For over a century, respondent Del Norte Water Company's articles of incorporation and bylaws have specified how water is to be distributed among its shareholders. For three generations, members of the De Boni family have been actively involved as shareholders, officers and directors of Del Norte Water Company and have approved the articles and bylaws their successor in interest, appellant De Boni Corporation, now questions.
Appellant now complains that the articles and bylaws governing the allocation of "irrigation" water as distinguished from "domestic" water in effect give preferential treatment to some shareholders in the event of a water shortage and are prohibited by Corporations Code section 400.
As we shall explain, the determination of the "threshold requirement," the number used to determine pro rata water entitlement, treats all shares of stock in precisely the same manner. The allocation is determined by a ratio of the number of shares to the number of acres owned. The trial court determined that this water allocation system is not discriminatory and does not violate section 400. We affirm.
Respondent Del Norte Water Company (Del Norte) was founded in 1910 to provide water for both domestic and irrigation use in the Somis area of
All of Del Norte's stock was, and remains, owned by landowners within the service area who are engaged in farming. The stock is not appurtenant to the land and is freely transferable by its owner. A buyer is typically another landowner. There is no formal classification of the stock into different series. Entitlement of a landowner to water from Del Norte is based on a formula of acreage and stock ownership as authorized in the articles of incorporation and specified in the bylaws of the company. As demonstrated by the minutes of a special board meeting on October 17, 1916, the primary purpose of Del Norte was to provide domestic water, and entitlement to water for domestic purposes takes preference over water for irrigation purposes. Historically, anyone entitled to water, including De Boni, has been granted as much water as needed to sustain its farming operations.
The stock certificates are generic. The certificate describes itself as being "Capital Stock" "subject to the rules and regulations of the Corporation."
The articles of incorporation state in part: "The purpose[s] for which it is formed are ... to divide the waters among its stockholders as needed but limited, in the event of shortage, to amounts in proportion to the number of shares of stock held by each, excluding therefrom the shares which are required to qualify each stockholder's property for domestic water service, in accordance with such criteria as may be established from time to time in the bylaws of the corporation...."
Del Norte's bylaws state that stock ownership for domestic water requires a threshold ownership of either one share for every three acres of property owned or one share for every five acres of land owned, the difference being the location of the property as north or south of the grant line. Only after this threshold requirement is satisfied would a shareholder qualify for irrigation water. If necessary, irrigation water would be allocated, in times of shortage, pro rata based on ownership of shares in excess of what is needed to qualify for domestic water.
On appeal, De Boni asserts, as it did in the trial court, that Del Norte's water allocation system is unlawful because it creates a de facto classification of stock as either "domestic" or "irrigation" not authorized in the articles of incorporation. In De Boni's view, anything which departs from a strict pro rata allowance of water based solely on share ownership is inequitable because, in the event of a water shortage, De Boni will be unfairly disadvantaged.
Del Norte contends that the use of shares of stock to potentially control allocations of water during a shortage has been in the corporate bylaws since incorporation, this system was approved by the corporate directors, and it is not discriminatory: "the use of the water should be pro-rata, according to the number of shares held by the respective stockholders after deducting one share for each [three or] five acres from the aggregate holding of each stockholder for his use of domestic water." In the trial court, Del Norte also contended that the present challenge is barred by laches, waiver, and/or the statute of limitations. The trial court did not address these issues, and the parties did not brief them on appeal.
The statute relied on by De Boni, section 400, states in relevant part:
"(a) A corporation may issue one or more classes or series of shares or both, with full, limited or no voting rights and with such other rights, preferences, privileges and restrictions as are stated or authorized in its articles....
"(b) All shares of any one class shall have the same voting, conversion and redemption rights and other rights, preferences, privileges and restrictions, unless the class is divided into series. If a class is divided into series, all the shares of any one series shall have the same voting, conversion and redemption rights and other rights, preferences, privileges and restrictions."
De Boni asserts that Del Norte's articles of incorporation violate section 400, subdivision (a), because the articles do not state or authorize the rights, preferences, and privileges of the stock. The contention is without merit.
Del Norte was incorporated prior to the enactment of section 400. At the time of Del Norte's incorporation, the required contents of a company's articles of incorporation were set forth in Civil Code former section 290. With respect to the description of shares in the articles, the statute provided in part: "6. The amount of its capital stock, and the number of shares into which it is divided. Corporations formed for profit, pursuant to the provisions of this code, may, by their articles of incorporation, provide for the classification of their capital stock into preferred and common stock. In the event that the articles of incorporation shall provide for such classification the same must contain a statement of the number of shares of stock to which preference is
Civil Code former section 290 contained permissive, not mandatory, language and nothing in Del Norte's articles of incorporation conflicts with that former statute.
