CHAPTER XXVI. PAYMENT OF SHARES. ART. I. IN GENERAL, §§ 1562-1600. III. IN WHAT Kind of ProPERTY, §§ 1642-1661. IV. NEW DOCTRINE THAT A CORPORATION CAN GIVE AWAY ITS V. RIGHTS OF BONA FIDE PURCHASERS OF UNPAID SHARES, VI. MISCELLANEOUS HOLDINGS, §§ 1691-1697. ARTICLE I. IN GENERAL. SECTION 1562. Must be paid for at their full value. 1563. No power in directors to fix price of stock or issue it for less than face value. 1564. No such power in the corporation itself. 1565. Such contracts not aided in equity. 1566. Effect of this rule on the liability of shareholders to credit ors. 1567. Statements of what the law was and is aside from recent Federal and State holdings. 1568. The leading case, Upton v. Tribilcock, considered. 1569. Distinction between the English and American cases: the capital stock a trust fund for its creditors. 1570. Continued: American doctrine that directors are trustees for creditors. SECTION 1571. Source of the American doc- 1572. This doctrine not found in 1576. Nor divide it among its mem- 1577. Nor release its members from SECTION 1579. Agreements that shares shall be deemed "fully paid up." 1580. Such agreements frauds on other shareholders. 1581. Not necessary that other shareholders should prove that they were actually misled. 1582. What agreements avoided by the rule. 1583. Effect of recital in certificate that the stock is "full paid." 1584. Substituting the paid-up shares of another member. 1585. Stock paid up and money loaned back to stockholder. 1586. Stock issued to bondholders as a bonus. 1587. Contrary view that receiver of shares issued as a gratuity not liable to creditors. 1588. Bonds issued to shareholders as a bonus, or to indemnify them against assessments. 1589. Bonds of corporation issued to stockholders as a bonus. SECTION 1599. When such an arrangement valid as between the company and the stockholders. 1591. May be valid as between the members personally. 1592. In England the company is estopped by its contract from demanding payment, but may have damages for the fraud. 1593. Authority to sell bonds no authority for selling stock at less than par. 1594. May issue its stock at par in payment of its debts. 1595. Issuing shares at less than par to pay past indebtedness. 1596. Further of this subject. 1597. Issuing shares as collateral se curity for present advances. 1598. Issuing new shares to old stockholders not to be paid in full. 1599. Making payment by reducing the capital stock. 1600. Where the capital stock is increased. Unless § 1562. Must be Paid for at Their Full Value. the governing statute otherwise provides, the general rule is that shares of corporate stock can only be issued by a corporation in the first instance at their full value.1 Any scheme by which they are to be issued at a percentage of their par value is ultra vires and not enforceable. This statement necessarily includes the proposition that neither the directors nor, for 1 Upton v. Tribilcock, 91 U. S. 45; Chouteau v. Dean, 7 Mo. App. 210; Keihor v. Lademan, 11 Mo. App. 550; Williams v. Evans, 87 Ala. 725; s. c. 6 South. Rep. 702. Compare New Orleans R. Co. v. Frank, 39 La. An. 707. That an arrangement among stockholders to pay for their shares in dividends is, if valid, rescinded by giving a stock note, see McDowell v. Steel Works, 124 Ill. 401. That the rule of the text does not 3 exclude bona fide compromises with stockholders, see Whitaker v. Grummond, 68 Mich. 249; ante, § 1553. 2 Zelaya Min. Co. v. Meyer (City Ct. N. Y.), 28 N. Y. State Rep. 759; s. c. 8 N. Y. Supp. 487; Sturges v. Stetson, 1 Biss. (U. S.) 246; s. c. 10 Meyer Fed. Dec., § 149. 3 Fisk v. Chicago &c. R. Co., 53 Barb. (N. Y.) 513; Sturges v. Stetson, 1 Biss. (U. S.) 246; s. c. 10 Meyer Fed. Dec., § 143. stronger reasons, the promoters of a corporation have, in the absence of an enabling statute, the power to dispose of the shares of the corporation at less than their par value The principle supporting this rule has been thus clearly stated: "It is the settled American doctrine that every corporation holds its capital stock as a trust fund for the benefit of its creditors. The fund, however, does not exist until the stock is issued to shareholders. Up to that point there is a mere possibility or privilege of creation of stock. When a share is issued, if the price be paid in cash, so much is added to the working capital, thereby enhancing the creditor's security. If the price be not paid, the purchaser's indebtedness may be looked to for a like effect. In either case there is a tangible asset to which creditors may resort under the forms of law. The directors, who may be aptly styled the trustees, have no right to destroy the fund by giving away the stock, or which is the same thing, by disposing of it for an insignificant return. Its value in their hands, or rather the value of the creative privilege, is fixed by the charter. When they issue stock to an individual holder, there must be secured to the corporation, in some shape, an equivalent at so much per share, in accordance with the fundamental condition of the privilege." "1 1563. No Power in Directors to Fix Price of Stock or Issue it for Less than Face Value.