guage: "In general, the present holders of stock have a primary right to subscribe in proportion to their holdings for any new is

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

reduced one-half, and while he consented to the increase he did not consent to the disposition of the new stock by a sale thereof to Blair & Co. at less than its market value, nor by sale to any person in any way except by an allotment to the stockholders. The increase and sale involved the transfer of rights belonging to the stockholders as part of their investment. The issue of new stock and the sale thereof to Blair & Co. was not only a transfer to them of one-half the voting power of the old stockholders, but also of an equitable right to one-half the surplus which belonged to them. In other words, it was a partial division of the property of the old stockholders. The right to increase stock is not an asset of the corporation any more than the original stock when it was issued pursuant to subscription. The ownership of stock is in the nature of an inherent but indirect power to control the corporation. The stock when issued ready for delivery does not belong to the corporation in the way that it holds its real and personal property, with power to sell the same, but is held by it with no power of alienation in trust for the stockholders, who are the beneficial owners, and become the legal owners upon paying therefor. The corporation has no rights hostile to those of the stockholders, but is the trustee for all including the minority. The new stock issued by the defendant under the permission of the statute did not belong to it, but was held by it the same as the original stock when first issued was held in trust for the stockholders. It has the same voting power as the old, share for share. The stockholders decided to enlarge their holdings, not by increasing the amount of each share, but by increasing the number of shares. The new stock belonged to the stockholders as an inherent right by virtue of their being stockholders, to be shared in proportion upon paying its par value or the value per share fixed by vote of a majority of the stockholders, or ascertained by a sale at public auction. While the corporation could not compel the plaintiff to take new shares at any price, since they were issued for money and not for property, it could not lawfully dispose of those shares without giving him a chance to get his proportion at the same price that outsiders got theirs. He had an inchoate right to one share of the new stock for each share owned by him of the old stock, provided he was ready to pay the price fixed by the stockholders. If so situated that he could not take it himself, he was entitled to sell the right to one who could, as is frequently done. Even this gives an advantage to capital, but capital necessarily has some advantage. Of course, there is a distinction when the new stock is issued in payment for property, but that is not this case. The stock in question was issued to be sold for money and was sold for money only. A majority of the stockholders, as part of their power to increase the stock, may attach reasonable conditions to the disposition there

of, such as the requirement that every old stockholder electing to take new stock shall pay a fixed price therefor, not less than par. however, owing to the limitation of the statute. They may also provide for a sale in parcels or bulk at public auction, when every stock holder can bid the same as strangers. They cannot, however, dispose of it to strangers against the protest of any stockholder who insists that he has a right to his proportion. Otherwise the majority could deprive the minority of their proportionate power in the election of directors and their proportionate right to share in the surplus, each of which is an inherent, pre-emptive, and vested right of property. It is inviolable, and can neither be taken away nor lessened without consent, or a waiver implying consent. The plaintiff had power, before the increase of stock, to vote on 221 shares of stock, out of a total of 5,000, at any meeting held by the stockholders for any purpose. By the action of the majority, taken against his will and protest, he now has only one-half the voting power that he had before, because the number of shares has been doubled while he still owns but 221. This touches him as a stockholder in such a way as to deprive him of a right of property. Blair & Co. acquired virtual control, while he and the other stockholders lost it. We are not discussing equities, but legal rights, for this is an action at law, and the plaintiff was deprived of a strictly legal right. If the result gives him an advantage over other stockholders, it is because he stood upon his legal rights, while they did not. The question is what were his legal rights, not what his profit may be under the sale to Blair & Co., but what it might have been if the new stock had been issued to him in proportion to his holding of the old. The other stockholders could give their property to Blair & Co., but they could not give his. A share of stock is a share in the power to increase the stock, and belongs to the stockholders the same as the stock itself. When that power is exercised, the new stock belongs to the old stockholders in proportion to their holding of old stock, subject to compliance with the lawful terms upon which it is issued. When the new stock is issued in payment for property purchased by the corporation, the stockholders' right is merged in the purchase, and they have an advantage in the increase of the property of the corporation in proportion to the increase of stock. When the new stock is issued for money, while the stockholders may provide that it be sold at auction or fix the price at which it is to be sold, each stockholder is entitled to his proportion of the proceeds of the sale at auction, after he has had a right to bid at the sale, or to his proportion of the new stock at the price fixed by the stockholders.

