crease is attempted to be made without obtaining the consent of two-thirds of the stock, the payment in full of the amount of such increase, and the certificate and approval of the comptroller of the currency, as required by those statutes, the proceedings are invalid, and preliminary subscriptions to such increase cannot be enforced.'

An authority to increase does not imply authority to reduce and vice versa. Whether a corporation having authority by its charter, or under amendments thereto, to issue bonds convertible into stock, and having issued such bonds may redeem them by the issue of stock in excess of its capital stock, otherwise fixed, is a question not very satisfactorily settled upon authority; but the prevailing opinion favors the power to do so.3

The ground upon which the validity of such issues is upheld is that the authority to issue stock so conditioned, contains by implication, the further authority to increase the capital stock to the same extent.1

1 Winter v. Armstrong, 37 F. 508. In this case an action by the receiver of a national bank was brought to enforce subscriptions to a proposed increase of its capital stock. It was held that an allegation that the bank, subsequent to defendants' subscription, and with their knowledge, represented to the public by means of circulars, letter-heads, etc., that its capital stock had been so increased, and that defendants allowed their names to remain "upon the list of those subscribing for and entitled to such new or increase of stock," but without alleging that the public gave credit to the bank on the faith that defendants were part owners of such increase of stock, or that they allowed themselves to be held out as actual stockholders, did not show that they were estopped to plead the failure of the bank to comply with the statutory requirements in perfecting such increase; and a subscriber who had made payments on his subscription to the proposed increase, believing that the statutory requirements would be complied with, was entitled to have the amount thereof allowed as a claim against the assets of the bank in the receiver's hands.

* Sutherland v. Olcott, 95 N. Y. 93; Seignouret v. Home Ins. Co., 24 F. 332. 3 Belmont v. Erie Ry. Co., 52 Barb. 637, 669; Ramsey v. Erie Ry. Co., 38 How. Pr. 193, 216.

It was held that a corporation having power to increase its capital stock might usually issue bonds at 50 per cent. of their par value convertible into stock upon payment of the other 50 per cent. Van Allen v. Ill. Cent. R. R. Co., 7 Bosw. 515. The

§ 771. Illegal and irregular exercise of the power.Where there is statutory authority for an increase, but the presribed formalities for the exercise of the power are not observed, the stock under such irregular exercise of authority is not void, but voidable only. The total disregard of the substantial requirements of the law, however, in the issue of stock will sometimes render it spurious and invalid for any purpose of membership, although the power to issue it in a lawful manner be possessed by the corporation.

§ 772. Remedies by corporation and holders of spurious stock. In addition to the right of any holder of the legally issued stock to invoke equitable remedies in such cases, a bona fide purchaser of spurious or overissued stock has his action against the corporation for damages. And though a purchaser take such stock with full notice of the illegality in its issue, he may set up the illegality as a defence to an action for calls. and assessments. There can be no estoppel in such case. If part of the subscription or an installment has been paid, the subscriber may recover back the money paid by tendering the spurious stock to the corporation and offering to rescind, although he subscribed for it and took it with full knowledge of the facts.

holder of bonds convertible into stock may demand stock therefor at any time; and though a dividend be declared just after the demand he is entitled to the stock and dividend. Jones v. Terre Haute, etc., R. R. Co., 57 N. Y. 196. Contra, Sutliff v. Cleveland, etc., R. R. Co., 24 O. St. 147. The question of payment for the stock issued upon the increase is separate and distinct from that involved in the legality of the issue; but it is held that payment may be received in 'bonds of the corporation. Lohman v. N. Y., etc., R. R. Co., 2 Sandf. (Sup. Ct.) 39; Reed v. Hoyt, 51 Id. 121.

1 Allen v. South Boston R. Co., 150 Mass. 200, holding the measure of damages to be the market value of the stock at time cause of action accrued. 2 Scoville v. Thayer, 105 U. S. 143; Page v. Austin, 10 Can. Sup. Ct. 132; Clark v. Tuner, 73 Ga. 1.

