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guage: "In general, the present holders of stock have a primary right to subscribe in proportion to their holdings for any new issue. The stockholders themselves certainly may determine otherwise, and order a sale to the public and payment of the proceeds into the treasury. But this is exceptional, and the exercise of a reserved power which should not be permitted unless there is a clear intent of the stockholders to do so." See, also, Cunningham's Appeal, 108 Pa. 546 ; Reading Trust Co. v. Reading Iron Works, 137 Pa. 282, 21 Atl. 169, 170; De La Cluesta v. Insurance Co., 136 Pa. 62, 658, 20 Atl. 505, 9 L. R. A. 631; Humboldt Driving Park Association v. Stevens, 34 Neb. 528, 534, 52 N. W. 568, 33 Am. St. Rep. 654; Hart v. St. Charles Street R. R. Co., 30 La. Ann. 758; State v. Smith, 48 Vt. 290; Atkins v. Albree, 94 Mass. 359; Hammond v. Edison Illuminating Co., 131 Mich. 79, 90 N. W. 1040, 100 Am. St. Rep. 582; Crosby v. Stratton (Colo. App.) 60 Pac. 130; Knapp v. Publishers: George Knapp & Co., 127 Mo. 53, 29 S. W. 885; Baltimore City Pass. R. Co. v. Hambleton, 77 Md. 341, 26 Atl. 279; Jones v. Railroad Co., 67 N. H. 119, 38 Atl. 120; Id., 67 N. H. 234, 30 Atl. 614, 68 Am. St. Rep. 650.

The elementary writers are very clear and emphatic in laying down the same rule, Thus in 2 Beach on Private Corporations, $ 473, the learned author says: "A stockholder of the old stock, at the time of the vote to augment the capital of a company, has a right in the new stock, in proportion to the amount of his interest in the old, of which he cannot be rightfully deprived by other stockholders. When the capital stock of a corporation is increased by the issue of new shares, each holder of the original stock has a right to offer to subscribe for and to demand from the corporation such a proportion of the new stock as the number of shares already owned by him bears to the whole number of shares before the increase. This pre-emptive right of the shareholders in respect to new stock is well recognized. The corporation cannot compel the old stockholders upon their supscription for a new stock to pay more than par value therefor. They are entitled to it without extra burden or price beyond the regular par value. An attempt to deprive the stockholder of this right will be enjoined in the absence of laches or acquiescence. The courts go very far in protecting the right of stockholders to subscribe for new stock. It is often a very important right.” 1 Cook on Corporations (4th Ed.) 286. "Each shareholder, it has been held, has a right to the opportunity to subscribe for and take the new or increased stock in proportion to the old stock held by him; so that a vote at a shareholders' meeting, directing the new stock to be sold, without giving to each shareholder such an opportunity, is void as to any dissenting shareholder.” 10 Cyc. 543. "Those who are shareholders when an increase of capital stock is effected enjoy the

right to subscribe to the new stock in proportion to their original holdings and before subscriptions may be received from outsiders." 26 Am. & Eng. Enc. (2d Ed.) 947. See, also, 2 Thompson's Commentaries, & 2094; Angell & Ames on Corporations, § 430; Morawetz on Corporations, § 455.

If the right claimed by the plaintiff was a right of property belonging to him as a stockholder, he could not be deprived of it by the joint action of the other stockholders, and of all the directors and officers of the corporation. What is the nature of the right acquired by a stockholder through the ownership of shares of stock? What rights can he assert against the will of a majority of the stockholders, and all the officers and directors? While he does not own and cannot dispose of any specific property of the corporation, yet he and his associates own the corporation itself, its charter, franchises, and all rights conferred thereby, including the right to increase the stock. He has an inherent right to his proportionate share of any dividend declared, or of any surplus arising upon dissolution, and he can prevent waste or misappropriation of the property of the corporation by those in control. Finally, he has the right to vote for directors and upon all propositions subject by law to the control of the stockholders, and this is his supreme right and main protection. Stockholders have no direct voice in transacting the corporate business, but through their right to vote they can select those to whom the law intrusts the power of management and control. A corporation is somewhat like a partnership, if one were possible, conducted wholly by agents where the copartners have power to appoint the agents, but are not responsible for their acts. The power to manage its affairs resides in the directors, who are its agents, but the power to elect directors resides in the stockholders. This right to vote for directors, and upon propositions to increase the stock or mortgage the assets, is about all the power the stockholder has. So long as the management is honest, within the corporate powers, and involves no waste, the stockholders cannot interfere, even if the administration is feeble and unsatisfactory, but must correct such evils through their power to elect other directors. Hence, the power of the individual stockholder to vote in proportion to the number of his shares is vital, and cannot be cut off or curtailed by the action of all the other stockholders, even with the co-operation of the directors and officers.

