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which this appeal is prosecuted may and should be upheld for the asserted reason that the granting of the temporary restraining order was in direct violation of the mandates of section 527 of the Code of Civil Procedure, as amended by the legislature of 1911 (Stats. 1911, p. 59), whereby a radical innovation on the former practice with respect to the issuance of temporary restraining orders has been brought about.
The respondents also make the point that the plaintiff has not, by its complaint, shown itself to be entitled to favor from a court of equity in the matter as to which it seeks relief.
While we recognize in the last stated contentions of respondents considerable force, it is not conceived to be necessary to consider them, since we are of the opinion that, upon the merits of the controversy, the order appealed from must be sustained.
We are unable to make out how or in what way the transaction complained of by the plaintiff may be held to be in opposition to the provisions of section 11 of article XII of the constitution, and, unless it can be said to be obnoxious to the objection so made, then the act of transferring the stock to the defendant corporation was in all respects bona fide and legal, there being no showing or even pretense of extrinsic fraud in connection therewith.
The section of the constitution, with the terms of which it is claimed the transaction involved here is in conflict, reads, in part, as follows: "No corporation shall issue stock or bonds, except for money paid, labor done, or property actually received, and all fictitious increase of stock or indebtedness shall be void.”
The purpose of those provisions of the constitution is, of course, to preserve at all times the property of the corporation and thus protect and maintain the rights of the creditors and stockholders thereof as against any such manipulation or disposal of the capital stock by the owners of a majority of such stock as might result in the serious impairment if not the complete destruction of the rights of such creditors and the minority stockholders and at the same time in advantage to such majority stockholders-a situation which experience shows could easily be brought about if the law were otherwise than as laid down by the provisions of the constitution above quoted. In other words, the design of said provisions is
among other things, to prevent the corporate stock of a corporation from being transferred or disposed of by it without a sufficient consideration, either in the form of money, or property or labor performed for it. But by this we are not to be understood as meaning a consideration equal in value with the stock, for we do not think that the constitutional inhibition invoked here requires such a consideration to render valid the issue of stock by a corporation. If there is a consideration of some sort and the transaction is one that is intended to redound to the benefit of the corporation in the prosecution of its corporate purposes, then we should say that, so far as are concerned the requirements of the law in that regard, the consideration is sufficient, and, in a sense, adequate, although it may not be equal in value to that of the stock. In any event, in the case of the issuance of stock by a corporation for an inadequate consideration, viewed from the standpoint of value, such transaction cannot be assailed by the stockholders, or, which is the same thing, by the corporation itself, merely upon the ground of such inadequacy of consideration. “Creditors may attack the transaction-stockholders cannot." (O'Dea v. Hollywood Cemetery Assoc., 154 Cal. 67, (97 Pac. 6].) So, in this case, if there be shown any consideration at all for issuance of the stock, then the plaintiff is in no position to challenge the transaction resulting in its issuance or the validity of such issue solely upon the ground of the inadequacy of the consideration in the sense that there is a marked or wide disparity, unfavorable to the stock, between the value of the latter and that of the consideration given therefor. Upon this proposition, assuming that the record discloses some consideration for the issuance of the stock to the defendant, we could rest the decision of this case. But we are of the opinion that the facts disclosed here clearly show that the plaintiff received, under the circumstances under which the stock was issued, an adequate consideration,
There is nothing in the record before us showing what the actual value of plaintiff's stock was, unless the par value thereof is to be assumed to be its actual value, which assumption is not warranted by the other facts disclosed by the record. The complaint is absolutely silent as to the actual value of said stock at the time of the transaction culminating in its transfer to the defendant. It merely alleges that the stock,
having a par value of one thousand dollars per share, was issued and delivered to the defendant corporation, without any of the several kinds of consideration for which it may legally be issued. On the other hand, the answer declares that the consideration for the issuance and delivery to the defendants ... of the said one hundred shares of the capital stock of the plaintiff and of the said certificate No. 29 therefor, was the advance by the defendant ... of the sums provided by it to be advanced under the terms of said contract," etc., and that “the same was a good and valuable consideration."