3 Knowlton v. Compress, etc., Co., 14 Blatchf. 364; s. c. 103 U. S. 49; Reed v. Boston Machine Co., 141 Mass. 454. The defence of the ultra vires character

§ 773. Illegal issue of preferred stock. In the absence of statutory authority or a provision in the articles. allowing it, the issue of preferred stock is illegal;1 but when authorized is entirely proper and binding provided the manner of issuing it is regular and it is justified by the purpose and occasion; and the power may be given by amendment accepted by the members, as well as in the original charter.2

Partly preferred and partly non-preferred stock cannot be issued under a power to issue preferred shares ;3 and the issue of preferred shares in excess of the amount authorized is an over-issue and is clearly illegal. Nor have directors under authority to issue preferred stock the right to issue it for the purpose of paying dividends upon common stock. To render

of the transaction is available, though a note has been given for the amount. Merrill v. Gamble, 46 Ia. 615; Merrill v. Beaver, Id. 646; Same v. Same, 50 Id. 404.

1 Guinness v. Land Corp. of Ireland, 22 L. R. Ch. Div. 349; Hutton v. Scarborough, etc., Co., De. G. J. & S. 672; Melhado v. Hamilton, 28 L. T. (N. S.) 578; Sturge v. Eastern, etc., R. R. Co., 7 De G. M. & G. 158; Fielden v. Lancashire, etc., Ry. Co., 2 De G. & Sm. 531; Hutton v. Scarborough, etc., Co., 2 Dr. & Sm. 521; Ashbury v. Wilson, L. R. 30 Ch. D. 376. See also, Railway Companies Act, 1867, 30, 31 Vict. Ch. 127, secs. 6-17. Authority to borrow money does not authorize the issue of preferred stock. Kent v. Quicksilver Mining Co., 78 N. Y. 159. A contrary doctrine has prevailed in a few cases. See Harrison v. Mexican, etc., R. R. Co., 19 L. R. Eq. Cas. 358; Hazelhurst v. Savannah, etc., R. R. Co., 43 Ga. 13; Rutland, etc., R. R. Co. v. Thrall, 35 Vt. 536. Since there is no material difference between a preference share and guaranteed stock, corporations have no common law authority to issue the latter. Davies v. Proprs., etc., 49 Mass. 321; Memphis, etc., Co. v. Memphis, etc., R. R. Co. (Tenn.) 5 S. W. 52; Wilson v. Mich., etc., R. R. Co., 95 Mass. 400; Curry v. Scott, 54 Pa. St. 270. There are a number of cases which hold that a loan may take the shape of a sale of stock on which dividends are guaranteed provided the transaction is had with parties not members of the corporation. See Burt v. Rattle, 31 O. St. 116; Totten v. Tison, 54 Ga. 139.

2 Everhart v. West Chester, etc., R. R. Co., 38 Pa. St. 339; Harrison v. Mexican, etc., R. R. Co., L. R. 19 Eq. Cas. 358. Compare Moss v. Syres, 32 L. J. Ch.

711.

3

Covington, etc., Co. v. Sargent, 1 Cin. Sup. Ct. 354.

Melhado v. Hamilton, 28 L. T. (N. S.) 578; s. c. 29 Id. 364.

Chaffee v. Rutland, etc., R. Co., 55 Vt. 110; Jones on Ry., sec. 620.

such issue legal its par value must be added to the permanent capital stock as is required in the case of an ordinary increase.1

The attempt to raise funds by this means has often been resorted to by companies when in financial straits, but the courts have almost invariably enjoined such threatened violation of the rights of holders of commom stock or decreed its cancellation after being issued. The remedy is by bill in equity, and the complainant need not wait until there are funds to make a dividend before suing.3

It is a power liable to be greatly abused not only to the injury of common shareholders, but to public detriment, as has been demonstrated in numerous instances in England under liberal statutory provisions.*

But common stockholders who have equal privileges extended to themselves with others, are entitled to no relief in equity against an issue of preferred stock under power conferred and regularly exercised."

