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of the constituent companies, as provided for in the stock certificates, but does not affect the right to unpaid dividends.87

§ 4770. Distribution of stock as dividend. Where stock of one company is exchanged for all the property of another company, the distribution of such stock among the stockholders of the former company is in the nature of a dividend.88 But stock of a consolidated corporation has been held to be not profits divisible under an agreement between stockholders of an old company whereby majority stockholders agreed to divide with the minority any profit derived by them from the sale of the property, where the membership in the new corporation was procured not in consideration of any interest that they had in the old one but upon new considerations, and the transfer in consideration of payment of the debts of the old company was the best the majority stockholders could do.89

§ 4771. Rights as to assets not taken over. Assets of a constituent company not taken over by the consolidated company belong to the corporation, and hence, until a dividend is declared, a stockholder cannot sue for his portion of such assets.90

§ 4772. Consent of transferrer stockholder as binding on transferee. A purchaser of stock becomes bound by an agreement of his vendor, entered into with the other stockholders, for the consolidation of the corporation, where the agreement was such as to be binding on the transferrer and the transferee has knowledge of the facts.91

§ 4773. Right to rescind. Stockholders who have participated in a consolidation agreement cannot rescind unless there is a lawful right to rescind, due notice of an intention to rescind, and a restoration of benefits received.92 And a stockholder who assents to a sale of all the corporate property, at a stockholders' meeting, cannot thereafter repudiate the sale and decline to accept payment for his stock in accordance with the conditions of sale.93

87 Colgate v. United States Leather Co., 73 N. J. Eq. 72, 67 Atl. 657.

88 Kimball v. Success Min. Co., 38 Utah 78, 110 Pac. 872.

89 Poling v. Teter, 64 W. Va. 117, 60 S. E. 1101.

90 Knickerbocker v. Conger, 110 N. Y. App. Div. 125, 97 N. Y. Supp. 127.

91 Senn v. Union Premium & Mercantile Co., 115 Mo. App. 685, 92 S. W. 507.

92 Jewell v. McIntyre, 62 N. Y. App. Div. 396, 70 N. Y. Supp. 826, aff'd 172 N. Y. 638, 65 N. E. 1118.

93 Carr v. Rochester Tumbler Co., 207 Pa. 392, 56 Atl. 945.

§ 4774. Liability on subscription to stock. Whether a subscriber to corporate stock is discharged by a subsequent consolidation, before payment for his stock, has already been stated. Of course, stockholders who consent to a consolidation of their corporation with another are liable to the consolidated corporation on their subscriptions to the stock of the consolidating corporation, transferred to the former under the agreement of consolidation.95

§ 4775. Liability for debts of the corporation. When the consolidating corporations are dissolved, and an entirely new corporation is created, the statutory liability of stockholders for the debts of the consolidated corporation is determined by the law in force at the time of the consolidation.96 And they cannot attack the validity of the consolidation, or of the statute under which it was effected, for the purpose of escaping such liability.97 But stockholders in a company which is merged into another company without their knowledge or consent do not become stockholders in the new company so as to be liable as stockholders of such new company.98

VIII. EFFECT OF UNAUTHORIZED, IRREGULAR OR FRAUDULENT CONSOLIDA-
TION OR COMBINATION

§ 4776. Rights of public. Where there is an unlawful consolidation of corporations, the state may attack it by quo warranto proceedings.99 When corporations undertake to consolidate without any legislative authority, or where, in consolidating under legislative authority, there is such a failure to comply with the requirements of the law that there is not a corporation de jure, proceedings by the state through the attorney general may be instituted, as in other cases, to oust the consolidated company from the exercise of corporate powers. The stock of a consolidated street railway, or part thereof, will not be cancelled by the courts, at the suit of the state, unless there is clear proof to show the illegality of the stock, and the fact that property of a constituent company exchanged for stock in the consolidated corporation is not worth in the market the par value of that stock will not ordinarily sustain a finding of fraud.2

94 See § 649, supra.

95 See $649, notes 30-32, supra. 96 Tibballs v. Libby, 87 Ill. 142; Gardner v. Minneapolis & St. L. Ry. Co., 73 Minn. 517, 76 N. W. 282.

