Allen v. Biltmore Tissue Corp.
161 N.Y.S.2d 418, 2 N.Y.2d 534, 141 N.E.2d 812 (1957)
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Rule of Law:
A restriction on the transfer of corporate stock, such as a first-option agreement allowing the corporation to purchase shares at their original price upon a stockholder's death, is enforceable if it is reasonable and the stockholder had adequate notice; notice by reference to specific by-law sections on the stock certificate satisfies statutory requirements.
Facts:
- Biltmore Tissue Corporation was organized in 1932, and its by-laws included provisions restricting stock transfers, specifically giving the corporation a right to purchase a deceased stockholder's shares at the original price it received for them, with a 90-day option period.
- Harry Kaplan purchased 5 shares of Biltmore stock in 1932, received a stock dividend of 5 shares in 1936, and bought an additional 10 shares in 1938, accumulating a total of 20 shares.
- Each of Kaplan's three stock certificates bore a legend stating, 'Issued subject to restrictions in sections 28, 29, and 30 of the By-laws' along the left-hand margin.
- Harry Kaplan died on October 25, 1953.
- In February 1954, Kaplan's son (one of his executors) inquired about Biltmore's interest in acquiring the shares, and the executors' attorney requested new certificates in the name of the estate or executors.
- On March 4, 1954, Biltmore's board of directors voted to exercise its option to purchase Kaplan's 20 shares under by-law § 30, offering $20 per share (more than the original purchase price).
- About three weeks later, Kaplan's executors' attorney was informed of Biltmore's decision.
- Kaplan's executors declined to sell the shares to Biltmore and instead insisted on the transfer of the stock to them.
Procedural Posture:
- Harry Kaplan's executors brought an action in Special Term (trial court) to compel Biltmore Tissue Corporation to accept surrender of the decedent's stock certificate and issue a new certificate for 20 shares to them.
- Biltmore Tissue Corporation counterclaimed for specific performance based on its exercise of the option to purchase the shares under by-law section 30.
- The Special Term court granted judgment to Biltmore Tissue Corporation on its counterclaim and dismissed Kaplan's executors' complaint.
- Kaplan's executors (appellants) appealed to the Appellate Division.
- The Appellate Division reversed the Special Term's judgment, rendered judgment directing the transfer of the stock to Kaplan's executors (plaintiffs), and dismissed Biltmore Tissue Corporation's (defendant's) counterclaim, holding that the by-law in question was void.
- Biltmore Tissue Corporation (appellant) appealed the Appellate Division's decision to this court (New York Court of Appeals).
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Issue:
Does a by-law granting a corporation a first option to purchase a deceased stockholder's shares at their original price constitute an unreasonable restraint on alienation, and does a stock certificate legend stating 'Issued subject to restrictions in sections 28, 29, and 30 of the By-laws' satisfy the statutory requirement that such restrictions be 'stated upon the certificate'?
Opinions:
Majority - Ftjld, J.
Yes, a by-law granting a corporation a first option to purchase a deceased stockholder's shares at their original price does not constitute an unreasonable restraint on alienation, and a stock certificate legend referencing specific by-law sections satisfies the statutory requirement that restrictions be 'stated upon the certificate.' The court first addressed the notice requirement of Personal Property Law § 176 (identical to Uniform Stock Transfer Act § 15), which mandates that a restriction on transfer be 'stated upon the certificate.' The court held that 'stated' does not require verbatim or substantial reproduction of the restriction, but rather sanctions a notation indicating where the restriction appears, allowing for incorporation by adequate reference. The legend on Kaplan's certificates, referencing specific by-law sections, was deemed sufficient notice, especially when contrasted with other statutes (e.g., Stock Corporation Law § 66) that explicitly require the substance of a restriction to be printed. Next, the court evaluated the by-law's validity as a potential unreasonable restraint on alienation. It affirmed that restrictions on stock transfers are generally sustained if 'reasonable' and if the stockholder acquired the stock with notice. First option provisions, requiring shareholders to offer stock to the corporation or fellow stockholders before outsiders, are almost uniformly held valid. The court clarified that the law condemns an effective prohibition against transferability, not merely a restriction that postpones sale during an option period. Since Biltmore's option was only for a 90-day period, after which Kaplan's legal representative was free to 'dispose of said stock as he sees fit,' the by-law did not render the sale of stock impossible. The court rejected the Appellate Division's finding of 'unreasonableness' based on the option price being the original purchase price. It reasoned that such a standard would encourage extensive litigation over 'fair market value' and undermine the utility of first-option restrictions, especially in closely held corporations where market value is difficult to ascertain. Parties are free to agree on a price formula, and mere disparity between the option price and current value is insufficient to invalidate a restriction. Finally, regarding the executors' claim of waiver due to Biltmore's alleged failure to exercise its option within 90 days, the court found the by-law 'patently deficient' in specifying the commencement date. It concluded that the 90-day period could not begin until a 'legal representative' was ascertainable through the issuance of letters testamentary, enabling the corporation to make a purchase. As Biltmore exercised its option within 90 days of being informed of the letters testamentary, the option was timely.
Analysis:
This case significantly clarifies the standards for valid stock transfer restrictions in New York, particularly for closely held corporations. It establishes that a general reference to by-laws on a stock certificate constitutes sufficient notice under the Uniform Stock Transfer Act, avoiding the need for lengthy verbatim reproduction. Furthermore, it firmly upholds the enforceability of first-option provisions, even when the option price is fixed at the original purchase price, emphasizing the importance of contractual freedom and the social utility of such restrictions for maintaining control in close corporations. The ruling mitigates litigation over the 'fairness' of agreed-upon prices and provides guidance on the commencement of option periods when not explicitly defined, focusing on practicality in legal representation.
