## Facts

- H.H. Ditch Company and Short Line Ditch Company were mutual ditch corporations involved in irrigation water delivery.
- H.H.’s articles of incorporation authorized 8,000 shares divided into four series (A, B, C, and D) and specified that Series D would be held in the corporate treasury and issued at a stated ratio upon conveyance of water rights to H.H.
- H.H.’s bylaws described capital stock as classed in only three series (A, B, and C) and allowed bylaw amendments by a two-thirds vote at a properly called shareholders’ meeting.
- H.H. shareholders approved a consolidation under which Short Line’s water rights and other property would be transferred to H.H., and H.H. would issue Series D stock to Short Line shareholders as consideration.
- At a special shareholders’ meeting, 56% of shares represented voted to consolidate under H.H.’s existing articles and bylaws.
- At a subsequent annual meeting, shareholders approved, by majority vote, an amendment to the minutes clarifying that Short Line would pay a proportionate share of H.H.’s indebtedness and that all Short Line property would become H.H.’s property.
- A shareholder, acting for himself and derivatively for the corporation and similarly situated shareholders, sued to stop the consolidation, arguing that Series D could not be issued unless the bylaws were first amended to include Series D and that the consolidation procedures were defective.
- The trial court entered judgment for the defendants, and the plaintiff appealed.

## Issues

1. Whether H.H. could lawfully issue Series D stock under its articles in exchange for conveyed water rights and property without first amending bylaws that referenced only three stock series.
2. Whether an inconsistency between the articles and bylaws regarding Series D invalidated the consolidation or the stock issuance.
3. Whether the shareholder approval and related corporate procedures used for the consolidation were legally sufficient.

## Decision

- The Court of Appeals affirmed the judgment for the defendants.
- It held that any conflict between bylaws and articles is resolved in favor of the articles of incorporation.
- Because the articles expressly authorized Series D stock and prescribed its issuance upon conveyance of water to the company, the corporation could issue Series D without amending bylaws that omitted mention of it.
- The consolidation and issuance of Series D stock were upheld as valid corporate actions.

## Legal Principles

- Articles of incorporation control over inconsistent bylaws; bylaws cannot abrogate or restrict powers expressly granted by the articles.
- When articles authorize a class or series of stock and specify conditions for issuance, the corporation may issue that stock consistent with the articles even if the bylaws are silent or inconsistent.
- A corporate consolidation approved by the required shareholder vote and carried out consistently with controlling governing documents is not invalidated solely by an omission or inconsistency in the bylaws.

## Conclusion

The court upheld the consolidation and related issuance of Series D stock, concluding that the articles of incorporation authorized the transaction and controlled over bylaws that did not expressly recognize Series D.


Paulek v. Isgar, 551 P.2d 213 (Colo. App. 1976)