itself into the question whether an active corporation, or as it is called a 'going concern,' finding its original capital impaired by loss or misfortune may not for the purpose of recuperating itself and providing new conditions for the successful prosecution of its business, issue new stock, put it upon the market and sell it for the best price that can be obtained. The question has never before been directly raised in this court and we are not consequently embarrassed by any previous decision on the point. The liability of a subscriber for the par value of increased stock taken by him may depend somewhat upon the circumstances under which and the purposes for which such increase was made. If it be merely for the purpose of adding to the original capital stock of the corporation and enabling it to do a larger and more profitable business, such subscriber would stand practically upon the same basis as a subscriber to the original stock. But we think that an active corporation may for the purpose of paying its debts and obtaining money for the successful prosecution of its business, issue new stock and dispose of it for the best price that can be obtained. As the company in this case found it impossible to negotiate its bonds at par without the stock, and as the stock was issued for the purpose of enhancing the value of the bonds and was taken by the subscriber to the bonds at a price fairly representing the value of both stock and bonds, we think the transaction should be sustained and that the defendants cannot be called upon to respond for the par value of such stock as if they had subscribed to the original stock of the company." The Chicf Justice, with whom Mr. Justice Lamar concurred, dissented on the ground that there was no actual payment of the bonus stock and that: "when the capital stock of a corporation

has become impaired or the business in which it is engaged has proven so unremunerative as to call for a change, creditors at large may well demand that experiments at rehabilitation should not be conducted at their risk." It will be perceived that in this case the court draws a distinction. between original and increased stock; and between an increase made for the purpose of saving the enterprise and one issued for the purpose of extending the business. The latter distinction can hardly be said to be founded on principle; but if you adopt it, there is no apparent reason for distinguishing between the case of increased stock and unissued shares of the original authorized issue. And so in Clark v. Bever, 139 U. S. 96 (decided at the same term with Handley v. Stutz), it was held that a railroad company whose original stock had no market value, could issue it as full-paid at the rate of twenty cents on the dollar, in discharge of its indebtedness to a construction company; and that a holder of this stock with notice, could not be called upon by creditors to pay the remaining eighty per

cent.1

§ 112. Summary. Watered stock is a short phrase for shares issued as full paid which have not contributed to the stock capital their par or nominal value in money or money's worth. The subscriber, and the subsequent holder with knowledge, have the burden of showing, in case of attack, why they should not be held for a liability

1 Statutes usually provide a method by which the corporation, when its capital stock has become impaired, may reduce the nominal value to the actual value. See ante, § 40. For a criticism of Handley v. Stutz, see 2 Thompson Corp. secs. 1579, 1586 and 1665. This case is cited with approval on the question of liability for stock which is a mere gift, in Hooper v. Central Trust Co., 81 Md. 581.

which they did not intentionally assume. And in the somewhat hysterical treatment which the subject has received in some jurisdictions, conclusions of fact, well enough in the particular cases in which they were announced, have been followed in subsequent cases as universal principles of law. Limited to the initial issue, which may properly be assumed to be worth par, the rule is sound, namely: that unless the creditor has actual or record notice to the contrary, he may rely upon the presumption that the shares outstanding are or will be represented by their equivalent, paid or promised. But where a going concern with unissued shares, worth less than par, needs money or property, there is no discernible sense in penalizing a subscriber who pays in money or in property at a fair valuation, not the nominal but the actual value of the shares. And a rule of law which produces such a result rests upon no sound principle and works an unnecessary hardship upon innocent parties. Where shares are issued for property in lieu of money, dissenting stockholders may always attack the transaction for actual fraud; and existing creditors are not injured because, whatever may be received by the corporation, they are that much to the good. Subsequent stockholders may always, by inquiry before investing, learn how the shares have been paid for; so can an intending creditor: and the notion that, in giving credit, he relies upon any equivalence between the par value of the stock and the payment therefor,—is usually a fiction.1 And where a gov

1 See Fogg v. Blair, 139 U. S. 118; Clark v. Bever, 139 U. S. 96; Thompson-Houston Electric Co. v. Railway Co., 54 Fed. 1001; Tompkins v. Sperry, 96 Md. 581; Brant v. Ehlen, 59 Md. 29; and the note to Security Trust Co. v. Ford, 8 L. R. A. (N. S.) 263. See also an article in xxii Harvard Law Review 319 by G. W. Wickersham, then Attorney-General of the United States: "In the case

erning statute (such as that of Maryland, presently discussed) makes the issuance of stock for property a matter to be passed upon by disinterested shareholders; and provides for a public record of the details of the transaction,in such a case there is no unfairness in holding that subsequent stockholders and creditors alike are bound, even when the stock issued for property is the initial issue.

§ 113. By and against whom the liability for watered stock may be asserted: The extent of the liability: Limitations: Set-off. Apart from statutory provisions and saving always the case of a purchaser of shares purporting to be full paid, who has no knowledge that they are not such, the debtor to the fund is the registered holder when contribution is required. Of course, in the case of a transfer and registration made with a fraudulent intent to escape liability, the true owner and not the registered holder may be held. The right to collect resides in

of corporations operating public utilities, the public has undoubtedly a legitimate interest in the amount of capital stock which may be issued and the value placed by the organizers upon property acquired as a basis for stock issued, because the reasonableness of rates charged the public for the use of the utilities operated may depend to some extent upon the actual amount of legitimate capital invested in the enterprise, and upon which the corporation has concededly the right to earn a fair return. But, a priori, there would seem to be no reason why the incorporators of an ordinary trading or business corporation should not ascribe any value they please to property with which they propose to engage in business, for the purpose of fixing the amount of the capital stock; nor why they should not give an interest in that capital, by the issue of certificates representing shares therein, to those who may have promoted or brought about the organization, so long as they do not deceive the public or those who may have to deal with the company, either by misrepresentation or suppression of the facts." 1 Brant v. Ehlen, 59 Md. 1.

the receiver or liquidator, who, by collecting, creates a common fund for the benefit of all the creditors entitled. Where, however, the subject is dealt with by statute, rights may be vested in the creditors severally, and this was formerly the case in Maryland.1 Only creditors who become such subsequent to the issue can participate, because they only are presumed to have acted upon the implied representation. The extent of the liability, if any exists, will be the amount needed, after the assets of the corporation have been exhausted, to pay the subsequent creditors, but not exceeding the amount of water in the stock. Sometimes a corporation undertakes to release an existing shareholder from part of his unpaid subscription; and sometimes by agreement he is released altogether and eliminated from the list of shareholders. Existing creditors may complain of both transactions, because as to them it may be the case of a voluntary gift of corporate assets. Subsequent creditors cannot complain of the second transaction, because they have not been misled thereby; but as to them, the first will present a real case for the application of the strict rule against watered stock. As the transaction is good between the corporation and the subscriber, the statute of limitations will logically run from the time the demand on behalf of the creditors is made. And since the fund

1 Post, § 121.

2 Handley v. Stutz, 139 U. S. 417; "We have no doubt the learned crcuit judge held correctly that it was only subsequent creditors who were entitled to enforce their claims against these stockholders, since it is only they who could, by any legal presumption, have trusted the company upon the faith of the increased stock." See also, Magruder v. Colston, 44 Md. 356.

3 Hughes v. Hall, 117 Md. 547.

4

* Compare: McDonald v. Dewey, 202 U. S. 510.