Of course, it can seldom, if ever, be said that the capital stock of a mining corporation whose properties are undeveloped is actually worth its par value. It certainly cannot be said that the stock of the plaintiff, at the time of the transaction here, was worth its par value or anything near such value. The fact is that the properties of the plaintiff which were related to the transaction involved in this dispute were in a condition and of a character that it could not be told, at the time of said transaction, what actual value the stock issued to the defendant possessed, if very much of any when compared to the amount of money the plaintiff asked the defendant to loan to it. Manifestly, the value of said stock, at the time of the transaction involved here, insofar as such stock might have any actual value from the fact of plaintiff's ownership of the properties to develop which it borrowed money from the defendant (and it does not appear that it owned any other property), was purely tentative, or extremely problematical, as all undeveloped mining enterprises, from their very nature, must necessarily be, for whatever actual value it might acquire would, of course, have to depend and be determined upon the result of the experimental development of its said mining properties. It is, therefore, proper to say, from all the facts presented by this record, that the actual value of the stock transferred to the defendant corporation was at the time of the issuance of said stock, very far short of its par value, if, indeed, it had any value at all as profit-producing property. We, therefore, have this situation here: That the plaintiff was the Jwner of certain mining claims, the value of which as such was unknown, and that it was in need of the means necessary for the development of said claims; that it made an application to the defendant corporation for the loan of certain
moneys to be used for that purpose, and its application was granted, the defendant corporation, upon an examination of the proposition, agreeing to advance the money required—the sum of fifty thousand dollars, more or less—in consideration of a promise upon the part of the plaintiff to do these things: 1. To execute and deliver to the said defendant a mortgage upon all its mining properties situated in the state of California and to develop which the loan was to be made, the money so loaned to bear interest at the rate of six per cent per annum; 2. To pay and deliver to the said defendant, as a “profit” to it, a certain per centum of the gross sale value in San Francisco of all products of said claims marketed by the plaintiff, the amount of such per centum to be regulated according to the amount of money so advanced by the defendant; 3. As “additional profit” to the defendant, and upon receipt by it (plaintiff) of the first payment of twenty-five thousand dollars, to issue and deliver to the defendant, or to any person or persons it might name to receive the same, one hundred shares of stock of plaintiff of the par value of one thousand dollars per share.
The plaintiff assented to the foregoing propositions, and not only executed an agreement in writing to that effect but executed the terms of the agreement, and thereupon received from the defendant the first advance of twenty-five thousand dollars and thereafter, from time to time, received other sums until the total amount so received exceeded the sum of seventyfive thousand dollars. It seems to us that, under the circumstances as thus indicated, it must be held to be true that the stock involved in this litigation was issued to the defendant corporation for a consideration which, whatever its value was when compared to the actual value of the stock, not only satisfied the mandates of the constitution, but which, even in a suit by creditors to cancel the stock on the ground of fraud in its issuance, could hardly be held to be such in itself to justify the inference of fraud, either as a matter of law or of fact.
It is very clear that the issuance of said stock to the defend. ant, under the circumstances disclosed here, was one of the chief inducements of the loan. Indeed, it is, we think, from a consideration of the whole transaction, proper to assume that but for the agreement of the plaintiff to so transfer one hundred shares of its stock to the defendant, the latter would not
20 Cal. App.—45
have agreed to advance to the former the large sum of money which was actually advanced.
However that may be, it is very clear that the stock was issued for a valuable consideration in the form of money and for the corporate purposes of the corporation, and that is all that is required by the provisions of section 11 of article XII of the constitution to make it a perfectly valid transaction.
Provisions in the constitutions of other states similar to those involved in this discussion have been considered by the courts of those jurisdictions as well as by the supreme court of the United States and they have thus uniformly been held not to mean that the consideration should always be of equal value with the stock issued, so long as "the transaction is a real one, based upon a present consideration, and having reference to legitimate corporate purposes, and is not a mere device to evade the law and accomplish that which is forbidden.'' (Memphis etc. R. R. Co. v. Dow, 120 U. S. 287, 299, [30 L. Ed. 595, 7 Sup. Ct. Rep. 482] ; see, also, Grant v. East and West R. Co., 54 Fed. 569, 575, 576, (4 C. C. A. 511); Nelson v. Hubbard, 96 Ala. 238, 250, [17 L. R. A. 375, 11 South. 428] ; Speer v. Bordeleau, 20 Colo. App. 413, (79 Pac. 332); Const. of Alabama (1875), art. XIV, sec. 6; Colorado Const., art. XV, sec. 9.)
Even if the stock issued to the plaintiff may be said to have constituted a “bonus,” as is the contention, still, it having been given as an inducement to the loan, it cannot be held to be void or even voidable for that reason. While the word "bonus" may, in its natural import, be said to imply a gift or gratuity, "bonus stock, technically, and perhaps correctly speaking, is stock issued to the purchasers of bonds as an inducement to them to purchase bonds or loan money to the corporation.” (Thompson on Corporations, 2d ed., sec. 3441.)
In Dickerman v. Northern Trust Co., 176 U. S. 181, (44 L. Ed. 423, 20 Sup. Ct. Rep. 311), where it was contended that certain stock was issued without a consideration to the purchasers of bonds of the corporation there concerned, it is said: “It is true that these parties, in disposing of the bonds, allowed to each purchaser of a one thousand dollar bond two hundred dollars of preferred and four hundred of common stock, but they do not seem to have profited by this themselves. And if it were necessary to the negotiation of the bonds to give a