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§ 600. Interest bearing stock.-A corporation sometimes gives a preference by issuing to a certain class of shareholders ordinary stock containing a promise to pay interest on the par value thereof. Such contract has the same effect to the extent of the preference as an obligation to give a preference in the matter of dividends, and is enforceable in like manner. The analogy between the two species of preference holds throughout and attaches to all the internal relations of stockholders to the corporation and to each other.1 Railroad companies frequently stipulate to pay interest

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"Of the shares proposed to be issued there is no one share upon which a person can place his finger and say that share is or will be feigned, imaginary not real, counterfeit, not genuine.' Accordingly an injunction to restrain such an issue was refused. See also Pacific Trust Co. v. Dorsey, 72 Cal. 55; Pac. Rep. 148; Same v. Same, 12 Id. 49. In Newcastle R. R. Co. v. Simpson, 21 Fed. Rep. 535, involving a construction of a similar provision in the Penn. constitution, the court held that a contract giving a construction company $300,000 of stock and $300,000 of bonds for property worth but $180,000 will be set aside although $40,000 of work had been done. In Memphis, etc., R. R. Co. v. Dow, 120 U. S. 287, it was held that such provision did not invalidate a transaction upon the re-organization of a company after foreclosure on its property; and a purchase of the property by a committee for the bondholders whereby they took in payment for such property the bonds and stock of the new corporation even though the stock of the new corporation at its par value was alone equal to the value of the property involved. But a stock dividend was adjudged illegal under the provision of a constitution which prohibited the issue of stock" except for money, labor done, or money or property actually received." Fitzpatrick v. Dispatch Pub. Co., 83 Ala. 604; 2 Sou. Rep. 727. See also Reid's App. (Pa.), 16 Atl. Rep. 100; Pittsburgh, etc., R. R. Co. App. (Pa.), 4 Atl. Rep. 385. 1 The interest can only be paid from profits. Richardson v. Vermont, etc., R. R. Co., 44 Vt. 613; Miller v. Pittsburgh, etc., R. R. Co., 40 Pa. St. 237; Cunningham v. Same, 78 Mass. 411; McLaughlin v. Detroit, etc., R. R. Co., 8 Mich. 100; City of Ohio v. Cleveland, etc., R. R. Co., 6 O. St. 489; Evansville, etc., R. R. Co. v. City of Evansville, 15 Ind. 395; Rutland R. R. Co. v. Thrall, 35 Vt. 543; Ohio College v. Rosenthal, 45 O. 183; 12 N. E. Rep. 665. In the last case a suit by a stockholder to collect interest from a corporation not organized for profit, though it owned real estate and had existed for forty years, failed. Any promise to pay interest except from profits renders the promise void. Painesville, etc., R. R. Co. v. King, 17 O. St. 534; Pittsburgh, etc., R. R. Co., County of Alleghany, 63 Pa. St. 126; Luckhart v. Van Alstine, 31 Mich. 76; Troy, etc., R. R. Co. v. Tibbits, 18 Barb. 297; McDougall v. Jersey, etc., Co., 2 Hem. & M. 528. See Salisbury v. Metrop., etc., Ry. Co. (N. S.), 38 L. J. Ch. 249; In re National, etc., Co., 10 L. R. Ch. Div. 118; Bardwell v. Sheffield, etc., Co. L. R., 14 Eq. Cas. 517.

upon subscriptions to their capital stock until the full amount of subscriptions shall have been paid in, or until the completion of the road, or some part of it. Such arrangements are valid and enforceable.1 The only effect of such a promise is, that the holders of the stock have a preference in the payment of dividends equal to the fixed rate of interest. To this conclusion tend all the decisions.

§ 601. The right of preferred shareholders.—On the same principle of equal benefit and protection to those having equal rights, one who is a preferred shareholder by the consent of the other members, or by the terms of the charter, may have his appropriate remedy in equity to enforce or protect his rights as such against the corporation, the directors or the other members.2 And where the directors of a corporation neglect or refuse to pay a dividend to the preferred stockholders when the finances of the corporation justify it, and the stockholders are equitably entitled to receive it, a court of equity has jurisdiction of a bill to compel payment thereof. The relation of a preferred shareholder and his right with respect to dividends, as heretofore defined,

1 Milwaukee, etc., R. R. Co. v. Field, 12 Wis. 340; Racine Co. B'k v. Amers, Id. 512; Waterman v. Troy, etc., R. R. Co., 74 Mass. 433.

