the former owner remains the apparent or technical owner, but would hold the stock in trust for the person beneficially entitled to it. The apparent owner alone could vote at an election for directors. The dividends would be declared in his name, though he would be required to account for them to the beneficial owner.

Special rules sometimes exist as to transfer, such as that it cannot be made until all indebtedness to the corporation is paid. Such a rule may be prescribed by statute, or by an authorized bylaw.1 In the latter case, the purchaser of the stock must at the time of the purchase have had either actual or constructive notice of the by-law.2 (a)

SECTION III. The Power of the Corporation over its Stock. Where the amount of stock is fixed in the charter, the corporation cannot increase it. A general agent, who assumes to increase it, could not do so, even though he issued it to a purchaser acting in good faith.3 Certificates of this kind, having no real but yet an apparent existence, would be cancelled on proper application by a court of equity. This remark is consistent with the proposition that the company might be liable in some other form for the act of its agent, e. g., for damages.5

Where, however, there is no restriction upon the issue of stock, the corporation may increase the number of shares. Such an act, if the capital be not increased, is, so to speak, a dilution of the property. If the capital originally consist of 10,000 shares of $100 each, representing $1,000,000, and the corporation acquire $500,000 more capital, an increase of 5,000 shares leaves the capital the same as before, and if understood by persons interested, harms no one. Accordingly, the company may properly, in such a case, make dividends in stock. So if not prohibited, a corporation may buy its own stock, or receive it in payment of a debt, and hold it as being still in existence, and reissue it.7

Stock is sometimes of different grades, such as common stock, and preferred stock. The effect of this distinction is to cause

4 N. Y. & N. H. R. R. Co. v. Schuyler, N. Y. 507; Taylor v. Miami Co., 6 Ohio, 17 N. Y. 592.

(a) Driscoll v. West Bradley & C. M. Co., 59 N. Y. 96. Also see Hammond v. Hastings, 134 U. S. 401; Farmers' & Traders' Bank of Bonaparte v. Haney, 54

176.

N. W. R. (Ia.) 61; Bank of Africa v. Salisbury Gold Mining Co. [1892] A. C. 281; Bishop v. Globe Company, 135 Mass. 132.

dividends to be paid to the latter in preference to, or if necessary, to the exclusion of the former. A power to create preferred stock is not necessarily implied from a power to issue capital stock. A corporation may, probably, at the outset divide its stock into two classes on this basis, giving sufficient publicity to its action, so that no one may be misled. It is quite otherwise, when ordinary shares have been issued on the usual basis of equality among shareholders. It is then beyond the power of the corporation to establish a preferred class, except by the assent of the shareholders. This assent may be shown either by express words, or by such acts on the part of the stockholders as lead to an inference of assent, such as unreasonable delay in objecting to the issue, where strangers have relied on the validity of the corporate acts.3 Were it not for the case cited, it might be claimed with much show of plausibility that preference shares are merely a mode of paying interest exclusively from profits, payable before dividends to regular stockholders. There is no implied power in a corporation to reduce the capital stock. This it can only do when authorized by statute."

SECTION IV. The Rights of Stockholders. (1) To vote for directors. This topic has already been sufficiently considered in another part of this chapter.

(2) To receive dividends. These are properly payable from the profits. It has already been stated that it is beyond the power of the company to reduce its capital by paying dividends from it, even though the stockholders consent. There are also statutory prohibitions to be noted.

When a dividend is declared, it is deemed to be detached from the shares, and when payable it becomes a debt due from the corporation to the stockholder. They belong to those who are stockholders at the time when they are declared. Prior to the declaration of dividends, the profits are a part of the property of the corporation, and they cannot be considered separately from the stock. Accordingly, a sale of shares carries with it by impli

1 Hutton v. Scarborough Hotel Co., 11 Jur. N. s. 551.

2 This seems to be the effect of Harrison v. Mexican Railway Co., L. R. 19 Eq. 358.

This subject is discussed with much fulness and ability in Kent v. Quicksilver Mining Co., 78 N. Y. 159. A number of cases are collected and distinguished on page 181 of the report.

