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CHAPTER XXXVII

RIGHTS AND LIABILITIES OF STOCKHOLDERS

1. Rights of stockholders.

2. The contract of membership. 3. Liability on subscription.

4. Liability of stockholders.

Rights and liabilities of stockholders... 5. Assessments and calls.

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a corporation and to each other is contracted. When a stockholder pays for his subscription to the stock he has the right to a certificate showing his ownership, and this certificate constitutes his evidence that he is a stockholder.

The stockholder has the right to dispose of his shares of stock in the manner prescribed in accordance with the regulations of the charter or by-laws of the company. The shares of the corporation are considered property and can be bought and sold. The shares of a stockholder also entitle him to vote the shares held by him in electing the officers of the corporation.

A stockholder also by weight of authority has the right to inspect the books of the company if such inspecting is done at the proper time and place.

417. The contract of membership. The contract which exists among the members of a corporation, and which constitutes them a corporate association, is the contract of membership and must possess all the requisites of a contract. (See ¶10). Persons become members of a corporation by original subscription or by a transfer of shares of stock.

A contract of membership gives the status of stockholders, and differs from a contract to become a stockholder. In the

latter case, if the subscriber fail to fulfill his agreement, the corporation would be entitled to recover only the difference between the amount which the subscriber agreed to pay and the value of the shares in the market.

418. Liability on subscription to corporation. By subscribing for capital stock the subscriber thereby promises to pay for the stock in the manner indicated by the charter. A number of persons had mutually agreed to form a corporation and to contribute a certain amount of capital stock each. An act of incorporation having been subsequently passed, it was held that the subscribers thereupon became shareholders, and, as such, were liable to pay in the capital stock which they had agreed to contribute. But subscriptions are not ordinarily enforceable against the subscribers until the whole amount of the capital stock is subscribed.

419. Liability of stockholders. Rule: In many states stockholders are liable for only the amount of the unpaid subscription.

If they have been released by the corporation after paying for only a part of the stock it does not in any way affect the rights of the creditors to compel the subscribers to pay in the full amount subscribed. The unpaid subscription of a corporation constitutes a trust fund to be held by the corporation for the benefit of creditors and stockholders.

Rule: In some states, however, stockholders are liable to the creditors of the corporation for twice the amount of their stock.

As this liability is usually regulated by statute, it will be necessary for the reader, if he be interested in the matter, to investigate the law of his own state on this subject.

420. Assessments and calls. An assessment is an apportionment of or call by a corporation for definite contributions or payments. Before subscribers become liable to contribute to the company's capital a regular call or assessment must be made upon all the subscribers, and under no circumstances can a subscriber be sued by the corporation on his subscription until the call has been regularly made. The time when the payments are to be made is frequently fixed by the charter. When not thus fixed the managing board of the company can issue a

call whenever the money is needed for the authorized purposes of the corporation.

421. Subscription obtained by fraud. Rule: If a person has been induced by fraudulent representations to become a member of a corporation he can withdraw without any liabilities attaching to his subscription.

Subscriptions obtained by fraud between an individual and a company are to be treated like contracts between any two individuals. If the false representation be concerning some public law, or charter, or even contents of the subscription paper, or by promises or statements of mere matter of opinion, the contract of membership will be binding, because such representations do not constitute fraud.

When the contract is voidable, a subscriber must use due diligence in avoiding it, for if he take part in the management of the concern after knowledge of the fraud he will be presumed to have waived the fraud. Thus, for example, a statement made by an agent obtaining subscription for shares in a railroad company to the effect that the road would be built upon a certain route or within a certain time would not render a subscription made upon the faith of it voidable, though the representations were false.

422. Transfer of stock. The charter or by-laws of a corporation usually prescribe a method for transferring its stock, and when it does a transferor does not lose, nor does the transferee gain, the status of a stockholder, unless the formalities thus prescribed are satisfied. But when they are observed the transferee is entitled to the rights and subject to the liabilities of the transferrer. Stock may be assigned, however, so as to pass title by any agreement which is binding upon the parties, and the assignment will be protected in a court of equity. Such an assignment does not change the relation between the assignor and the company, but the beneficial interest in the stock, however, belongs to the transferee.

423. Assignment by endorsement. When a party buys the stock of a corporation, the purchaser usually receives a certificate showing that the holder is the owner of the stock

described therein. By general custom, shares are assignable by endorsement and delivery of the certificate issued to the owner as evidence of his rights. It is well settled that after a certificate for shares has been endorsed by the holder, with an assignment and power of attorney to execute a transfer upon the stock books, the certificate thus endorsed may be transferred from hand to hand, and the last holder has the right to fill out the blank form of assignment and the power of attorney and have the transfer recorded on the books of the corporation.

The Supreme Court of the United States says: "Stock certificates of all kinds have been constructed in a way to invite the confidence of business men, so that they have become the basis of commercial transactions in all the large cities of the country, and are sold in open market the same as other securities. Although neither in form nor character negotiable paper, they approximate to it as nearly as practicable. If we assume that the certificates in question are not different from those in general use by corporations, and the assumption is a safe one, it is easy to see why investments of this character are sought after and relied upon. No better form could be devised to assure the purchaser that he can buy with safety. He is told, under the seal of the corporation, that the shareholder is entitled to so much stock, which can be transferred on the books of the corporation in person or by attorney when the certificates are surrendered, but not otherwise. This is a notification to all persons interested to know that whoever in good faith buys the stock and produces to the corporation the certificate regularly assigned, with power to transfer, is entitled to have the stock transferred to him. The notification goes further, for it assures the holder that the corporation will not transfer the stock to anyone not in possession of the certificate."

424. Dividends. A dividend is a portion of the earnings of a corporation set aside to be distributed proportionately among stockholders. The directors of the corporation have the power to declare dividends out of the earnings of the corporation. The profits of the company do not constitute dividends until the board of directors have declared them to be dividends. Directors

have a large discretion in declaring dividends, and may add the profits to the capital instead of distributing the profits among the stockholders as dividends if they choose to do so. If there are no profits there can be no dividends, as the directors have no power to declare and pay dividends out of the capital stock.

QUESTIONS

1. What are the rights of a stockholder of a corporation?

2. What is the contract of membership in a corporation?

3. What is the liability of a subscriber to the capital stock of a corporation?

4. What is the liability of the stockholders of a corporation for the debts of a company?

5. What is the effect of fraud in obtaining a subscription to a corporation? 6. How is the stock of a corporation transferred from one person to another?

7. Has a certificate of stock any of the elements of a negotiable paper? 8. What are the dividends of a corporation?

9. When have the stockholders the right to demand dividends?

CASES

(GIVE REASONS FOR YOUR ANSWERS)

1. G was soliciting subscriptions for the building of a railway. He signed his own name in the subscription book for a certain number of shares. Later he had a disagreement with the company, and cut his own name out of the subscription book and returned it to the company. Can G repudiate his membership in this way?

2. A, who had paid only fifty cents on the dollar of his stock for which he had subscribed, sold it to B, because he expected the company would fail. After assignment and transfer of stock on the books of the corporation, can creditors who dealt with the company on the faith of A's being a stockholder look to him for satisfaction of their claims created while he was a stockholder? Will A be obliged to pay the company the balance of his subscription for stock?

3. A proposed company issued a prospectus to secure subscriptions for a corporation to operate a street railway. In this prospectus it was stated that the company had a franchise to operate a street railway on certain streets of the town. On this statement many persons subscribed. The company had no such franchise and were unable to obtain it. Can they hold the subscribers liable on their subscriptions?

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