Meyers v. El Tejon Oil & Refining Co.

California Supreme Court Nov 1, 1946 No. L. A. 19804Published

Before: Traynor

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Holding. A corporate resolution declaring a dividend, even if initially invalid due to improper meeting procedures, may be retroactively validated through subsequent corporate ratification. Such ratification provides sufficient consideration for a promissory note issued in exchange for the dividend.

Issues

Whether a dividend declared at an improperly convened board meeting can be retroactively ratified by the corporation.
Whether the issue of whether a dividend was declared out of sufficient surplus or net profits can be raised for the first time on appeal.
Whether a corporation may avoid payment of a note issued for a dividend by claiming subsequent insolvency or lack of surplus.

Disposition. affirmed

Quotations verified verbatim against the opinion

“A resolution of the board of directors declaring a dividend, even though it is unlawful in its inception for lack of a duly held meeting, can be ratified by the board of directors”

“The issue whether defendant had sufficient surplus or net profits to declare a dividend is entirely different from the issue whether the board of directors had properly authorized the dividend, and cannot first be raised on appeal.”

TRAYNOR, J.

On March 15, 1940, a dividend was declared upon defendant’s common stock at a special meeting of defendant’s board of directors attended by only four of its seven directors. No notice of the meeting was given to the directors as required by section 307a of the Civil Code, nor did the absent directors sign a waiver of notice or a consent to the meeting or an approval of its minutes as required by section 307b of the Civil Code. Plaintiff who was then vice-president of the corporation as well as one of its directors was present at the meeting. The dividend was paid in cash to all holders of common stock, but the seven directors who were also holders of such stock, immediately returned their dividends to the corporation and received in exchange promissory notes in amounts equal to their respective dividends. Only one of the seven notes has been paid. The present action was brought on April 14, 1944, to recover upon the one given plaintiff. The trial court found “that any irregularity in the declaration of the dividend of March 15, 1940, has been ratified and confirmed by [defendant] corporation” and eptered judgment for plaintiff. Defendant appeals. h

Defendant contends that since the authority to declare a dividend is vested in the board of directors (Civ. Code, §§ 305, 363) and since the directors can pass a valid resolution only if the board is duly assembled for the purpose of transacting corporate business (Civ. Code, § 307;

Pauly

Pauly,

107 Cal. 8, 18 [40 P. 29, 48 Am.St.Rep. 98];

Hotaling

Hotaling,

193 Cal. 368, 377 [224 P. 455, 56 A.L.R. 734] ;

Curtin

Salmon River etc. Co.,

130 Cal. 345, 350 [62 P. 552, 80 Am.St.Rep. 132]; see 6A Cal.Jur. 1097), the declaration of the dividend was invalid, and that therefore the corporation issued the note to plaintiff without consideration. A resolution of the board of directors declaring a dividend, even though it is unlawful in its inception for lack of a duly held meeting, can be ratified by the board of directors, and such ratification does not require the holding of a regular meeting of the board or the passing of a resolution declaring the ratification

Meyers v. El Tejon Oil & Refining Co.

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TRAYNOR, J.

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