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Court of Appeal, First District, Division 3, California.

MONITOR TECHNOLOGY, INCORPORATED, Plaintiff and Appellant, v. G. Dale HETRICK, Jr., et al., Defendants and Respondents.*

Civ. 40963.

Decided: January 19, 1978

Tuckman & Horwich, Paul L. Warner, San Francisco, for plaintiff and appellant. Coombs, Dunlap, Dunlap & Champlin, Philip A. Champlin, Napa, for defendant and respondent Patricia J. Hetrick.

Monitor Technology, Incorporated (hereinafter appellant) appeals a judgment of the trial court refusing to issue a declaratory judgment stating that a corporate bylaw provision restricting transfer of corporate shares applies to the division of community property upon a marital dissolution. For the reasons hereinafter stated, we reverse the judgment.

Appellant was incorporated in or about 1969. The original incorporators were a group of businessmen, some of whom, at least, had had experience in forming and owning other corporations. All of the officers, directors and shareholders of appellant are either businessmen or corporations which invested venture capital in other corporate entities. Appellant never sought or acquired a permit to sell its shares under the federal securities laws, nor did it seek a permit to make a public offering under California law.

In April 1972, respondent G. Dale Hetrick (hereinafter Mr. Hetrick) became a director and president of appellant. In June 1974, pursuant to written agreements, appellant issued 15,000 shares of its capital stock to Mr. Hetrick at the price of $2.00 per share. He was also granted warrants to purchase an additional 7,650 shares. Mr. Hetrick paid for 3,000 of these shares and gave a promissory note for the balance with the shares themselves pledged as security for the note. The share certificates had a stamp on their face which read as follows: “See legend on reverse side.” On the back of the certificate, the following words were printed: “The sale or other transfer for consideration of the shares of the Corporation or any interest therein, whether voluntary, involuntary or by operation of law, is subject to a right of first refusal on the part of the Corporation and all other shareholders as provided by the By-laws of the Corporation.” The by-law referred to in the above quoted language is article IX of appellant's by-laws and reads as follows:



“Before there can be a valid sale or transfer of any of the shares of this corporation by the holders thereof, the holder of the shares to be sold or transferred shall first give his notice in writing to the secretary of this corporation of his intention to sell or transfer such shares. Said notice shall specify the number of shares to be sold or transferred, the price per share and the terms upon which such holder intends to make such sale or transfer.

The corporation shall have the first right and option to purchase said shares or any part thereof at the price offered for sale. Within fifteen days after the mailing or delivering of such notice the board of directors of the corporation shall meet to determine whether the corporation shall purchase said shares upon the terms at which they are offered for sale. If the board of directors determines that it is in the best interests of the corporation to acquire such shares or any part thereof, and that the purchase can be made by the corporation in compliance with all applicable provisions of California law and regulation, the offer to sell shares shall be accepted in whole or in part by the board.

If the board of directors determines that said purchase should not be made, then the secretary shall give notice immediately to the shareholders of the number of shares that remain for sale and the terms of the offer.

Within ten days after the mailing or delivering of said notices to such shareholders, any such shareholder or shareholders desiring to acquire any part or all of the shares referred to in said notice shall deliver by mail or otherwise to the secretary a written offer or offers to purchase a specified number or numbers of such shares at the price and upon the terms stated in said notice.

If the total number of shares specified in such offers exceeds the number of shares referred to in said notice, each offering shareholder shall be entitled to purchase such proportion of the shares referred to in said notice by the secretary as the number of shares of this corporation which he holds bears to the total number of shares held by all such shareholders desiring to purchase the shares referred to in said notice.

If all of the shares referred to in said notice are not disposed of under such apportionment, each shareholder desiring to purchase shares in a number in excess of his proportionate share, as provided above, shall be entitled to purchase such proportion of those shares which remain thus undisposed of as the total number of shares held by all of the shareholders desiring to purchase shares in excess of those to which they are entitled under such apportionment.

If none or only a part of the shares referred to in said notice by the secretary is purchased as aforesaid in accordance with offers made within said ten-day period, the shareholder desiring to sell or transfer may dispose of all shares of stock referred to in said notice not so purchased by the other shareholders, to any person or persons he may so desire; provided however, that he shall not sell or transfer such shares at a lower price or on terms more favorable to the purchaser or transferee than those specified in the original notice to the secretary.

