of the corporation affairs, and launched its new scheme, then, as between the purchasers and holders of such new stock and the corporation or its creditors, the shareholders are estopped from denying the regularity of the proceedings to increase the stock, and from denying the validity of the stock so issued. If, through misrepresentation and fraud, any one is induced to subscribe for or purchase of such stock, he may repudiate the stock and be relieved of his relation as stockholder, provided he does so promptly and uses reasonable diligence in measures to that end. But it will be too late to set up the misrepresentation and fraud after he has paid repeated assessments, participated, in person or by proxy, in the meetings of stockholders, and continued to hold his stock for a year or more, and until the company has, by reason of losses, become insolvent, and creditors seck to have its assets applied to the payment of their claims. $138. Authority to increase stock; acquiescence of stockholders.

For the purposes of this suit, prosecuted by the assignee in bankruptcy of the corporation against a holder of the increased stock, and therefore brought in behalf and for the interest of creditors as well as the bankrupt company, I hold that there was legislative authority to reorganize and increase the stock of the Great Western Insurance Company, and that the documentary evidence put into the case by plaintiff, of authenticated copies of papers in the office of the auditor of public accounts of Illinois, are legally sufficient to establish the right and authority to issue the increased stock. The documentary evidence, taken in connection with proof of user under the charter as amended, such as the opening and keeping of an office, the actual issue and sale of stock to the amount of a million of dollars, more or less, and the transaction of bus.ness for about a year and a half, not only constitutes prima facie evidence of the existence of the corporation under the amended charter, with power to increase and dispose of the capital stock, but concludes all stockholders who, by continued silence or participation in its affairs as stockholders or officers, permitted the company to palm itself off on the public as a corporation entitled to the exercise of such power and rights. The alleged false, irregular and defective proceedings in launching the new enterprise could have been inquired into by the state; but such stockholders will not be allowed to question the proceedings as against the rights of creditors. The practical effect of the rulings I have given would be to exclude much of the defendant's evidence. These rulings have not been made so much for the purpose of instructing the jury as to decide the questions raised at the bar, and so ably argued.

139. Conduct that estops a shareholder of a corporation from denying the validity of the stock held by him.

Gentlemen of the jury, the instructions which form the basis of your verdict are brief, and I now invite your attention to them. If you find that defendant, on or about November 25, 1870, became the holder, by purchase or otherwise, of $1,000 of the stock of the Great Western Insurance Company, and continued to hold and own the same up to the time of the insolvency and bankruptcy of the company, in February, 1872, and during that time paid thirty per cent. assessed by the company, and acted in person or by proxy at a stockholders' meeting; and if you find the company, during all that time, or up to its actual insolvency, was doing business as an insurance company, issued stock and policies, and kept an office, and advertised itself by pamphlets and circulars, representing and holding itself out to the public as a corporation authorized to do a fire insurance business, with an authorized capital of $500,000, a subscribed capital of $1,000,000, or about that, the amount

thereof paid in, and giving the names of stockholders and officers, then I instruct you defendant is estopped from denying the validity of the stock held by him, and is liable to plaintiff for the amount thereof unpaid, with interest at six per cent. from August 22, 1872.

§ 140. As against creditors, stockholders or directors have no power to declare stock"non-assessable."

There is printed across defendant's certificate of stock the word "nonassessable." Twenty per cent. had been paid when it was issued; hence, the remaining eighty per cent. was represented as non-assessable. Evidence is in the case showing that the company passed a resolution declaring eighty per cent. of all the new or increased stock non-assessable. I instruct you that the directors and stockholders had no power to exempt stockholders from liability, or to limit their liability within the full amount of the stock held as against creditors of the corporation. The capital stock was held out as, and did represent part of, the assets of the company, upon the faith of which the public did business with it. The stock issued represented capital. Whatever was not paid was subject to be called for, if necessary, to meet liabilities.

§ 141. An assignee in bankruptcy represents creditors as well as the bankrupt. The plaintiff, as I have said, sues as well in the interest of creditors as of the bankrupt, and no defense can be set up against his right of recovery which could not be set up if the suit was solely in the interest of creditors, so far as touches the validity of the stock in question. Under these brief instructions, I submit the case to the jury.

STURGES v. STETSON.

(Circuit Court for Ohio: 1 Bissell, 246-254. 1858.)

Opinion by McLEAN, J.

