## Facts

- Continental Trust Company, a New York corporation, had 5,000 shares of $100 par stock; William E. D. Stokes owned 221 shares as an original stockholder.
- The corporation proposed to double its capital by issuing 5,000 additional shares for cash.
- A banking firm (Blair & Co.) offered to buy all new shares at a fixed price of $450 per share.
- At a January 1902 special meeting, stockholders approved the capital increase; Stokes voted for the increase but opposed selling all new shares to Blair & Co.
- Stokes protested the sale of his proportional interest and demanded the right to subscribe for his proportional share, but the corporation refused.
- The directors issued all 5,000 new shares to Blair & Co. at $450 per share without offering Stokes his proportional allotment on the same terms.
- Around that time, the stock traded at about $550 per share; at trial it was higher.
- Stokes sued seeking issuance of shares or damages for the denial of his subscription right.
- The trial court awarded damages based on market value versus par; the Appellate Division reversed and ordered a new trial.

## Issues

1. Whether an existing stockholder has an inherent right to subscribe for a proportional share of newly issued stock when the new issue is for cash.
2. Whether that right can be cut off by directors and a majority of stockholders without the stockholder’s consent where the shares are sold to a third party at a fixed price.
3. What measure of damages applies when a stockholder is wrongfully denied the opportunity to purchase proportional new shares at the fixed sale price.

## Decision

- The Court of Appeals reversed the Appellate Division and reinstated judgment for Stokes, but modified the damages measure.
- The court held that a stockholder has an inherent property right to subscribe for a proportional part of a new issue made for money.
- Stokes did not waive that right by voting for the capital increase or by initially demanding the shares at par before the sale price was fixed.
- The corporation violated Stokes’s right by selling the entire new issue to Blair & Co. without giving Stokes an opportunity to take his proportional shares at the fixed price.
- Damages were the difference between the fixed sale price ($450) and the market value on the date the new shares were issued/delivered, multiplied by the number of shares Stokes should have been permitted to buy (221).

## Legal Principles

- A shareholder has a preemptive (proportional subscription) right in a cash issuance of new shares; the right is treated as a property interest connected to maintaining proportional ownership and voting power.
- Directors and a stockholder majority cannot deprive a dissenting shareholder of that proportional right without consent, unless the shareholder is afforded an equitable opportunity to take shares at the fixed issuance price (not less than par) or by another fair method allowing self-protection using the shareholder’s own resources.
- Voting for an increase in capital stock does not, by itself, constitute consent to a separate transaction that reallocates the new shares to outsiders and dilutes the shareholder.
- When a shareholder is denied the chance to purchase at the fixed issuance price, damages are measured by the lost bargain: market value at issuance/delivery minus the fixed price, for the shares the shareholder was entitled to purchase.

## Conclusion

The court recognized a shareholder’s inherent preemptive right in a cash stock increase and held that selling all new shares to a third party without offering proportional participation violates that property right; the remedy is damages equal to the market value at issuance minus the fixed sale price for the denied proportional allotment.


Stokes v. Continental Trust Co. of City of New York, 186 N.Y. 285 (N.Y. 1906)