Tu-Vu Drive-In Corp. v. Ashkins

Supreme Court of California · 1964 · Corporations

CorporationsTortsstock transfer restrictionsbylawsclosely held corporationsCorporations Code section 501reasonable restriction on transferright of first refusal

Facts

Tu-Vu Drive-In Corporation was organized in 1958, and Russo, Ashkins, and a third party acquired all of its shares at that time. In 1960, by written consent of Russo as majority shareholder, the corporation adopted and later amended a bylaw requiring a shareholder who wished to sell to an outsider first to offer the shares to the other shareholders and then to the corporation on the same price and terms. Neither Russo nor the corporation gave Ashkins actual notice of the bylaw, but in 1961 Ashkins granted an option to purchase her shares to Sero Amusement Company, a business competitor of Tu-Vu. Plaintiffs then filed this action seeking a declaration that the bylaw was valid and enforceable.

Issue

May a corporation enforce a bylaw imposing a right-of-first-refusal restriction on stock transfers against a nonconsenting shareholder who acquired her shares before the bylaw was enacted? If so, does enforcement unconstitutionally impair the shareholder's contract with the corporation, or is it barred by waiver or estoppel?

Rule

Under Corporations Code section 501, a bylaw imposing a reasonable restriction on the right to transfer shares is valid. Reasonableness has two aspects: the bylaw must not unreasonably curtail alienation, and it must not otherwise unreasonably deprive the shareholder of substantial rights; when such a bylaw is adopted after acquisition of the shares and without the shareholder's consent, reasonableness is evaluated in light of the bylaw's purpose and the extent of impairment of the complaining shareholder's rights. Because the state's reserved power to regulate shareholder rights is part of the shareholder's contract with the corporation, a corporation may alter that contract pursuant to statutory authority.

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Red Mesa Film Supply, a closely held corporation in Albuquerque, has three shareholders. Two years after all shares were issued, the majority shareholders adopt a bylaw requiring any shareholder who wants to sell to a nonshareholder to first offer the shares to the other shareholders, and then to the corporation, on the same price and terms offered by the outsider; founding shareholder Elena Park did not consent and later signs a sale agreement with an outside investor.

If Elena challenges the bylaw solely because it was adopted after she acquired her shares, which is the best answer?

Explanation. The majority held that a corporation may enforce a reasonable bylaw restricting stock transfers against a nonconsenting shareholder who acquired shares before the bylaw was enacted. A right-of-first-refusal provision is reasonable because it does not unreasonably restrain alienation; it limits only the choice of transferee while preserving the same price and terms. That reasoning applies here.