We are thus led to lay down the rule that a stockholder has an inherent right to a proportionate share of new stock issued for money only and not to purchase property

for the purposes of the corporation or to effect a consolidation, and while he can waive that right, he cannot be deprived of it without his consent except when the stock is issued at a fixed price not less than par, and he is given the right to take at that price in proportion to his. holding, or in some other equitable way that will enable him to protect his interest by acting on his own judgment and using his own resources. This rule is just to all and tends to prevent the tyranny of majorities which needs restraint, as well as virtual attempts to blackmail by small minorities which should be prevented.

The remaining question is whether the plaintiff waived his rights by failing to do what he ought to have done, or by doing something he ought not to have done. He demanded his share of the new stock at par, instead of at the price fixed by the stockholders, for the authorization to sell at $450 a share was virtually fixing the price of the stock. He did He did more than more than this, however, for he not only voted against the proposition to sell to Blair & Co. at $450, but, as the court expressly found, he "protested against the proposed sale of his proportionate share of the stock, and again demanded the right to subscribe and pay for the same which demands were again refused," and "the resolution was carried notwithstanding such protest and demands." Thus he protested against the sale of his share before the price was fixed, for the same resolution fixed the price, and directed the sale, which was promptly carried into effect. If he had not attended the meeting, called upon due notice to do precisely what was done, perhaps he would have waived his rights, but he attended the meeting and, before the price was fixed, demanded the right to subcribe for 221 shares at par, and offered to pay for the same immediately. It is true that after the price was fixed he did not offer to take his share at that price, but he did not acquiesce in the sale of his proportion to Blair & Co., and unless he acquiesced the sale as to him was without right. He was under no obligation to put the corporation in default by making a demand. The ordinary doctrine of demand, tender, and refusal has no application to this case. The plaintiff had made no contract. He had not promised to do anything. No duty of performance rested upon him. He had an absolute right to the new stock in proportion to his holding of the old, and he gave notice that he wanted it. It was his property, and could not be disposed of without his consent. He did not consent. He protested in due time, and the sale was made in defiance of his protest. While in connection with his protest he demanded the right to subscribe at par, that demand was entirely proper when made, because the price had not then been fixed. After the price was fixed it was the duty of the defendant to offer him his proportion at that price, for it had notice that he had

not acquiesced in the proposed sale of his share, but wanted it himself. The directors were under the legal obligation to give him an opportunity to purchase at the price fixed before they could sell his property to a third party, even with the approval of a large majority of the stockholders. If he had remained silent, and had made no request or protest he would have waived his rights, but after he had given notice that he wanted his part and had protested against the sale thereof, the defendant was bound to offer it to him at the price fixed by the stockholders. By selling to strangers without thus offering to sell to him, the defendant wrongfully deprived him of his property, and is liable for such damages as he actually sustained.

The learned trial court, however, did not measure the damages according to law. The plaintiff was not entitled to the difference between the par value of the new stock and the market value thereof, for the stockholders had the right to fix the price at which the stock should be sold. They fixed the price at $450 a share, and for the failure of the defendant to offer the plaintiff his share at that price we hold it liable in damages. His actual loss, therefore, is $100 per share, or the difference between $450, the price that he would have been obliged to pay had he been permitted to purchase, and the market value on the day of sale, which was $550. This conculsion requires a reversal of the judgment rendered by the Appellate Division and a modification of that rendered by the trial court.

The order appealed from should be reversed and the judgment of the trial court modified by reducing the damages from the sum of $99,450, with interest from January 30, 1902, to the sum of $22,100, with interest from that date, and by striking out the extra allowance of costs, and as thus modified the judgment of the trial court is affirmed, without costs in this court or in the Appellate Division to either party.

