CHAPTER XI

SUBSCRIPTION FOR STOCK

Nearly all the cases which involve the character and terms of subscriptions for stock, whether certain contracts are subscriptions, manner of payments thereon, etc., are cited and considered under the subject of liabilities of stockholders, assessments, and subscriptions in the Articles of Incorporation, to which subjects reference is made. There are a few cases, however, of interest which raise other points, and they will be noted here.

CONTRACT GENERALLY

It is not necessary that the subscriber's name appear in the Articles of Incorporation as a subscriber, nor that he sign the Articles. While he is entitled to stock upon payment of his subscription, his membership in the corporation is wholly foreign to the right of recovery. In enforcing such a subscription the contract of subscription is the basis of the suit, nor need an assessment be levied under section 332 of the Civil Code. Nor is any assignment of the subscription agreement to the corporation necessary where it clearly appears that the subscription was made for its benefit and in contemplation of its creation; the legal effect is to pay the corporation when organized.1

The terms of the statute become a part of the contract of subscription, and, as the obligation to pay

1 Horseshoe Pier etc. Co. v. Sibley, 157 Cal. 442-446, 108 Pac. 308. This case in effect so far overrules Monterey etc. R. Co. v. Hildreth, 53 Cal. 123, as to limit the rule announced in the latter case to proceedings to collect the amount of the subscription under section 332 of the Civil Code.

subscriptions is only upon call duly made, the duty to pay does not arise until the call is made, and therefore the statute of limitations does not begin to run until the call is made.2

An agreement to subscribe to the stock in a corporation does not make the subscriber a member of the corporation, nor are the subscribers present at the organization of the corporation agents of those who are absent.

A written offer to a corporation to purchase a certain number of its shares at varying prices, "the stock to be delivered as called for," payable in monthly payments not to be required in excess of certain sums, which offer was duly accepted by the corporation, is not simply an option to purchase but is a contract of purchase and sale."

An attachment may issue against the property of a subscriber who is sued for a payment due upon his subscription according to its terms, there being no lien of the corporation either upon the stock certificate or the shares by virtue of the law or any contract made." Evidence that a person subscribed for stock, it was said, is not proof that he owns the stock when the subscription was to be paid in cash and the subscriber had not paid or offered to pay for the same. For many purposes, it is doubtful whether this is a correct statement of the law.

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2 Glenn v. Saxton, 68 Cal. 353, 357, 358, 9 Pac. 420; Union Savings Bank v. Leiter, 145 Cal. 696, 705, 79 Pac. 441.

3 West v. Crawford, 80 Cal. 19, 29, 21 Pac. 1123.

4 Marysville etc. Co. v. Johnson, 109 Cal. 192, 50 Am. St. Rep. 34, 41 Pac. 1016.

5 Provident Gold Min. Co. v. Manhattan etc. Co., 168 Cal. 304, 142 Pac. 884.

• Lankershim Ranch etc. Co. v. Herberger, 82 Cal. 600, 23 Pac. 134.

7 Bank of Yolo v. Weaver, 3 Cal. Unrep. 569, 31 Pac. 160, which was ordered not to be published in the official reports.

Where a subscriber to stock signed a prospectus stating that the corporation's building was to cost twenty thousand dollars, it was held that this did not require that that amount be subscribed before he was bound, and his acting as director and participating in the business of the corporation estopped him from rescinding his subscription. A subscription on a separate paper, referring to "annexed" list and terms, is good although this paper is not actually annexed."

SUBSCRIPTIONS FIXING TERMS OF PAYMENT

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The subscriber for stock may fix the dates and amounts of instalments upon which the same shall be paid, and if the corporation continues solvent the subscriber can not be compelled to pay in any other manner. No assessment is necessary to collect such subscriptions; the corporation may sue upon the subscription contract.1 This rule has the support of decisions in many states, and may be said to be established law. But it is wrong in principle, for it promotes favoritism and lays unequal burdens on subscribers, and such agreements are almost always secret-that is, unknown to other subscribers. A long line of cases holds such agreements, if secret, to be void, as our own court did in what appears to be the only case in our

