Ling and Company v. Trinity Savings and Loan Ass'n
15 Tex. Sup. Ct. J. 328, 482 S. W.2d 841, 53 A.L.R. 3d 1265 (1972)
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Rule of Law:
Stock transfer restrictions, even if adequately incorporated by reference in corporate articles, must be "conspicuously" noted on the stock certificate to be effective against a transferee without actual knowledge under the Texas Business and Commerce Code. Restrictions requiring stock exchange approval or offering first-option rights to a corporation or its shareholders are generally reasonable and not subject to statutory limits on "buy-and-sell agreements" unless proven otherwise.
Facts:
- Bruce W. Bowman pledged 1500 shares of Class A Common Stock in Ling & Company, Inc. to Trinity Savings and Loan Association to secure a promissory note.
- Ling & Company's articles of incorporation (amended 1968, Article Four) contained restrictions requiring New York Stock Exchange (NYSE) approval for stock encumbrance and first-option rights to the corporation and other Class A stockholders for sale.
- The stock certificate referenced restrictions on its reverse side, which in turn referred to Article Four of the articles of incorporation for the specific conditions.
- It was conceded that Bowman did not obtain NYSE approval for the pledge, nor did he offer the stock to other Class A stockholders before pledging it.
- The line of print referring to the restrictions on the face of the stock certificate did not "stand out."
- It was stipulated there were more than twenty holders of record of Ling & Company's Class A stock.
Procedural Posture:
- Trinity Savings and Loan Association sued Bruce W. Bowman in state trial court for the balance owed on a promissory note and to foreclose on a certificate for 1500 shares of Class A Common Stock in Ling & Company, Inc. pledged by Bowman.
- Ling & Company, Inc. was made a party to the suit due to its assertion that the transfer of its stock was subject to unfulfilled restrictions.
- The trial court entered summary judgment in favor of Trinity Savings and Loan, against Ling & Company's contentions, ordering foreclosure of the security interest in the stock and its sale.
- Ling & Company, Inc. (appellant) appealed the trial court's judgment to the Court of Civil Appeals.
- The Court of Civil Appeals (470 S.W.2d 441) affirmed the trial court's judgment.
- Ling & Company, Inc. (appellant) then appealed to the Supreme Court of Texas.
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Issue:
Is a corporation's restriction on stock transferability unenforceable against a pledgee when the restriction, though incorporated by reference in the articles of incorporation, is not "conspicuously" noted on the stock certificate, or is deemed unreasonable, or statutorily prohibited, under Texas law?
Opinions:
Majority - REAVLEY, Justice
Yes, the stock transfer restrictions are unenforceable against Trinity Savings and Loan Association under this record because they were not "conspicuously" noted on the stock certificate. No, the restrictions were not unreasonable as a matter of law, nor statutorily prohibited by the "not more than twenty" rule. The court affirmed that the stock certificate's content complied with the Texas Business Corporation Act (Art. 2.22, subd. A, and Art. 2.19, subd. F) by adequately incorporating the restrictions by reference. However, the court determined that the reference to restrictions on the certificate's face and back was not "conspicuous" as required by the Texas Business and Commerce Code (TBCC) Sec. 8.204, applying the definition of "conspicuous" from TBCC Sec. 1.201(10) which mandates a term to be so written as to be noticed by a reasonable person (e.g., capitals, larger or contrasting type). Since the line of print did not "stand out," it failed this test. Despite this, the court noted that TBCC Sec. 8.204 makes a restriction effective against a person with actual knowledge, and the record did not conclusively establish that Trinity lacked such knowledge, thus remanding the case. The court rejected the argument that the restrictions were unreasonable; it found the NYSE approval requirement reasonable given Ling & Company's brokerage house status and Rule 315 of the Exchange. It also found the first-option provisions (to the corporation then pro rata to other stockholders) not "unusual or oppressive," absent evidence that the number of stockholders made the burden too heavy or lacked a reasonable corporate purpose. Finally, the court held that TBCA Art. 2.22, subd. B(2) (limiting buy-and-sell agreements to no more than 20 record holders) was inapplicable, as Ling's restriction was an "option" to purchase, not a "buy and sell agreement" which typically implies an obligation to purchase and usually refers to contracts between shareholders.
Concurring - DANIEL, J.
Concurs in result. (No detailed reasoning provided beyond this statement.)
Analysis:
This case is significant for clarifying the interplay between the Texas Business Corporation Act and the Texas Business and Commerce Code regarding stock transfer restrictions. It establishes a dual requirement: formal incorporation by reference and conspicuous notation on the certificate. The decision emphasizes the importance of actual knowledge as an exception to the conspicuousness requirement, which can lead to complex factual disputes. It also provides guidance on the reasonableness of common restrictions, such as first-option rights and stock exchange approval, and limits the application of statutory "buy-and-sell agreement" definitions to prevent overly broad invalidation of such restrictions, thereby affecting corporate governance and investment in closely held companies.