HAIGHT, J. (dissenting). I agree that the rule that we should adopt is that a stockholder in a corporation has an inherent right to purchase a proportionate share of new stock issued for money only, and not to purchase property necessary for the purposes of the corporation or to effect a consolidation. While he can waive that right he cannot be deprived of it without his consent, except by sale at a fixed price at or above par, in which he may buy at that price in proportion to his holding or in some other equitable way that will enable him to protect his interest by acting on his own judgment and using his own resources. I, however, differ with Judge VANN as to his conclusions as to the rights of the plaintiff herein. Under the findings of the trial court the plaintiff demanded that his share of the new stock should be issued to him at par, or $100 per

He

share, instead of $450 per share, the price offered by Blair & Co. and the price fixed at the stockholders' meeting at which the new stock was authorized to be sold. This demand was made after the passage of the resolution authorizing the increase of the capital stock of the defendant company and before the passage of the resolution authorizing a sale of the new stock to Blair & Co. at the price specified. After the passage of the second resolution he objected to the sale of his proportionate share of the new stock to Blair & Co., and again demanded that it be issued to him, and the following day he made a legal tender for the amount of his portion of the new stock at $100 per share. There is no finding of fact or evidence in the record showing that he was ever ready or willing to pay $450 per share for the stock. He knew that Blair & Co. represented Marshall Field and others at Chicago, great dry goods merchants, and that they had made a written offer to purchase the new stock of the company provided the stockholders would authorize an increase of its capital stock from $500,000 to $1,000,000. knew that the trustees of the company had called a special meeting of the stockholders for the purpose of considering the offer so made by Blair & Co. He knew that the increased capitalization proposed was for the purpose of enlarging the business of the company and bringing into its management the gentlemen referred to. There is no pre tense that any of the stockholders would have voted for an increase of the capital stock otherwise than for the purpose of accepting the offer of Blair & Co. All were evidently desirous of interesting the gentlemen referred to in the company, and by securing their business and deposits increase the earnings of the company. This the trustees carefully considered, and in their notice, calling the special meeting of the stockholders, distinctly recommended the acceptance of the offer. What, then, was the legal effect of the plaintiff's demand and tender? To my mind it was, simply an attempt to make something out of his associates, to get for $100 per share the stock which Blair & Co. had offered to purchase for $450 per share; and that it was the equivalent of a refusal to pay $450 per share, and its effect is to waive his right to procure the stock by paying that amount. An acceptance of his offer would have been most unjust to the remaining stockholders. It would not only have deprived them of the additional sum of $350 per share, which had been offered for the stock, but it would have defeated the object and purpose for which the meeting was called, for it was well understood that Blair & Co. would not accept less than the whole issue of the new stock. But this is not all. It appears that prior to the offer of Blair & Co. the stock of the company had never been sold above $450 per share; that

thereafter the stock rapidly advanced until the day of the completion of the sale on the 30th of January, when its market value was $550 per share; but this, under the stipulation of facts, was caused by the rumor and subsequent announcement and consummation of the proposition for the increase of the stock and the sale of such increase to Blair & Co. and their associates. It is now proposed to give the plaintiff as damages such increase in the market value of the stock, even though such value was based upon the understanding that Blair & Co. were to become stockholders in the corporation, which the acceptance of plaintiff's offer would have prevented. This, to my mind, should not be done. I, therefore, favor an affirmance.

LEO et al. v. McCORMACK. (Court of Appeals of New York. Nov. 13, 1906.) BROKERS-SALE BY BROKER-FRAUD OF PRINCIPAL RECOVERY OF PRICE.

Plaintiff, a broker operating on the New York Stock Exchange, purchased certain stock for a customer, which he carried on margin. Subsequently, the customer, by a fraudulent scheme, induced defendant, another broker, to buy such stock, which was worthless, for a wholly irresponsible customer, and after the sale, without waiting to receive from defendant the amount which he had promised to pay, plaintiff paid his customer the amount due him over plaintiff's advances. Held that, owing to the fraud of his customer, plaintiff was not entitled to recover from defendant any amount in excess of plaintiff's interest as pledgee.

Appeal from Supreme Court, Appellate Division, First Department.

Action by Arnold Leo and others against John L. McCormack. From a judgment of the Appellate Division (94 N. Y. Supp. 1151), affirming a judgment in favor of plaintiffs, defendant appeals. Reversed, and new trial granted.

William J. Leitch, for appellant. Herbert Noble and Massey Holmes, for respondents.

HISCOCK, J. The plaintiffs and defendant are brokers, the latter dealing on the curb. The former, acting for certain customers, sold to the latter, acting for an undisclosed customer, 150 shares of stock at $40 per share, and this action is brought to recover said purchase price. The defendant has refused to pay the same, upon the ground that the persons owning said stock were guilty of fraud in effecting its sale to him, and that such fraud constitutes a defense against plaintiffs, who were their agents. The learned courts below have respectively directed and affirmed the direction of a verdict for plaintiffs, upon the ground that the ordinary

rules of principal and agent did not apply to the plaintiffs as brokers. We think such error has been committed in this disposition of the case as calls for a reversal of the judgment.

