163 Stokes vs Continental Trust Company AUTHOR: Enriquez

186 N.Y. 285 (1906) NOTES:

TOPIC: The Pre-emptive Right to Shares
PONENTE: Vann, J.
FACTS:
 Petitioner Stokes was an original stockholder of Respondent Continental which is a banking corporation in New York.
He holds 221 shares.
 The market value of the shares was $550, but the par value was $100.
 Blair & Company, a strong and influential firm of private bankers in New York, offered to buy 500,000 newly issued
shares of Respondent Continental on the condition that if those shares were issued at $450 and that they be allowed to
nominate 10 out of 21 trustees.
 Stokes protested against the proposed sale because he wanted to retain his proportionate share in the Respondent
Continental and keep the same percentage of stock ownership. He also demanded that it be sold to him at par value
($100). However, both demands were denied by the Respondent.
 This prompted Petitioner Stokes to file a complaint seeking to compel Respondent to issue to him at par such a
proportion of an increase made in its capital stocks as the number of shares held by him before such increase
 The lower court ruled in favor of Petitioner Stokes. It stated that he had the right to subscribe for such proportion of
the increase, as his holdings bore to all the stock the increase was made; that the stockholders, directors and officers of
the Respondent cannot deprive Petitioner of the right.
 The Appellate Court reversed the lower court. (The ratio behind the appellate court’s reversal was never mentioned.)
 Hence, this appeal.
ISSUE(S): Whether Respondent Continental should allow Stokes (a stockholder) the opportunity to purchase newly
issued stocks at the fixed price so that he may retain his proportionate share

HELD: Yes.
RATIO:
 Corporations must allow shareholders to purchase newly issued stocks at the fixed price so that they may keep the
share they currently have.
 A vote to increase the capital stock was in its nature an agreement among the stockholders to enlarge their shares
in the amount or in the number of the extent required to effect that increase.
 Stockholders have this option as a matter of right. He cannot be deprived of it by the joint action of the other
stockholders and of all the directors and officers of the corporation.
 In this case, the new stock came into existence through the exercise of a right belonging wholly to the
stockholders. As the right to increase the stock belonged to them, the stock when increased belonged to them also,
as it was issued for money and not for property or for some purpose other than the sale thereof for money. By the
increase of stock, the voting power of the Petitioner Stokes was reduced one-half, and while he consented to the
increase he did not consent to the disposition of the new stock by a sale thereof to Blair Company at less than its
market value, nor by sale to any person in any way except by an allotment to the stockholders.
 The increase and sale involved the transfer of rights belonging to the stockholders as part of their investment. The
issue of new stock and the sale thereof to Blair Company was not only a transfer to them of one-half the voting
power of the old stockholders, but also of an equitable right to one-half the surplus which belonged to them. In
other words, it was a partial division of the property of the old stockholders.
 While the corporation could not compel the Petitioner Stokes to take new shares at any price, since they were
issued for money and not for property, it could not lawfully dispose of those shares without giving him a chance to
get his proportion at the same price that outsiders got theirs. He had an inchoate right to one share of the new stock
for each share owned by him of the old stock, provided he was ready to pay the price fixed by the stockholders.
 The Petitioner Stokes had the power, before the increase of stock, to vote on 221 shares of stock, out of a total of
5,000, at any meeting held by the stockholders for any purpose. By the action of the majority, taken against his
will and protest, he now has only one-half the voting power that he had before, because the number of shares has
been doubled while he still owns but 221. Blair Company acquired virtual control, while he and the other
stockholders lost it. The other stockholders could give their property to Blair Company, but they could not give
his.
CASE LAW/ DOCTRINE:

A stockholder has an inherent right to proportionate share of new stock issued for money. He cannot be deprived of such
right without his consent.