2 Prouty v. Mich. Southern, etc., R. R. Co., 1 Hun, 655; Thompson v. Erie Ry. Co., 45 N. Y. 468; Boardman v. Lake Shore, etc., Ry. Co., 84 N. Y. 157, 180; Henry v. Gt. North Ry. Co., 4 K. & J. 1; 1 De' G. & J. 606; Sturge v. Eastern Un. Ry. Co., 7 De G. M. & G. 158; Smith v. Cork, etc., Ry. Co., Ir. Rep. 3 Eq. 356; Bailey v. Hannibal, etc., R. R. Co., 1 Dill. 174; 17 Wall. 96.

3 Hazeltine v. Belfast, etc., R. Co., 79 Me. 411; 10 A. 328. In Belfast, etc., R. Co. v. Belfast, 77 Me. 445; 1 A. 362, it appeared that a railroad corporation whose line was leased at a specified annual rental owed a floating debt of some $100,000, due in 1885. In 1882, there being $10,863 in the treasury of the company, the preferred stockholders demanded the distribution of that sum as a dividend. It was held that they were not entitled to it of right, but that good policy and sound judgment required its application to this debt, and a court of equity, acting under the same considerations which would bind directors governing for the best interest of the corporation, would order it to be so applied.

was shown not to constitute his claim that of debtor to the corporation.1

No right in the corporation to issue preferred stock existed at common law. It must be sought for in the charter or statute under which the corporation is formed. But when so given to the corporation and exercised, it vests in those who receive the preferred stock certain superior rights to common stockholders which will be recognized and enforced in the courts.2 Such power was once held to be included in the power to borrow money and the implied right to authorize it for that purpose was strongly asserted. The right to do so

1 Supra, § 456.

2 Hutton v. Scarborough, etc., Co., 4 De G. J. & S. 672; Sturge v. Eastern, etc., R. R. Co., 7 De G. M. & G. 158; Guinness v. Land Corp. of Ireland, L. H. 22 Ch. Div. 349; Moss v. Syers, 11 Week Rep. 1046; Melhado v. Hamilton, 28 L. T. (N. S.) 578; Filden v. Lancashire, etc., Ry. Co., 2 Dels. & Sm. 531.

A by-law provided that "dividends on the preferred stock shall first be made semi-annually from the net earnings of said road, not exceeding 6 per centum per annum; after which dividend, if there shall remain a surplus, a dividend shall be made upon the non-preferred stock up to a like per cent. per annum; and should a surplus then remain of net earnings, after both of said dividends, in any one year, the same shall be divided pro rata on all the stock." It was held that this by-law is a part of the contract between the company and its subscribers' and that subscribers for preferred stock are entitled to such stock according to the terms therein stated; holding also, that such by-law sufficiently describes and identifies the stock on which dividends are to be paid. Belfast, etc., R. Co. v. Belfast, 77 Me. 445; 1 A. 362.

Where an act of the legislature allowed a railroad corporation, whose finances were embarrassed by a large floating debt with the proceeds of second mortgage bonds to be thereafter issued, or to issue preferred stock for the purpose, and provided that the holders of such preferred stock should receive "out of the net earnings" of the company, annually, a certain per cent. on said stock, arrearages for any year to be paid out of the net earnings of subsequent years before paying anything on the common stock, and the company adopted the latter method, and issued preferred stock, it was held, that dividends on the preferred stock were payable from the net earnings of any year notwithstanding an existing deficiency of nearly a quarter of a million dollars, and not withstanding the provision of the general statute forbidding any corporation to declare a dividend while its capital is impaired, said deficiency having existed prior to the act of the legislature. Cotting v. N. Y. & N. E. R. Co., 54 Conn. 156; 5 A. 851.

3 Hazlehurst v. Savannah, etc., R. R. Co., 43 Ga. 13; Harrison v. Mexican, etc., R. R. Co., 19 L. R. Eq. Cas. 358; Rutland, etc., R. R. Co. v. Thrall, 35 Vt. 536.

has also been sustained upon the ground of a right to raise money by a sale of stock. But the law is now established in accordance with the view here expressed.2 The holders of common stock cannot object to an amendment to the charter authorizing an issue of preferred stock where it is also provided that their consent to the provision enacted shall first be obtained, and that they shall be given the privilege of taking all the preferred stock.3

§ 602. Action to prevent wrongful issue of preferred stock. -The abuse of the power when given, or its attempted exercise when not given, will be enjoined at the suit of a dissenting holder of common stock who has brought his suit for the purpose within a reasonable time. He need not delay action until there are funds to make a dividend. The charter or amendment must be consulted as well for the terms upon which preferred stock may be issued as for the power to issue it. The legality of the contract between the preferred stockholder and the corporation is to be determined by comparing it with

