SHINN, J. This is an appeal by the Commissioner of Corporations from a judgment of the superior court directing the commissioner to issue a permit authorizing plaintiff, Transportation Building Company, to change its capital structure and enter into a contract for the management of its property, if and when the proposed plan is approved by the stockholders of the corporation who are entitled to vote thereon.
The petition for writ of mandate filed by plaintiff incorporated the entire record of the evidence taken before the Commissioner of Corporations. No additional evidence was taken in the superior court. The return by the commissioner to the alternative writ was by general demurrer and also by answer. The demurrer was overruled and an order was made that the petition be granted. Findings and conclusions were filed and a peremptory writ was issued. The ground of [606]the decision was that certain findings and conclusions of the commissioner upon which he based his refusal to issue the permit were not supported by the evidence adduced at the hearing.
We are in accord with the views of the trial court. It appears clearly to us from the record that the proposed plan of plaintiff is fair, just and equitable, that plaintiff intends to fairly and honestly transact its business under that plan, and that the issuance of the securities and the carrying out of the plan will not work a fraud upon the stockholders of plaintiff whose stock is to be exchanged for new stock to be issued under the plan of reorganization. (See Corporate Securities Act, § 4, Stats. 1917, p. 673, as amended; 2 Deering’s Gen. Laws, Act 3814.) Under these circumstances, and in view of considerations hereinafter discussed, it was not within the discretionary power of the commissioner to deny the application.
The property of plaintiff corporation consists of the land and a 13-story and basement, Class A loft type building at the southwest corner of Seventh and Los Angeles Streets in Los Angeles. The building was constructed in 1923, by Standard Holding Company, which authorized the issuance of $625,000 of 6Yz per cent bonds. Thereafter Assets Corporation acquired the property, subject to the bonds but did not assume them. The operation of the building was not a successful one. In 1938 the bonded indebtedness was $425,000, but the income had been insufficient to meet the required payments of principal and interest and they were in default. There was a reorganization in bankruptcy and plaintiff corporation was formed to take over the property, with an authorized capital of 14,725 no par shares, consisting of 8,508 shares of preferred and 6,217 shares of common. In acquiring the property through the reorganization in bankruptcy, plaintiff was authorized to exchange its preferred shares and 4,254 common shares to the bondholders of Assets Corporation in units of two shares of preferred and one of common, and approximately $4.13 in cash, for each $100 principal of bonds, and also to issue 1,963 shares of common stock to Assets Corporation. The plan was carried out and the conversion was accomplished with the minor exception that, at the time plaintiff’s application was heard by the commissioner, $3,300 face value of bonds had not been converted. At that date there were issued and outstanding 8,442 preferred shares and 6,184 [607]common shares and there were in reserve sufficient shares to exchange for the then unconverted bonds. In February, 1944, the brokerage firm of O ’Melveny-Wagenseller and Durst, Inc. purchased from divers owners 5,046 shares of preferred stock and 2,523 shares of common, in units of two shares of preferred for one of common, for a price of $53.60 per unit. A large part of these shares were acquired from Assets Corporation and in that transaction the brokerage firm acquired the additional 1,963 shares of common, paying no additional consideration therefor. The brokers then sold the units so acquired to their customers at $57 per unit and retained the 1,963 shares of common.
In March, 1944, plaintiff filed its application with the commissioner for a permit allowing it to make substantial changes in its articles of incorporation. The capital was to be increased to 8,508 shares of preferred and 10,000 shares of common, both having changed rights, preferences and privileges. (It will not be necessary to mention all the features in which the new stock would differ from the old. The important ones will be taken up in order.) It was proposed to exchange 8,508 shares of new, no par, preferred for the outstanding 8,508 shares of preferred, share for share, or to exchange preferred and common for outstanding bonds on the basis of two shares of preferred and one of common for each $100 face value of bonds; also to exchange 6,217 shares of new common, share for share, for the outstanding common and to sell and issue to the brokerage firm the balance of the 10,000 shares of common, namely, 3,783 shares, at a price of 10 cents per share and the execution of a management contract by the brokers. The proposed management contract was one by which the brokerage firm agreed to manage the building for seven years or until the preferred shares had been fully retired, whichever should occur sooner, and was to receive compensation of not to exceed $50 per month, to be paid to the president of plaintiff corporation, and $25 per month for keeping the records of plaintiff, bookkeeping and auditing.
