American Bond & Mortgage Co. v. Lindsay

FINLAYSON, P. J.

This is an action by a California corporation to cancel an issue of certain of its shares of treasury stock—shares that it had issued to the four defendants, Lindsay, Corbaley, Maeseher, and McKinney, in exchange for certain shares that they owned of the capital stock of the State Investment Company. The theory of

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the complaint is that the issue of plaintiff’s stock in exchange for stock of the State Investment Company was in direct contravention of a permit that had been granted by the commissioner of corporations, and that, therefore, under the provisions of the Investment Companies Act, commonly known as the blue sky law (Stats. 1913, p. 715), the issue was a nullity. The appeal is by the defendant Lindsay.

The case, as presented by the complaint and found by the court, is substantially as follows: At a time when plaintiff’s board of directors was dominated and controlled by one Pearson, the latter, for his own illegal profit and gain, caused 57,226 shares of plaintiff’s treasury stock to be issued to the four above-named defendants in exchange for 71,532 shares of the capital stock of the State Investment Company that theretofore had been issued to and were then owned by these four defendants. Of the 57,226 shares of plaintiff’s treasury stock so issued, 19,944 were issued to defendant Lindsay. Previous to the issue of the 57,226 shares, and pursuant to the act commonly known as the blue sky law, plaintiff, whose capital stock was divided into two million shares of the par value of one dollar each, had made application to the commissioner of corporations for authority to sell its corporate stock. A temporary permit was issued by that officer whereby plaintiff was authorized to issue not exceeding one million of its shares “in exchange for property, the fair and reasonable net market value of which . . . shall . . . equal or exceed 110 per cent of the par value of the shares issued therefor.” It is alleged in the complaint and found by the court, in substance and effect, that the value of the State Investment Company’s shares that the four defendants transferred to plaintiff in exchange for its 57,226 shares of treasury stock, did not exceed sixty-three per cent of the par value of plaintiff’s capital stock. Wherefore plaintiff, which, since the exchange, has come under the control of a board of directors by whom the whole transaction has been repudiated, seeks to rescind the exchange and to cancel the issue of its treasury stock as a void issue under the blue sky law, section 5 of which reads: “It shall he unlawful to issue any security to which this act is applicable unless a certificate or a temporary permit authorizing the issue thereof shall first have been received from the commissioner of corporations as provided in this act.”