Any sale or transfer, or purported sale or transfer, of the shares of said corporation shall be null and void unless the terms, conditions and provisions of this article are strictly observed and followed.

In no event will the restriction on transfer of shares as provided herein exceed the total period of thirty days from the time the original notice of intention to sell is delivered to the secretary of the corporation.

The certificates representing the shares of the corporation shall conspicuously bear the following legend:

The sale or other transfer for consideration of the shares of the corporation or any interest therein, whether voluntary, involuntary or by operation of law, is subject to a right of first refusal on the part of the corporation and all other shareholders as provided in the by-laws of the corporation.

The provisions hereof relating to the sale and transfer of the shares of the corporation and the restrictions thereon shall not be altered, amended or repealed, except with the affirmative vote or written consent of the holders of all issued and outstanding shares of the corporation.”

At the time he purchased appellant's shares, Mr. Hetrick also executed an “investment letter,” which read as follows:

“In connection with the purchase of the above listed securities, I, the Purchaser, represent to the Seller and to the Company the following:

a. I have prior investment experience, including experience in venture capital investments of a nature similar to the present securities purchase. I am aware of the Company's business affairs and financial condition and have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. I am acquiring these securities for investment for my own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act of 1933 (“Securities Act”).

b. I understand that the securities have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of my investment intent as expressed herein. In this connection, I understand that, in the view of the Securities and Exchange Commission (“Commission”), the statutory basis for such exemption may not be present if my representation meant that my present intention was to hold these securities for a minimum capital gains period under the tax statutes, for a deferred sale, for a market rise, for a sale if the market does not rise, or for a year or any other fixed period in the future.

c. I further acknowledge and understand that the securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available, and that the Company is under no obligation to register the securities, other than as set forth in its agreement with me. I understand that the certificate evidencing the securities will be imprinted with a legend which prohibits the transfer of the securities unless they are registered or such registration is not required in the opinion of counsel for the Company.

d. I am aware of the adoption of Rule 144 by the Commission, promulgated under the Securities Act, which permits limited public resale of securities acquired in a non-public offering subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about the Company, the resale occurring not less than two years after the party has purchased and paid for the securities to be sold, the sale being through a broker in an unsolicited “broker's transaction” and the amount of securities being sold during any six-month period not exceeding specific limitations (generally, 1% of the total amount outstanding).

e. I further acknowledge and understand that the Company is not currently a “reporting company” under the Securities Exchange Act of 1934 and may not be satisfying the current public information requirement of Rule 144 at the time I wish to sell the securities; and, if so, I would be precluded from selling the securities under Rule 144 even if the two-year minimum holding period had been satisfied.

f. I further acknowledge that in the event all of the requirements of Rule 144 are not met, compliance with Regulation A or some other registration exemption will be required; and that although Rule 144 is not exclusive, the Staff of the Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and other than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk.

g. I understand that the certificate evidencing the securities will be imprinted with a legend which prohibits the transfer of the securities without the consent of the Commissioner of Corporations of California. I have read a copy of the Commissioner's Rules with respect to such restriction, a copy of which is attached hereto.


DATE: 10 June, 1974.

[s] G. Dale Hetrick



Attached to this investment letter was a copy of title 10, California Administrative Code, section 260.141.11.

In September 1974, Mr. Hetrick's then wife, respondent Patricia J. Hetrick (hereinafter Mrs. Hetrick), commenced dissolution proceedings in the Napa County Superior Court. Mr. and Mrs. Hetrick entered into a marital property settlement agreement which provided in part that Mr. Hetrick would transfer one-half of the shares in appellant standing in his name to Mrs. Hetrick and Mrs. Hetrick would assume one-half of the remaining obligation on the promissory note. It is conceded that the shares were community property. On January 20, 1976, an interlocutory judgment of dissolution was issued by the Napa Superior Court, incorporating the terms of the marital property settlement agreement between Mr. and Mrs. Hetrick.