8 Auburn Opera House etc. Ass'n v. Hill, 3 Cal. Unrep. 839, 32 Pac. 587, s. c. 113 Cal. 382, 45 Pac. 695.

9 Beedy v. San Mateo etc. Co., 27 Cal. App. 653, 150 Pac. 810. 10 Kohler v. Agassiz, 99 Cal. 9, 14, 33 Pac. 741; California Southern Hotel Co. v. Callender, 94 Cal. 120, 28 Am. St. Rep. 99, 29 Pac. 859; Ventura etc. Ry. Co. v. Hartman, 116 Cal. 260, 263, 48 Pac. 65; Ventura etc. R. Co. v. Collins, 5 Cal. Unrep. 469, 46 Pac. 287, 48 Pac. 1115; Union Sav. Bank v. Leiter, 145 Cal. 696, 706, 79 Pac. 441; Horseshoe Pier etc. Co. v. Sibley, 157 Cal. 442, 446, 108 Pac. 308, and cases cited in these several cases. See Provi. dent etc. Min. Co. v. Manhattan etc. Co., 168 Cal. 304, 142 Pac.

appellate courts where that point was raised.11 But the subscription, or a promissory note given therefor, may be enforced.

SUBSCRIPTION CAN NOT BE DIVERTED TO ANOTHER

CORPORATION

Where the subscription was to the stock of either of two corporations, taken by the agent of both, and upon payment the subscriber elects to apply it to the shares of one of them, the funds thereof can not be diverted by the agent to the other corporation, notwithstanding both corporations were of the same character and the property of each was identical, and of the same value (shares of stock of another corporation), and that the shares of the corporation chosen by the subscriber were over-subscribed when he made his subscription.12 The court went still further than this and said that the subscriber could not be compelled to take shares of the stock of the company which he chose, if such shares were furnished by other subscribers to the stock of that company. And if the purposes for which the corporation is formed are materially different from those named in the agreement the subscription can not be enforced.13

CANCELLATION OF SUBSCRIPTIONS

Our supreme court has said "a subscription for capital stock of a corporation can not be rescinded or cancelled, except for fraud or mistake, without the unanimous consent of all the stockholders, is too firmly

11 Quartz Glass etc. Co. v. Joyce, 27 Cal. App. 523, 150 Pac. 648. See 1 Thomp. on Corp., subject: Subscriptions, Parol, and Secret Conditions. As to a condition subsequent, see Jefferson v. Hewitt, 95 Cal. 535, 30 Pac. 772, s. c. 103 Cal. 624, 37 Pac. 638.

12 Gray v. Ellis, 164 Cal. 481, 129 Pac. 791.

18 Marysville etc. Co. v. Johnson, 109 Cal. 192, 50 Am. St. Rep. 34, 41 Pac. 1016.

Cal. Corp.-16

settled to admit of controversy;"" or by the board of directors duly authorized thereto (dictum).15

The district court of appeal (a rehearing being denied by the supreme court, but by a divided court) has gone to the extent of releasing a part of the several subscriptions, without the consent of the other stockholders having been obtained, and upon no showing of the insolvency of such subscribers other than the recital contained in the resolution of the directors releasing them, and in the absence of any by-law giving the directors such power.16

RESCINDING PURCHASE OF STOCK

An offer to rescind a subscription which is claimed to have been procured by fraud must be accompanied by an offer to return everything of value received under it, such as dividends, but this right will be lost by attending a stockholders' meeting and voting for an assessment and paying the same before offering to rescind, and while the proof of the offer to rescind may be proved by circumstantial evidence the burden of proof is on the plaintiff.18 But a subscription upon

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14 Pacific Fruit Co. v. Coon, 107 Cal. 447-452, 40 Pac. 542; Silica Brick Co. v. Winsor, 170 Cal. 151 Pac. 425, distinguishing Thomas v. Wentworth, below.

15 Tulare Savings Bank v. Talbot, 131 Cal. 45-48, 63 Pac. 172.

16 Thomas v. Wentworth Hotel Co., 16 Cal. App. 403, 117 Pac. 1041, 1046. The reasoning of the opinion on these points is far from satisfactory or convincing; nor was it necessary to consider those questions to determine the rights of the plaintiff. The suit was by a creditor, no other stockholders being parties or apparently concerned. The releases which were held effectual were made before the debts sued on were incurred; therefore, so far as the plaintiff was concerned, it was the same as if those subscriptions had never been made.

17 Marten v. Paul O. Burns Wine Co., 99 Cal. 355, 33 Pac. 1107; Gifford v. Carvill, 29 Cal. 589.

18 Pacific Fruit Co. v. Coon, 107 Cal. 447, 40 Pac. 542.