STATEMENT OF FACTS.-This action is brought on a promissory note for $24,000, made to plaintiff by defendant, dated February 4, 1853, and payable on demand. The questions before the court are raised by the ninth plea, which states that the Hillsboro & Cincinnati Railroad Company, on the 31st of January, 1853, was engaged in the construction of its line of road from Cincinnati to the Ohio river, at or opposite Parkersburg, in Virginia; that its capital stock, under various acts of the legislature, was $5,000,000, and was divided into shares of $50 each; that the subscriptions of stock were regularly under the control of the board of directors for the time being, yet that neither the board of directors nor the company had power by their charter, or by the laws of the land, to issue and dispose of stock at less than $50 per share; that the plaintiff, being a dealer in railroad stocks, entered into an unlawful scheme and device with the board of directors, that they should execute to him a bond for $750,000, payable in January, 1858, without interest, and within four years from date convertible into fifteen thousand shares of stock, at $50 each; and that the said bond should be sold and delivered to the plaintiff for $521,677, payable on the call of the company, which sum was less by $228,333 than the amount of the shares purchased by him; and the plea further averred that the plaintiff, on the 4th of February, 1853, still holding six hundred shares of the above purchased stock, of which he represented himself to be the lawful holder, induced the defendant to purchase the same, and as a consideration for which he gave the promissory note on which the action is founded; and the power of the directors to issue the stock by the charter or under the laws of

the state, at less than $50 for each share, is denied. To the special plea a general demurrer was filed.

In the original act of incorporation the capital stock was limited to $300,000, to be divided into shares of $50 each. The sum of $150,000 was required to be subscribed, before the structure of the road should be commenced.. In a subsequent act this sum was reduced to $100,000. The twelfth section authorizes the directors to require payment of capital stock subscribed, by instalments, as they shall think fit; and if the instalment shall remain unpaid for sixty days after the time required, the board may collect the same by suit, or shall have power to sell the stock at public auction. By the fifteenth section the directors are authorized to mortgage the capital stock, to secure the payment of money borrowed. The act of 1849 increased the capital stock to $900,000, and the amendatory act of 1851 increased it to $5,000,000. By a special act of 5th of February, 1851, the company was authorized to sell its bonds, issued for loans, and its notes and certificates, payable in money or property received as donations, or in payment of subscriptions to its stock, above or below par. By the fifth section of the original act the affairs of the company were vested in seven directors, a majority of whom were authorized to act; and by the sixth section it is declared that the directors may determine the times and terms of payment of stock." There appears to be nothing in the various legislative acts that constitute the charter of this company which is not common to other railroad companies chartered in this state. § 142. Subscription essential to the creation of stock.

In the consideration of this case, it is necessary to ascertain the nature of the contract between the directors and the plaintiff. Was there a sale or a subscription of stock, or both? When the parties came together, with a view to this transaction, there is no pretense to say that the fifteen thousand shares were stock. They constituted a part of the capital stock, as provided in the charter, but in no other sense were they stock. The corporate powers of the company were conferred for the express purpose of creating stock as a means of constructing the railroad. As well might the route for the road designated be called a railroad, as to call the corporate means of creating the stock, stock. In a legal point of view, it is important to call things by their right names. This is especially necessary when the effect of the exercise of corporate powers is to be determined. Stock can be created only by contract, whether it be in the simple form of a subscription, or in any other mode. There must be an agreement to take the stock, and nothing short of this can create it. This imparts to the stock the quality of property, which before it did not possess. It is called capital stock in the charter, because the corporate capacity to create it is given. The term stock, as used in the charter, before it is taken by subscription, means nothing more than a power in the directors to receive subscription for stock.

143. Promoters or directors cannot sell stock for less than its par value. The plea sufficiently shows that there was no sale of stock to the plaintiff, which had been previously issued, but an attempt to create the stock and sell it at the same time, as one transaction; and it appears that the discount of nearly one-third of the shares purchased was a part of the contract of subscription, and this presents the great question in the case, whether the directors had power to issue the stock for less than its par value. If it is not admitted in the argument, it is not controverted, that the commissioners who, before the organization of the company, received subscriptions of shares had no power to

receive them for less than the amount stated in the charter. But it is said that the subscription of the plaintiff was not received by the commissioners, but by the board of directors, who exercised all the powers of the corporation, and, among others, the power of sale over its property; that the sixth section of the charter gives them express power over the stock, "to determine the time and terms of payment." As capital stock is not property until it shall be subscribed for, the power given to the directors in the charter to sell the property of the company does not apply to the disposition of capital stock; and it seems to be clear that the power to determine the time and terms of payment of subscriptions of stock can have no reference to its price. The charter declares the shares of the capital stock shall each be $50; and it would be contrary to all known rules of construction to say that a provision that applies only to the payment of stock subscribed shall be so construed as to repeal the provision that fixes the value of each share.

