31 S.W.2d 746Supreme Court of Arkansas
Opinion delivered October 20, 1930.

CORPORATIONS — VALIDITY OF ISSUE OF STOCK. — Where a corporation issued certificates of stock in consideration of notes, in violation of Const., art. 12, 8, both the notes and the certificates are unenforceable and void.

Appeal from Poinsett Circuit Court, First Division; G. E. Keck, Judge; affirmed.


Lepanto Gin Company, a corporation, instituted an action in the circuit court against J. S. Barnes to recover $1,998 and the accrued interest for certain shares of stock which had been issued to him by said corporation. Orgill Brothers Company, a corporation, was allowed to intervene in the action on the ground that said shares of stock had been transferred to it by J. S. Barnes for value received. J. S. Barnes filed an answer in which he admits that he transferred the shares of stock to Orgill Brothers Company, but denies that there is past due and unpaid on his subscription for said stock any sum whatever. Lepanto Gin Company also filed separate suits against L. O. Anderson and C. M. Johnson and H. C. Wade to recover amounts alleged to be due by each of them on stock which had been issued to them in said corporation. These cases were consolidated and tried together.

According to the testimony of C. F. Deyerle, he was manager, treasurer, and secretary of the corporation. The shares of stock in the corporation were $100 each; and at the time the shares of stock were issued to J. S. Barnes, L. O. Anderson, H. C. Wade, and C. M. Johnson, each of them executed to the corporation his note for the par value of the shares issued to him. The notes were all in common form, and the notes of Barnes, Wade, and Johnson contain the following: “This note is given in consideration of five shares of stock in the Lepanto Gill Company.”

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The note of Wade contains the following clause:

“This note is given in consideration of three (3) shares of the stock of Lepanto Gin Company, and is given with the understanding and agreement that I am to gin cotton, such as I own and control, with the above company. in case of my failure to do so, then this stock shall be forfeited and returned to the Lepanto Gin Company.”

None of the notes were paid. The record also shows that the corporation made a profit in its business for the first two years; and, instead of issuing a dividend in cash to the stockholders, it issued to them a stock dividend. In other words, it increased the capital stock by doubling it and issuing the new stock to the subscribers and received payment for same in the profits of the company which would have been due the individual stockholders. The stockholders herein, having failed to pay the notes which had been executed by them respectively for the original stock which had been issued to each of them, the board of directors by resolution directed the original shares of stock together with the new issue, to be sold in payment of the indebtedness of the stockholders. The stock was bought in by the treasurer of the company for a nominal sum. The record also shows that J. S. Barnes transferred and assigned his certificates of stock to Orgill Brothers Company for an indebtedness which he owed that corporation.

According to the testimony of the defendants, there was an oral agreement between them and the promoters of the corporation at the time the stock was issued to them, and they gave their notes in payment therefor that the certificates of stock were to be paid for out of the earnings of the gin company.

The case was tried before a jury, and, after the evidence was introduced, the plaintiff, defendants, and intervener each asked for a directed verdict and asked for no other instructions. Thereupon, the court withdrew the submission of the case from the jury and found for the defendants and each of them, and for the intervener,

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against the plaintiff. Judgment was entered accordingly, and it was ordered and adjudged by the court that the plaintiff take nothing in the consolidated case against the defendants and intervener. The plaintiff alone has appealed.

Caraway, Baker Gautney, for appellant.

Dudley Dudley, for appellee.


(after stating the facts). The sole issue raised by the appeal and decided by us is whether or not he court erred in finding that there was no liability against the defendants upon the certificates of stock which had been issued to them and for which each of them had given his note.

Article 128, of our Constitution provides that no private corporation shall issue stocks or bonds, except for money or property actually received or labor done, and all fictitious increase of stock or indebtedness shall be void. In the construction of this clause of the Constitution in Bank of Dermott v. Measel, 172 Ark. 193, 287 S.W. 1017, it was held that a note given to a private corporation for the purchase of stock in it is void. To support the holding, the court quoted from Bank of Commerce v. Goolsby, 129 Ark. 416, 196 S.W. 803, the following:

“When notes are taken in exchange for stock, it is a palpable violation of the constitutional provision, because notes are merely evidences of indebtedness, and such a transaction shows upon its face that the stock has not been paid for. The design of the framers of the Constitution was that stock should not be issued and sold except for its value in money or property actually received, or labor done. A note is not property in the sense of the Constitution, because it only indicates that the stock has not, in fact, been paid for; and where the notes are worthless the stock has been exchanged for nothing. Notes are not money and not bankable paper, but mere chooses in action and it in no sense meets the requirements of the above provision of the Constitution

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to accept a note in exchange for stock” (citing authorities).

The notes introduced in evidence in this case were contractual in their nature because they contained a clause that they were given for shares of stock of the Lepanto Gin Company. The notes were merely evidence of the indebtedness of the persons executing them; and if the notes were void as being given in violation of the constitutional provision above referred to, there was no indebtedness of the stockholders to the corporation, for the certificates of stock which had been issued to them were also void; and the court properly held that there was no liability upon the part of the defendants.

Having reached this conclusion, it is unnecessary to consider the other questions discussed by counsel in their respective briefs. Therefore the judgment will be affirmed.