23 Bargate v. Shortridge, 5 H. L. Cas. 297; Ellison v. Schneider, 25 La. An. 436.

24 Nat. Bank v. Lake Shore etc. Railw. Co. 21 Ohio St. 221. See Sprague v. Cocheco Manuf. Co. 10 Blatchf. 173.

25 Williams v. Mechanics' Bank, 5 Blatchf. 59. But compare De Comeau r. Guild Farm Oil Co. 3 Daly, 218; State v. Warren Foundry etc. 32 N. J. L. 439.

7

§ 123. Effect and incidents of transfers.—The transferee of stock is substituted to the rights and obligations of the original subscriber,1 and is liable for installments called for after the transfer.2 A contract to buy shares, induced by fraudulent misrepresentations, is voidable at the election of the buyer; and a buyer of shares illegally issued may rescind his contract, and recover back the price paid from the vendor, if the latter took part in the illegal transaction.4 If stock is sold without disclosing to the buyer that it is subject to a tax, the seller is liable to the buyer for the sum paid to discharge the tax.5 Hypothecated shares of stock in the hands of the transferee subjects him to all the liabilities of ordinary owners. Where the holder of stock assigns his interest therein after the corporation is dissolved, the assignee takes no greater interest then had the assignor; and a purchaser under an attachment sale takes the same title that the judgment debtor had to the shares when the attachment was levied.8 A transfer which operates to relieve a stockholder from liability for his subscription, by the substitution of another person to the prejudice of creditors, will not be allowed. And since it is the duty of a corporation to protect the owners of shares from unauthorized transfers, 10 it may be held liable in damages for any loss sustained through the negligence or miscon duct of its officers in making transfers.11 In an action for inducing the plaintiff, by fraudulent means and representations, to purchase stock which the defendant knew to be worthless, the measure of damages is the difference in the value of the stock as the condition of the company issuing it really was, and its value as the purchaser was fraudu lently induced to believe it was. 12

1 Mann v. Currie, 2 Barb. 294; and see Bayard v. Farmers etc. Bank, 52 Pa. St. 232; Sabine v. Bank of Woodstock, 21 Vt. 353; McCready v. Rumsey, 6 Duer, 574.

2 Hall v. U. S. Ins. Co. 5 Gill, 484. See also Brigham v. Mead, 10 Allen, 245.

3 Upton v. Englehart, 3 Dill. 496; Upton v. Tribilcock, 91 U. S. 45; Seaman v. Low, 4 Bosw. 337.

4 Vosdick v. Sturges, 1 Biss. 255.

5 Simmons v. Aldrich, 41 Wis. 241.

6 Wheelock v. Kost, 77 Ill. 296.

7 James . Woodruff, 10 Paige, 541; 2 Denio, 574; and see Callanan v. Edwards, 32 N. Y. 483.

8 Geyer v. Western Ins. Co. 3 Pittsb. 41.

9 Re Bachman, 12 Bank. R. 223. Compare Hughes v. Antietam Manuf. Co. 34 Md. 316; Isham v. Buckingham, 49 N. Y. 216; Firkel v. Joliet Opera House Co. 79 Ill. 334; Bowden v. Santos, 1 Hughes, 158.

10 Bayard v. Farmers' etc. Bank, 52 Pa. St. 232; Magwood v. Railroad Bank, 5 So. Car. 379.

11 Bank v. Lanier, 11 Wall. 369.

12 Hubbell v. Meigs, 50 N. Y. 480. Compare Douglas v. Merceles, 25 N. J. Eq. 144.

§ 124. Lien of the corporation on stock.-There is no lien upon stock at common law in favor of the corporation for the indebtedness of the stockholders; 1 and the general power to enact by-laws does not embrace that of creating such liens.2 When, therefore, such a lien does exist, it is by virtue of authority, either expressed in the act of incorporation, or by by-laws made by authority of the act. A power to abridge the right of transfer will not be inferred from a statutory provision, unless it cannot otherwise have efficacy, and unless it present so strong a probability of intention that the contrary cannot be supposed. But a stockholder may be bound by a usage, known to him, not to permit a transfer of the stock of one indebted to the corporation.5 And where a provision of the charter authorizes the directors to make rules and regulations as to the transfer of stock, a by-law forbidding the transfer, where the stockholder is indebted to the corporation, may be valid, although it be inconsistent with the general law of the state governing the transfer of property. Where the corporation has a valid lien against the stock for a debt of the holder, a transferee of

the certificate is not entitled to a transfer of the stock on the company's books, except on terms of his satisfying the lien.8 The indebtedness of a stockholder, which entitles the corporation to a lien on his stock, includes notes discounted by a bank for the stockholder, as well as debts due for an original subscription; 10 also debts to become due, as well as those due; 11 and also those in which the stockholder is liable, as surety or indorser, as well as those in which he is liable as principal.12 So, a lien upon "shares and stock" extends to dividends; 13 and to a debt due from two stockholders in partnership, as well as to debts which each owes in severalty; 14 but not to dividends accruing after the death of the shareholder. 15 The whole of the debtor's stock may be held under a valid lien, till the debt is paid, though the debt be less than the value of the stock; 16 and although the bank takes security from one of the parties to a bill or note discounted by it, it may also hold the shares of another party as security for the same.17 In order to put a corporation in the wrong for refusing to transfer, where it claims more than is due, the stockholder must tender what he admits to be due.18 Stock standing on the books of the company in the name of a fictitious person is liable for the debt of the true owner.19

1 See Utica Bank v. Smalley, 2 Cowen, 770; 14 Am. Dec. 526; Heart v. State Bank, 2 Dev. Eq. 111; Farmers' etc. Bank v. Wasson, 48 Iowa, 336; 30 Am. R. 398; Massachusetts Iron Co. v. Hooper. 7 Cush. 1831 Weston's Case, Law R. 4 Ch. 20; People v. Crockett, 9 Cal. 112.

