Davey v. Masser

Henderson, J., delivered the opinion of the Court. This suit was instituted by J. Edward Davey against Harry and Evelyn Masser and Warren Bitner, alleging that Davey is the president and a director of Accelerated Transport-Pony Express, Inc. of Hagerstown, Maryland, and the owner of fifty per cent of its outstanding common stock, being fifty per cent of all the stock entitled to vote, and that Harry Masser is a director and the owner of the other fifty per cent of said stock. Evelyn Masser is alleged to be a director, and Bitner the secretary-treasurer of the corporation. The bill alleged that on July 29, 1950, Davey and Masser entered into a writ ⁶¹⁷ ten contract, attached to the bill as an exhibit, whereby Masser agreed to transfer all the assets of his business, Masser Motor Express, and the assets of Masser Properties, Inc., to a corporation to be formed, and to sell Davey fifty per cent of the common stock of the new corporation for $500.

Davey agreed to give up his employment as an officer of Associated Transport, Inc., with offices in New York, and move to Hagerstown, devoting his entire time to the new corporation. The new corporation was duly formed and took over the Masser business, but not the real estate held by Masser Properties, Inc. An organization meeting was held on July 21, 1951, at which officers and directors were elected. The officers elected were, Masser, chairman of the board, Davey, president, and Bitner, secretary-treasurer. The four directors were Masser and his wife and Davey and his son.

The salaries of Masser and Davey were each fixed at $20,000 per year. Bank accounts were opened, subject to withdrawal on the signatures of Davey and Bitner. Davey took over the management of the business. In April 1952, stock certificates were issued in the name of Masser, which certificates remained in the custody of Davey.

The bill further alleged that in December, 1952, Masser and his wife tried, unsuccessfully, to induce Davey to surrender first all, and then part, of his stock interest in the corporation. There were also negotiations for purchase of his interest. On February 19, 1953, there was a purported meeting of the incorporators of. the corporation, of which Davey had no notice. At this meeting resolutions were adopted authorizing the issuance of 30,000 shares of common and 1,400 shares of preferred stock to Masser as a “subscriber.” There was an election of directors, consisting of Masser, his wife and Bitner.

This board undertook to remove Davey as president, and elect Masser in his place. On March 5, 1953, Masser wrote Davey informing him of the action taken, enclosing a check for the balance due him for his services. Davey refused to recognize the validity ⁶¹⁸ of the action, and brought this suit, praying that the purported issuance of stock on February 19, 1953, be declared invalid, and that the previous issue of stock be declared valid; that the purported election of officers and directors on February 19, 1953, be declared invalid, and that the election on July 21, 1951, be declared valid. After a demurrer had been overruled, answer filed, and extended hearings, the Chancellor, on February 15, 1954, passed the decree from which cross-appeals were taken.

This decree provided (1) that the contract of July 29, 1950, as amended by mutual agreement, is a valid and subsisting agreement, and that Accelerated Transport-Pony Express, Inc. is the corporation formed pursuant thereto; (2) that the issue of stock authorized at the meeting of July 21, 1951, is void, and that the issue authorized at the meeting of February 19, 1953, is valid, consisting of 1,400 shares of preferred stock of the par value of $50 per share and 30,000 shares of common stock of the par value of $1 per share; that all of said stock shall be issued to Masser, who shall transfer to Davey fifty per cent thereof; (3) that the officers and directors of the corporation elected February 19, 1953, are the lawfully elected officers and directors of the corporation; and (4) that the costs be paid by Harry G. Masser. Davey appealed from paragraph (3) of the decree, and from that portion of paragraph (2) invalidating the stock authorized at the meeting of July 21, 1951, and validating that authorized and issued on February 19, 1953. Masser appealed from paragraph (1) of the decree, and that portion of paragraph (2) requiring Masser to deliver fifty per cent of the outstanding stock to Davey. A number of questions are raised at the outset as to the correctness of the corporate procedures.