All the stockholders of plaintiff were given notice of the hearing to be held before the Commissioner of Corporations and this notice was sufficient to inform them in detail as to the changes proposed to be made in the certificate of incorporation and the proposed sale of 3,783 shares of common to [608]the brokers at 10 cents per share, and the execution of the management contract. The stockholders were invited to attend the hearing but none attended or opposed the granting of the permit. The plan as proposed had three main purposes : first, the removal from the articles of certain restrictive provisions which were obstructing successful management of the business; second, lowering the call price of the preferred shares, and third, to increase the number of common shares for the purpose of selling the additional shares to 0 ’Melveny, Wagenseller and Durst at 10 cents per share as the principal consideration for an agreement by the firm to manage plaintiff’s property for a maximum term of seven years. It appears from the findings of the commissioner and the briefs filed in his behalf that he found fault with all the major features of the plan. His findings, as will be pointed out, were almost exclusively in the nature of conclusions as to the merits of the plan from a business standpoint. The trial court made findings differing from those of the commissioner, but with a single exception, which we shall mention later, these also consisted of conclusions drawn from the admitted facts. Stated simply, the appeal brings us (1) a record in. which there is no dispute as to the facts; (2) an order of the commissioner refusing a permit, based not upon a finding of unfairness but substantially upon his opinion that it would be unwise for the stockholders to give their approval to the plan, and (3) the judgment of the trial court directing the commissioner to issue the permit, based upon conclusions of the trial judge which were the opposite of those drawn by the commissioner. We are of the opinion that no cause was shown for a denial of the application, and that it was the duty of the commissioner to grant it. In the statement of our conclusions it is necessary to discuss the apparent advantages and disadvantages of the proposal. We should make clear, however, that we consider it to be the right and privilege of the stockholders to decide whether the advantages outweigh the disadvantages, and that our question is whether there are disadvantages which would have justified the commissioner in refusing the permit upon the ground that the plan is unfair, unjust, inequitable or fraudulent.
Petitioner was not seeking a permit to make a public offering of securities, as that term is commonly understood. There was involved only a matter of internal management of a going concern, affecting no one except the present stockholders of [609]the corporation. Necessarily there can be no amendment of the capital structure unless the present stockholders, after approval of the plan by the commissioner, also approve it in the manner provided by the existing articles.
An analysis of the plan must take as a starting point a definite figure as the present value of the property. It would otherwise be impossible to appraise the fairness of the proposed reduction in the call price of the preferred, or the contract with the brokers. The commissioner found: “That the Commissioner is unable to determine the exact worth of the Transportation Building, the principal asset of applicant, however it does appear that said building is worth in excess of $255,240; ...” The finding of the superior court was: “It is not true that defendant was unable to determine the exact worth of the Transportation Building nor is it true that said building is worth in excess of $255,240.00 or any amount in excess of $225,000.00.” The importance of this finding is obvious. The present preferred stock of plaintiff is retirable at $50 per share upon call, or upon liquidation, which would return a possible maximum of $425,400, or such lesser sum as might be received in case of liquidation, before the common stockholders would receive anything. Under the amended articles the retirement and liquidation price would be reduced from $50 to $30 per share or to $255,240. The commissioner made the following finding: “That the proposed exchange as set forth in said application would reduce the liquidating value of the outstanding preferred shares and bonds from $425,400 to $255,240; that said reduction in liquidating value would redound to the benefit of the holders of common shares; that said exchange of shares would result in the transfer of the voting control of Transportation Building Company from the holders of preferred shares to the holders of common shares.” The change in the liquidating “price” per share obviously would not lessen the “value” per share unless the property should be worth more than $255,240, nor would the proposed change in the retirement or liquidating price of the preferred be of advantage to the holders of common stock unless the property has now, or later acquires, a value in excess of $255,240. The evidence before the commissioner was that the present gross value of the property was $225,000 and that if a sale should be made at that price, the net amount received, after payment of commission and expenses of sale, [610]would be about $213,000 or $26.50 per share for the