97 Gardner v. Minneapolis & St. L. Ry. Co., 73 Minn. 517, 76 N. W. 282.

98 Richards v. Robin, 178 N. Y. App. Div. 535, 165 N. Y. Supp. 780.

99 Supra, chapter on Quo Warranto.
1 See § 3227 et seq., supra.

2 State v. Lincoln Traction Co., 90
Neb. 535, 134 N. W. 278.

H

§ 4777. Rights of third persons. A third person cannot sue to determine the validity of a consolidation or merger, unless otherwise provided by statute. Under a statute prohibiting the consolidation of railroad companies having competing lines, and allowing any citizen to sue to enjoin its violation, it was held that a suit to restrain such a consolidation could be maintained by a private individual, without showing that he had any private interests, beyond those which every citizen is presumed to have, which would be damaged by the proposed consolidation.

Unless so authorized by statute, even stockholders cannot sue to dissolve a de facto consolidated company,5 although, in a proper case, they may sue to enjoin or set aside the consolidation.6

A person or corporation not injured thereby cannot attack a consolidation on the ground that it is a consolidation of parallel and competing lines."

§ 4778. Rights of creditors. A creditor cannot, merely because he is a creditor, prevent a corporation from consolidating under legislative authority, and cannot maintain a suit to enjoin a consolidation. Where corporations undertake to consolidate, and issue mortgage bonds, a general creditor whose claim is based upon a contract made with it as a consolidated corporation cannot question the validity

3 Atchison, T. & S. F. R. Co. v. Board Com'rs Sumner Co., 51 Kan. 617, 33 Pac. 312; Terhune v. Potts, 47 N. J. L. 218, bondholders; Bell v. Pennsylvania, S. & N. E. R. R. (N. J. Eq.), 10 Atl. 741; Western New York Water Co. v. Niagara Falls, 91 N. Y. Misc. 73, 154 N. Y. Supp. 1046.

4 Currier v. Concord R. Corporation, 48 N. H. 321.

5 Terhune v. Potts, 47 N. J. L. 218; Terhune v. Midland R. Co. of New Jersey, 38 N. J. Eq. 423.

When corporations are authorized to consolidate, and attempt to do so, colorably complying with the requirements of the law, and afterwards assume to act as a consolidated corporation, there is a de facto consolidated corporation, and its existence can only be questioned in a direct proceeding by the state. It has been held, therefore, that a bill to annul

a consolidation of corporations, and to have declared void a mortgage executed by the consolidated company upon the aggregate property, on the ground that one of the consolidating companies had no legal corporate existence, cannot be maintained by stockholders of the consolidating corporations. Proceedings must be instituted, if at all, by the state through its attorney general. Bell v. Pennsylvania, S. & N. E. R. R. (N. J. Eq.), 10 Atl. 741.

6 Jones v. Missouri-Edison Elec. Co., 144 Fed. 765, 776, where this distinction is clearly brought out by Judge Sanborn. See also §§ 4792-4794, infra.

7 Shreveport Traction Co. v. Kansas City, S. & G. R. Co., 119 La. 759, 44 So. 457.

8 See § 4777, supra.

of the consolidation for the purpose of attacking the bonds and mortgage. So creditors of a selling corporation may be barred from attacking the sale by laches, as where three or four years have elapsed and third persons have become creditors of the transferee.10

Where there is no legal consolidation, but nevertheless one is attempted and thereafter two companies are operated as one although their business is kept separate, a subsequent separation agreement cannot be enforced as against the rights of creditors of the insolvent consolidated company.11

§ 4779. Rights of consenting stockholders-In general. Consenting stockholders cannot ordinarily attack the validity of the consolidation.12 But a consenting stockholder may attack a consolidation for

9 Louisville Trust Co. v. Louisville, N. A. & C. Ry. Co., 84 Fed. 539. And see Continental Trust Co. v. Toledo, St. L. & K. C. R. Co., 82 Fed. 642.

10 Anthony v. Campbell, 112 Fed.

212.

11 Carton v. West Virginia Bridge & Construction Co., 183 Fed. 1009.

12 Farmers' Loan & Trust Co. v. Toledo, A. A. & N. M. Ry. Co., 67 Fed. 49; Dimpfel v. Ohio & M. Ry. Co., 9 Biss. 127, Fed. Cas. No. 3,918, aff'd 110 U. S. 209, 28 L. Ed. 121; Bradford v. Frankfort, St. L. & T. R. Co., 142 Ind. 383, 41 N. E. 819, 40 N. E. 741; Rothschild v. Rochester & P. R. Co., 1 Pa. Co. Ct. 620. See also Tagart v. Northern Cent. Ry. Co., 29 Md. 557.