On December 17, 1975, Mr. Hetrick advised appellant's board of directors that he wished to transfer one-half of his stock to Mrs. Hetrick. The board, with Mr. Hetrick abstaining, unanimously rejected the proposal and instead exercised its right of first refusal pursuant to article IX of appellant's by-laws to purchase any and all shares which Mr. Hetrick proposed to transfer to Mrs. Hetrick at the fair market value. There being no public market for the stock, appellant offered Mrs. Hetrick $2.00 per share, the price paid by Mr. Hetrick. She refused this offer.

Mrs. Hetrick then obtained an order from the Napa Superior Court directing that one-half of Mr. Hetrick's shares in appellant be transferred to her. Appellant was not a party to the Napa Superior Court action and the parties have agreed that the action of that court is not binding upon appellant.

On August 24, 1976, appellant filed the complaint in this action against Mr. and Mrs. Hetrick, seeking a declaratory judgment that appellant's right of first refusal with respect to one-half of Mr. Hetrick's stock was valid against Mrs. Hetrick. Mr. and Mrs. Hetrick filed separate answers and she requested a declaratory judgment with respect to her rights in the option, granted to Mr. Hetrick, to purchase an additional 7,650 shares of appellant's stock.

After hearing the evidence and receiving post-trial briefs, the trial court issued a memorandum decision on January 7, 1977, which read as follows: “The Court finds that no consent was obtained by Monitor from Patricia Joy Hetrick that she be bound by Article IX of the by-laws of Monitor Technology, Inc.

“Monitor's by-law restriction is also invalid because it is not stated on the face of the certificate.

The issue involved is the question of whether a division of the stock would constitute a sale or transfer or would be only a recognition of the wife's interest by the husband. The Court finds that it is the latter and is not such a sale or transfer. The parties (owners of the stock) are simply retaining their presently owned interest and only dividing their community property rights between themselves as required by the Family Law Act. There must be an equal division of the community property. In any event whether required or not, the parties Hetrick are not transferring their interest—only dividing it between themselves. There was no stated price per share. A price could not be set on the shares and there was no consideration for the transfer of shares.

The Court further finds that Article IX of the corporation's by-laws does not apply to such a transfer as is here involved. The Court also finds that the rights of Patricia Joy Hetrick further apply to her community property interest in 7,650 additional shares of stock in the corporation which defendant G. Dale Hetrick has an option to purchase and in which option rights Patricia J. Hetrick has a community property interest.

Judgment is for defendants Hetrick. The shares of stock and stock option rights are ordered to be divided in kind between the parties Hetrick with one-half thereof assigned to each. The purchase money obligation with respect to said stock shall likewise be divided equally between the parties. Costs are awarded to the defendants.”

Appellant did not request the trial court to make findings of fact and conclusions of law. Appellant has appealed from the adverse judgment rendered pursuant to the memorandum decision.

Although appellant did not request findings of fact and conclusions of law, in reviewing the judgment it is proper for this court to rely on the memorandum decision as an aid to interpretation of the judgment and as an indication of the grounds upon which the judgment was rendered. (See Birkenfeld v. City of Berkeley (1976) 17 Cal.3d 129, 161, 130 Cal.Rptr. 465, 550 P.2d 1001; 6 Witkin, Cal. Procedure (2d ed. 1971) Appeal, § 231, pp. 4221-4222.) There is no real factual dispute evident in this case. The trial court's judgment is based on its interpretation of article IX and the applicable law. Since no extrinsic evidence was received with respect to the meaning and interpretation of article IX we are not bound by the trial court's interpretation. An appellate court is free to interpret a written contract, as a matter of law, unless the trial court's interpretation turns on the credibility to be given controverted evidence. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865, 44 Cal.Rptr. 767, 402 P.2d 839.) Thus, in cases where the basis for the trial court's interpretation is solely the written terms or where the extrinsic evidence is not in conflict, the reviewing court “must make an independent determination of the meaning of the contract.” (Parsons v. Bristol Development Co., supra, at p. 866, 44 Cal.Rptr. at p. 771, 402 P.2d at p. 843; see generally 6 Witkin, Cal. Procedure (2d ed. 1971) Appeal, §§ 257-260, pp. 4248-4251.) In addition, in their briefs on appeal, the parties have expressed their respective positions on the grounds set forth in the memorandum of decision. Accordingly, we will direct our attention to those issues.