There may be many instances where land is purchased for a depot, or for other purposes connected with the road, or where work has been done on the road or rolling stock furnished for it, a subscription for stock may be given by the directors in payment. But whether land, labor, property or money be received in payment, the principle is the same. The directors may regulate the time and terms of payment, but they have no power over the price of each share. In declaring that the capital stock should be divided into shares of $50 each, the law was designed to give the same permanency to the limitation of the shares as to the limitation of the capital stock. A subscription procured of fifteen thousand shares, amounting to the sum of $750,000, with the understanding that it should be discharged on the payment of about one-third less, was a fraud upon the law and upon the stockholders. The term fraud is here used in no other sense than as an act done without the authority of law and against the provisions of the charter, and this epithet legally applies, however innocently the act may have been done by the directors. In regard to the price of the shares, the directors have no greater power over it than the commissioners had. They were both the instruments of the law, and were alike bound by its provisions. If power had been given to either to exercise a discretion so vital to the success of the scheme as to vary the price of shares, it would have destroyed all confidence in the enterprise. The plaintiff seemed to have been convinced of this, from the plan adopted to receive from the company the first bond for $750,000, to give to the act an appearance of fairness on the books of the company. It is essential to the success of any enterprise which involves the expenditure of money that the contributors should be placed upon an equal footing in regard to the money paid. In this case the plaintiff received in stock $228,333 more than he paid for. This was a fraud on the stockholders who had paid in full for their shares.

§ 144. Power to pledge capital stock held confined to stock owned by the stockholders.

It is said the directors had power to secure the payment of loans by mortgage on capital stock. This is admitted. In the sixteenth section of the first act it is provided that, to secure the payment of money and the interest thereon, borrowed, "the directors may pledge, by mortgage or otherwise, their entire road, fixtures and equipments, with the income and resources thereof, together with the capital stock." What was meant by the capital stock in this provision? Does it refer to the stock named in the charter, and for which no subscription has been made? Such stock is a legal fiction. It is not in esse,

and, as such, cannot be a subject of mortgage. What security under the mortgage could it afford? It is, at least, nothing more than a right to subscribe for stock, which is common to all persons; and every one who does subscribe confers a favor on the company. The power given to the directors to pledge the capital stock was, undoubtedly, intended to cover the capital stock, which was owned by the stockholders, and was property that might be mortgaged at the time.

$145. Stock liable to sale under execution.

It is admitted that stock may be sold on execution after judgment against a stockholder, under the statute, or it may be sold at auction, under the charter, for default of payment, at less than its nominal value. In either case the stock, being property, may be sold, as other personal property, for what it may bring. On a sale at auction, or execution, nothing is sold but the interest of the stockholder, and the purchaser acquires only his right. If the stock has been paid for in part only, the new owner must pay the instalments required under the rules of the company; and if he fail so to do, the stock may be again sold. The same rule of procedure applies where the stock is sold on execution. In neither case is it important that the stock should sell for the amount paid on it. If it sell for more, it is the gain of the delinquent stockholder; if for less, it is his loss. But, by the sale, the interest of the other stockholders is not affected. If the stock has been paid in full, and it sell for half the amount so paid, the sale is valid and the interests of the other stockholders remain unaffected. The stock, like other property, being subject to the claims of creditors, is liable to loss on forced sales. But such a procedure is altogether different in principle from the act of taking subscriptions of stock.

§ 146. Not necessary expressly to prohibit directors from selling stock below par. It is said there is nothing in the charter which prohibits the directors from taking subscriptions of stock for less than $50 a share. No such provision was necessary. The duties of the directors are plainly pointed out in the charter, and as their powers were wholly derived from that instrument, it was not necessary to prohibit them from doing that which the charter did not authorize them to do. The charter fixed the rates at which the shares should be subscribed. This is matter of law, and is no more subject to the discretion of the directors than it was to the discretion of the commissioners, who first received subscriptions.

§ 147. Authority to sell bonds, etc., not a warrant for selling stock.

From the authority given to the directors to sell "notes, bonds, scrip, and certificates for the payment of money or property, which the company had previously received as donations, or in payment of subscriptions to the capital stock," above or below par, an argument is drawn that stock may be disposed of to subscribers for less than $50 a share. It appears to me the provision authorizes an inference in conflict with the one drawn. If bonds, or other instruments for the payment of money, be transferred at less than their face, with legal interest on the entire sum, in payment for the money loaned, it would be usurious; and this was the reason for the above provision. Without it, the sale of the bonds, etc., would have been illegal. A certificate of stock was issued to the plaintiff for fifteen thousand shares, amounting to the sum of $750,000, of which only $521,677 were paid, which was less for the shares than the price fixed by the charter by 228,303. This sum, distributed among the shareholders at the time of the transaction, will show the loss they sustained; and if this be a correct construction of the powers of the directors,