2 Conklin v. Second Nat. Bank, 53 Barb. 512; 45 N. Y. 655; Driscoll v. West Bradley etc. Manuf. Co. 59 N. Y. £6; Bullard v. Bank, 18 Wail. 589; Evansville Nat. Bank r. Metrop. Nat. Bank, 2 Biss. 527. But compare Lockwood v. Mech. Nat. Bank, 9 R. I. 308; Pendergast v. Bank of Stockton, 2 Sawy. 108; McDowell v. Bank of Wilmington, 1 Harr. 27; Vansands v. Middlesex County Bauk, 26 Conn. 144; Tuttle v. Walton, 1 Ga. 43.

3 Grant v. Mech. Bank, 15 Serg. & R. 140; Union Bank v. Laird, 2 Wheat. 30; Steamship Dock Co. v. Heron, 52 Pa. St. 280; Hubbertsty v. Manchester Railw. Co. Law R. 2 Q. B. 471.

4 Driscoll v. West Bradley etc. Manuf. Co. 59 N. Y. 96.

5 Morgan v. Bank of North America, 8 Serg. & R. 73; 11 Am. Dec. 575.

6 See St. Louis etc. Ins. Co. 9 Mo. 149; Cunningham v. Alabama etc. Trust Co. 4 Ala. 652.

7 Mechanics' Bank v. Merchants' Bank, 45 Mo. 513.

8 McCready v. Rumsey, 6 Duer, 574; Reese v. Bank of Commerce, 14 Md. 271; and see Mech. Bank v. N. Y. etc. R. R. Co. 13 N. Y. 599; West Branch Bank v. Armstrong, 40 Pa. St. 278.

9 Rogers v. Huntington Bank, 12 Serg. & R. 77.

10 Morgan v. Bank of North America, 8 Serg. & R. 73; 11 Am. Dec. 575; Pittsburgh etc. R. R. Co. v. Clarke, 29 Pa. St. 146.

11 Grant v. Mech. Bank etc. 15 Serg. & R. 140; Downer v. Bank of Zanesville, Wright, 477; Leggett v. Bank of Sing Sing, 24 N. Y. 283. Compare Re Stockton etc. Iron Co. Law R. 2 Ch. Div. 101.

12 St. Louis etc. Ins. Co. v. Goodfellow, 9 Mo. 149; McDowell v. Bank of Wilmington, 1 Har. (Del.) 27.

13 Hague v. Dandeson, 2 Ex. 741.

14 German Security Bank v. Jefferson, 10 Bush, 326; Matter of Bigelow, 2 Ben. 469; Geyer v. West Ins. Co. 3 Pittsb. (Pa.) 41 Compare Arnold v. Suffolk Bank, 27 Barb. 424.

15 Brent v. Bank of Washington, 2 Cranch C. C. 517.

16 Sewall v. Lancaster Bank, 17 Serg. & R. 285.

17 Union Bank v. Laird, 2 Wheat. 390; and see McLean v. Lafayette Bank, 3 McLean, 587.

18 Pierson v. Bank of Washington, 3 Cranch C. C. 363. 19 Stebbins v. Phoenix Fire Ins. Co. 3 Paige, 350.

§ 125. Profits and dividends.-"Profits" or "net earnings" are, properly, the gross receipts less the expense of carrying on the business of the corporation to earn such receipts,1 not including interest on money borrowed; 2 or the term "profits may denote what remains after defraying every expense, including loans falling due, as well as the interest on such loans. The term 'dividend," when applied to something to be paid by corporations not insolvent, or in contemplation of dissolution, means a sum which the corporation sets apart from its profits to be divided among its members.5 When all liabilities are paid, either out of the gross receipts or out of the net earnings, the remainder is the profit of the shareholders, to go toward dividends. The guaranty of a dividend is nothing more than a pledge of the funds legally applicable to the purposes of a dividend; and agreements to pay interest or dividends on the capital stock, without reference to the ability to pay from the earnings of the company, are opposed to public policy and void.8 Ownership of stock is essential to a recovery

9

of dividends; and a stockholder has no legal title to the property or profits of the corporation until a dividend is actually declared; 10 and dividends cannot be sued for until after a demand of payment.11 A purchaser of shares takes with them the right to receive all future dividends declared on such shares. 12 Generally, the directors are the sole judges of what portion of the profits they ought from time to time to divide, and when to make such division; 13 but they are bound to make the dividend equal and just among all who are interested,14 and it must be general on all the stock. 15 Equity will interfere to prevent an unjust discrimination in the distribution of profits; 16 and acceptance of a dividend by a stockholder is no ratification of the illegal conduct of the directors.17 Dividends improperly declared and paid, before payment of the corporate debts, may be recovered back; 18 creditors of the corporation being entitled to priority of payment over its stockholders. 19 If a dividend be paid to a person not authorized to receive it, the company may be compelled to pay it again to the true owner.20 It is the English rule, that dividends must be paid in money; 21 but in the United States, stock, or scrip dividends, are common.22 And generally, where the company has earned a dividend, the directors may elect to retain the moneys so earned for proper corporate purposes, and in lieu thereof issue to stockholders a corresponding amount of stock.28 But dividends cannot be applied by the directors to purposes not included in the charter or fundamental contract, without the consent of the stockholders.24 And the courts will not presume that an increase of stock authorized by law is a stock dividend.25 Interest will not accrue upon dividends, nor will the statute of limitations begin to run, until demand is made.26 And a letter of mere inquiry is not a sufficient demand to sustain an action for dividends.27 So, a corporation may retain a cash dividend in pledge for a debt due it from a shareholder; 28 and a demand made while the lien con