preferred stock, with nothing for the common. This value of the property was testified to upon the hearing before the commissioner by a competent and experienced appraiser, Mr. W. W. Touchstone. No witness testified to any different value and the testimony of Mr. Touchstone was corroborated by that of the secretary of the company, who testified to a gross value of $225,000. It appears from the evidence taken at the hearing that the deputy commissioner who presided was not dissatisfied with the testimony of Mr. Touchstone, for he stated: “If there is no objection, I will reserve determination as to whether a formal appraisal will be required by the Commissioner, until the close of the hearing.” The commissioner did not cause an appraisal to be made, but thereafter made the finding that he was unable to determine the exact worth of the property, but that “it does appear that said building is worth in excess of $255,240.” This did not “appear” from the evidence. There was evidence that plaintiff had refused the offer of $225,000 but this means no more than that the directors, instead of selling at a price that would not pay the preferred shareholders even $30 per share, chose to retain the property in the hope of getting a better price. The deputy commissioner appears to have given weight to the fact that the federal court, in the reorganization proceeding of 1939, apparently considered it a possibility that the preferred stockholders would receive $425,400, the amount of the unpaid bonds, at some future time, since it fixed a liquidating price of $50 per share. This was not evidence as to value, nor was there anything in the record to warrant a finding that the market value of the property could not be ascertained from the evidence. The commissioner had before him the highest type of expert evidence of value and no opposing evidence of any sort. The only finding consistent with the evidence was the one made by the superior court, namely, that the market value of the property was $225,000 and no more. Upon this basis of value the preferred stockholders will have given up no part of the present value of the shares if they consent to a liquidation price of $30 per share.
Another proposed change in the articles relates to the payment of dividends on the preferred shares. Under the present articles they are payable out of “net cash receipts,” regardless of earnings, and at the rate of $2.50 per share, $1.50 of which is cumulative, $1.00 noncumulative. They [611]have been paid in this manner and there is, at present, no arrearage. Under the proposed amendment the dividends would be payable only out of surplus or net earnings. The commissioner found: ‘ ‘ That the net profit from operations of applicant for the year 1942 was the sum of $348.65, and for the year 1943 was the sum of $2,390.55, that because of the provisions of the articles of incorporation of Transportation Building Company allowing the payment of dividends on the preferred shares out of ‘net cash receipts’ [emphasis added] there is no arrearage in dividends on said shares; that an amendment of the articles of incorporation vesting voting control of the subject company in the holders of common shares and limiting the payment of dividends to holders of preferred shares so that such dividends could only be paid out of ‘surplus and net profits’ accounts might result in an early default in dividends; . . .” The superior court found: “It is not true that the proposed amendment to the certificate of incorporation of plaintiff providing for the payment of dividends on preferred shares of plaintiff out of surplus or net profits [emphasis added] might result in an early or any default in such dividends.” It is immaterial which of these prognostications is the more accurate. The welfare of the corporation does not depend upon uninterrupted payment of dividends regardless of the source of the funds. The commissioner’s auditor, Mr. Heyne, testified: “These dividends are in reality distribution of capital by reason of the fact that the company has incurred an operating deficit from its inception to December 31, 1943.” The owners of the preferred shares may be dissatisfied with the present policy and wish to change it. They should be allowed that opportunity.
Under the present certificate of incorporation there is a related restriction which interferes with good management. No more than $3,000 may be spent in any one year for repairs, improvements or alterations without the unanimous consent of the board of directors or the holders of a majority of preferred shares, nor more than $5,000 in any one year for such purposes, without the consent of a majority of the preferred shares. This unwise restriction would be removed by the proposed amendment of the articles. According to the testimony of Mr. Touchstone, the expenditure of between $20,000 and $50,000 will be required to put the Transportation Building in repair. He stated it as his opinion that if this is done, the property will be worth $300,000, his theory no [612]doubt being that the resulting increase in value would be derived through a higher type of operation after the rejuvenation of the building. The present policy of diverting capital to the payment of dividends, with the result that the property has been allowed to deteriorate, and the income has been seriously impaired, is indefensible from the standpoint of good management.
