Henry J. Walsh, Judge Superior Court County of Ventura (Super. Ct. No. 56-2008-00321284-CU-MC-VTA)
The opinion of the court was delivered by: Perren, J.
CERTIFIED FOR PUBLICATION
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 gives preferential treatment to some shareholders in the event of a water shortage and is prohibited by Corporations Code section 400.*fn1
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.
Facts and Procedural History
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 Ventura County. Del Norte was formed as a mutual benefit corporation with 2,500 shares of capital stock. Appellant De Boni Corporation (De Boni) is a family business whose predecessors have been shareholders in Del Norte since 1913. The president of De Boni is Ronald De Boni, the grandson of the original owner. De Boni currently owns 199 acres within Del Norte's service area and 111 shares of Del Norte stock.
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 1 share for every 3 acres of property owned or 1 share for every 5 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.*fn2
De Boni filed a complaint for declaratory relief seeking a reallocation of water rights on the ground that Del Norte's water allocation system violates Corporations Code section 400, subdivisions (a) and (b). The case was heard in a two-day bench trial. The parties stipulated to most of the facts considered by the trial court and to the authenticity and admissibility of nearly all documents admitted into evidence. The trial court's proposed statement of decision found that the water allocation system does not give preferential treatment to any shareholder and is not discriminatory. After considering objections submitted by De Boni, the court entered a final statement of decision, identical to its earlier proposed statement. Judgment was entered accordingly.
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.