§ 101. Subscription contracts generally. Shareholding has elements of status; and there are some particulars in which an agreement to take shares presents exceptions to the well-defined principles of contract law. Ist. A subscription may be made before and in contemplation of incorporation. In such a case some courts hold that the doctrine of offer and acceptance governing the formation of an ordinary contract, does not apply. 2nd. Within certain limits, the law and not the agreement of the parties, controls the terms, conditions and the manner of enforcing payment. 3rd. A subscription contract is construed (or more properly, the resulting status of the shareholder is determined) by the law of the corporation's domicil.1 4th. In favor of creditors the law infers the existence of the contract from the fact that the name of the alleged shareholder appears on the corporate books, and puts upon him the burden of proving that his name is not rightfully there. 2 The rights of creditors, moreover, may shut out defenses, such as fraud or misrepresentation, which would be available in the case of an ordinary contract. 5th. As between the corporation and the subscriber the latter may transfer to another, if legally capable of holding, the rights and obligations resulting from the subscription contract. And, in the absence of good reason to doubt the solvency of the transferee, the corporation is bound, where there is no statutory or charter provision to the contrary, to accept and look to him for uncalled payments on the shares.

§ 102. Preliminary

subscriptions.

1 Compare Pinney v. Nelson, 183 U. S. 144.

2 See, however, post, § 105.

Frequently the

3 Compare: Keyser v. Hitz, 133 U. S. 138; Kerr v. Urie, 86

Md. 72.

agreement signed by the subscriber is to take shares in a proposed corporation; and, when suit on the agreement is brought by the corporation, the question arises, How can there be a contract with a non-existing party? The logical difficulty of the question has caused a variety of answers, and there are two views, among others, which may be called the principal ones.

By some courts it is held that a preliminary subscription is merely an offer which may be withdrawn at any time before the corporation comes into being and accepts. In Bryant's Pond Steam Mill Co. v. Felt, 87 Maine 234,' the appellee had agreed to take shares in a corporation to be thereafter formed. Before its actual formation, he notified the agent of the promoters through whom the subscription had been obtained, that he wished to withdraw; and this notice was communicated to the other subscribers at one of their meetings. The court said: "The only question we find it necessary to consider is whether a subscriber to the capital stock of an unorganized corporation has a right to withdraw from the enterprise, provided he exercises the right before the corporation is organized and his subscription is accepted. We think he has. Such a subscription is not a completed contract. A non-existing corporation can no more make a contract for the sale of its stock than an unbegotten child can make a contract for the purchase of it. With regard to such subscriptions, we regard it as settled law that they do not become binding upon the subscribers until the corporation has been organized and the subscriptions accepted, and that until then the subscribers have a right to revoke their subscriptions. And in

133 L. R. A. 593.

view of the fact that such subscriptions are often obtained by over-persuasion and upon sudden and hasty impulses, we are not prepared to say that the rule of law which allows such a revocation is not founded in wisdom. We think it is."1

In the other view, logic is sacrificed to common sense. The subscriber is regarded as having pledged his faith to the co-signers, and without their consent he cannot withdraw. The corporation when formed cannot refuse to accept the subscriber; he is entitled to receive his shares; and he is bound to respond to calls for payment. In this view, subscription makes the shareholder; and neither a tender of the certificate nor payment is essential.2 Of course, the subscriber is bound to make payments when and as they are duly called; and while in default, he may be deprived of his right to vote the share. But the point for emphasis is that if the contemplated corporation is duly formed within a reasonable time, and in substantial accordance with the preliminary agreement, nothing more than subscription is necessary to make the subscriber a shareholder. In Hughes v. Antietam Co., 34 Md. 328, the law is stated thus: "But it is further insisted that the appellant had the right to withdraw his subscription after the acknowledgment of the certificate before the justice of the peace, and at any time prior to its being recorded. We think, however, it is clear, both upon principle and authority, he cannot. As we have before said, the subscription is in itself a contract on the part of the appellant to pay for the

1 To the same effect is Hudson Co. v. Tower, 161 Mass. 10. For the opposing views see Thomp. Corp., secs. 1162 and 8606. 2 Railway Co. v. Hambleton, 77 Md. 341.

3 Code (1911) Art. 23, sec. 19.

shares thus taken in the manner and according to the terms prescribed by law, in consideration of which he acquired the right to demand the same upon the organization of the company and of which he could not be deprived either before or subsequent to the incorporation. The obligation to pay on the one hand and the right to demand on the other, created a mutuality of contract, binding as between the co-subscribers, the parties thereto, and could not be discharged by the act of one."1

Where an

§ 103. Subscriptions after incorporation. agreement to take shares is or purports to be made with an existing corporation, the rule is different. The offer, whether made by the corporation or by the subscriber, must be accepted and is revocable until acceptance; and, moreover, there will be no contract unless both parties are competent to contract. In Cleaveland v. Mullin, 96 Md. 598, the appellant had made application for shares in a corporation which had been duly formed in all respects except that it had not paid its bonus tax; some days later he was notified that the shares had been allotted to him; and some days after the receipt of this notice he withdrew his application and asked to have the subscription cancelled. The company subsequently went into the hands of a receiver; the bonus tax was paid and suit was brought on the subscription. It was held that by reason of the non-payment of the tax, the corporation had no capacity to contract; that the appellant was not bound, because he had withdrawn his offer before it was legally accepted; and that the case was not to be governed by the rule applicable to subscriptions made prior to

1 For a valuable collection of authorities see 33 L. R. A. 593 and 47 L. R. A. 246.

and in contemplation of incorporation. But, in cases of this character, the acceptance of dividends by the subscriber after the corporation has paid the bonus tax constitutes a ratification of the subscription, rendering it an enforceable obligation.1

§ 104. Form and conditions. A subscription, etymology notwithstanding, need not be in writing. In the absence of some statutory or charter provision, neither payment, in whole or in part, nor the issue of a certificate is, in the case of original stock, necessary to create the status of stockholder with its attendant rights and liabilities; moreover,

1 Murphy v. Wheatley, 102 Md. 501.

21 Thomp. Corp. secs. 1146-1147.

3 This seems to be well settled by the authorities; but in the case of Busey v. Hooper, 35 Md. 15, there is language to the contrary. Here the appellants, claiming to be shareholders of the Citizens Railway, were attacking by injunction acts done at a meeting from which they were excluded. The subscription agreement which the appellants had signed, provided that as soon as two thousand shares had been subscribed, the signers should pay five dollars per share to the Company's treasurer. The instalment payment, although due, had not been made by the appellants, and the court refused the injunction. In the opinion it is said: "None of the cases decide that the mere fact of subscribing to the stock of an incorporated company constitutes the subscriber a stockholder, but that such subscription puts it in his power to become a stockholder, by compelling the corporation to give him the legal evidence of his being a stockholder, upon his complying with the terms of the subscription." This would appear to be too broad a statement of the law, and as has been pointed out (1 Thomp. Corp. sec. 1139), the New York case cited as an authority for the proposition does not touch it. It is one thing to say that a delinquent subscriber has no standing in court, and no right to vote; but it is a different thing to say that where the subscription contract has been duly formed by offer and acceptance and no calls for payment have been made, a sub