The opinion of the court was delivered by: HOLTZOFF
This is a derivative action brought by a minority stockholder of a corporation known as Industrial Processes Company, Incorporated, organized under the laws of the State of Virginia, against its majority stockholders and certain other persons, to redress grievances which the plaintiff asserts the Corporation has against the individual defendants and in respect to which the Corporation declined to act.
Industrial Processes Company, Incorporated, which is named as a defendant in this action, was organized in July 1949 by the defendants Elmer Davies and his brother Howard Davies. The two Davies brothers had been endeavoring to develop an idea into a concrete process and concrete apparatus for sterilizing liquids such as fruit juices and milk, and further for extracting salt from sea water and making sea water potable. At the time the ideas were in an embryonic or inchoate state, no patent applications had been filed, no machinery had been built or anything concrete done beyond preliminary experimentation at best.
The plaintiff, Mary B. Vann, is a lady of culture and refinement, but apparently of little business experience and not too well versed in the intricacies of corporate affairs. She met Elmer Davies through a relative, heard that he was about to organize a corporation for the exploitation of these inventions, and indicated that she would like to invest some money in the enterprise. It is fair to the defendants to note that they did not invite her to make the investment. Nor did they do anything to induce her to do so. She made the first approach. She was given to understand that the Davies brothers would control the corporation, as was to be expected, because, naturally, they wanted to be in control of their own inventions. It was their intention to control 52 per cent of the stock and to sell the balance as best they could by private sale to friends and acquaintances, without apparently putting the stock on the open market, as otherwise they might have come under the provisions of the Securities and Exchange Act.
The Corporation was organized, as stated, under the laws of the State of Virginia. The reason why Virginia was selected will become apparent hereafter. The organization meeting, after the Articles of Incorporation were properly filed, was held on July 9, 1949. At that meeting the two Davies brothers offered to assign to the Corporation all of their inventions, covering methods and apparatus for heating and vaporizing liquids, heat exchange apparatus and methods of heat exchange, concentrating evaporators and methods of operating same, centrifugal apparatus and methods of operating same, methods and apparatus for heat treating liquids, solids or gases, and any and all improvements on or relating to the apparatus or methods enumerated, in exchange for 26,000 shares of the authorized stock of the company. The authorized stock of the company was 50,000 shares, so that by this method the Davies brothers would receive control of the company by virtue of ownership of a majority of the stock. The par value of the stock was $1.00 per share. The Board of Directors at that meeting accepted the offer and fixed the value of the inventions that were being conveyed by the Davies brothers for 26,000 shares of the capital stock of the Corporation at $2,600. At the same meeting it was voted to sell stock of the company and to accept subscriptions at $5.00 a share, among them a subscription for 200 shares from the plaintiff and her husband. She later acquired additional shares.
The ownership of the plaintiff's shares has been changed, so that now they are owned by Mary B. Vann and her sister, Ann B. Lackman. Some question has been raised as to whether Mary B. Vann is qualified to bring a stockholder's action without joining her co-owner. The Court is of the opinion that she is qualified. She is either a tenant in common or a joint tenant of the stock. If she is a tenant in common, she has a one-half interest in the stock. If there is a joint tenancy, then each owns the whole, subject to the right of survivorship. In either event, the Court is of the opinion that Mary B. Vann is qualified to bring this suit.
The first count of the complaint finds fault with the fact that while stock was being sold for $5.00 a share, the Davies brothers caused the Corporation to vote to them 26,000 shares for a consideration worth $2,600 or ten cents a share. There is no doubt that at first blush this transaction may well arouse a query. We must, however, determine an issue such as this by the law of the State in which the Corporation was organized, namely, Virginia. The Corporation Laws of Virginia in regard to the issuance of stock are quite different and more liberal than the laws of some other States. The Constitution of Virginia, Section 167, authorizes the issuance of stock for services or property other than money, with the qualification that a statement must be filed with the State Corporation Commission describing the services or property, together with the valuation at which the same are received or to be received. This provision is elaborated in the Code of Virginia, Section 13-97, which at the time of the transaction provided, in part, that:
"Subscriptions to the capital stock of any corporation may be paid in money, land, or other property, real or personal, leases, options, mines, minerals, mineral rights, patent rights, rights of way, or other rights or easements, contracts, labor, or services."
It is readily apparent, therefore, that stock may be issued for practically any type of an intangible asset. There is a further provision to the effect that:
"There shall be no individual or personal liability on any subscriber beyond the obligation to comply with such terms as he may have agreed to in his contract of subscription."
In other words, a stockholder may not be compelled to pay for his stock anything in addition to the consideration exacted in the contract of subscription.
Consequently, inadequacy of consideration does not create any obligation on the part of the stockholder to make any additional payment. There is a provision to the effect that:
"Any corporation may adopt such plan of financial organization and may dispose of its stock or bonds for the purposes of the corporation at such prices, for such consideration, and on such terms and conditions as it sees fit."
There is a requirement to the effect that a statement must be filed with the State Corporation Commission describing the services and property other than money received in payment for stock, "together with the ...