times contradictory ways, by the several courts. In the following discussion it is proposed to consider the nature of capital stock and of shares and certificates; the classes of stock usually met with and their legal characteristics; how the relation of shareholder is created; the liabilities and incidents of this relation; and how they are transferred and terminated.

§ 87. Capital stock as a legal conception. Stock capital is characteristic of a business corporation, and it may be compared with the capital contributed by partners to the firm. The resemblance would be closer, if each partner's liability for the firm's debts were limited to the share of the capital paid in or promised by him; and if, by assignment, he could substitute the transferee to his rights and obligations in the firm, without the consent of his co-partners. But there is another and a crucial difference. The firm is under no obligation to keep its capital at the amount originally promised or contributed; and, ordinarily,1 the partners may at any time, by mutual agreement, re-convert the common fund into several ownership. With the corporation it is not so. Stock capital is capital at stake, and in the original conception this stake must not only be put up or secured, before the game begins, but it must be kept up until the game is over,—that is to say, until the business is liquidated and the creditors paid. The charter or certificate of incorporation prescribes the amount of capital stock which the corporation may issue, and the number of shares (each having an equal or "par" value) into which it is divided. These

1 For the exceptional case see Franklin Co. v. Henderson, 86 Md.

452.

shares are taken by subscribers who, in consequence, become members of the corporation, entitled, upon payment, to receive from it certificates of share ownership. The money thus received in payment for the capital stock, and of course anything in which it is subsequently invested, constitutes the stock capital-the stake pledged for the security of creditors.

§ 88. Capital stock, stock capital, and capital. In ordinary usage, the term capital stock has two meanings which are different. Sometimes it is used abstractly as an arithmetical expression to indicate the sum of the authorized shares, taken at their par value: the nominal figure which limits the number of shares that may be issued and fixes the relative interests of the shareholders. At other times the concrete property, representing what has been paid in for the shares, is called the capital stock; and when this is worth less than the par value of the outstanding shares, the capital stock is said to be impaired. The latter is the correct meaning of the term. Capital stock meant the common fund; a share was an undivided interest in it, and was regarded as real or personal property, according to the nature of the corporate assets.1 As will be noticed later, this view of the nature of a share no longer prevails; but there has not been a corresponding adjustment of terminology. The fundamental idea, however, and one which, if kept in mind, makes the ambiguity of phrasing unimportant, is this: So much of the corporate assets as represents payment for shares which have been issued constitutes the stock capital. The actual capital, the sum of all the assets, may be

1 Coombs v. Jordan, 3 Bland 284.

greater or less than the stock capital, according as profits have been accumulated or losses incurred. The surplus, being free capital, may be accumulated or returned to the shareholders as dividends; but everything the corporation, while a going concern, owns up to the par value of the outstanding shares, is stock capital, capital at stake, and cannot be drawn down by the shareholders, except as a portion may be converted into surplus through a statutory reduction of the capital stock.

§ 89. Illustrative cases. The habit of using the term capital stock, now abstractly to indicate the sum of the shares, and again concretely as meaning corporate property, is inveterate; and some of the difficulty arising from applying the same name to different things, is shown by the following cases. In Farrington v. Tennessee, 95 U. S. 679, it is said: "The capital stock and the shares of the capital stock are distinct things. The capital stock is the amount paid or authorized or required to be paid in as the basis of the business." Here there is confusion. A share of capital stock cannot be a thing distinct from that of which it is a share; but it is true that what the shareholders own and what the corporation owns, are distinct properties and not different interests in the same property. This is made clear in Tennessee v. Whitworth, 117 U. S. 129, where the charter under discussion provided that the capital stock of a railroad company should be exempt from taxation forever and the corporate property for twenty years. This was held to exempt the shares perpetually because "as the whole is exempt, so must necessarily be its several parts." In the same case, however, the court speaks of the "franchises, the capital stock in the hands of the corporation, the corporate property and the shares of capital stock in the hands.

of the stockholders," as being distinct taxable properties. Here, capital stock means stock capital; shares can have no existence for taxing purposes until issued.1

§ 90. Modifications of the original conception. When business enterprises began to take corporate form, the existing and still prevailing theory recognized no liability on the part of the members for the corporation's debts. To protect creditors, or at least to give them notice of what they had to trust to, special charters usually required all or some part of the stock to be paid in before the commencement of business. The first general incorporation laws aimed at the same result; and, taking the situation in Maryland as typical, the principles established by statute and judicial decision were these: Ist. The courts treated every subscription as subject to the implied condition that all the shares should be taken,-so that consequently, no calls for payment could be made until all the authorized stock was subscribed. 2nd. A shareholder participating in the conduct of business and the incurring of debts before all the shares were taken, waived this implied condition of his subscription. 3rd. The corporation had no power to accept less than par for its shares or to receive anything other than money in payment.2 4th. Until all the shares were taken and paid for, every shareholder, notwithstanding he had fully paid his own subscription, was liable to creditors in a sum equal to the par value of his holdings. The net result

1 Consumers Ice Co. v. State, 82 Md. 132. The cases quoted in §89 are examined in Bank v. Tennessee, 161 U. S. 147. It is there said that "capital stock in the hands of the corporation" means stock capital; and "corporate property" means surplus. Note the terminology in Wright v. Georgia R. & Bkg. Co., 216 Md. 420. 2 Code of 1860, Art. 26, sec. 40.

of these and similar provisions in other states, was to hinder, if not to prevent, the corporation from commencing business until the fixed stake was paid in, and to make the nominal capital stock a true indication of the actual stock capital. The tendency of later legislation has been to undo this result, and the tendency expresses a changed view of public policy. The common sense idea became current that persons who may be asked to extend credit to a corporation, are able to take care of themselves and to find out, if they want to know, how much of the authorized capital stock has been subscribed and paid for; and that where the business of the corporation is purely private, the law need not provide how much capital shall be raised before corporate operations are begun. Of the four principles above enumerated, the first and second are still the law of this state;1 but the fourth has been so changed, that except in the case of banks, safe deposit, trust and loan companies, which are governed by special statutes, a shareholder whose share is paid for, is under no liability to creditors. The farthest reaching modification touches the third principle. It is now possible to pay for shares in property at an inflated valuation, provided the transaction is free from actual fraud; and there is high authority for the proposition that under some circumstances a corporation may, in the absence of statute, dispose of its shares at less than their par value.3 It would not be accurate to say that the earlier policy, in which the rights of creditors were recognized and protected, has been abandoned. On the contrary, it is as true now as it ever was that the money or property which represents

1 See Morgan v. Landstreet, 109 Md. 558.

2 See post, Chapter XVI-Liabilities of Share Ownership. 3 See post, & 110.