The basic issue on this appeal is whether the agreement between Mr. and Mrs. Hetrick to divide the shares of appellant in kind constitutes only a recognition of the wife's interest in the community by the husband (as found by the trial court) or a transfer within the meaning of article IX of appellant's by-laws (as claimed by appellant on this appeal). If it is the former, then we need not address the other issues raised on this appeal. If it is the latter, we must discuss the other bases for the trial court's judgment.

There appears to be a surprising dearth of authority on the underlying question presented here. We start with Civil Code section 5105, which prior to January 1, 1975, provided: “The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing and equal interests under the management and control of the husband as is provided in Sections 5125 and 5127. This section shall be construed as defining the respective interests and rights of husband and wife in community property.”

We are aware of no legal requirement that Mr. Hetrick obtain Mrs. Hetrick's consent before he acquired appellant's shares with community funds. Indeed, Civil Code section 5125, prior to January 1, 1975, gave the husband management and control of the community personal property, with like absolute power of disposition, other than testamentary, as he had of his separate property, subject to certain exceptions not here applicable. Mr. and Mrs. Hetrick do not argue that in acquiring appellant's shares in 1974 Mr. Hetrick made a gift of community personal property, or disposed of it without a valuable consideration. Nor is any claim made that Mr. Hetrick acted fraudulently or otherwise than in good faith in his dealings with the community property. Mr. and Mrs. Hetrick thus acquired the stock as community property subject to the restriction on transfer contained in article IX of appellant's by-laws.

The closest authority on the basic issue here to be decided is Casady v. Modern Metal etc. Mfg. Co. (1961) 188 Cal.App.2d 728, 10 Cal.Rptr. 790. In Casady, as in this case, the parties to the dissolution of a marriage (then a divorce proceeding) entered into a property settlement agreement whereby it was agreed that plaintiff wife would take one-half of the shares of the stock of Modern Metal Spinning and Manufacturing Co., a corporation, as her sole and separate property. The shares stood in the record name of Mr. Casady but were conceded to be community property. The corporation refused to issue a new certificate to Mrs. Casady, and she brought an action for specific performance of the property settlement agreement. In Casady, as in this case the stock certificates contained a restriction relative to transfer, which read as follows: “‘This Certificate may only be transferred, assigned or hypothecated pursuant to Article VI, Section 6 of the By-laws of this Corporation.”’ Article VI, section 6 provided as follows: “‘The shares of stock of the company shall not be transferrable or the subject of sale or pledge until first offered to the Company at the then value, as determined by a certified public accountant. If said offer is refused by the Company, then said stock shall be offered to the stockholders and if necessary prorated among them or such of them as desire to purchase. In each of the foregoing cases if such offer be made and refused by the Company, and the stockholders, the shares so offered shall be subject to sale, pledge or transfer, but not otherwise. The shares if any so purchased by the Company, shall be resold by it upon such terms as the Board of Directors may determine, but all remaining shareholders shall be first entitled to participate in the purchase in proration to the number of shares then held by them. In no case shall any share be assignable or transferrable until after offer to the Company and refusal by it, and subsequent offer and refusal by the stockholders to purchase as aforesaid.”’ (At p. 730, 10 Cal.Rptr. at p. 791.) This by-law was subject to amendment by written assent of two-thirds of the stockholders. Mr. Casady and two other persons (Cimral and Butcher) each owned one-third of the shares.

Defendant corporation refused to transfer shares to Mrs. Casady because there had been no compliance with the pertinent provisions of article VI, section 6 of the by-laws. Mrs. Casady had not offered to sell the shares awarded to her by the divorce decree nor did she offer to have them valued or appraised by a certified public accountant. In her complaint, Mrs. Casady sought to compel Mr. Casady to deliver his certificate of stock to defendant corporation and to demand of the corporation that a new certificate for one-half of his shares be issued to Mrs. Casady. The trial court found that such delivery and request had been made by Mr. Casady. Mrs. Casady also asked the court to order Mr. Casady as president or as a stockholder to call a special meeting of the board of directors for the purpose of voting on deleting the restrictive provisions of section 6 and temporarily waiving such provisions so that she could become a stockholder, and an order compelling an affirmative vote by Mr. Casady on both questions. She further sought to compel Mr. Casady to execute two documents, namely, an amendment to the by-laws which would delete the restrictive provision, and a written assent to the temporary waiving of the restrictive provision to permit Mrs. Casady to become a stockholder of record. Both of these documents had already been executed by Butcher, one of the other shareholders. Thus Mr. Casady's written assent, which Mrs. Casady sought to compel, would have constituted the written assent of two-thirds of the stockholders to amend the restrictive by-law.