1 Chaffee v. Rutland, etc., R. R. Co., 55 Vt. 110; State v. Cheraw, etc., R. R. Co., 16 S. C. 524.

2 Kent v. Quicksilver Min. Co., 78 N. Y. 159.

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3 City of Covington v. Bridge Co., 10 Bush. 69; Re The South Durham Brewery Co., 53 L. T. Rep. (N. S.) 928. But the issue of preferred stock cannot be created by a by-law, enacted after incorporation. Hutton v. Scarborough, etc., Co., 2 Dr. & Sm. 521; Ashbury v. Wilson, T. R. 30 Ch. D. 376. Such issue would be valid under a by-law however, if authorized by the charter. In re South, etc., Co., L. R. 31 Ch. D. 261. And under a power to increase capital stock "in such manner and with and subject to such rules and regulations and privileges and conditions as the company may see fit, it has been held that preferred stock may be issued. Harrison v. Mex. R. R. Co., L. R. 19 Eq. Cas. 358. Amendments made to by-laws of corporations, but afterwards repealed, and agreements afterwards canceled, will not be considered as never having existed, but will be regarded as admissions or expressions of policy in the settlement of disputes between preferred and common stockholders as to their respective rights to dividends. Belfast & M. L. R. Co. v. City of Belfast, 77 Me. 445; 1 A. 362.

4 Guinn. v. Land Corp., etc., L. R. 22 Ch. D. 349.

5 Sturges v. Eastern, etc., Ry. Co., 7 De G. M. & G. 158.

the provisions of the charter or statute authorizing it to be made, as well as by reference to the by-laws, resolutions passed at corporate meetings, minutes of the same, reports, and other corporate records.1

§ 603. Actions to compel payment of preferred dividends. -The rule that it is within the discretion of the directors to declare or not to declare dividends does not apply to preferred stock. A court of equity will interfere and compel a dividend to be paid to preferred stockholders where there are surplus earnings not needed for payment of floating debts,2 and an injunction will be granted against declaring dividends on ordinary stock to the prejudice of the rights of the preference shareholders, and against paying such dividends in full, without paying in full the dividends called for by the preferred stock. The preferred shareholder may also sue in equity to obtain his pro rata share of dividends with holders of common stock over and above the preference.*

1 Bailey v. Hannibal, etc., R. R. Co., 1 Dill. 174; s. c. 17 Wall. 96; St. John v. Erie Ry. Co., 22 Id. 136; West Chester R. R. Co. v. Jackson, 77 Pa. St. 321; Matthews v. Gt. North., etc., Ry. Co., 28 L. J. Ch. 375; Belfast, etc., R. R. Co. v. Belfast, 77 Me. 445; 1 A. 362. See also, Boardman v. Lake Shore, etc., Ry. Co., 84 N. Y. 157; Gordon v. Richmond, etc., R. R. Co., 78 Va. 501; Stevens v. South Devon, etc., R. R. Co., 9 Hare, 313; Corey v. Londonderry, etc., R. R. Co., 29 Beav. 263; Kent v. Quicksilver Min. Co., 78 N. Y. 159. After preferred stock has been once issued it is beyond the power of the corporation to limit or diminish the right of the holder of it in the matter of preference. Ashbury v. Walton, L. R. 30 Ch. D. 376; Coats v. Nottingham, 30 Beav. 86; West Chester, etc., R. R. Co. v. Jackson, 77 Pa. St. 321.

2 Boardman v. Lake Shore, etc., R. R. Co., 84 N. Y. 157, 180, 181; Henry v. Gt. North, etc., Ry. Co., 4 Kay & J. 1.

3 See Sturges v. Eastern, etc., Ry. Co., 7 De. G. M. & G. 158; Smith v. Cork, etc., Ry. Co., Ir. Rep. 3 Eq. 356; Bailey v. Hannibal, etc., R. R. Co., 1 Dill. 174; Prouty v. Mich., etc., R. R. Co., 1 Hun, 655; Thompson v. Erie, etc., R. R. Co., 45 N. Y. 468; Barnard v. Vt., etc., Co., 89 Mass. 572.

4 Williston v. Mich., etc., R. R. Co., 95 Mass. 400. But in West Chester, etc., Co. v. Jackson, 77 Pa. St. 321, it was held that assumpsit was the proper remedy for dividends on preferred stock which by the contract were to be paid "from the time of payment for stock." It was considered that the issue of the

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