Corporate Bylaw Restricting Shareholder's Eligibility To Own Shares And Forcing Transfer When Restriction No Longer Met Is Valid Under Kansas Law
05/16/08
Hospital board became concerned that some shareholders were contemplating investing in a competing facility. Ultimately, at a subsequent shareholder meeting a bylaw provision was adopted restricting eligible shareholders to include only shareholders who do not own any portion of a competing facility within one hundred miles of the hospital. The new bylaw provision further provided if a shareholder subsequently became ineligible to own shares in hospital, then “the corporation may compel redemption of the shareholder’s stock . . . however, the maximum redemption price shall not exceed Five Hundred Twenty-Five Dollars ($525.00) per share, increased or decreased by any change in the Consumer Price Index.” Subsequently, restated articles of incorporation were filed which contained a provision prohibiting shareholder ownership in a competing healthcare facility.
The Kansas General Corporation Code requires some types of stock restrictions must be in the articles of incorporation in order to be valid. K.S.A. 17-6002(a)(4). However, there is a difference between stock restrictions (K.S.A. 17-6002(a)(4)) and “ownership restrictions” (K.S.A. 17-6426(b) – which permits the enforcement of written ownership “restrictions” on corporate securities). The trial court properly relied upon Capano v. Wilmington Country Club, 2001 WL 1359254 (Del.Ch. 2001), an unpublished Delaware case. A provision which operates only against the holder of the stock (e.g., death, expulsion), not against the stock itself in not a “limitation ‘with respect to the [ ] shares, and is therefore not statutorily required to be set forth in the [ ] charter.” Where the provision operates only against certain stockholders, not against an entire class of stock then the “restriction” is on ownership and not on the stock itself and therefore permitted as an “other lawful restriction” . . . on the amount of securities that may be owned . . .” K.S.A. 17-6426(e).
It is a well-settled rule that the bylaws of a corporation are self-imposed rules, resulting from an agreement or contract between the corporation and its members to conduct the corporate business in a particular way. Consequently, corporate instruments such as charters and bylaws are interpreted in the same manner as other contracts. Where the parties have created an unambiguous, integrated written statement of their contract, the language will control, not as subjectively understood by either party but as understood by a hypothetical reasonable third party. Additionally, even if a word has two or more meanings, a document is ambiguous only if an examination of the entire document leaves a genuine uncertainty as to which of the two meanings was intended by the parties. Finally, “bylaws of a corporation are presumed to be valid, and the courts will construe the bylaws in a manner consistent with the law rather than strike down the bylaws.
The court went on to reject the shareholder’s argument that the stipulated maximum $525.00 per share amounted to a penalty (because it did not factor into the formula the increased value of the underlying hospital). The reasonableness of a liquidated damages clause should be determined as of the time the contract was executed, not with the benefit of hindsight. A bylaw provision that establishes a formula for the calculation of the price to be paid when a corporation reacquires stock from a shareholder is not a penalty even if the formula varies depending upon the circumstances of the reacquisition and is not based upon market value.
Kansas Heart Hospital, LLC v. Idbeis, Docket No. 97,131 (Ks.S.Ct. May 16, 2008).
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