In affirming the trial court's refusal to decree specific performance as requested by Mrs. Casady, the court first ruled that the restrictive provisions in article VI, section 6 were valid. In doing so, the court set forth at length the following language from Baumohl v. Goldstein, 95 N.J.Eq. 597, 124 A. 118, 120: “‘As among the original incorporators there seems to be no reason in principle why they should not be permitted to retain the control of the corporation in which they have embarked their fortunes among themselves, or such of them as stand by the vessel, where no question of a bona fide purchaser without notice is involved. In this court, where the intent of the parties is the thing sought to be enforced, every effort should be made to hold men to agreements into which they have voluntarily entered, where the same are not obnoxious to any law or policy, and upon the strength of which others have changed their position or circumstances, or parted with a valuable consideration. It is their business and their money which is involved. It is by their efforts that success is attained, if attained at all. Surely, the public cannot be aggrieved, and individuals acting in accordance with equitable doctrines cannot be injured, because if they have no knowledge or notice of the fact they are not injured by it.”’ (At p. 732, 10 Cal.Rptr. at p. 793.) This language is equally applicable to this case.

The court further described the contractual nature of a by-law restriction such as the one involved here, in the following language: “The by-laws of a corporation constitute a contract between the shareholders and the corporation (Riverside Land Co. v. Jarvis, 174 Cal. 316, 327, 163 P. 54); the by-laws are also a contract among the shareholders (Saline Valley Salt Co. v. White, 177 Cal. 341, 346, 170 P. 820); accordingly, courts have often said that a first option provision, akin to that found in section 6, is “‘in the nature of a contract” between the corporation and its stockholders and, as such, binding upon them [citations].’ (Allen v. Biltmore Tissue Corp., 2 N.Y.2d 534, 161 N.Y.S.2d 418, 141 N.E.2d 812, 815.)” (Casady, supra, 188 Cal.App.2d at pp. 732-733, 10 Cal.Rptr. at p. 793.) This language demonstrates the weakness of Mrs. Hetrick's argument that she is not bound by the by-law because she did not consent to be bound by it. If the by-laws are a contract between the corporation and its shareholders, as well as among the shareholders themselves, it is apparent that the rights of these third parties cannot be affected by Mr. Hetrick's failure to obtain the consent of his wife when he purchased the corporate shares. He was not required to do so.

Mrs. Hetrick concedes that the Casady holding is contrary to her position and the judgment of the trial court. She attempts to distinguish it on the basis that the restrictive provision in the Casady case provided for a method by which the shares could be valued. We find this to be a distinction without a difference. Civil Code section 5105 (then section 161a) read exactly the same in all pertinent respects at the time Casady was decided as it did in 1974. The wife's interest in 1961 was “present, existing, and equal,” just as it was in 1974 and is today. The wife's interest was vested in 1961, just as it was in 1974 and is now. (Cooke v. Cooke (1944) 65 Cal.App.2d 260, 265, 150 P.2d 514; Estate of Kelley (1953) 122 Cal.App.2d 42, 43, 264 P.2d 210.) Yet the Casady court refused to decree specific performance, and we think correctly so.

In a dissolution proceeding in which the community property must be divided equally between the parties (Civ.Code, § 4800) there is no requirement in the law that each community asset be divided in kind. The law requires only that the value received by each spouse must be equal. (Cronk v. Cronk (1962) 210 Cal.App.2d 683, 27 Cal.Rptr. 229; Dallman v. Dallman (1958) 164 Cal.App.2d 815, 819, 331 P.2d 245; In re Marriage of Brown (1976) 15 Cal.3d 838, 838-849, 126 Cal.Rptr. 633, 544 P.2d 561.) If the trial court's memorandum decision intends to suggest that community property must be divided equally in kind, it is simply in error.