In the case before us the new stock came into existence through the exercise of a right belonging wholly to the stockholders. As the right to increase the stock belonged to them, the stock when increased belonged to them also, as it was issued for money and not for property or for some purpose other than the sale thereof for money. By the increase of stock the yoting power of the plaintiff was

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reduced one-half, and while he consented to of, such as the requirement that every old the increase he did not consent to the disposi- stockholder electing to take new stock shall tion of the new stock by a sale thereof to pay a fixed price therefor, not less than par. Blair & Co. at less than its market value, nor however, owing to the limitation of the by sale to any person in any way except by an statute. They may also provide for a sale allotment to the stockholders. The increase in parcels or bulk at public auction, when and sale involved the transfer of rights be- every stock holder can bid the same as longing to the stockholders as part of their strangers. They cannot, however, dispose of investment. The issue of new stock and the it to strangers against the protest of any sale thereof to Blair & Co. was not only a stockholder who insists that he has a right to transfer to them of one-half the voting power his proportion. Otherwise the majority could of the old stockholders, but also of an equi- deprive the minority of their proportionate table right to one-half the surplus which be- power in the election of directors and their longed to them. In other words, it was a proportionate right to share in the surplus, partial division of the property of the old each of which is an inherent, pre-emptive, and stockholders. The right to increase stock is vested right of property. It is inviolable, not an asset of the corporation any more than and can neither be taken away nor lessened the original stock when it was issued pursuant without consent, or a waiver implying conto subscription. The ownership of stock is in sent. The plaintiff had power, before the inthe nature of an inherent but indirect power crease of stock, to vote on 221 shares of to control the corporation. The stock when stock, out of a total of 5,000, at any meeting issued ready for delivery does not belong to held by the stockholders for any purpose. By the corporation in the way that it holds its the action of the majority, taken against his real and personal property, with power to sell will and protest, he now has only one-half the the same, but is held by it with no power of voting power that he had before, because the alienation in trust for the stockholders, who number of shares has been doubled while he are the beneficial owners, and become the still owns but 221. This touches him as a legal owners upon paying therefor. The cor- stockholder in such a way as to deprive him poration has no rights hostile to those of the of a right of property. Blair & Co. acquired stockholders, but is the trustee for all includ- virtual control, while he and the other stocking the minority. The new stock issued by holders lost it. We are not discussing equithe defendant under the permission of the ties, but legal rights, for this is an action at statute did not belong to it, but was held by law, and the plaintiff was deprived of a strictit the same as the original stock when first ly legal right. If the result gives him an issued was held in trust for the stockholders. advantage over other stockholders, it is beIt has the same voting power as the old, share cause he stood upon his legal rights, while for share. The stockholders decided to en- they did not. The question is what were his large their holdings, not by increasing the legal rights, not what his profit may be under amount of each share, but by increasing the the sale to Blair & Co., but what it might number of shares. The new stock belonged to have been if the new stock had been issued the stockholders as an

an inherent right by to him in proportion to his holding of the old. virtue of their being stockholders, to be The other stockholders could give their propshared in proportion upon paying its par erty to Blair & Co., but they could not give value or the value per share fixed by vote of a his. A share of stock is a share in the power majority of the stockholders, or ascertained to increase the stock, and belongs to the stockby a sale at public auction. While the cor- holders the same as the stock itself. When poration could not compel the plaintiff to take that power is exercised, the new stock belongs new shares at any price, since they were to the old stockholders in proportion to their issued for money and not for property, it holding of old stock, subject to compliance could not lawfully dispose of those shares with the lawful terms upon which it is issued. without giving him a chance to get his propor- When the new stock is issued in payment for tion at the same price that outsiders got property purchased by the corporation, the theirs. He had an inchoate right to one share stockholders' right is merged in the purchase, of the new stock for each share owned by him and they have an advantage in the increase of the old stock, provided he was ready to of the property of the corporation in proporpay the price fixed by the stockholders. If tion to the increase of stock. When the new so situated that he could not take it himself, stock is issued for money, while the stockhe was entitled to sell the right to one who holders may provide that it be sold at auction could, as is frequently done. Even this gives or fix the price at which it is to be sold, each an advantage to capital, but capital neces- stockholder is entitled to his proportion of the sarily has some advantage. Of course, there

