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District Court of Appeal, First District, Division 2, California.


Civ. 11024

Decided: May 16, 1939

Rosendale & Thomas, of Salinas, and Silas W. Mack and John Milton Thompson, both of Monterey, for appellants. J.A. Bardin and J.T. Harrington, both of Salinas, and McCutchen, Olney, Mannon & Greene, of San Francisco, for respondent.

Plaintiff sued to recover possession of certain certificates of stock of the Custom House Packing Corporation, and to quiet title thereto as against the defendants. The cause was tried by the court without a jury, and plaintiff had judgment.

The facts are not in material dispute. The stock certificates were purchased by plaintiff from two stockholders to whom they had been regularly issued by the corporation. When the proceeding was commenced they were in actual possession of the defendant bank, which held them for the other defendants, who, in turn, claimed them as trustees under a voting trust agreement to which these two stockholders were parties. This agreement, executed on August 19, 1936, by a majority of the holders of the issued and outstanding stock of the corporation, called for the endorsement and delivery by the subscribing holders of their stock certificates to the three trustees named therein and provided for the transfer of such shares upon the books of the corporation into the names of these trustees. Voting trust certificates were to be issued by the trustees representing the beneficial interest of each holder in the stock of the corporation. These certificates were made transferable and called for the payment by the trustees of proportionate dividends on the corporation's stock, such payments to be made to the “registered owners” of such certificates appearing on the “transfer books” of the trustees. Though the agreement provided that, upon the transfer of the stock to the trustees upon the books of the corporation the trustees should be entitled to vote them, no such transfer had been made at the time of trial. It is conceded that the trustees had no permit from the corporation commissioner to issue the trust certificates, and no permit to take subscriptions for, or make a contract for, their issuance. Just two questions are presented on this appeal—whether these certificates are “securities” within the meaning of the Corporate Securities Act, and whether, if the provision for the issuance of such certificates be void for that reason, it is a separable provision of the entire contract.

The trial judge held adversely to the trustees upon both of these issues, and we are in full accord with his ruling. The parties agree that there are no authorities of this state covering the first question and that the case is one of first impression. It is a question to be resolved by an interpretation of the Corporate Securities Act (Deering's Gen.Laws, Act 3814). The creation of such trusts is authorized by section 321a of the Civil Code, which provides in part: “Shares of stock in any corporation may be transferred to a trustee or trustees in order to confer upon them the right to vote and otherwise represent such shares.” Fletcher, in his Cyclopedia of Private Corporation, volume 5, page 267, says: “The modern voting trust, especially one formed under statutes enacted in several states, transfers to and vests in the trustees the stock and the legal title to it, and the stockholders receive voting trust certificates in lieu of their holdings so transferred.” (Italics ours.)

Section 16 of the Corporate Securities Act provides that “Every security issued by any company, without a permit of the commissioner authorizing the same then in effect * shall be voidable.” Section 2(a) 7 provides: “The word ‘security’ shall include any stock, bond, note * certificate of interest or participation * any transferable share * or beneficial interest in title to property, profits or earnings, *.” (Italics ours.) Section 26, which fixes the method for the estimate of fees to be charged for filing an application with the commissioner for a permit to issue a “security”, provides: “For the purpose of determining the above fees [subd. (c)]: Interim or voting trust certificates shall be deemed to have a value equal to the aggregate value of the securities to be represented by said interim or voting trust certificates.”

We can draw but one conclusion from these provisions of the act, and that is that the legislature contemplated the inclusion of such voting trust certificates within its definition of security—either as a “certificate of interest or participation” or a “transferable share”, or a “beneficial interest in * profits or earnings”. It would serve no purpose to further define the term, or to confine it to any one of the specifications above named. It is sufficient to say that under any one of them the certificates in suit would come under the head of “securities” within the meaning of the act. This being so, they were not subject to issuance by the trustees without the commissioner's permit because, the trust having been created in part for the purpose of carrying on the business of the corporation, the trustees come within the definition of “company” (sec. 2 [a], subd. 3) as that word is used in the prohibitory provisions of section 16. Being void for this reason, the equitable title to the stock rested in the original stockholders and, since they had transferred to the trustees under a void agreement, they were at liberty to sell and assign to the plaintiff their full title and interest.

The second question is one of both law and fact. The trial court, upon all the evidence, found that the provision for the issuance of the voting trust certificates was an inseparable part of the entire agreement “without which first parties thereto would not have entered into said contract and that said provision was one of the principal considerations for entering into said contract”. With this finding of fact the trial court rightly drew the conclusion that the entire contract was void. Such conclusion is in harmony with section 1608 of the Civil Code, which reads: “If any part of a single consideration for one or more objects, or of several considerations for a single object, is unlawful, the entire contract is void.”

The judgment is affirmed.

NOURSE, Presiding Justice.