Chater v. S.F. Sugar Ref. Co.

C., G. & B. enter into an agreement to form a corporation for commercial purposes. By this agreement and the corporate act subsequently filed, each corporator is entitled to an equal proportion of the stock; G. and B. contribute to the capital in money, and C., having no money, proposes and is allowed to give his note in lieu of money, pledging his stock to G. and B. as security, they agreeing to raise him the money on the stock. It is agreed that the stock due him shall be issued on a given event; the event happens. The note is not made nor the stock issued to him, but the company, controlled by the other two corporators, go on with their business, recognizing C. as a corporator. No demand is made for his note or the stock. The corporation makes profit enough to pay the debts, and the share coming to C. pays his contribution to the capital. No stock having been issued to C., he now claims and sues to enforce the specific performance of the agreement: Held, that if G. and B., who were to raise the amount to be contributed by C., having by the agreement the right to demand his note and stock, do not demand them, or issue the stock to him, and without this form of security advance the money which was to be raised, they are to be considered as waiving this formal right, and cannot plead the want of a mere literal compliance as a forfeiture of the interest of C. in the common enterprise; that in equity, the substance of the whole transaction was fulfilled; the object of the security answered; and the original right of C. to his stock was not lost by mere failure on his part to give a particular form of security, upon which G. and B., who were beneficially interested in demanding it, did not insist; and that C.’s stock, whether actually issued in the form of a certificate or not, is boimd by the agreement, and he is entitled to it.

This case is distinguished from mere executory agreements, through a performance of the terms of which a party becomes entitled to property, because here C. was entitled, as of original right, to his stock, and the conditions annexed to the issuance of the certificates to him, even if not waived, were mere qualifications in favor of G. and B. in the nature of security to them, the substance of which security they enjoyed, though not in the precise way described. Green v. Covillaud, (10 Cal. 317) and other cases cited by appellants here, are examples of mere executory agreements.

In this case, after the execution of the agreement, the corporation was formed under the laws of this State, C. G-. & Chas. W. B. being the trustees—the agreement stipulating that they should be the first trustees, and the latter probably being assignee of B., the party to the agreement—and they were also the sole corporators, and organized with full knowledge of the agreement, which not only contemplated the formation of the corporation, but prescribed the terms and rights of the members in the corporation and corporate business. Under the agreement, C. was to be superintendent of the business as well as trustee. The corporate business was commenced, and for a long time prosecuted with reference to this agreement reciting these terms and affirming these rights: Held, that under these circumstances the corporation adopted and is bound by the agreement.