§ 774. Distinction between the legal status of preferred and over-issued stock. While stock issued beyond the amount designated in the charter and unauthorized preferred or guaranteed stock are equally without validity at the inception, a somewhat different rule applies to them respectively in the hands of purchasers.

1 Supra, § 602

2 Guinness v. Land Corporation of Ireland, L. R. 2 Ch. D. 349.

3 Sturge v. Eastern, etc., Ry. Co., 7 De G. M. & G. 158.

4 For expositions of practices under statute 30 and 31 Vict., ch. 27, see Corry v. Londonderry, etc., Ry. Co., 29 Beav. 263; Re Bristol, etc., Ry. Co., L. R. 6 Eq. 448; Midland Ry. Co. v. Gordon, 16 Mee & W. 804; London, etc., Ass'n v. Wrexham, etc., Ry. Co., L. R. 18 Eq. 566; Munas v. Isle of Wight Ry. Co., L. R. 8 Eq. 665; Matthews v. Gt. Northern, etc., Ry. Co., 28 L. J. Chan. 375; Re Cambrian Ry. Co., L. R. 3 Chan. 278; Webb v. Earl, L. R. 20 Eq. 556; Stevens v. Midland, etc., Ry. Co., L. R. 8 Chan. 1064; Re Anglo-Danubian, etc., Co., L. R. 20 Eq. 339.

5 Re The South Durham Brewery Co., Ltd., 53 L. T. Rep. (N. S.) 928; City of Covington v. Bridge Co., 10 Bush. (Ky.) 69.

Questions of public policy affect the case of an attempted increase of capital stock without legal authority, it being the policy of the law to prevent the deception of the public and the obtaining of credit by a corporation upon ostensible capital which it does not, in reality, possess ; and this is best accomplished by holding such overissue absolutely void and incapable of ratification.1

But it is unimportant to creditors whether the surplus profits of their debtor be paid to one class of shareholders in preference to another, or distributed to all impartially, so long as the capital and their security is not impaired. Accordingly, it is held that an unauthorized issue of preferred stock may be ratified by the holders of common stock, so as to estop them from afterwards objecting. Dissenting shareholders may be barred by delay from which acquiescence may be inferred, especially if while they have slept upon their right to have it set aside and cancelled, the interests of bona fide purchasers of the preference issue have become involved, whereas not even unanimous assent of all the parties concerned will legalize an attempted illegal increase or reduction of capital stock.3 holder of common stock who has acquiesced in an issue

A

1 Grangers' Life, etc., Ins. Co. v. Kramper, 73 Ala. 325; Ferris v. Ludlow, 7 Ind. 517; Salem Mill Dam Corp. v. Ropes, 6 Pick. 23; Scoville v. Thayer, 103 U. S. 143, 148; Mechanics' B'k v. N. Y., etc., R. R. Co., 13 N. Y. 599; N. Y. etc., R. R. Co. v. Schuyler, 34 Id. 30; Lathrop v. Kneeland, 46 Barb. 432; Moses v. Ocoee B'k, 1 Lea (Tenn.), 398; Sutherland v. Olcott, 95 N. Y. 93, 100; Infra, § 804.

2 Hazelhurst v. Savannah, etc., Ry. Co., 43 Ga. 13; Kent v. Quicksilver Mining Co., 78 N. Y. 159; Lockhart v. Van Alstyne, 31 Mich. 76; Taylor v. South, etc., R. R. Co., 4 Woods, 575; s. c. 13 Fed. Rep. 152. What amounts to a waiver of the right and acquiescence is a question of fact for a jury. Acceptance of part of the preferred stock and receipt of dividends thereon is a waiver Branch v. Jessup, 106 U. S. 468. Compare Covington, etc., Co. v. Sargent, 1 Cin. Sup. Ct. 354.

3 Droitwitch, etc., Co. v. Curzon, L. R. 3 Ex. 35, 42.