United Steel Industries, Inc. v. Manhart

405 S.W.2d 231 (Tex. 1966)

MCDONALD, CHIEF JUSTICE

This is an appeal by defendants, United Steel Industries, Inc., J. R. Hurt and W. B. Griffitts, from a

judgment declaring void and cancelling 5000 shares of stock in United Steel Industries, Inc. issued to

Hurt, and 4000 shares of stock in such corporation issued to Griffitts.

Plaintiffs Manhart filed this suit individually and as major stockholders against defendants United Steel

Industries, Inc., Hurt, and Griffitts, alleging the corporation had issued Hurt 5000 shares of its stock in

consideration of Hurt agreeing to perform CPA and bookkeeping services for the corporation for one

year in the future; and had issued Griffitts 4000 shares of its stock in consideration for the promised

conveyance of a 5 acre tract of land to the Corporation, which land was never conveyed to the

Corporation. Plaintiffs assert the 9000 shares of stock were issued in violation of Article 2.16 Business

Corporation Act, and prayed that such stock be declared void and cancelled.

Trial was before the Court without a jury which, after hearing, entered judgment declaring the 5000

shares of stock issued to Hurt, and the 4000 shares issued to Griffitts, issued without valid consideration,

void, and decreeing such stock cancelled.

* * *

The trial court found (on ample evidence) that the incorporators of the Corporation made an agreement

with Hurt to issue him 5000 shares in consideration of Hurt's agreement to perform bookkeeping and

accounting services for the Corporation for the first year of its operation. The Corporation minutes

reflect the 5000 shares issued to Hurt "in consideration of labor done, services in the incorporation and

organization of the Corporation." The trial court found (on ample evidence) that such minutes do not

reflect the true consideration agreed upon, and that Hurt performed no services for the Corporation

prior to February 1, 1965. The Articles of Incorporation were filed on January 28, 1965, and the 5000

shares were issued to Hurt on May 29, 1965. There is evidence that Hurt performed some services for

the Corporation between January and May 29, 1965; but Hurt himself testified the "5000 (shares) were

issued to me for services rendered or to be rendered for the first year in keeping the books...."

The situation is thus one where the stock was issued to Hurt both for services already performed and for

services to be rendered in the future.

The trial court concluded the promise of future services was not a valid consideration for the issuance of

stock under Article 2.16 Business Corporation Act; that the issuance was void; and that since there was

no apportionment of the value of future services from the value of services already rendered, the entire

5000 shares were illegally issued and void.

Article 12, Section 6, Texas Constitution, provides: "No corporation shall issue stock...except for money

paid, labor done, or property actually received...." And Article 2.16 Texas Business Corporation Act

provides: "Payment for Shares.

"A. The consideration paid for the issuance of shares shall consist of money paid, labor done, or

property actually received. Shares may not be issued until the full amount of the consideration, fixed as

provided by law, has been paid....

"B. Neither promissory notes nor the promise of future services shall constitute payment or part

payment for shares of a corporation.

"C. In the absence of fraud in the transaction, the judgment of the board of directors...as to the value of

the consideration received for shares shall be conclusive."

The Fifth Circuit in Champion v. CIR, 303 Fed. 2d 887 construing the foregoing constitutional provision

and Article 2.16 of the Business Corporation Act, held:

Where it is provided that stock can be issued for labor done, as in Texas...the requirement is not met

where the consideration for the stock is work or services to be performed in the future....The situation is

not changed by reason of the provision that the stock was to be given...for services rendered as well as

to be rendered, since there was no allocation or apportionment of stock between services performed

and services to be performed."

The 5000 shares were issued before the future services were rendered. Such stock was illegally issued

and void.

Griffitts was issued 10,000 shares partly in consideration for legal services to the Corporation and partly

in exchange for the 5 acres of land. The stock was valued at $1 per share and the land had an agreed

value of $4000. The trial court found (upon ample evidence) that the 4000 shares of stock issued to

Griffitts was in consideration of his promise to convey the land to the Corporation; that Griffitts never

conveyed the land; and the issuance of the stock was illegal and void.

The judgment of the board of directors "as to the value of consideration received for shares" is

conclusive, but such does not authorize the board to issue shares contrary to the Constitution, for

services to be performed in the future (as in the case of Hurt), or for property not received (as in the

case of Griffitts).

The judgment is correct. Defendants' points and contentions are overruled.

AFFIRMED.

EXERCISES

1. What was wrong with the consideration in the transaction between United Steel and Hurt?

2. What if Hurt had completed one year of bookkeeping prior to receiving his shares?

3. What was wrong with the consideration Griffitts provided for the 4,000 shares he received?