, proceeds of the sale at auction, after he has is a distinction when the new stock is issued had a right to bid at the sale, or to his proin payment for property, but that is not this portion of the new stock at the price fixed by case. The stock in question was issued to be the stockholders. sold for money and was sold for money only. We are thus led to lay down the rule that A majority of the stockholders, as part of a stockholder has an inherent right to a their power to increase the stock, may attach proportionate share of new stock issued for reasonable conditions to the disposition there- money only and not to purchase property for the purposes of the corporation or to not acquiesced in the proposed sale of his effect a consolidation, and while he can share, but wanted it himself. The directors waive that right, he cannot be deprived of were under the legal obligation to give him it without his consent except when the stock an opportunity to purchase at the price fixed is issued at a fixed price not less than par, before they could sell his property to a third and he is given the right to take at that party, even with the approval of a large price in proportion to his. holding, or in some majority of the stockholders. If he had other equitable way that will enable him remained silent, and had made no request to protect his interest by acting on his own or protest he would have waived his rights, judgment and using his own resources. This but after he had given notice that he wanted rule is just to all and tends to prevent the his part and had protested against the sale tyranny of majorities which needs restraint, thereof, the defendant was bound to offer as well as virtual attempts to blackmail by it to him at the price fixed by the stocksmall minorities which should be prevented. holders. By selling to strangers without

The remaining question is whether the thus offering to sell to him, the defendant plaintiff waived his rights by failing to do wrongfully deprived him of his property, what he ought to have done, or by doing and is liable for such damages as he actually something he ought not to have done. He sustained. demanded his share of the new stock at The learned trial court, however, did not par, instead of at the price fixed by the stock- measure the damages according to law. The holders, for the authorization to sell at $450 plaintiff was not entitled to the difference

, a share was virtually fixing the price of the between the par value of the new stock and stock. He did more than this, however, the market value thereof, for the stockholdfor he not only voted against the proposition ers had the right to fix the price at which to sell to Blair & Co. at $450, but, as the court the stock should be sold. They fixed the expressly found, he "protested against the price at $450 a share, and for the failure proposed sale of his proportionate share of of the defendant to offer the plaintiff his the stock, and again demanded the right to share at that price we hold it liable in damsubscribe and pay for the same which de- ages. His actual loss, therefore, is $100 per mands were again refused," and "the resolu- share, or the difference between $450, the tion was carried notwithstanding such pro- price that he would have been obliged to pay test and demands.” Thus he protested had he been permitted to purchase, and the against the sale of his share before the price market value on the day of sale, which was was fixed, for the same resolution fixed the $550. This conculsion requires a reversal of price, and directed the sale, which was the judgment rendered by the Appellate Dipromptly carried into effect. If he had not vision and a modification of that rendered attended the meeting, called upon due notice by the trial court. to do precisely what was done, perhaps he The order appealed from should be rewould have waived his rights, but he at- versed and the judgment of the trial court tended the meeting and, before the price was modified by reducing the damages from the fixed, demanded the right to subcribe for sum of $99,450, with interest from January 221 shares at par, and offered to pay for the 30, 1902, to the sum of $22,100, with interest same immediately. It is true that after from that date, and by striking out the extra the price was fixed he did not offer to take allowance of costs, and as thus modified the his share at that price, but he did not ac- judgment of the trial court is affirmed, withquiesce in the sale of his proportion to Blair out costs in this court or in the Appellate & Co., and unless he acquiesced the sale as Division to either party. to him was without right. He was under no obligation to put the corporation in de- HAIGHT, J. (dissenting). I agree that the fault by making a demand. The ordinary rule that we should adopt is that a stockdoctrine of demand, tender, and refusal has holder in a corporation has an inherent right no application to this case. The plaintiff to purchase a proportionate share of new had made no contract. He had not promised stock issued for money only, and not to purto do anything. No duty of performance chase property necessary for the purposes of rested upon him. He had an absolute right the corporation or to effect a consolidation. to the new stock in proportion to his holding While he can waive that right he cannot be of the old, and he gave notice that he wanted deprived of it without his consent, except it. It was his property, and could not be by sale at a fixed price at or above par, in disposed of without his consent. He did not which he may buy at that price in proporconsent. He protested in due time, and the tion to his holding or in some other equisale was made in defiance of his protest. table way that will enable him to protect While in connection with his protest he de- his interest by acting on his own judgment manded the right to subscribe at par, that and using his own resources. I, however, demand was entirely proper when made, differ with Judge VANN as to his conclusions because the price had not then been fixed. as to the rights of the plaintiff herein. UnAfter the price was fixed it was the duty der the findings of the trial court the plainof the defendant to offer him his proportion tiff demanded that his share of the new stock at that price, for it had notice that he had should be issued to him at par, or $100 per

