*CHAPTER XXXIII.

RAILWAY INVESTMENTS.

SECTION I.

Power of Company to do Acts affecting the Value of their Stock and Bonds. Over-issue of Stock.

1. The importance and unsettled state of the law upon the subject.

2. The English statute requires the stock subscriptions to precede the grant.

8. Over-issue of stocks somewhat of a similar character.

9. Case of New York and N. H. Railway before Superior Court.

3. Duty of railway directors, in regard to 10. Same case before the Court of Appeals.

speculations in shares.

4. Nature and effect of desperate financial expedients in building railways.

(1). Issuing stocks in railways, at different prices, fraudulent.

11. The principles involved in similar cases. 12. Right of canal company to mortgage tolls without consent of legislature.

13. New company, formed after sale on mortgage, succeed to rights of old company.

(2.) Mode of issuing bonds and mort- 14. Parol gift of railway debentures, where gages objectionable.

5. Difficulty of preventing this by legislative

restrictions, no excuse.

6. Something might be effected by legislation. 7. These losses fall severely upon small owners.

act of Parliament requires deed duly stamped.

15. Such gift by parol lately maintained in England.

§ 234. 1. THERE is perhaps no subject connected with the law of railways which comes home so directly to the pecuniary interests of so large a number of persons in this country as that of railway investments, in the various forms of stock, original and preferred, and bonds and mortgages. But it will not be in our power to give much information upon the subject, and none probably which will afford relief to those who have adventured their money in these enterprises which so generally, in this country, have proved unproductive. But few questions, in regard to the subject, have yet been definitely settled, in this country, and these, for the most part, are of secondary importance in comparison of those which yet remain.1

1 Ante, §§ 17, 41, 55, 56, 59.

2. This subject is incidentally alluded to in former portions of the work.1 In England the provisional committees of the promoters * of railways issue scrip certificates, which are publicly sold at the stock-exchange,2 and pass from hand to hand, by delivery,2 without the necessity of formal transfers or stamps.3 The holders of these scrip certificates ordinarily have their names entered upon the registry of shareholders, after the act of incorporation is obtained, and thus constitute the members of the corporation, and are liable for calls.4

3. We have seen, too, that all speculating practices of the directors of a railway, or other business corporation, with a view to raise the market value of shares, are fraudulent, and will be relieved against in equity, and the participators punished criminally.5

4. There have been some expedients resorted to for the purpose of enabling companies to complete their works, without the requisite capital, bonâ fide subscribed and paid in, which, as they do not seem to have come much under discussion, in the judical tribunals of the country, we could do little more than allude to, but which have so serious a bearing upon the safety and permanent value of railway investments, that we could not, perhaps, with perfect propriety, altogether pass over them. Where the charter of a railway company does not limit the amount of capital, except by the necessity of the undertaking, as the work progresses the stock naturally becomes more or less depreciated in the market, and it has sometimes been the practice of the directors, either with or without a vote of the shareholders, to issue shares at a reduced price, so much below the market price as to induce sales. And sometimes such an expedient has been repeated, according to the necessities of the case and the desperate fortunes of the enterprise. Such practices cannot fail to strike all minds alike as desperate financial expedients,6

2 London Grand Junction Railw. Co. v. Freeman, 2 Man. & Gran. 638, 639; Jackson v. Cocker, 2 Railw. C. 368, 372; Hesseltine v. Siggers, 1 Exch. 856. 3 Willey v. Parratt, 6 Railw. C. 32; s. c. 3 Exch. 211; Vollans v. Fletcher, 1 Exch. 20; Moore v. Garwood, 4 Exch. 681.

4 Ante, § 29, 53. Ante, § 2.

5 Ante, § 41, 59, 179.

• Herrick v. Vermont Central Railw., 27 Vt. R. 673, 692. Opinion of court:

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and more or less fradulent in their operation upon the market value of stock sold at a higher price. But we see no reason to "This building railways at vast expense, with no adequate means, is desperate business, and I do not think we should be surprised to find desperate efforts and desperate expedients resorted to by the best of men, whose very lives and all earthly hopes stand upon the event of their success or failure." But the courts have felt compelled to recognize them as valid and binding unless resisted in a formal and judicial mode. The case of Faulkner v. Hebard, 26 Vt. R. 452, may be of interest in this connection: "Where F. & H. entered into a written contract, by the terms of which H., in consideration of a certain number of shares of stock in the Vermont Central Railw. Co. 'to be delivered to me (H.) by F. on or before the first day of July, 1850,' agreed to sell and convey certain property to F., and this contract was signed by both parties. Held, that the contract was upon sufficient consideration; and that both parties are bound to do what is specified in the contract to be done on his part; and that if F. had declined to deliver the stock according to the terms of the contract, an action would lie upon the contract, for the refusal.

"And in such a contract the delivery of the stock and the conveyance of the property are concurrent acts; and as the one promise is the entire consideration of the other, neither party would be bound to convey absolutely his property except upon the conveyance by the other.

"But either party, claiming damages for non-fulfilment of the contract, must either show a readiness and offer to perform on his part, or that he was excused therefrom by the consent or the conduct of the other party.

