CHAPTER III.

STOCKHOLDERS.

SECTION 18. CAPITAL STOCK.

The capital stock of a corporation is the money contributed by the members of a private corporation as the working capital of such corporation. Such capital stock is generally represented by shares of stock issued to the subscribers, who are then known as stockholders.

"Capital and shares are a species of property distinct from each other. The capital or capital stock belongs to the corporation considered as a legal person or entity; the shares are the property of the individual shareholders according to their several holdings, and in the absence of restraint imposed upon them by a valid statute they have the absolute right to dispose of them without any restraint from the corporation."' SECTION 19. How A PERSON MAY BECOME A STOCKHOLDER.

A person may become a stockholder either by subscription to the stock or by purchasing the stock from a stockholder. Any natural person sui juris may become a stockholder in either of the above ways. A private corporation can acquire stock in another corporation, except in so far as they are prohibited by statute or by the terms of their charter.

SECTION 20. SUBSCRIPTIONS.

A subscription to stock, is the signing of an agreement to take a specified amount of the capital stock 1 Cyclopedia of Law and Proce

dure, Vol. X, pp. 364–365.

121

of the corporation. If the corporation is already incorporated, the contract becomes at once binding on the subscriber. There is some dispute in the case of the subscriber to a corporation not yet organized. Some hold that in such a case, the subscribers are bound, the promise of a subscriber to be the consideration of the promise of the other; other cases hold that there is no liability in such cases. Under any circumstances, if the subscriber accepts the stock after the organization of the corporation, he becomes bound on the terms of his contract of subscription.

SECTION 21. NATURE OF RIGHTS OF STOCKHOLDERS.

A share of stock in a corporation represents a proportionate undivided interest in the capital and good-will of the company. A stockholder has no property interest in any specific property of the corporation. During the continuance of the corporation he is entitled to a proportionate share of the profits of the company in the form of, what is known as, dividends. Upon the dissolution of the corporation, he is entitled to his proportionate share of the excess of the assets of the corporation over its liabilities.

The principal specific rights of a stockholder are those of receiving dividends, voting, and having access to the books of the company under proper conditions.

"A dividend is that portion of the profits and surplus funds of the corporation which has been actually set apart by a valid resolution of the board of directors, or by the shareholders at a corporate meeting, for distribution among the shareholders according to their respective interests, in such a sense as to be

come segregated from the property of the corporation, and to become the property of the shareholders distributively.'

A dividend is not a debt due by the corporation until it has been declared. If a dividend has been declared and a special fund set aside for its payment, the right of the stockholders to this money becomes superior to the rights of the creditor of the corporation. Particular stockholders cannot be discriminated against in the declaration and payment of a dividend. A dividend cannot legally be declared except out of the earnings of the company. Where there are such undivided earnings in the treasury, it generally lies within the discretion of the stockholders of the corporation whether or not a dividend shall be declared. Under proper circumstances, however, a court of equity has the power to order the declaration and payment of a dividend in order to prevent the working of an injustice to the minority stockholders.

SECTION 22. RIGHTS OF INDIVIDUAL STOCKHOLDERS AGAINST A CORPORATION.

In addition to the rights already mentioned, of compelling the corporation to pay dividends under certain conditions, an individual stockholder has also the right to make a proper examination of the books of the company for proper purposes. In case of a denial of this right, the stockholder has the choice of four remedies; he may either bring a suit for mandamus against the corporation or the officer in charge Cyc. of Law and Procedure, Vol. X, p. 546.

Taft vs. Hartford, etc., R. Co., 8 R. I., 310, 5 Am. Rep., 575; Stevens vs. So. Revon R. Co.,

9 Hare, 313; 21 L. J., Ch. 816; 41 Eng., Ch. 313. Minot vs. Paine, 99 Mass., 101, 96 Am. Dec., 705; Wolfe vs. Underwood, 96 Ala., 329, 11 So., 344.

of the books, or he may sue the corporation or the officer at fault for damages. A stockholder may also sue the corporation for any debt which they may owe him.

SECTION 23. LIABILITIES OF STOCKHOLDERS TO A CORPORATION.

A stockholder is liable to his corporation for the unpaid portion of the par value of his stock. The directors of a corporation may make a contract with purchasers of stock to sell them the stock of the corporation at less than its par value. This contract will be binding as far as the corporation is concerned. A corporation can sue a stockholder on any indebtedness to the corporation which he may have contracted, the same as an outsider. A stockholder can set off any dividend due him against any debt which he may owe to the corporation. A stockholder cannot, however, set off a debt which the corporation may owe him against the unpaid amount due on his stock.

SECTION 24. LIABILITIES OF STOCKHOLDERS TO THIRD PERSONS.

Although a contract made by the directors to sell the stock of the corporation at less than its par value would be binding upon the corporation, it is not binding upon the creditors of the corporation except in one class of cases. If the corporation has been so unsuccessful in its business that the price of the stock has fallen below par, and it is necessary to increase the capital stock of the corporation in order to get additional capital to carry on the work of the corporation, they will be allowed to sell the new stock at the best market price that can be obtained. With this

exception, the stockholders in a company are liable in case of the insolvency of the company to creditors of the company for all unpaid balances due on their stock.

"A doctrine of the American courts, slowly becoming obsolete, invented by Mr. Justice Story, is that the assets of a corporation are a trust fund for the payment of its creditors, who have an equitable lien or charge upon it, superior to that of the shareholders, and that the directors of a corporation are consequently in a sense trustees for its creditors."

"The capital stock of a corporation, which is subject to the operation of this principle, consists of all the stock which the members have subscribed." This is deemed to consist of three funds: (1) Money which has been subscribed and paid in. (2) Money thus subscribed but not paid in. (3) Money thus subscribed, but afterward improperly divided among the members, leaving the debts of the corporation unpaid. Stated in another way the capital stock of a corporation in the eye of an American court of equity is the stake or pledge upon which the company obtains credit. If any member has not paid his share of it into the common treasury he is deemed to hold so much of a fund in his pocket, upon which the creditors of the concern have an equitable charge or lien, and a court of equity will lay hold of him, and compel him to surrender up this fund for the benefit of such creditors.""

Leffman vs. Flanigan, 5 Phila.
(Pa.), 155, 20 Leg. Int. (Pa.),
148.

Mann vs. Pentz, 3 N. Y., 415;
Spear vs. Grant, 16 Mass., 9.

' Ward vs. Griswoldville Mfg. Co.,
16 Conn., 593.

Reid vs. Eatonton Mfg. Co., 40 Ga., 98; 2 Am. Rap., 563; Wood vs. Drummer, 30 Fed. Cas. No. 17, 944; 3 Mason, 308. • Adler VS. Milwaukee Patent Brick Mfg. Co., 13 Wis., 57.