Until January 1, 1977, Corporations Code section 103 defined a shareholder as follows: “‘Shareholder’ or ‘stockholder’ or ‘holder of shares' means ‘holder of record of shares' or ‘shareholder of record’ …” It should be noted that the same section defines a “holder of shares” as a “holder of record of shares” or “shareholder of record.” (Emphasis added.) So also the revised Corporations Code (effective January 1, 1977) defines “shareholder” in section 185 as follows: “‘Shareholder’ means one who is a holder of record of shares.”' It is apparent to us that when the by-laws of appellant speak in article IX of “holders of shares” they refer to the holder of record of the shares. It is undisputed that Mr. Hetrick was, at all times, the shareholder of record.

The term “shareholder of record” is not an idle or meaningless phrase. Several significant rights and privileges are dependent upon one being a shareholder of record. Thus, under Corporations Code sections 601 and 700 only a shareholder of record has the right to receive communications from the corporation, including reports of financial condition, acquisitions, and other events affecting the corporation's business, since only the shareholder of record is entitled to vote on any such matter. Similarly, under Corporations Code section 500 the shareholder of record is entitled to receive any dividends which may be declared. Only a shareholder of record has the right to inspect corporate books and records under Corporations Code section 1601 and to receive annual reports under section 1501. Finally the right to exercise dissenter's rights and to receive cash value for shares in the event of merger belong to the shareholder of record under Corporations Code section 1301. If one were to follow Mrs. Hetrick's argument to its logical conclusion all of these rights would belong not only to the shareholder of record but to his or her spouse whose rights are “present, existing and equal” under Civil Code section 5105. We do not perceive this to be the law or the intent of the parties who entered into the agreement reflected by article IX of appellant's by-laws.

The broad language of article IX of appellant's by-laws applies to an “… sale or transfer of any of the shares of this corporation by the holders thereof.” It further requires that the certificate representing the shares of the corporation bear a legend stating that the by-law applies to any transfer for consideration “whether voluntary, involuntary or by operation of law.”

Given this broad language and the obvious intention of the parties in drafting article IX to restrict transfers to third parties who are sophisticated investors so as to avoid federal and California securities restrictions, we hold that the agreement by Mr. and Mrs. Hetrick to divide appellant's shares in kind constituted a transfer within the meaning of article IX of appellant's by-laws. Since the corporation refused to accede to this transfer, the judgment of the trial court is incorrect and must be reversed.

In so holding, we do not in any way affect Mrs. Hetrick's present, existing and equal rights in their community property. This is not a case in which appellant's shares are the only community asset to be divided. The record discloses other substantial community assets which may be awarded to Mrs. Hetrick to equalize Mr. Hetrick's retention of appellant's shares.

Nor does our holding prevent Mrs. Hetrick from acquiring appellant's shares if appellant or its shareholders do not exercise their rights under article IX. We see no reason why Mr. and Mrs. Hetrick cannot agree upon a value to be placed upon the shares, which appellant or its stockholders may either meet or reject as they see fit. Nor do we see any reason why Mrs. Hetrick may not offer to acquire one-half of Mr. Hetrick's shares at a price offered by her. If Mr. Hetrick accepts her offer, appellant and its shareholders may then meet that price or permit the transfer to Mrs. Hetrick. Alternatively, expert testimony as to the value of the shares could establish their value, and appellant and its shareholders would then either have to purchase the shares or permit the transfer to take place.

Having concluded that the division of appellant's shares in kind pursuant to the Hetrick agreement constitutes a transfer within the meaning of article IX, we must address the other reasons advanced by the trial court in its judgment.

Mrs. Hetrick argues that the by-law restriction in article IX is unreasonable and therefore is invalid, even if applicable. Former Corporations Code section 501 (in effect prior to January 1, 1977) provided: “The by-laws of a corporation may make provisions not in conflict with law or its articles for: … (g) Special qualifications of persons who may be shareholders, and reasonable restrictions upon the right to transfer or hypothecate shares.” The core of Mrs. Hetrick's argument is that the method of valuation set out in article IX does not apply to the division of community property. She argues that the valuation of the stock would be difficult, lengthy, subjective and expensive and that there is no public market for the stock. While Mrs. Hetrick concedes that a restriction providing for a right of first refusal has generally been upheld by the courts (see Tu-Vu Drive-In Corp. v. Ashkins (1964) 61 Cal.2d 283, 286-287, 38 Cal.Rptr. 348, 391 P.2d 828, and Casady, supra), she argues that the application of the restriction in article IX to the division of community property is unreasonable. We do not agree.