It may be noted that the written contract of July 29, 1950, called for the formation of a corporation under Delaware law having an authorized capital stock of 4,000 shares of preferred, $50-par, entitled non-cumulatively to dividends ⁶¹⁹ of $2-, and 1,000 shares of $l-par common. Voting-rights were not specifically mentioned, but in a later clause, after providing for the issuance of the 1,000 shares of common to Masser, it was stated that Masser, for $500, would transfer 500 shares of the common, “constituting fifty per cent of the voting stock thereof”, to Davey. However, a certificate of incorporation was prepared and filed with the State Tax Commission of Maryland. This authorized the issuance of 30,000 shares of $l-par common and 1,400 shares of $50-par preferred.

Nothing in the charter referred to voting rights. Masser, his wife, and Fred A. Puderbaugh were named as incorporators, and authorized to act as directors until the first annual meeting, or until their successors were duly chosen and qualified. The number of directors was fixed at four, with the right in the Board to alter the number, from three to fifteen, in the manner prescribed in the by-laws. Davey contends that Masser agreed to a modification of the written agreement, so far as incorporation in Maryland, and the amounts of common and preferred stock are concerned.

This is not seriously disputed, for Masser signed the charter, and Davey approved it in writing. It is not disputed that a meeting was held on July 21, 1951, at which all of the named incorporators and directors, as well as Davey and his son, were present. Davey made long-hand notes, but they were never written up or recorded in the minute book. This, however, would not be a fatal objection, as between the parties, even though a violation of the corporation law, Code (1951), Art. 23, Sec. 45(a).

See Brune, Maryland Corporation Law and Practice, § 381. Cf. Grafflin v. Woodside, 87 Md. 146 and Weber v. Fickey, 52 Md. 500 . Davey’s notes show that the directors authorized the issuance of 20,000 shares of common stock and 400 shares of preferred, the 20,000 shares to be issued in Masser’s name with the understanding that he would transfer 10,000 shares to Davey, in consideration of $500 paid ⁶²⁰ to Masser on October 25, 1950.

The 400 shares of preferred were to be distributed to Miss Winn, Puderbaugh and others, apparently for services rendered to Masser in connection with the contract with Davey or the formation of the corporation. Davey’s notes do not show that the directors fixed the value of the property transferred to the corporation as consideration for the stock authorized to be issued, or even described the property to be transferred. No by-laws were adopted. No stock issuance statement was ever filed.

Some eight months later, “temporary” stock certificates were issued in Masser’s name, as authorized. There were several subsequent meetings of the board of directors elected on July 21, 1951, apparently to deal with current business problems, but no stockholders’ meetings were ever held. When Masser, through his attorney, arranged for the meeting of February 19, 1953, without notice to Davey or his son, he chose to regard all of the previous corporate actions, except the filing of the corporate charter with the State Tax Commission, as void. Some of the steps then taken were in formal compliance with the corporation law.

Puderbaugh was present although he claimed to have resigned as a named director. Masser represented •himself to be the subscriber to all of the authorized shares of stock, and presented a proposal to transfer certain described property of Masser Motor Express, valued at $100,000, in exchange for said stock. This, of course, ignored the fact that the property had been previously taken over by the new corporation and operated by it for a year and a half. The proposal was accepted, and the meeting then elected a new board, which in turn elected officers and directors, and ousted Davey as president.

It would appear from this recital, that from the convening of the first organization meeting on July 21, 1951, until the meeting of February 19, 1953, the requirements of the corporation law ,were consistently • ignored.. Nevertheless, the charter of the-corporation ⁶²¹ was valid, although it is incomplete in its description of the preferred stock and makes no provision for supplying the omissions by articles supplementary, as permitted by Code (1951), Art. 23, Sec. 14(b). Likewise, the first organization meeting was properly convened and adopted the charter, as filed with the State Tax Commission. See Code (1951), Art. 23, Sec. 127(b).

The corporation was in a position to function and did conduct business continuously thereafter. Since we are not confronted with any problems concerning the rights of third parties, we think the solution of the puzzle must be found in recognized equitable principles as between the parties. We have already referred to the failure to keep minutes as not fatal to the complainant’s case. The fact that a meeting was held on July 21, 1951, is not disputed, nor is it seriously denied that the transactions described took place at that meeting, however defective in form.

All of the incorporators and directors named in the charter were present and voted in favor of the issuance of stock. The facts that no resolutions were adopted, and no stock issuance statement was prepared or filed, as required by Code (1951), Art. 23, Sec. 16(b) (c) and (e), are not fatal as between the parties. In