5 Strong v. Brooklyn Cross Town R. R. Co., 93 N. Y. 426. This rule would lead to the conclusion that independently of any prohibitory statute, a corporation would have no power to make dividends out of capital, as that would be a reduction of capital. Flitcroft's Case, L. R. 21 Ch. D. 519.

6 Ante, pp. 362-364.

7 Jones . Terre Haute R. R. Co., 57 Henry v. Great Northern Railway N. Y. 196; Hyatt v. Allen, 56 N. Y. Co., 27 L. J. Ch. 1,

553.

cation dividends subsequently declared, but not those previously declared, the declaration having separated them from the general property of the company.

Holders of preferred shares are entitled to be paid their guaranteed dividends and all arrears, before the holders of common or non-preferred stock are entitled to anything. There is nothing in law to prevent the creation by the legislature, or by the company at the time of its organization, of a series of preferred stock, such as first preferred, second preferred, etc. Each of these might have dividends in their proper order, either of the same or of varying amounts, the first having always in payment a preference over the second, etc. Dividends of a prescribed amount are sometimes guaranteed by another corporation, as in the lease of a railroad, where the lessee guarantees dividends to the stockholders of the lessor company. If the corporation, being under a duty to pay preferred dividends, divert the funds from the preferred to the common stock, interest must be paid on the arrears.1

(3) The right of a stockholder to call the directors and corporation to account for mismanagement, etc. The stockholder is to be regarded as having an interest distinct from that of the corporation. He may, under certain circumstances, claim the interposition of the court to prevent the corporation from dealing in an unauthorized way, and from diverting the capital from its appropriate uses.2 This doctrine is founded upon the notion that the corporate property is held in trust by the corporation, and thus a court of equity may control it as a trustee. It is a very common thing when a trustee will not preserve trust property, and, for example, will not bring or defend an action after reasonable request, for the cestui que trust to bring the action and to make the trustee defendant. This principle was applied in the case of Dodge v. Woolsey. The facts were that an illegal tax was imposed upon a bank. The corporation would not resist its collection. A suit was brought to prevent the collection of the tax against the bank itself, the directors, and the tax collector, and it was maintained.5

The directors will also be liable to a stockholder in some instances in their individual capacity, either for wasting the

1 See the case of Boardman v. L. S. & M. S. R. R. Co., 84 N. Y. 157.

2 A leading case upon this point is Dodge v. Woolsey, 18 How. U. S. 331.

8 Bate v. Graham, 11 N. Y. 237; Hagan v. Walker, 14 How. U. S. 29.

4 18 How. U. S. 331.

5 See also March v. Eastern R. R. Co., 40 N. H. 548; Pratt v. Pratt, Read, & Co., 33 Conn. 446.

funds or depreciating the value of the stock by improper means,1 or by a fraudulent breach of trust.2 While they are liable for losses, even though not wilful, if they occur through their gross neglect and inattention, they are not responsible if they have exercised ordinary care.3 Additional remedies are given by statute. Thus, in New York, if dividends in a monied corporation are made from capital instead of income, the directors are personally liable. (a) The fact that the stockholder received such a dividend will not bar the action, if he did not know that the diversion of capital was taking place.1

(4) Rights of stockholders in case of the dissolution of the corporation. If the corporation be dissolved, the debts being first paid, the remaining assets belong to the stockholders. The directors. thereupon become trustees for the management of the property with a view to its ultimate division among the stockholders.5 In making distribution, any debt due from a stockholder is treated as assets of the corporation, and deducted from his share. The object is to equalize the distributive shares of all the stockholders in the fund after payment of all debts due by them to the corporation. The stockholder may in such a case assign his interest, and his assignee will have the same rights against the corporation as he himself would have had, had he remained owner. This matter is usually regulated in the various States by statute, in accordance with the principles already stated.

-

SECTION V. Liability of the Corporation, Stockholders, and Directors to Creditors. But little additional need be said as to the liability of the corporation. As has already been stated, it is liable (where the doctrine of ultra vires does not prevent) much in the same way that a natural person would be. It can be sued upon its contracts and its torts, and judgment obtained in the same general way. In addition to this, when it becomes insolvent, the remedies allowed in the law of trusts will be applicable, the property being a trust fund for the payment of its debts. The principles of equity jurisprudence will be applied to the case. Statutory remedies must also be considered in the respective States.

