Story Case

The Portland Bank was incorporated under the laws of the state of Massachusetts, with a capital stock of $50,000, divided into 5,000 shares at $100 each. In its charter it was given the right at any time to increase its stock to $100,000 with the consent of the stockholders. Mr. Mackay was the owner of five shares in the corporation, for which he had paid the par value. The bank had prospered during the first few years of its business, and the shares of stock were reasonably worth about $125 each. At a meeting of the stockholders, it was voted to increase the stock of the corporation to $100,000. The directors, without offering any shares of stock to stockholders for purchase sold the entire new issue to the First National Bank of Boston. Only Mr. Mackay, among all the stockholders, objected to the sale. He insisted that he had a right to a part of the new issue. Under the foregoing facts is he right in his contention?

Ruling Court Case. Stokes Vs. Continental Trust Company, Volume 186 New York Reports, Page 285

The Continental Trust Company is a banking corporation organized and existing under the laws of the state of New York. By its charter, the corporation was authorized to maintain a capital stock of $500,000, consisting of 5,000 shares of the par value of $100 each. Stokes was one of the original stockholders and still owns all the stock issued to him at the date of organization, together with enough acquired since to make 221 shares in all. At the beginning of the year 1902, the corporation had a surplus of $1,048,450.94, which made the book value of the stock at that time $309.69 per share. About this time Blair and Company, private bankers, made the following proposition to the corporation: "If your stockholders, at the special meeting to be called for January 29, 1902, vote to increase your capital stock from $500,000 to $1,000,000 you may deliver the additional stock to us as soon as issued at $450 per share (100 par value) for ourselves and associates, it being understood that we may nominate ten of the twenty-one trustees to be elected at the adjourned meeting of stockholders."

At the meeting it was voted to increase the capital to $1,000,000; for this, Stokes voted. It was then voted to sell the increase to Blair and Company, in accordance with their offer. To this proposition, Stokes objected. He claimed the right to his share of the stock. Bat notwithstanding his objections and claim, the corporation issued the increase to Blair and Company.

This action was brought by Stokes, as a stockholder, to compel his corporation to issue to him at par such proportion of an increase made in its capital stock as the number of shares held by him before such increase bore to the number of all the shares originally issued; and in case such additional shares could not be delivered to him, he then asked that he be given damages.

Decision

The capital stock of a corporation can be increased only with the consent of the stockholders; the increase, when made, does not belong to the corporation, but belongs to the stockholders; they have the first right to purchase the same at par value; and not until they have waived their claim to do so, may the corporation sell the increase to any third person or persons. Accordingly, the Court was of the opinion that Stokes was entitled to his proportionate share of the increased capital stock; and in case the additional stock could not be delivered to him, the Court was of the opinion that he was entitled to damages for whatever loss he suffered thereby.

Mr. Justice Vann, who delivered the opinion of the Court, said in part:

"In the case before us, the new stock came into existence through the exercise of a right belonging wholly to the stockholders. As the right to increase the stock belonged to them, the stock when increased belonged to them also, as it was issued for money and not for property or for some purpose other than the sale thereof for money. By the increase of stock, the voting power of the plaintiff - Stokes - was reduced one-half, and while he consented to the increase he did not consent to the disposition of the new stock by a sale thereof to Blair & Company at less than its market value, nor by sale to any person in any way except by an allotment to the stockholders."

The Court decided that Stokes was entitled to his proportionate share of the increased capital stock of the corporation.

Ruling Law. Story Case Answer

A stockholder in a corporation has a certain ratio, or a certain relative position, depending upon the number of the shares which he owns. This ratio or relative position cannot be changed without his consent. Accordingly, if the corporation decides to increase its capital, every stockholder therein is entitled to take or receive his proportionate number of shares of the new issue. He cannot be deprived of this right without his consent. If all of a new issue is sold without his consent, his relative standing in the corporation is to that extent cut down; his voice in the affairs of the corporation does have as much value; and his right to share in the profits of the corporation is decreased. He is not entitled, however, to take the new stock at par; he must be willing to pay the market value therefor. In the Story Case, Mr. Mackay had a right to have his proportionate share of the new issue, - five shares. If the corporation has so changed its position that it can not issue to him this number, it must pay him the amount of damages which he has suffered by its wrongful conduct.