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District Court of Appeal, Fourth District, California.

TU-VU DRIVE-IN CORP. et al., Plaintiffs and Appellants, v. Della M. ASHKINS et al., Defendants and Respondents.

Civ. 6977.

Decided: October 28, 1963

Higgs, Fletcher & Mack and Vincent E. Whelan, San Diego, for plaintiffs and appellants. Pentoney & Sjogren and Howard A Pentoney, San Diego, for defendants and respondents.

Appellants brought this action in declaratory relief to resolve the validity of by-laws regulating future transfers of shares of the Tu-Vu Drive-In Corporation which had been adopted by the sole written consent of the majority shareholder, appellant Sam J. Russo, and the effect of said by-laws on the option to purchase the Tu-Vu shares granted by the respondent Della M. Ashkins to the respondent Sero Amusement Company, a competitor.

After a trial, judgment was entered for the respondents, from which the appellants appeal.

The Tu-Vu Drive-In Corporation was organized in 1958, and 1,275 shares (or 54%) were purchased by Sam J. Russo, 913 shares (or 39%) were purchased by Della M. Ashkins, one of the respondents, and 156 shares (or 7%) were purchased by Adeline Israel, and were placed in escrow with the Commissioner of Corporations.

Eddie Ashkins, husband of respondent Della M. Ashkins, was a director of the Tu-Vu Corporation. On June 24, 1960, a new by-law was adopted by written consent of Sam J. Russo in the exercise of his majority voting power providing that no sale or transfer of such Tu-Vu shares by any shareholder would be valid unless the shares were first offered to the other shareholders, and if refused, to the corporation, itself.

On July 8, 1960, the board of directors, by resolution, provided for an application to be made to the Commissioner of Corporations to replace the original shares with new certificates embodying the new by-law. Director Eddie Ashkins was not present at this meeting or at the subsequent meetings on October 14, 1960, and June 23, 1961.

Appellant Russo obtained an option to purchase respondent Ashkins' 913 shares on December 7, 1960, but on failing to make the payments provided for under the option, relinquished the option on January 7, 1961. Then on May 1, 1961, the respondent Ashkins granted an option to respondent Sero Amusement Company to purchase said 913 shares of stock and no attempt has been made to exercise said option.

Again on June 23, 1961, the by-law of June 24, 1960, was amended, with the sole written consent of appellant Russo through his majority power, to provide that before the above shares of stock could be transferred to an outsider they first had to be offered to Tu-Vu Corporation and its shareholders at the same price and under the same terms and conditions as offered to the outsider.

This action was then brought to declare the validity of the 1960 by-law as amended in 1961, and the trial judge held that the respondent Ashkins, as a minority shareholder, had a vested right to retain her shares free from any restrictions on transfers other than those imposed when the shares were originally issued.

On appeal, the appellants claim that the shareholders may have the right of first refusal to purchase the stock and that any subsequent transfer of the shares may be so restricted by the by-laws, that there were no damages done, and such shares may be regulated and restricted as to sale after originally issued to grant to other shareholders or the corporation the first right of refusal to purchase.

After a trial the court found that the 1960 and 1961 amendments were adopted by the written consent of Sam J. Russo; that the respondent Della M. Ashkins had no knowledge of nor had received no notice of the amendments, nor had any attempt to so notify her been made and that such was admitted; that there was no provision in the original by-laws or articles of incorporation limiting the right of the stockholder to sell or transfer said stock; that the new share certificates restricting their sale or transfer are now in escrow with the Commissioner of Corporations; and as a conclusion of law, the court found that the restrictions on said stock do not apply to any stockholder who had not consented thereto and that such by-law amendments did not affect the transferability of the stock owned by respondent Ashkins.

The most general and common restriction with regard to the transferability or sale of stock to an outsider is that the stock must first be offered to shareholders or the corporation before being offered to outsiders. (See 1 Hornstein, Corporation Law and Practice, § 193, p. 250.) Such restrictions are generally held to be valid where the shareholders have consented thereto by contract or otherwise. (1 Hornstein, Corporation Law and Practice, § 192, p. 244.)

Corporations Code section 2404 provides that as far as a transferee is concerned, any such restrictions must be stated on the face of the certificate.