Another objection, emphasized by the findings of the commissioner, and now urged by him, is that the proposed amendment contemplates a change in voting rights. The preferred shareholders now have the right to elect all but one of the directors. Under the proposed amendment the common shareholders would elect the directors except in the event of a failure to pay dividends for a period of 18 months, whether consecutive or not, in which event, and so long as the default existed, the holders of preferred shares would have a right to elect a majority of the directors. The commissioner found: “. . . That said exchange of shares would result in the transfer of the voting control of Transportation Building Company from the holders of preferred shares to the holders of common shares; . . .” Of this change it is said in appellant’s brief: “Again, however, this change in rights, preferences and privileges is definitely a loss to preferred shares and properly considered by the respondent [appellant] in determining if the plan is not unfair, unjust or inequitable. ’ ’ The proposed amendment would be in conformity with customary, approved, and sound corporate management. The present scheme for control and management, under which the preferred shareholders have continued to take dividends from capital, is unusual, inadvisable and, in the case of plaintiff corporation, has been demonstrated to be unsound. Clearly this is a change which the stockholders should be allowed to make if -they wish to do so. Other proposed changes in the articles are unimportant and need not be noted.
Another of the findings upon which the commissioner appears to base his refusal reads: “That the sale and issuance of 3783 common shares to O ’Melveny-Wagenseller and Durst, Inc., as contemplated in said application would result in the control of the management and operation of applicant being transferred from the holders of preferred shares representing an original investment in applicant and its predecessor corporations of $422,100 to a firm representing an investment in applicant of $378.30; ...” The commissioner’s statement [613]of the case in his opening brief commences with the following paragraph: “The ultimate factual question in this case, to state it rather tartly, is whether the firm of 0 ’Melveny-Wagenseller and Durst, Inc. should be permitted to gain control of respondent company which has assets admitted to be worth $225,000 and found by the Corporation Commissioner to be worth in excess of $255,420, upon investing the sum of $378.30 and agreeing to manage a building, which is the principal asset of respondent company, for a period of seven years.” It is true that the brokerage firm, if it saw fit to retain the stock, would own 5,746 shares of common out of a total of 10,000 shares and could elect a majority of the directors. Perhaps the holders of the preferred would approve this change of control. If they are satisfied to have the brokerage firm acquire a controlling interest of the common stock, it will be their privilege to make the change in the capital structure providing for additional common stock, and if they do not prefer that management they no doubt will vote against the plan. The lack of opposition at the hearing would indicate that they will vote approval of the plan, in the hope that new management will revitalize the business of the corporation. We do not see what hope there can be for improvement of the position of the stockholders, other than by the improvement of management. The commissioner appeared to attach much importance to the fact that the new arrangement might result in a large profit to the brokers. That, we think, is not the question. The building is at the intersection of two important streets in Los Angeles; it is a 13-story store and loft building and the land and building represent an initial outlay of some $900,00p. It has never been a successful operation. Messrs. O’Melveny, Wagenseller and Durst are offering to assume the management of the property for seven years. It is not at all inconceivable that they are more interested in the welfare of their clients than they are in any profit they may make out of the undertaking. If the permit is granted and through able, management they convert an unprofitable operation into a successful one, so that the common stock becomes of value, they will realize a gross profit of some 57 per cent and the other holders of common stock 43 per cent of any increase in value that accrues to the common stock. For the chance of making this profit they accept a heavy responsibility to their clients, not by the investment of money, but of time and effort, and by putting to the test
The stockholders of plaintiff have a right to be relieved from the burdensome restrictions of their existing capital structure. They should not be compelled to go on depleting their capital and allowing their property to remain in disrepair, and to decay. It is necessary that someone undertake to end the present sad state of affairs. It is the right of the corporation, without the approval of the Commissioner of Corporations, to make a contract with the firm of 0 ’Melveny, Wagenseller and Durst, Inc. for the management of the building, and for such compensation as it may wish to pay the brokers for their efforts. It has not seen fit to do this. It wishes to put its house in order and to remove the obnoxious restrictions from the articles, which have operated as a hindrance and detriment from the beginning. All the corporation is asking is that the stockholders be allowed to decide by two-thirds vote of the holders of the preferred shares (and those are the ones the commissioner feels may be imposed upon) whether the plan submitted for the approval of the commissioner is a desirable one for them to adopt. The question before the commissioner was not whether they should adopt the proposed plan or some alternative plan which might be more advantageous to them. So far as disclosed by the record, it was a question of adopting the proposed plan or doing nothing. The issuance of the permit would at least give the [615]shareholders a chance, under amended articles, to work out a better plan of management than the one proposed, if they do not approve it. To deny the permit is to encourage a sale of the property in order to avoid further loss through its operation under unwise restrictions.