As we have already pointed out the law does not require that each community asset be divided equally. Civil Code section 4800 requires that, absent a contrary agreement of the parties, the community property be divided equally, but the section also provides: “[w]here economic circumstances warrant, the court may award any asset to one party on such conditions as it deems proper to effect a substantially equal division of the property.” (Civ.Code, § 4800(b)(1).) The trial court in the dissolution action had and retains great flexibility in tailoring the division of the community property which will protect both Mr. and Mrs. Hetrick. For example, the dissolution court, faced with an agreement by the parties that cannot be enforced, retains jurisdiction to effect the division of the community. It may choose to order an evaluation of the shares by a neutral expert. Indeed appellant has stipulated to an appraisal of its shares by an independent expert. If Mr. Hetrick then chose to keep the shares he could pay the cash equivalent to Mrs. Hetrick or equalize her share with other community assets. Or he could offer the shares to appellant and its stockholders at the price determined, and if they refuse to purchase at that price, Mr. Hetrick would be free to transfer the shares to Mrs. Hetrick. These are only a few of the alternatives which are available to the dissolution court in the exercise of its continuing jurisdiction.

Finally, we turn to the trial court's conclusion that the restriction on the transfer of appellant's shares is invalid because it was not stated on the face of the stock certificate. Former Corporations Code section 2404 read: “Subject to Sections 1300 to 1303, inclusive, relative to shareholders' subscription liability, and to Sections 2478, 2479, and 2704, relative to transfer of shares subject to lien, no restriction of the right to transfer shares stated in the articles or by-laws, no power of assessment, and no lien on shares for assessments or for the unpaid subscription price or other lien in favor of the corporation, is effective against a transferee of the shares unless stated on the face of the certificate.” The simple answer to this conclusion is that Mrs. Hetrick does not have standing to raise the issue since she is not a “transferee.” Mr. Hetrick proposes to transfer the shares to Mrs. Hetrick, and he must first offer the shares to appellant and the other shareholders before he can do so. Mr. Hetrick received the stock directly from the corporation. In Wilson v. Cherokee Drift Min. Co. (1939) 14 Cal.2d 56, at pages 58 59, 92 P.2d 802, at page 803, the court, in construing the predecessor of section 2404 said: “The other contention of plaintiff is that the assessment was void because of a failure on the part of the corporation to comply with the terms of section 326, subdivision 8, of the Civil Code. This section provides that certain restrictions, liens or powers, including the power of assessment, shall not be effective ‘against a transferee’ of shares unless they are stated on the face of the certificate. The provision was intended to protect a transferee who purchases in reliance on the face of the certificate from undisclosed liens, powers or restrictions which vitally affect his shares. (See Ballantine & Sterling, California Corporation Laws, 1938 ed., pp. 132, 133.) Obviously, it does not apply to every shareholder, but is limited to transferees, that is, those who take the stock by transfer of the certificate from an existing shareholder after the restriction or power is in effect. Persons to whom stock is issued by the corporation cannot correctly be deemed ‘transferees'.” This language fully supports appellant's contention that Mrs. Hetrick does not have standing to raise the issue of the invalidity of the restriction. Since this case does not involve an attempt by Mrs. Hetrick to transfer stock she received from her husband to a third party, the provisions of former section 2404 do not apply.

Judgment reversed. The trial court is directed to enter judgment for appellant, declaring that article IX of appellant's by-laws is effective against Mrs. Hetrick and that the shares may be transferred to Mrs. Hetrick only after they are first offered to appellant and the other shareholders in accordance with article IX.



BROWN,* Associate Justice. FN* Assigned by the Chairperson of the Judicial Council.

SCOTT, Acting P. J., and SMITH (Assigned by the Chairperson of the Judicial Council), J., concur.