At oral argument, De Boni contended that section 400 was applicable because Del Norte had amended its articles in 1988. De Boni argues that the amendment of the articles subjected it to all requirements of existing law pursuant to section 900. That argument is without merit. Section 102, subdivision (b), adopted at the same time as section 900, states: "The existence of corporations formed or existing on the date of enactment or reenactment of this division shall not be affected by the enactment or reenactment of this division nor by any change in the requirements for the formation of corporations nor by the amendment or repeal of the laws under which they were formed or created."
Similarly, section 2302 states in part: "The provisions of Sections 202, 204 (other than subdivision (a) thereof) and 205[
The 1988 amendments to Del Norte's articles of incorporation do not contain an election to be governed by provisions of the new law. (See appen.)
De Boni's principal argument is that using a domestic threshold before a right to irrigation water accrues is discriminatory because it makes some
A reallocation of water giving De Boni a greater proportionate share would impair the vested contractual rights of other shareholders in the company to the proportionate share of water represented by the stock they purchased in reliance on the articles and bylaws. (See Crescent Canal Co. v. Kings Co. D. Co. (1941) 43 Cal.App.2d 370, 375-376 [110 P.2d 1006] [water company could not dedicate one stockholder's beneficial interest, without his agreement or consent, to the use and benefit of the other stockholders]; see also
The domestic threshold is not discriminatory. Each and every share is subject to the same restriction imposed by the threshold system.
Gilbert, P. J., and Coffee, J., concurred.
Section 2 of Del Norte's articles of incorporation was amended in 1988 to state: "The purpose[s] for which it is formed are to engage in the business of selling, distributing, supplying, and delivering water for irrigation purposes and for domestic use only to its stockholders (and to non-stockholders only in emergencies, as permitted by law) as a mutual water company and for the exclusive use upon lands owned by them or in their lawful possession situated within the corporation's service area in Ventura County, the exterior boundaries of which shall be described in the corporation's bylaws (`the company's service area'); to charge for such services only such sums as will be sufficient to maintain, operate, and extend its water system and no dividends of any kind or character shall ever be paid; to divide the waters among its stockholders as needed but limited, in the event of shortage, to amounts in proportion to the number of shares of stock held by each, excluding therefrom the shares which are required to qualify each stockholder's property for domestic water service, in accordance with such criteria as may be established from time to time in the bylaws of the corporation; to buy, sell, and dispose of real and personal property, to contract debts and borrow money and to secure the payment thereof by mortgage or Deed of Trust of the property of the corporation; to acquire, purchase, have and hold such real and personal property, water, water bearing lands, water rights, rights of way, reservoirs, pumping plants, water works, pipe lines, conduits and other property as may be necessary or convenient to the conduct of its business; to build, construct, maintain, and operate reservoirs, pipe lines, conduits, pumping plants and any and all other necessary or convenient things proper or incidental to the carrying on of its business."
Del Norte's bylaws state in part: "Article XVII ... Section 3.
"a) To be eligible to obtain water for domestic use only for property within the Company's service area situated North of the Ranch[o] Santa Clara Del Norte grant line, a shareholder is required to have one share of stock for each five acres of property owned by such shareholder within the Company's service area.
"b) To be eligible to obtain water for domestic use only for property within the Company's service area situated South of the Rancho Santa Clara Del Norte grant line, a shareholder is required to have one share of stock for each three acres of property owned by such shareholder within the Company's service area. [¶] ... [¶]
"Section 6.
"`Irrigation water stock' shall entitle the holder thereof to such proportion of the supply of irrigation water as the number of shares of such irrigation stock owned by such stockholder bears to the outstanding capital stock of the corporation after deducting the domestic water stock (as computed in this Paragraph 6) therefrom. A stockholder who qualifies for irrigation water may be supplied any additional amount he or she desires if the rights of other stockholders to water are not thereby interfered with.
"In view of the differing quality standards between irrigation and domestic water, shareholders shall not use irrigation water for any domestic purpose whatsoever at any time....
"Section 7.
"Section 8.
"As a condition [for] approving such allocation or designation, the board of directors may, in its sole and absolute discretion, require such stockholder to waive and renounce the right to receive either domestic or irrigation water on the balance of his or her property situated within the company's service area (`withdrawn property'). Nothing herein shall preclude such stockholder's withdrawn property from later qualifying to receive irrigation water if the stockholder acquires the necessary shares to satisfy the domestic threshold requirement with respect to the withdrawn property."
"(1) Irrigation water may be supplied to a non-shareholder or a shareholder otherwise ineligible to be served, on request to the Manager, providing that the Company's system has sufficient capacity and no shareholder is otherwise injured. No emergency water shall be supplied for a period exceeding six (6) weeks without approval of the Board of Directors....
"(2) Domestic water shall not be supplied on an emergency basis except on approval of the Board of Directors...."