"The directors of the railway company, before the sale, but without the. knowledge of the parties, by letting in those who paid but $ 30, to an equal par ticipation in the profits of the company with those who paid $100, lessened the market value of the stock which F. by the contract sold to H.; it was held, that if this act of the directors was a legal one, then it was one which H. was bound to know they might do, and would therefore form one of the contingencies of H.'s purchase; and whether the act of the directors was before or after the actual time of sale, would no more affect the validity of the sale than any other legal act of theirs; but if the act was an unlawful exercise of authority by the directors, then H. when he became a stockholder might resist it in any legal way; and therefore it will form no defence for H. in a suit for non-performance of the contract." In giving judgment, the court say:

"But the important question in this case is, whether the plaintiff can recover at all. The finding of the jury negatives all fraud or intentional misrepresentation on the part of the plaintiff, or even knowledge of the circumstance, which it is claimed should exonerate the defendant from his contract. The only question then is, whether the parties were under such a mutual misapprehension in regard to the actual state of the subject-matter of the contract, at the time of entering into it, as will relieve the defendant from the obligation of it. This is a familiar ground of relief from the performance of contracts in a court of equity, and, as a general thing, confined mainly to that forum. But in some few

*

doubt their binding obligation upon those who approve them by their votes, and it would seem that the minority who vote. cases it has been allowed as a defence at law. The case of Ketchum v. Catlin, 21 Vt. R. 194, has perhaps gone to the full extent of such relief, in a court of law, and may be regarded as laying down the law, as it now stands, in regard to defence at law to contracts, on the ground of mutual misunderstanding in regard to the state of the subject-matter at the time. And this case goes upon the ground, that to constitute a defence at law such subject-matter must be so changed, at the time of the contract, without the knowledge of either party, as not, in any sense, to answer the purpose for which the contract was made. This mode of defence goes upon the assumption, that if the party buys one thing, or a thing in one state, he is not bound to accept of a different thing, or the same thing in a different state. If property is sold, as being in existence, and in fact has been destroyed, or changed state, the sale will be inoperative.

“But any accidental occurrence, not directly affecting the state or quality of the thing sold, but only its market value, will have no such effect. News of peace or war, or commercial restrictions, or their modification, has often a most surprising effect upon the market value of commodities, but whether both parties, or one only, is ignorant of such facts, which renders the matter more unjust and unequal, is no ground of relief even in equity, unless the one party gaining the advantage is guilty of artifice or misrepresentation. The rule of the civil law was somewhat different, and more in accordance with the rule of moral justice and equity than that of the common law. This has been with some writers a ground of reproach to the common law, as being less in accordance with the principle of Christian morality than the law of pagan Greece and Rome. And the case put in Cicero de Officiis is of this character, where the two cargoes of corn coming into Rhodes, in time of famine, or great want, and the one first reaching port, knowing of the near approach of the other with a large supply, the question is, whether the first is bound, before he sells his cargo, to make known the probable early arrival of the other? The Roman casuist decides that he is, and so must a Christian moralist; but the common law will not allow any such determination in a civil tribunal!

“So, too, stocks may be affected by general legislation, by the granting of other charters, by governmental negotiations, by war or peace, by the management of the corporations, by the result of an election, by the death of an important financial agent, and by a thousand other accidental matters. The question is, whether such mere accidents, not affecting the inherent quality of the stocks or essentially their actual value, can be said to create such a change of state as to justify the vendee in refusing to go forward with his contract. I have not been able to find any such case, and the books abound with those of an opposite character.

"Had this vote of the directors cancelled or annihilated the stock, it would, no doubt, have been a good ground of defence to this action within the principle of the best considered cases upon the subject. But, so far from that it did not affect the stock in any sense, except incidentally, by its increase at a low 566

VOL. II.

32

against them should take measures to stop * them before the stock goes into the market and falls into the hands of bona fide purchasers, or they will be precluded from objecting afterwards.6 Questions of this kind will doubtless come before the courts, and we do not intend to express any very settled opinion upon them here. A very similar series of expedients is perhaps more

rate. This had three accidental effects upon all the stock of the company. 1st. It showed the company to be embarrassed, if not desperate, which of itself had a tendency to lessen the market value of the stock, but not its real value. 2. It showed the probable opinion of the directors that the stock was not worth much above $30, which would have a similar effect. 3d. If it was a legal act it did tend to lessen in some degree the actual value of the stock, by letting in those who paid but $ 30, to an equal participation in the profits of the company with those who paid $100. But if this was a legal act, it was one which the defendant was bound to know the directors might do, and which would therefore form one of the contingencies of his purchase, and which, whether done before or after the actual time of sale, could no more affect the validity of the sale than any other legal act of the directors. If the act was an unlawful exercise of authority by the directors, the defendant, when he became a stockholder, might resist it in any legal way.

"The length of time given the plaintiff to deliver the stock must have involved the hazard of the directors doing many things which might affect the stock, and indeed every legal act certainly, and illegal acts would not bind the stockholders. We do not see how this will form any defence to the suit, there being no fraud or misrepresentation.”

In the case of Sturges v. Stetson, 10 Am. Railw. Times, No. 50, in the U. S. Circuit Court, Mr. Justice McLean presiding, it was recently decided, Leavitt, J. giving the opinion, that where the plaintiff entered into a scheme with a railway company, through the directors, to enable them to sell him shares below the par value, it was, as to the directors, ultra vires, and as to the other shareholders, fraudulent, and entitled them, by proper proceeding, to compel the reduction of the number of plaintiff's shares, so as to bring them to the par value.

The form of the contract in this case was that the directors executed a bond to plaintiff for $750,000, payable in five years, without interest, and convertible into stock of the company, at any time within four years, at par. This bond was sold at $521,677, and converted into stock. Subsequently the plaintiff sold $30,000 of the same stock to defendant, for which the note in suit, of $ 24,000, was executed.

The court held that the defendant, as a bonâ fide purchaser, might hold the stock freed of all equity in favor of the other stockholders, to have the number reduced; or he might defend against the note.

And at the same time, in Fosdick v. Sturges, which was an action to compel defendant to refund money received for stock sold under similar circumstances, it was held the action will lie.