## Facts

- Portland Bank was incorporated with authority to operate with a capital stock between a minimum and maximum amount, divided into $100 shares.
- The bank began business with $100,000 capital, divided into 1,000 shares.
- William Gray, Jr. owned 70 original shares as an associate of the original subscribers.
- The bank was authorized to increase its stock by $200,000 (2,000 additional $100 shares) and the stockholders voted to increase to the larger amount.
- Gray alleged the corporation agreed that original subscribers, associates, and assignees could subscribe for twice the number of new shares as the number of original shares held, which would entitle him to 140 new shares.
- Gray claimed he was ready to subscribe and pay required installments, but the bank’s officers refused to accept his subscription and allowed the shares to be taken by others.
- Gray alleged the refusal deprived him of the chance to buy at par shares worth more than par in the market and to receive the economic benefit of that increase.

## Issues

1. When a corporation is chartered with authority to increase capital within stated limits, do existing shareholders have a proportional right to subscribe to the new shares upon an authorized increase?
2. If the corporation refuses to permit such a subscription, may the shareholder sue the corporation in a special action on the case for damages, and how are damages measured?

## Decision

- The court held that shareholders in the original capital have a right to subscribe for and hold the new stock in proportion to their respective shares when the corporation increases capital within the charter’s authorized range.
- The court held that if the corporation or its officers refuse to permit a shareholder to subscribe proportionally, the shareholder may maintain a special action on the case against the corporation.
- The court held the measure of damages is the excess of market value over par value for the number of shares the shareholder was entitled to take, plus interest on that excess.

## Legal Principles

- When a corporation validly increases its capital within charter limits after commencing business with a smaller authorized amount, existing shareholders have a proportional right to participate in the new issue.
- Corporate action in issuing additional shares must respect proportional shareholder rights and may not improperly dilute existing interests by excluding shareholders from the authorized increase.
- Wrongful refusal to honor a shareholder’s proportional subscription right supports damages against the corporation in an action on the case.
- Damages for denial of the right to subscribe are measured by market value minus par value of the shares wrongfully withheld, plus interest.

## Conclusion

The court recognized a proportional shareholder right to subscribe to newly issued shares upon an authorized capital increase and allowed a damages action against the corporation for wrongful refusal, with recovery based on the lost spread between market and par value (plus interest).


Gray v. Portland Bank, 3 Mass. (2 Tyng) 364 (Mass. 1807)