- Let us enlarge on this subject a little. No power exists in the directors of a corporation to fix the price of a stock differently from the manner in which it is fixed by its charter or articles of association; or to sell it for less than its par value; or, especially, to make a contract to sell a part of it at less than its par value; and such an arrangement is a fraud on such of the stockholders as have paid in full for their shares. In commenting on a case presenting an arrangement of this kind, Mr. Justice McLean, at circuit, said: "There may be many instances where land is purchased for a depot, or for other purposes connected with the road, or where work has been done on the road or rolling stock furnished for it, and a subscription for stock may be given by the directors in pay 1 Chouteau v. Dean, 7 Mo. App. 210, 214. ment. But whether land, labor, property or money be received in payment, the principle is the same. The directors may regulate the time and terms of payment, but they have no power over the price of each share. In declaring that the capital stock should be divided into shares of $50 each, the law was designed to give the same permanency to the limitation of the shares as to the limitation of the capital stock. A subscription procured of fifteen thousand shares, amounting to the sum of $750,000, with the understanding that it should be discharged on the payment of about one-third less, was a fraud upon the law and upon the stockholders. The term fraud is here used in no other sense than as an act done without the authority of law and against the provisions of the charter, and this epithet legally applies, however innocently the act may have been done by the directors. In regard to the price of the shares, the directors have no greater power over it than the commissioners had. They were both the instruments of the law, and were alike bound by its provisions. If power had been given to either to exercise a discretion so vital to the success of the scheme as to vary the price of shares, it would have destroyed all confidence in the enterprise. The plaintiff seemed to have been convinced of this, from the plan adopted to receive from the company the first bond for $750,000, to give to the act an appearance of fairness on the books of the company. It is essential to the success of any enterprise which involves the expenditure of money that the contributors should be placed upon an equal footing in regard to the money paid. In this case the plaintiff received in stock $228,333 more than he paid for. This was a fraud on the stockholders who had paid in full for their shares.”1 In reply to the argument that there was nothing in the charter which prohibited the directors from taking subscriptions of stock at less than $50.00 a share, the amount fixed by the charter, the learned justice said: "No such provision was necessary. The duties of the directors are plainly pointed out in the charter, and as their powers were wholly derived from that instrument, it was not necessary to prohibit them from doing that which the charter did not authorize them to do. The charter fixed the rates at which the shares should be 1 Sturges v. Stetson, 1 Biss. (U. S.) 246; s. c. 10 Myer Fed. Dec., § 143. subscribed. This is matter of law, and is no more subject to the discretion of the directors than it was to the discretion of the commissioners, who first received subscriptions.1 § 1564. No Such Power in the Corporation Itself. The author states with great confidence the general principle to be, that the corporation itself has no power to dispose of its unissued shares in the first instance at less than their par value, unless empowered to do so by statute, either in express terms or by necessary implication. This is simply another statement of the principle, elsewhere enlarged upon, that a corporation must in the first instance receive payment for its shares according to their face value, either in money or in money's worth. This principle is deeply intrenched in public policy. It is necessary to prevent corporations from acquiring false credits and defrauding the public by a fictitious capitalization. It is to be regretted that the courts have ever admitted any exceptions to the rule. The breaking down of the principle under the sanction of judicial decisions has been productive of the greatest fraud and public injury. Such is the rule under the New York Manufacturing Act, as declared in several cases, which hold that, where a corporation, governed by that act, issues its shares in exchange for property or labor, it can only take the property or labor at its fair value. Such also is the rule under a provision of the constitution of Pennsylvania, prohibiting the issuing of corporate stocks or bonds except for money paid, labor done, or property 4 N. Y. Laws, 1848, ch. 40, § 2. Gamble v. Queens County Water Co., 123 N. Y. 91; s. c. 9 L. R. A. 527; 33 N. Y. St. Rep. 88; 8 Rail. & Corp. L. J. 484; 25 N. E. Rep. 201; reversing 52 Hun (N. Y.), 166; 5 N. Y. Supp. 124; 23 N. Y. St. Rep. 409. See also Schenck v. Andrews, 57 N. Y. 142; Boynton v. Andrews, 63 N. Y. 94; Lake Superior Iron Co. v. Drexel, 90 N. Y. 87. Under this statute a cor poration which purchases property intending to pay therefor by issuing its stock and bonds, the former of which must be issued at par, will not be permitted to issue a much larger quantity of bonds taken at their actual value than is necessary to make up the difference between the par value of the stock offered and the purchase price of the property, the surplus bonds being rendered necessary by the fact that the actual value of the stock is much less than par. Gamble v. Queens County Water Co., supra. |