Prior to the date of the sale in question plaintiffs, acting as brokers, had purchased and were then carrying upon a margin for one Uhren 50 shares, and for one Cosmides upwards of 100 shares, of the capital stock of the Snap Hook & Eye Company. Said customers ordered plaintiffs to sell on the curb Uhren's stock and 100 shares of that belonging to Cosmides. Before this order and the hour of its execution, these customers, acting with others, had concocted a contemptible fraud by which to entice the defendant to buy said stock so ordered to be sold, which was absolutely worthless, for an utterly irresponsible purported customer, and the defendant fell a victim to the scheme; defendant's pleadings have prevented him from establishing, if he could have done so, that plaintiffs were parties to or cognizant of the scheme when they received and executed the order of the conspirators.

We do not gather that the courts below doubted, or that the plaintiffs deny, that the fraud of plaintiffs' customers would, under ordinary circumstances, be a bar to an action brought by an agent to enforce a contract made in their behalf. It has, however, been strenuously urged and thus far found that there is something so peculiar about the relation between a broker and his customer that the same is not subject to the ordinary principles and rules of agency. It very likely may be conceded that, as the result of long usage and of various rules made by the Stock Exchange, some exceptions have been ingrafted upon the general rules of principal and agent for the particular benefit and help of brokers. But we are aware of no reason and no adjudication which should or does exempt such relationship from the fundamental principles which are applicable to other phases of the relation of agency. In this particular case, upon the order and request of Cosmides and Uhren, the plaintiffs had bought for them certain shares of stock, which they then held and carried for their respective accounts. These parties ordered plaintiffs to sell said stock, and they did so, delivering, as it appears, the identical certificates which had been taken and carried for their customers. Under such circumstances, it would require some justification with which we are unacquainted to lead us to say that the customers were not the principals, and that the plaintiffs were not their agents in the transaction, and governed as such by the general rules of law upon that subject. Reaching this conclusion, it is, as we have said, substantially conceded that the fraud of the customers is to be imputed to the plaintiffs as their representatives.

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

gins from their conspiring customers to the apparent extent of about 50 per cent. of the price originally paid for the stock, which was about $40 per share. The balance of this purchase price the brokers had advanced, and for this amount they were pledgees in possession of, and having a lien upon, the stock. Their customers were not entitled to effect a sale of the stock without the concurrent action of the brokers as pledgees, and therefore in making the sale the plaintiffs acted in a dual capacity of brokers and agents for their customers, and as pledgees in their own behalf for the amount which they had advanced. As to their own interest as pledgees, we think it may be said that they acted as principals, and therefore are not contaminated by or charged with the fraud of their customers so as to prevent their recovery of that portion of the purchase price which shall be equivalent to the amount of their lien.

Another reason has been urged why plaintiffs should be allowed to recover the entire amount of the selling price. It appears that immediately after the sale, without waiting to receive from defendant the amount which he had promised to pay, plaintiffs by two checks paid to their customers $4,000, which seems to have been about all that was due to them over plaintiffs' advances. Evidence has been given of the custom of brokers to pay to their customers the proceeds of stock sales before actually received, and it is urged that by these payments plaintiffs have so changed their position that defendant ought not to be allowed to interpose his defense. This argument does not commend itself to our approval. There are some things in the record which suggest the idea that the plaintiffs are making this fight for the benefit of their discredited principals, and have been willing to so adjust matters between themselves and the latter as to fortify the claim for recovery. Assuming, however, that these payments were made in perfect good faith, we know of no reason why defendant's rights should be injured by them. The evidence introduced upon this subject seems simply and only to indicate that if a broker selling stock believes that his customer is reputable and responsible, he sometimes pays the proceeds to him in advance, thereby trusting him to that extent. Defendant was in no way a party to plaintiffs' alleged confidence in their worthy customers, and we think he should not be made to suffer if it has been misplaced.

In accordance with these views, the judgment appealed from should be reversed, and a new trial granted, with costs to appellant in both courts to abide the event.

CULLEN, C. J., and EDWARD T. BARTLETT, HAIGHT, VANN, and CHASE, JJ., concur. GRAY, J., absent.

Judgment reversed, etc.