If a stockholder in a corporation acquiesces in its consolidation with another corporation and surrenders his stock for shares in the new company, he cannot complain of the consolidation, or of the terms and conditions upon which it was authorized and effected. Union Canal Co. V. Young, 1 Whart. (Pa.) 410, 30 Am. Dec. 212.

When corporations are consolidated under legislative authority and all the property and rights of the consolidating corporations are transferred by the agreement of consolidation, or by the statute authorizing or effect

ing the consolidation, to the consolidated corporation, a stockholder of one of the consolidating corporations who surrenders his stock and accepts stock in the new corporation cannot afterwards complain of the transfer, "for it will not do for him to avail himself of the advantages of the change, without at the same time submitting to any inconvenience or loss which may attend the substitution of the one for the other." Union Canal Co. v. Young, 1 Whart. (Pa.) 410, 30 Am. Dec. 212.

When stockholders of a corporation consent to its consolidation, under a statute, with another corporation, and the new corporation contracts debts, they cannot attack the statute under which they consolidated as unconstitutional, for the purpose of escaping individual liability for such debts, imposed by a constitutional or statutory provision adopted or enacted prior to the consolidation. Gardner v. Minneapolis & St. L. Ry. Co., 73 Minn. 517, 76 N. W. 282.

When railroad corporations have undertaken to consolidate, a county or city which afterwards subscribes to the capital stock of the new corporation and issues its bonds in payment of the subscription, is thereby estopped to deny the validity of the

fraud of which he was ignorant at the time he gave his consent.13 Furthermore, a vote as a director to submit the question of consolidation to stockholders for their consent is not equivalent to assent on his part as a stockholder so as to estop him from attacking the consolidation as illegal.14 But the right of a stockholder in a selling corporation, who has transferred his stock for stock in the purchasing company, to rescind the contract and recover his original shares is lost by acquiescence and laches where he became a director of the purchasing corporation and participated in acts consistent only with an absolute ownership by it of the stock of the selling company even after an action had been brought to declare the transaction illegal.15 And as between innocent stockholders in a consolidated company, and

consolidation or the legal existence of the new corporation. Young v. Township of Clarendon, 26 Fed. 805; Lewis v. Clarendon, 5 Dill. 329, Fed. Cas. No. 8,320. See also Phinizy v. Augusta & K. R. Co., 62 Fed. 678; Dimpfel v. Ohio & M. Ry. Co., 9 Biss. 127, Fed. Cas. No. 3,918; Swartwout v. Michigan Air Line R. Co., 24 Mich. 390.

One purchasing stock in a company after the enactment of a statute authorizing a consolidation cannot attack it on the ground that there was no statute authorizing a consolidation at the time the corporation was organized. In such a case there is an implied consent. Colgate v. United States Leather Co., 73 N. J. Eq. 72, 67 Atl. 657.

A stockholder who declines to vote
for a merger does not consent thereto.
Cattlemen's Trust Co. v. Beck,
Civ. App., 167 S. W. 753.

Tex.

13 Stockholders are not estopped by their having voted for a consolidation to attack it for fraud of the directors of which they were ignorant at the time they voted. Alabama Fidelity Mortgage & Bond Co. v. Dubberly, Ala., 73 So. 911.

When corporations enter into an agreement to consolidate, and one of them, or its stockholders, perpetrates a fraud upon the stockholders of the

other, the latter are entitled to relief. Thus, the issue of a scrip dividend by a corporation in fraud of another corporation, with which it is about to consolidate, is voidable as against the stockholders of the other corporation. Bailey v. Citizens' Gas Light Co., 27 N. J. Eq. 196. In this case, while negotiations were pending between two gas companies for their consolidation upon a certain basis of indebtedness, one of the companies passed a resolution, without the knowledge of the other, declaring a scrip dividend of ten per cent on the amount of its capital stock, with interest, payable at the option of the company, thus increasing their indebtedness to that amount, certificates of indebtedness being issued in accordance with the resolution; and consolidation was afterwards effected between the companies, without any knowledge on the part of the other company as to such resolution and increase of indebtedness. Upon a bill filed for the purpose, it was held that the scrip would be declared void, and the company issuing it restrained from recognizing it as a valid obligation, or permitting its transfer.

14 Mowrey v. Indianapolis & C. R. Co., 4 Biss. 78, Fed. Cas. No. 9,891.

15 Harriman v. Northern Securities Co., 197 U. S. 244, 49 L. Ed. 739,

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