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share, instead of $450 per share, the price thereafter the stock rapidly advanced until offered by Blair & Co. and the price fixed the day of the completion of the sale on the at the stockholders' meeting at which the 30th of January, when its market value was new stock was authorized to be sold. This $550 per share; but this, under the stipulademand was made after the passage of the tion of facts, was caused by the rumor and resolution authorizing the increase of the subsequent announcement and consummation capital stock of the defendant company and of the proposition for the increase of the before the passage of the resolution authoriz- stock and the sale of such increase to Blair ing a sale of the new stock to Blair & Co. at & Co. and their associates. It is now prothe price specified. After the passage of posed to give the plaintiff as damages such the second resolution he objected in the sale increase in the market value of the stock, of his proportionate share of the new stock even though such value was based upon the to Blair & Co., and again demanded that it understanding that Blair & Co. were to bebe issued to him, and the following day he come stockholders in the corporation, which made a legal tender for the amount of his the acceptance of plaintiff's offer would have portion of the new stock at $100 per share. prevented. This, to my mind, should not There is no finding of fact or evidence in be done. I, therefore, favor an affirmance. the record showing that he was ever ready or willing to pay $150 per share for the

CULLEN, C. J., and WERNER and HISstock. He knew that Blair & Co. repre

COCK, JJ., concur with VANN, J.; WIL

LARD sented Marshall Field and others at Chicago,

BARTLETT,

concurs with great dry goods merchants, and that they

HAIGHT, J.; O'BRIEN, J., absent. had made a written offer to purchase the

Ordered accordingly. new stock of the company provided the stockholders would authorize an increase of its capital stock from $500,000 to $1,000,000. He

(186 N. Y. 330) knew that the trustees of the company had

LEO et al. v. McCORMACK. called a special meeting of the stockholders (Court of Appeals of New York. Nov. 13, 1906.) for the purpose of considering the offer so BROKERS-SALE BY BROKER-FRAUD OF PRINmade by Blair & Co. He knew that the CIPAL-RECOVERY OF PRICE. increased capitalization proposed was for the

Plaintiff, a broker operating on the New

York Stock Exchange, purchased certain stock purpose of enlarging the business of the

for a customer, which he carried on margin. company and bringing into its management Subsequently, the customer, by a fraudulent the gentlemen referred to. There is no pre. scheme, induced defendant, another broker, to

buy such stock, which was worthless, for a wholtense that any of the stockholders would

ly irresponsible customer, and after the sale, have voted for an increase of the capital without waiting to receive from defendant the stock otherwise than for the purpose of ac- amount which he had promised to pay, plaintiff cepting the offer of Blair & Co. All were

paid his customer the amount due him over

plaintiff's advances. Held that, owing to the evidently desirous of interesting the gentle- fraud of his customer, plaintiff was not entitled men referred to in the company, and by se- to recover from defendant any amount in excuring their business and deposits increase cess of plaintiff's interest as pledgee. the earnings of the company. This the trus- Appeal from Supreme Court, Appellate Di. tees carefully considered, and in their notice, vision, First Department, calling the special meeting of the stock- Action by Arnold Leo and others against holders, distinctly recommended the accept- John L. McCormack. From a judgment of ance of the offer. What, then, was the legal the Appellate Division (94 N. Y. Supp. 1151), effect of the plaintiff's demand and tender? affirming a judgment in favor of plainTo my mind it was, simply an attempt to tiffs, defendant appeals. Reversed, and new make something out of his associates, to get trial granted. for $100 per share the stock which Blair &

William J. Leitch, for appellant. Herbert Co. had offered to purchase for $450 per Noble and Massey Holmes, for respondents. share; and that it was the equivalent of a refusal to pay $450 per share, and its effect

HISCOCK, J. The plaintiffs and defendis to waive his right to procure the stock

ant are brokers, the latter dealing on the by paying that amount. An acceptance of curb. The former, acting for certain cushis offer would have been most unjust to the tomers, sold to the latter, acting for an unremaining stockholders. It would not only disclosed customer, 150 shares of stock at $40 have deprived them of the additional sum of

per share, and this action is brought to re$350 per share, which had been offered for

cover said purchase price. The defendant the stock, but it would have defeated the has refused to pay the same, upon the ground object and purpose for which the meeting that the persons owning said stock were guilwas called, for it was well understood that ty of fraud in effecting its sale to him, and Blair & Co. would not accept less than the that such fraud constitutes a defense against whole issue of the new stock. But this is not plaintiffs, who were their agents. The learnall. It appears that prior to the offer of ed courts below have respectively directed Blair & Co. the stock of the company had and affirmed the direction of a verdict for never been sold above $450 per share; that piaintiffs, upon the ground that the ordinary

