may recover the difference in a suit against the stockholder.18 This right is independent of the constitutional and statutory liability of the stockholder for his proportion of all the debts of the corporation.

Where stock was sold at fifty cents a share and afterwards the price was reduced to twenty-five cents a share and thereupon sufficient shares were issued to the first purchasers, without the payment of anything, to reduce the price of their purchase to twenty-five cents a share, it was held that the shares so issued without the payment of anything therefor were void, and as a consequence they were not subject to assessment to pay the debts of the company.14 It was also said in this case that the persons organizing a corporation, being all the stockholders or subscribers at that time, could legally issue to themselves the stock of the company in payment for property conveyed by them to the company as full paid stock and that no public policy would be violated by so doing and no one was injured thereby. This may have been a dictum in that case, but it has been since confirmed.15

In the Garretson case cited above, it was also said that it makes no difference if such shares are not issued to the original stockholder until after other shares have been sold to persons becoming stockholders later. The latter stockholders can not sue the original stockhold13 R. H. Herron Co. v. Shaw, 165 Cal. 668, Ann. Cas. 1915A, 1261, 133 Pac. 488; Merchants' etc. Agency v. Davidson, 23 Cal. App. 274, 137 Pac. 1091. As to issuing stock for patent rights, see Harrison v. Armour, 169 Cal. 787, 147 Pac. 1166.

14 Kellerman v. Maier, 116 Cal. 416, 48 Pac. 377; but if paid up in cash at less than par the case is different. Vermont Marble Co. v. Declez etc. Co., 135 Cal. 579, 585, 87 Am. St. Rep. 143, 56 L. R. A. 728, 67 Pac. 1057.

15 Garretson v. Pacific Crude Oil Co., 146 Cal. 184, 188, 79 Pac. 838; Smith v. Ferries etc. Co., 5 Cal. Unrep. 889, 51 Pac. 710, and cases cited in each. Greve v. Echo Oil Co., 8 Cal. App. 275-283, 96 Pac. 904.

Cal. Corp.-8

ers in behalf of the company to compel them to pay anything further on their stock; if they have been misled to their injury by statements as to what the others paid for their stock their remedy, if any, is a personal action against the persons making the misstatements.

But if stock is issued to a person, without consideration, simply upon the agreement that he shall sell the same and turn the proceeds over to the corporation it is void by the constitution and the statutes; the effect of such an issue is to leave the stock so improperly issued in the treasury as completely as though no void certificate had been issued therefor; that is if no innocent party has acquired any rights on the faith of the issue.16 This may have been dictum in this particular case, but this declaration is undoubtedly sound law.

This section of the constitution applies also to creating a bonded debt of street railroad corporations,17 notwithstanding sections 456 and 457 of the Civil Code.

BONDS MAY BE SOLD AT A DISCOUNT

The courts say that there is no statute, or rule of public policy, forbidding a corporation selling its bonds below par; they are not a part of the "trust fund" of a corporation, and, the corporation being a "going concern," creditors can not object.18 In this case bonds and stock were sold together, under a fiction that the stock was being paid for, at par, and the bonds were given as a bonus. Nor does the fact that the corporation is not able to pay its debts as they fall due, its assets being sufficient for that purpose, raise any presumption of fraudulent intent.

How far the stock was paid up was not raised, nor how that could be ascertained, although alluded to.

16 Cortelyou v. Imperial Land Co., 156 Cal. 373-376, 104 Pac. 695. 17 Boyd v. Heron, 125 Cal. 454, 58 Pac. 64.

18 McKee v. Title Ins. etc. Co., 159 Cal. 206, 113 Pac. 140.

DISCORDANT DECISIONS

Strange discords vex in the decisions interpreting these two sentences of the constitution.

It is clear that the word "fictitious," found only in the first, means that the consideration for which stock is issued shall not be fictitious, imaginary, or non-existent; for, stock itself can not be imaginary or nonexistent. Both sentences have been declared to be mandatory and prohibitory. The first sentence declares all "fictitious increases" of stock or bonds void; the second relates to procedure for all increases, but does not declare that the failure to follow such procedure shall make the issue void.

The court, in construing even the first sentence, says "void" may sometimes mean only "voidable," like in a statute, and that any value, no matter how insignificant, may make the stock valid.19

Yet the court says the failure to observe only one of the requirements of this method of procedure renders the stock, no matter how bona fide or honest, "absolutely void" (Navajo v. Curry, supra), saying that a constitutional prohibition is greater in effect than a statutory one, thus establishing two methods of construing the English language.

The first sentence protects the bona fide investor and the public; the second is only procedure in the interest of the stockholder. Estoppel may often be pleaded, when necessary, to prevent the corporation and stockholders from plundering the investors.20

19 Turner v. Markham, 155 Cal. 562, 102 Pac. 272, and cases cited therein, and in the preceding notes.

20 McKee v. Title Ins. Co., 159 Cal. 206, 223, 113 Pac. 140.

CHAPTER VI

INCREASING OR DIMINISHING CAPITAL STOCK
CREATING OR INCREASING BONDED DEBT

Section 359 of the Civil Code is as follows:

§ 359. No corporation shall issue stocks or bonds except for money paid, labor done or property actually received, and all fictitious increase of stock or indebtedness is void.

Every corporation may increase or diminish its capital stock, and every corporation, or two or more corporations, may create or increase its or their bonded indebtedness, subject to the following provisions:

First-The capital stock of a corporation may be increased or diminished at a meeting of the stockholders by a vote representing at least two-thirds of the subscribed or issued capital stock, or in the manner otherwise in this section provided;

When by meeting as aforesaid, then such meeting must be called by the board of directors or trustees, and notice must be given by publication in a newspaper published in the county or city and county where the principal place of business of the corporation is located, or if there be none published in said county or city and county, then in a newspaper published in an adjoining county, or city and county, such paper to be designated by the board of directors or trustees in the order calling for the meeting;

Provided, however, that where the Articles of Incorporation provide for two or more kinds of capital stock, no increase or reduction of capital stock shall be made without the assent of two thirds of all the subscribed stock, and in making such increase or reduction, the assent shall identify the particular class or classes of

stock to be increased or reduced, and the amounts apportioned to each.

Second-The notice must specify the object of the meeting and the amount to which it is proposed to increase or diminish the capital stock, the time and place of holding the meeting, which latter must be at the principal place of business of the corporation and at the building where the board of directors or trustees usually meet. The notice herein provided must be published once a week for at least sixty days. The capital stock can not be diminished to an amount less than the indebtedness of the corporation.

Third-The bonded indebtedness of a corporation may be created or increased by a vote of the stockholders representing at least two-thirds of the subscribed or issued capital stock at a meeting called by the board of directors or trustees, and after notice of the time and place of the meeting published in the same manner and for the time prescribed.

Which notice shall state the amount of the bonded indebtedness which it is proposed to create, or the amount to which it is proposed to increase such indebtedness, and shall in all other respects contain the same matters as are above provided and set forth in the notice of meeting to increase or diminish the capital stock; or such original creation of bonded indebtedness may be made as otherwise in this section provided.

Fourth-In addition to the notice by publication, when proceedings are to be had hereunder at a meeting of stockholders, the secretary of the corporation shall also address a notice to each of the stockholders whose names appear on the company's books as sufficiently addressed or identified, at his place of residence, if known, and if not known, then at the place in which the principal place of business of the corporation is situate, which notice shall be so mailed to such stockholders at least thirty days before the day appointed for such meeting.