ing and adopting the unanimous opinion of the three commissioners who heard and decided the case in the first instance. The principle upon which this dissenting opinion was founded was the foundation of the recent decision in Baldwin v. Miller & Lux, 152 Cal. 454, 92 Pac. 1030, although no mention is made of it in the latter case.

There is nothing in our law which requires net profits to be divided. The majority may use net profits for all time to augment capital, thus really forcing a loan from the minority stockholders; and this power has often been used for manipulation purposes in controlling the price of the shares-a destroying force sweeping over the unable. As a consequence, bonds have become popular, often representing substantially all the capital invested in the enterprise; while the stock represents only the possibility of earning more than a reasonable return upon the capital invested. The laws of some of the states, like New Jersey and others, recently have made it lawful for the corporation to provide in its Articles of Incorporation that bonds may vote equally with a like amount of stock, and almost everywhere preferred stock may now be created, thus securing some sure return to inactive capital and also a voice in the management.

To be entitled to the dividends, one must be the owner of the stock at the time the dividends are declared. An executory contract to purchase the stock does not entitle the prospective purchaser to the dividends."

4 Brewster v. Lathrop, 15 Cal. 21; Dow v. Gould & Curry etc. Min. Co., 31 Cal. 629, 630; Ashton v. Zeila Min. Co., 134 Cal. 408, 66 Pac. 494. On stock dividends see Harris v. San Francisco Sugar etc. Co., 41 Cal. 393.

Gilfallan v. Gilfallan, 168 Cal. 23, Ann. Cas. 1915D, 784, 141 Pac. 623.

The pledgee is entitled to all dividends declared upon the stock, but if he fails to collect them he is not compelled to credit them upon the debt; but in such a case and where the stock has been transferred on the books of the corporation to the pledgee the pledgor must account for all dividends received by him to the pledgee.

DECLARING UNEARNED DIVIDENDS

If the directors declare and pay any dividends except from surplus profits arising from the business, or divide, withdraw or pay to the stockholders, or any of them, any part of the capital stock (except on the dissolution of the company), or create any debts beyond the subscribed capital stock, all who have not caused their dissent to be entered on the minutes, or were not present when it was done, are jointly and severally liable to the corporation and its creditors for the capital stock so divided, withdrawn, paid out, or reduced, and no statute of limitations is a bar to such liability. An exception is made in the case of real estate and water companies. Civil Code, section 309, supra.

A similar statutory prohibition which in terms declared "it shall not be lawful," instead of "must not, etc., was said to be designed to protect creditors and stockholders against mismanagement and distribution of the capital stock in the form of dividends, and included the stockholders and corporation as well as the directors."

The capital or all the assets except surplus profits are to be retained intact and form a fund to which creditors of the corporation have a prior right over stockholders. Profits or interest on investment or securities, no 6 McAulay v. Moody, 128 Cal. 202, 60 Pac. 778.

7 Martin v. Zellerbach, 38 Cal. 300, 99 Am. Dec. 365. The syllabus of this case is inaccurate on this point.

matter how secured, are not money in hand and may never be received, and can not be made the basis of a dividend.

A corporation, not for profit, can not divide any part of its funds among its members.9

This section (Civil Code, section 309) is held1o not applicable to a mining corporation, whose property is of a kind which can not be used except by consuming it. On general principles this is sustained by all authorities, but it can not be sustained upon the language of this section as interpreted in the preceding cases. This case also holds that dividends are legal, notwithstanding the corporation has a large debt arising from the purchase of the property, and that it borrowed money to pay the dividends, net profits having been temporarily used a short time before for payments on the debt above mentioned, or for constructing permanent improvements, like tunnels, etc.

Martin v. Zellerbach, and Kohl v. Lilienthal were affirmed in a case where a corporation sold all its patents and property to another corporation, the stock of the purchasing corporation being given to the stockholders of the selling corporation in payment therefor.11 But where a corporation sold all of its property for a sum of money and a great majority of the stockholders (the plaintiff included) agreed to surrender their stock to the purchaser on receiving their respective proportions of the purchase price, which agreement as to distribution was carried out with all

8 People v. San Francisco Savings Union, 72 Cal. 199-204, 13 Pac. 498. › Ashton v. Dashaway Ass'n, 84 Cal. 61, 69, 7 L. R. A. 809, 22 Pac. 660, 23 Pac. 1091.

10 Excelsior Water etc. Co. v. Pierce, 90 Cal. 131, 27 Pac. 44.

11 Schaake V. Eagle etc. Can Co., 135 Cal. 472, 63 Pac. 1025, 67 Pac. 759.

the stockholders except the plaintiff who sued for his proportion, it was held that the whole transaction was void under this section as a dividend of its capital stock,12 and that the complaining stockholder's remedy was not to sue for his proportion but to require all the money distributed to be returned to the corporation. This case and all those cited above, where the distribution was held to be improper, base the relief granted on the theory that the transaction being forbidden by law is void.

We now come to some cases where quite a different conclusion was reached. There is a peculiar line of decisions in this state that corporations may be formed to liquidate partnerships and divide the assets in the shape of dividends to the stockholders.13 If these corporations assumed the form of an agency, or if they took the form of trustees to which property was conveyed to execute a trust, the form would be familiar; their capital would be something apart from the property administered and to be divided, and dividends. could be lawfully made under the statutes out of the profits of their business. But in these cases capital stock is issued for the entire value of the trust property, and dividends are made from time to time out of the proceeds of the sales of the trust property until it is all gone, leaving the entire capital stock in existence, representing nothing and worthless. The court recognizes the fact that there is no statute expressly permitting such dividends and reduction of capital, but says that the purpose of the corporation is made so clear "that it must be given that effect, even if it is inconsistent in some particulars with the provisions of the law governing corporations," and quotes the Civil Code that "private corporations may be formed for any

12 Tapscott v. Mexican etc. Land Co., 153 Cal. 664, 96 Pac. 271. 13 Baldwin v. Miller & Lux, 152 Cal. 454, 92 Pac. 1030, and cases cited.

purpose for which individuals may lawfully associate themselves." The Articles of Incorporation provided "that the profits and dividends to be divided annually were to consist of the excess of the proceeds of the property over the debts and expenses" and, in order to avoid the apparently absolute prohibition of dividends of anything but surplus profits, the court said that section 309 of the Civil Code "does not make such acts of the directors void, but declares merely that certain consequences shall follow such acts, namely, that the directors shall personally be liable to the corporation and the creditors for the amount of the capital so divided." Taking all these statements together they announce very novel law. Here is the statute absolutely prohibiting the directors making a dividend of the capital or any part thereof, and sections 560 et seq. of the Penal Code make such an act a crime; yet the court says it is lawful, and that the only consequences are that the directors must restore the amounts so divided and go to jail for their crime. The reference to a clause in section 309 in regard to companies acquiring, etc., "real estate, water and water rights" [not or water rights] being empowered to divide the same among their stockholders is inapt, for such division is in kind, and this particular corporation owned a vast amount of personal property, and one of the purposes for which it was organized was to conduct that business until it could be advantageously sold, and to divide the proceeds of sales from time to time. No rights of creditors were involved. It seems a fair deduction from this decision, if all the stockholders consent, and no rights of creditors are involved (or if they consent) that, after all, dividends may be made from capital. But we still have the declaration in Martin v. Zellerbach, that "as to all creditors of the company, prior or subsequent, it was simply void." We think this