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rules of principal and agent did not apply gins from their conspiring custooners to the to the plaintiffs as brokers. We think such apparent extent of about 50 per cent. of the error has been committed in this disposition price originally paid for the stock, which was of the case as calls for a reversal of the about $40 per share. The balance of this judgment.

purchase price the brokers had advanced, Prior to the date of the sale in question and for this amount they were pledgees in plaintiffs, acting as brokers, had purchased possession of, and having a lien upon, the and were then carrying upon a margin for

stock. Their customers were not entitled to one Uhren 50 shares, and for one Cosmides

effect a sale of the stock without the conupwards of 100 shares, of the capital stock current action of the brokers as pledgees, of the Snap Hook & Eye Company.

Said and therefore in making the sale the plaincustomers ordered plaintiffs to sell on the

tiffs acted in a dual capacity of brokers and curb Uhren's stock and 100 shares of that agents for their customers, and as pledgees belonging to Cosmides. Before this order in their own behalf for the amount which and the hour of its execution, these custom

they had advanced. As to their own interest ers, acting with others, had concocted a con- as pledgees, we think it may be said that temptible fraud by which to entice the de- they acted as principals, and therefore are fondant to buy said stock so ordered to be not contaminated by or charged with the sold, which was absolutely worthless, for

fraud of their customers so as to prevent an utterly irresponsible purported customer, their recovery of that portion of the purchase and the defendant fell a victim to the scheme; price which shall be equivalent to the amount defendant's pleadings have prevented him

of their lien. from establishing, if he could have done so,

Another reason has been urged why plainthat plaintiffs were parties to or cognizant

tiffs should be allowed to recover the entire of the scheme when they received and exe

amount of the selling price. It appears that cuted the order of the conspirators.

immediately after the sale, without waiting We do not gather that the courts below

to receive from defendant the amount which doubted, or that the plaintiffs deny, that

he had promised to pay, plaintiffs by two the fraud of plaintiffs' customers would, un

checks paid to their customers $4,000, which der ordinary circumstances, be a bar to an

seems to have been about all that was due action brought by an agent to enforce a con

to them over plaintiffs' advances. Evidence tract made in their behalf. It has, however, bas been given of the custom of brokers to been strenuously urged and thus far found

pay to their customers the proceeds of stock that there is something so peculiar about the

sales before actually received, and it is urged relation between a broker and his customer

that by these payments plaintiffs have so that the same is not subject to the ordinary

changed their position that defendant ought principles and rules of agency. It very like

not to be allowed to interpose his defense. is may be conceded that, as the result of This argument does not commend itself to long usage and of various rules made by the our approval. There are some things in the Stock Exchange, some exceptions have been

record which suggest the idea that the plainingrafted upon the general rules of principal

tiffs are making this fight for the benefit of and agent for the particular benefit and help

their discredited principals, and have been of brokers. But we are aware of no reason

willing to so adjust matters between themand no adjudication which should or does

selves and the latter as to fortify the claim exempt such relationship from the funda- for recovery. Assuming, however, that these mental principles which are applicable to oth- payments were made in perfect good faith, er phases of the relation of agency. In this

we know of no reason why defendant's particular case, upon the order and request

rights should be injured by them. The eviof Cosmides and Uhren, the plaintiffs had

dence introduced upon this subject seems bought for them certain shares of stock,

simply and only to indicate that if a broker which they then held and carried for their

selling stock believes that his customer is respective accounts. These parties ordered

reputable and responsible, he sometimes pays plaintiffs to sell said stock, and they did so,

the proceeds to him in advance, thereby delivering, as it appears, the identical certifi

trusting him to that extent. Defendant was cates which had been taken and carried

in no way a party to plaintiffs' alleged confifor their customers. Under such circumstan

dence in their worthy customers, and we

think he should not be made to suffer if it ces, it would require some justification with

las been misplaced.
which we are unacquainted to lead us to
say that the customers were not the princi-

In accordance with these views, the judgpals, and that the plaintiffs were not their

ment appealed from should be reversed, and agents in the transaction, and governed as

a new trial granted, with costs to appellant such by the general rules of law upon that

in both courts to abide the event.
subject. Reaching this conclusion, it is, as
we have said, substantially conceded that CULLEN, C. J., and EDWARD T. BART-
the fraud of the customers is to be imputed LETT, HAIGHT, VANN, and CHASE, JJ.,
to the plaintiffs as their representatives. concur. GRAY, J., absent.

There is, however, still another aspect to
this case. The plaintiffs had received mar- Judgment reversed, etc,

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