Section 501, subdivision (g), of the Corporations Code (which modifies section 500) states that by-laws may make provision not in conflict with law or its articles for ‘Special qualifications of persons who may be shareholders, and reasonable restrictions upon the right to transfer or hypothecate shares.’ (See Hornstein, supra, § 199, p. 270)

In Casady v. Modern Metal etc. Mfg. Co., 188 Cal.App.2d 728, 733, 10 Cal.Rptr. 790, 793, the court quoted Bornstein v. District Grand Lodge, No. 4, 2 Cal.App. 624, 84 P. 271, where ‘the court held that a beneficiary certificate is a contract and that the existing by-laws of a private corporation are a part of the contract’; that “* * * no alteration could be made which would infringe a right already given and secured by the contract of the corporation”; and that such corporation cannot repeal a bylaw to impair rights which have been given and have become vested by virtue of a later amendment, and, “A by-law, like a statute, will not be construed as intended to operate retrospectively unless express provision is found therefor in its terms; and if its language is such that by giving it a retrospective operation it would have the effect to annul or impair an existing obligation on the part of the corporation, such by-law will be held unreasonable and in contravention of existing laws [citations] * * *.' 2 Cal.App. at pages 627–628, 84 P. at page 272.' (Italics omitted.)

Mancini v. Patrizi, 110 Cal.App. 42, 44–45, 293 P. 828, is authority for the general proposition that a corporation is estopped to assert against a bona fide purchaser for value, without notice, any restrictions on the right to transfer stock, and that by-laws are not binding on third persons having no knowledge of them. This would particularly apply to respondent Sero Amusement Company.

In Mancini v. Patrizi, 87 Cal.App. 435, 439–440, 262 P. 375, the court held that the by-laws must not be unreasonable in their practical application nor does the law require idle acts, and that a by-law prescribing as a condition to the right to transfer stock that an offer be made, the acceptance of which is forbidden, is manifestly unreasonable and consequently invalid.

In Mancini v. Setaro, 69 Cal.App. 748, at 753, 232 P. 495, 497 the court held that it would be reasonable to require the stock to be presented to the corporation for examination and cancellation before transfer, but that the additional requirement that the holder must offer the stock for sale to the corporation before transfer is difficult of comperhension and that such a restriction could not be binding on the plaintiff in that action. The court went on to hold that while such restrictions could certainly be valid where properly imposed, such a restriction is an invalid restraint on alienation and that while such a restriction might be invalid as a by-law, it could be binding on the stockholders who had consented thereto.

By-laws must be reasonable and must operate equally upon all persons of the same class. (Lindsay-Strathmore Irrigation Dist. v. Wutchumna Water Co., 111 Cal.App. 688, 701, 296 P. 933.)

Even in 1858, in People ex rel. Bosqui v. Crockett, 9 Cal. 112, 115, the court was of the opinion that a by-law having been passed two days after the transfer, with regard to a lien, could have no retrospective operation and the court doubted very much that a purchaser who has no notice of a by-law takes the stock subject to the lien. (See 12 Cal.Jur.2d, Corporations, § 78, p. 660.)

Angell on Corporations, 8th edition, section 342, is quoted in Vannucci v. Pedrini, 217 Cal. 138, at page 144, 17 P.2d 706, as stating that “What may be bad as a by-law, as against common right, may be good as a contract; since a man may part with a common right voluntarily of which it would be impolitic and unjust to deprive him by a by-law passed without his assent, or, perhaps, knowledge, by those who might not know or would not consult his individual interests.” In Vannucci v. Pedrini, supra, it is further said at page 144, 17 P.2d at page 708 quoting from People's Home Savings Bank v. Sadler, 1 Cal.App. 189, 197, 81 P. 1029, 1032:

“While provisions for regulating the rights of the members of a corporation as between themselves, duly adopted by a majority of the stockholders, may not be enforceable as a by-law upon nonconsenting stockholders, yet, if assented to by all, they may be enforced as a contract.”

Appellants have relied on Wilson v. Cherokee Drift Mining Co., 14 Cal.2d 56, 58, 92 P.2d 802, 803 in which the court stated that when one becomes a stockholder he makes a contract ‘in anticipation of any possible changes in the law under the state's reserve power,’ but at the time when the plaintiff in that action became a stockholder he knew under the law then in existence ‘the power of assessment could be conferred on the corporation by amendment of the articles,’ and thus there was no violation of his constitutional rights. In the case before us we feel that this is quite different; the respondent Ashkins had certain property rights with reference to the alienation of her shares regardless of the rights which respondent Sero has under section 2404 of the Corporations Code.

It is therefore our conclusion that no restrictions of alienation as covered in the facts set out above may be made by by-law or charter amendments without the consent and knowledge of the shareholder.

The judgment is affirmed.



RALPH M. BROWN, Justice.* FN* Assigned by the Chairman of the Judicial Council.

GRIFFIN, P. J., and COUGHLIN, J., concur.