The conclusions of law, signed by a deputy commissioner, read as follows: “From the foregoing facts the Commissioner of Corporations is unable to find:
“1. That the plan of business of Transportation Building Company as set forth in its application filed with the Commissioner on March 15, 1944, is not unfair, unjust or inequitable ;
“2. That the securities that Transportation Building Company proposes to sell and issue as set forth in said application are not such as in the opinion of the Commissioner of Corporations will not work a fraud upon the purchaser thereof.”
It is made the duty of the commissioner, by section 4 of the Corporate Securities Act (2 Deering’s General Laws, Act 3814), to issue a permit “if he finds that the proposed plan of business of the applicant is not unfair, unjust, or inequitable, that it intends to fairly and honestly transact its business, and that the securities that it proposes to issue and the method to be used by it in issuing or disposing of them are not such as, in his opinion, will work a fraud upon the purchaser thereof.” There was a finding that the exchange would redound to the benefit of the holders of the common shares, and there was a finding “that the exchange of shares as contemplated in the said application would not result in the holders of preferred shares receiving considerations commensurate with the advantages to be surrendered by such shareholders to the benefit of the holders of common shares. ’ ’ The commissioner did not find that the plan was unfair, unjust or inequitable nor that a fraud would be worked upon those who would acquire the new stock. There was no dispute whatever as to the facts, and there was no failure to disclose any facts in connection with the proposal. It is a fair, just, and equitable plan unless it is the reverse. It is an honest plan if it is not dishonest. There is no middle ground. The deputy commissioner evidently thought there was, and that without any finding or evidence to support a finding that the plan was unfair, unjust or inequitable, it was his duty to refuse the permit because of his opinion that the shareholders should be able to work out a better deal for themselves.
[616]The order cannot be justified upon the ground that the commissioner was of the opinion that it would be the exercise of poor business judgment for the stockholders to amend their articles and to entrust the management of the property to the brokerage firm. The commissioner’s act of refusing to issue the permit was, in effect, a veto of the plan by him, on behalf of the holders of the preferred shares. Such supervisory control of the internal affairs of a corporation, however wisely it may be exercised, is not vested in him. It appears from what we have said that the evidence before the commissioner clearly disclosed that the proposed plan is not unfair, unjust or inequitable, that it is not dishonest in any particular, and that it will defraud no one. If the plan should prove to be unwise or unsuccessful, the responsibility will be that of the stockholders and not of the state.
It is the contention of the commissioner that the trial court exceeded its power in making new findings and conclusions and in directing defendant commissioner to issue the permit as applied for. It is claimed that the trial in the superior court was “de novo,” and that this practice is forbidden except in cases in which it is sought to revoke an existing permit or license. It is contended that the court is limited to a review of the orders of the Commissioner of Corporations in matters relating to the issuance of securities and may not make new findings and conclusions. It is said that the trial was de novo because the court made findings and drew conclusions from the evidence contrary to those of the commissioner. There was no trial de novo, but only a review. The court received no additional evidence and made no findings upon the evidence which was before the commissioner, contrary to those of the commissioner, in any particular in which the findings of the latter were supported by the evidence. In the respects in which the conclusions of the court differed from those of the commissioner the facts from which the conclusions were drawn were not in dispute. The power to review would be futile if the court could not reach decisions of fact based on unconflicting evidence, and draw conclusions from the findings, which differ from those of the commissioner. The facts adduced at the hearing furnished no legal basis for a denial of the permit, and the court properly issued a peremptory writ directing respondent to issue it.
The judgment is affirmed. The attempted appeal from the order overruling the demurrer is dismissed.
Wood, J., concurred.