As a general rule, stockholders will not be liable to the creditors

1 Robinson v. Smith, 3 Paige, 222. 2 Cunningham v. Pell, 5 Id. 607.

8 Scott v. Depeyster, 1 Edw. Ch. 513; ante, p. 391.

Gaffney v. Colvill, 6 Hill, 567.

5 Angell & Ames on Corporations (11th ed.) § 779 a, and cases cited; Curran v. State of Arkansas, 15 How. U. S. 312.

6 James v. Woodruff, 10 Paige, 541, aff'd in 2 Den. 574.

(a) See Stock Corporation Law, Laws of 1892, ch. 688, § 23.

of the corporation from their private estate. Statutes may, however, impose either a partial or unlimited personal liability. Thus the National Banking Act provides for a partial personal liability. In some instances unlimited personal liability is imposed for the payment of certain debts, as, for example, for the wages of employees (a). Trustees or directors may become liable to creditors. for personal wrongful acts or negligence causing injury. There is sometimes a statutory liability, as, for instance, for not filing a prescribed report. (b)

(b) The New York statute is found in the Stock Corporation Law, §§ 30 and 31.

(a) See Stock Corporation Law of New the Laws of 1890, as amended by ch. 687 York, § 54. of the Laws of 1892) all corporations are divided into four classes: Municipal corporations, stock corporations, non-stock corporations, and mixed corporations. Stock corporations are in turn divided into monied, transportation, and business corporations, while non-stock corporations are divided into religious and membership corporations. Mixed corporations, which may or may not have capital stock, are either cemetery, library, co-operative, board of trade, or agricultural and horti cultural corporations. The General Corporation Law is applicable to all domestic corporations, and provides in a general way for their administration and internal government, leaving the details of organization to be prescribed by other laws.

The policy of the legislation concerning the creation of corporations has been quite different in New York from that of the English Companies Act, 1862. Ante, p. 401. By that and amendatory statutes a single scheme has been adopted in England applicable to all business corporations formed for lawful purposes. In New York, on the contrary, there have been in the past many distinct methods of incorporation provided for in separate statutes, which were enacted to meet the diverse ends which the incorporators might have in view. Many corporations were formed under the act of 1848 and amendatory acts (ch. 40, Laws of 1848), known as the "Manufacturing Corporation Act." In 1875 a general scheme known as the "Business Corporation Act" (ch. 611, Laws of 1875), was enacted, but this did not repeal the law of 1848, nor the other numerous acts for the creation of stock corporations, such as the laws relating to monied corporations and to railroad and other transportation companies.

Besides laws for the incorporation of stock corporations, there were separate statutes for the creation of religious, social, charitable, and benevolent organizations, and distinct rules provided for their administration, their power to acquire land, their visitation, and dissolution.

In 1890, and again in 1892, by the recommendation of the Commissioners of Statutory Revision, it was endeavored to simplify, and to a certain extent codify, the various general corporation acts then in force. This legislation resulted in several acts of a wide scope and application. By the General Corporation Law (ch. 563 of

Another act of especial importance is the Stock Corporation Law (ch. 564, of the Laws of 1890, as amended by chs. 2, 337, and 688 of the Laws of 1892). This act applies to all corporations having capital stock divided into shares, except that the first article does not apply to monied corporations. Its provisions are confined for the most part to the general powers of such corporations, to subscriptions for stock, its issuance and transfer, and to the rights, duties, and liabilities of stockholders and directors. The provisions relating to the organization of stock corporations are found in special acts passed at the same time. These are the Banking Law, the Insurance Law, the Railroad Law, the Transportation Corporations Law, and the Business Corporations Law. The classes of corporations to which the first four of the above named acts apply, appear from the respective titles of these acts.

The Business Corporations Law (ch. 691 of the Laws of 1892) was designed to take the place of the Manufacturing Cor