The president was the principal promoter and president of a corporation. He paid for the shares he had subscribed for. The corporation became insolvent and made an assignment for the benefit of its creditors. The principal controversy was as to the legal effect of a finding of fact made by the district court, and upon which it based a conclusion of law that the president was liable in the first instance to an amount not exceeding five times the amount of his subscription and shares, for which sum a judgment against him was ordered to be entered. It appeared that the president and his fellow stockholders paid for stock that was then issued on a five to one basis. On appeal, the court found that corporations having capital stock divided into shares, unless specially authorized, could not issue any shares for a less amount to be actually paid in on each share than the par value of the shares first issued. The act performed by the president and his fellow stockholders was void. Therefore, liability could not lie on a void act. The president could only be liable for those shares he actually purchased and paid for. It was to this extent only that a judgment could be rendered against him.

$$The trial court found that Gross should be liable for $$10,000$ he owned in stock value.

$$Gross appealed this on the basis that he had only actually purchased $$2,000$ in stock, so his actual contribution was lower than the value he held in the company.

$$Gross and the Board had decided to award themselves stock on a $5$:$1$ basis for each share purchased.

$$The court found that since the premise of $$watering down$$ the stock is void, Gross can only be liable for his actual contribution.

Discuss the case based on these points:

$1.$ How does the $5$:$1$ agreement impact the general shareholders?

$2.$ What would have been the larger implications had the company not become insolvent?

$3.$ Do you think this is fair? Ethical?

$4.$ Discuss your overall view of the Court's decision.

Answer rating: 100% (QA)

Answer 1 The 51 agreement to award shares based on a ratio rather than actual contribution impacts general shareholders in several ways Firstly it dil... View the full answer