such properties, or any part thereof." There are other objects of the corporation which are found generally in every corporate charter. The fact remains, however, that the primary function of Huntsville was rental of real estate. Rental of its property was its "usual" and "regular course of business" and a reorganization was out of the scope of its usual and regular course of business.
There was no liquidation or dissolution of the corporation within the common meaning of those terms. Dissolution means terminating the corporate business by collecting and distributing the corporate assets — not stock in another corporation — to the stockholders. Liquidation means to wind down the corporate business, pay the debts, and distribute the remaining property and assets to the stockholders in cash or in kind.
We conclude that the reorganization of Huntsville was a sale or exchange of all or substantially all of the property and assets of the corporation otherwise than in the usual and regular course of business, and was not in connection with the dissolution and liquidation of the corporation. The dissenting stockholder was entitled to bring his suit.
II.
The complaint's allegation of an offer to purchase the stock at its book value, which was allowed by the court to be read to the jury over objection, was prejudicial to the defendant Huntsville's case. The offer to purchase could not be admitted as evidence. Tennessee Coal, Iron and Railroad Co. v. The State, 141 Ala. 103, 37 So. 433 (1904); Bates v. General Steel Tank Co., 36 Ala. App. 261, 55 So.2d 213, cert. denied 256 Ala. 466, 55 So.2d 218 (1951). And it was not offered in evidence. It was, nevertheless, a unique way to plant in the minds of the jury the fact that Huntsville had offered to pay Cummings $40,728.00 for his stock. It gave the jury a base on which to begin their deliberation. This prejudice was compounded by a portion of the court's oral charge where it referred to the offer:
"The complaint is not evidence, it is not to be taken by you as evidence. It is simply the manner by which a plaintiff states a claim against a defendant or defendants. And the plaintiff here in the pertinent portion of the complaint, and in each complaint, says in essence that he gave written notice of an objection to the action that the stockholders took on December 23, 1969, and that he demanded his fair value of his shares of stock; that he was offered the book value of some $40,000.00 or $203.00 a share; and that he was unable to agree with the corporation as to the fair value of the shares of stock; and that consequently he brought suit for a determination of the fair value of his share of stock, which he alleges amounted to $150,000.00."
The offer to purchase at book value was immaterial. As this case was tried, the issue of fact for the jury was to determine the fair value of the stock. The verdict of the jury should not be influenced by the interjection of immaterial matters, especially matters calculated to be prejudicial. (See Southern Electric Generating Company v. Leibacher, 269 Ala. 9, 110 So.2d 308 (1959), an eminent domain case where the court spoke of the narrow issue of determining fair market value of land being for the jury.) The reference to the offer in the complaint was prolix and should have been stricken. It was prejudicial to allow reference to it by counsel in his opening statement to the jury.
We pretermit discussion of the evidence establishing the fair value of the stock because of the likelihood of a new trial.
Reversed and remanded.
HEFLIN, C. J., and MERRILL, HARWOOD, and MADDOX, JJ., concur.