CHAPTER XVI.

LIABILITIES AND INCIDENTS OF SHARE

OWNERSHIP.

§ 106. Introductory Some one with a turn for epigram has characterized a share of stock as a "collection of rights and liabilities." This is not the historical aspect, but it affords a helpful view of the modern conception and suggests a convenient mode of treating the subject.

In considering the situation of a shareholder from the point of view of his liability to the corporation and its creditors, attention must be re-called to certain previously noticed theories and notions of public policy which have largely molded the law. Some of these are obsolete, others are in various stages of obsolescence, but they must all be taken into an account of the present situation, and in a measure, they serve to explain the conflict of opinion which it exhibits.

First. It used to be a prevalent opinion that the state, as the creator of corporations, was in some degree their sponsor, and owed to creditors the duty of securing by law the actual payment of the nominal capital stock. Almost universally, special charters and general laws made the subscription, and sometimes the payment of all or some part of the authorized issue, a condition precedent to either corporate existence or activity. This original or required issue was called by the courts "formative stock" and, inde

pendently of statute, they formulated the still prevailing doctrine that, unless otherwise provided by the charter, every subscription is subject to the implied condition that all the original stock shall be taken. Moreover, in the nature of things, the corporation could not sell or pledge its formative stock. Selling and pledging not only involve the logical inconsistency of treating the corporation as the owner of its formative shares, but they also assume the right, directly or indirectly through the foreclosure of the pledge, to dispose of this stock at less than par. In recent times, however, the point of view has changed; notions of public policy have shifted; corporation laws do not as a rule make subscriptions a pre-requisite to corporate birth and activity; the courts have held that in the absence of statute, no such pre-requisite exists; and the term formative stock has lost much of its meaning.1 Consequently and naturally, the idea has developed that the un-issued shares of a corporation which is a going concern are its property which it may pledge and, under some circumstances, sell for what they will bring. And the earlier decisions, which had to do with forgotten theories, are sometimes misunderstood and misapplied.

2

Second. Inherent in the original conception was the obligation to pay for the stock in money. Very generally this obligation was imposed by statute, as for example, the

1 See ante, $95.

2 Burgess v. Seligman, 107 U. S. 20, approving Matthews v. Albert, 24 Md. 527, is usually cited for this proposition; but the actual point was not raised or decided. The real question in both of these cases was whether a pledgee, who was being sued for the liability of a shareholder, had ever contracted that status. See the cases cited in 2 Clark and Marshall, Corp., sec. 387, and notes.

Maryland Act of 1838, relating to manufacturing corporations, which provided that "nothing but money shall be considered as payment for any part of the capital stock;"'. but the courts treated the obligation also as a requirement of public policy. In Sanger v. Upton, 91 U. S. 56, an early Ohio case is quoted with approval as authority for the proposition that "An agreement that a stockholder may pay in any other medium than money, is also void as a fraud upon the other stockholders and upon the creditors as well." Here again the point of view has changed. If a going concern has unissued shares and needs property for which the owner is willing to take stock,-why should the money be passed back and forth? There is no reason why, except that the average man will always sell his property cheaper for money than for shares and some over-valuation is inevitable. Accordingly, for years, statutes have permitted, under various restrictions, the payment for shares in what is called money's worth; and now many courts hold broadly that in the absence of prohibition in the written law, shares may be paid for in anything of value which the corporation is by its charter, authorized to acquire.2

1 By the Code of 1860 it was provided that mining corporations might accept lands in payment of capital stock. In Basshor v. Dressel, 34 Md. 503, the court held that leasehold interests were not lands within the meaning of the law.

2 Brant v. Ehlen, 59 Md. 29; Noyes, Intercorporate Relations, 2 Ed. pp. 571 et seq: "Questions may arise as to the valuation of property taken, but the power of a corporation to agree with a subscriber to receive property in payment for stock cannot be questioned at the present day. ✶✶✶ Statutes have been passed in many States authorizing corporations, under prescribed conditions, to accept property in payment of subscriptions. The conditions of such statutes are limitations upon the power of the corporation."

Third. Originally a share was an incident merely of membership status. It was not transferable as of right; nor did the possession of more than one share give a member more than one vote. Moreover the incidents of this status, and particularly the obligation to pay for the share its par value, could not be varied by contract. This theory, namely, that while the relation of shareholder is created by contract, its existence may be inferred from conduct and its obligations are fixed by law, has had a wide influence. But here, too, has operated the general movement from status to contract which marks the history of all legal relations. The mere fact of membership in a stock corporation still raises the presumption of liability for whatever may remain unpaid on the shares standing in the member's name. But the courts (some slightly and others in a larger degree) have permitted the presumption to be met by proof of a special agreement between the corporation and the shareholder.1

1 Brant v. Ehlen, 59 Md. 1, was a creditor's suit against shareholders whose stock was not in fact paid up. They escaped because they had in good faith taken certificates stating that the shares were fully paid. In the course of the opinion it is said that "the liability for subscription to the stock of a corporation is founded upon contract." Such a statement, if limited to suits between the corporation and the shareholder, represents the position the courts have reached; unless so limited, the statement is broader than the case required or the court intended. The rule, if limited to parties with notice, would be accurately expressed in Crawford v. Rohrer, 59 Md. 604: "Any arrangement therefore among the stockholders or those in charge of the affairs of the corporation by which the stock is but nominally paid for, whether in money or property, the corporation not in fact getting the benefit of the price in good faith, will be regarded as a sham and not as a valid payment as against the creditors of the corporation. As between the creditors of the cor

If you

107. What the liability of a share is. objectify a share and say that, upon being taken, it becomes debtor to the stock capital for its par value, payable as called; that this obligation cannot be impaired or released; that it shifts by transfer from owner to owner and attaches to the person who is shown by the corporate books to be owner (as distinguished from a pledgee or fiduciary) at the time a call for payment is made, then you have stated in broad outline what, for convenience merely, may be called the original liability of a share, in the case of a normal subscription. The right to collect this liability is always and only in the corporation or its liquidator,-whether assignee, trustee or receiver. The limit of the liability is always the difference between what the share has paid and its par value. The person liable in respect of the share is the book owner at the time payment is duly called.1 After the share has paid its par value into the stock capital, it is quit, unless some governing statute imposes an extra liability. Such extra or statutory liability was universal once, and restricted to certain classes of corporations, is common still; and the extent of the liability and the persons by and against whom it may be asserted are determined by and vary with the provisions of the several statutes.

poration and the original holders of the stock, it in no manner affects the rights of the former if the stock has been issued as fully paid-up; for their rights depend not upon the mere appearance of things, but upon the actual bona fide payment by the stockholder whether that payment be alleged to have been made in money or property."

1 See post, § 117-Novation.

2 The corporation has no inherent power to levy assessments on full-paid shares; and this is true whether the certificates are marked "non-assessable" or not. For the case of national banks, see Bank v. Weinhard, 192 U. S. 243.