APPEAL from the Circuit Court of Sangamon County; the Hon.
JAMES T. LONDRIGAN, Judge, presiding.
MR. JUSTICE GREEN DELIVERED THE OPINION OF THE COURT:
Rehearing denied March 27, 1979.
This case concerns a contract made on December 1, 1975, between plaintiff American Heritage Investment Corporation (American) and defendant Nathan Hale Investment Corporation (Hale Investment). The latter agreed to transfer to American its shares in Nathan Hale Life Insurance Co. (Hale Life) in exchange for which American agreed to pay to Hale Investment $750,000 or transfer to Hale Investment 500,000 of Hale Investment's own shares or make payment by both shares and cash with the shares valued at $1.50 each.
On May 24, 1977, plaintiff filed suit in the circuit court of Sangamon County seeking specific performance of the contract. Hale Investment and Illinois National Bank, escrowee under the contract, were made defendants. Plaintiff appeals from the March 10, 1978, judgment of the trial court, the substance of which was to (1) declare the portion of the contract permitting American to make payment to Hale Investment in Hale Investment shares unlawful and unenforceable, (2) deny specific performance if consideration tendered by American included Hale Investment shares, and (3) grant specific performance of tender to be made entirely in cash.
Defendant Hale Investment answered the complaint denying some of its allegations and setting forth as an affirmative defense the provisions of section 6 of the Illinois Business Corporation Act (Ill. Rev. Stat. 1975, ch. 32, par. 157.6) which prohibits a corporation from purchasing its own shares, except under circumstances not involved here, when to do so would impair its capital structure. Hale Investment counterclaimed, seeking a declaration that because of section 6, the contract was illegal to the extent that it required a transfer to it of its own shares. Plaintiff American replied and set forth as affirmative defenses to the counterclaim that: (1) section 6 of the Business Corporation Act was not applicable; (2) Hale Investment's defense was a plea of ultra vires which could not be raised by the corporation; (3) the sale was not void and should be required to be performed because it had been substantially completed; and (4) Hale Investment was estopped to raise the defense of section 6. Various orders were entered prior to the evidentiary hearing on the merits. Appeal is taken from the order entered after that hearing.
Plaintiff American maintains on appeal that no showing was made that the sale would have impaired Hale Investment's capital and surplus accounts as defined in section 6 and reasserts the contentions of its affirmative defenses.
At all times in issue, section 6 of the Business Corporation Act provided in pertinent part as follows:
"A corporation shall have power to purchase, take, receive, or otherwise acquire, hold, own, pledge, transfer, or otherwise dispose of its own shares, provided that it shall not purchase, either directly or indirectly, its own shares when its net assets are less than the sum of its stated capital, its paid-in surplus, any surplus arising from unrealized appreciation in value or revaluation of its assets and any surplus arising from surrender to the corporation of any of its shares, or when by so doing its net assets would be reduced below such sum. Notwithstanding the foregoing limitations, a corporation may purchase or otherwise acquire its own shares for the purpose of:
[functions not here applicable]." Ill. Rev. Stat. 1975, ch. 32, par. 157.6.
The parties agree that if section 6 is applicable and can be used as a defense, the status of the Hale Investment capital and surplus accounts on December 1, 1975, the date of the contract, is determinative as to whether its conveyance of its Hale Life stock in exchange for its own shares would violate that section. Defendant Hale Investment's Exhibit 4, its ledger for 1975, was admitted without objection. It showed a debit balance in the retained earnings account of $711,172.13 on January 1, 1975. The entries for the year showed a loss for the year and for the period up to December 1, 1975. There was thus obviously a substantial debit balance in the retained earnings account on December 1, 1975. As explained by witness Frank J. Baker, an accountant, and as is also obvious, if the retained earnings account of a corporation has a deficit, the net assets of the corporation are less than the capital and surplus accounts listed in section 6. Although there is dispute as to whether adjustments should have been made in Hale Investment's ledger accounts, plaintiff offered no proof as to what those adjustments should have been. In the absence of any such proof, a sufficient prima facie showing was made that Hale Investment's capital and surplus accounts were impaired within the meaning of section 6 on December 1, 1975. To have given up some of its assets, Hale Life shares, in exchange for its own shares would have further impaired those accounts.
1 Plaintiff's assertion that section 6 of the Business Corporation Act is not applicable is based on its theory that the transaction did not involve a "purchase" by Hale Investment of its own shares as Hale Investment was merely receiving its own stock as partial consideration for the sale of Hale Life. However, the prohibition of section 6 is against a corporation purchasing its own shares "directly or indirectly." Black's Law Dictionary 1399 (4th ed. 1968) defines the word "purchase" as "Transmission of property from one person to another by voluntary act and agreement, founded on a valuable consideration [citations] * * *." Hale Investment's acquisition of its own shares here would appear to have been a direct purchase and, in any event, would have been an indirect purchase.
Plaintiff's contention that the sale was not void and should be enforced because substantially performed and its contention that Hale Investment is improperly attempting a defense of ultra vires are related and will be discussed together.
Section 8 of the Illinois Business Corporation Act at all times in question provided in part that:
"No act of a corporation and no conveyance or transfer of real or personal property to or by a corporation shall be invalid by reason of the fact that the corporation was without capacity or power to do such act or to make or receive such conveyance ...