that an act has already been obtained, consents to become a party to the new enterprise. In either case, he has signed a subscription paper; but when it comes to a demand of payment, he is found reluctant to take the stock, and ready to assign a number of reasons why he should not be held to his engagement; the truth being that he has been disappointed in some way, and wants to get out of the peculation. Our further examination as to the validity of subscriptions for stock will lead us, then, to consider how far the binding force of a subscription contract may be affected by the circumstance that it was upon conditions which have not been fulfilled, or that it presupposed some state of things which was not realized, or that the subscriber has been fraudulently imposed upon, or that the subscription was not in fact his own, but that of some third person, who had no authority to bind him. The general law of contracts must be our main guide in forming conclusions under any of these circumstances; the rule being still that a subscription is a contract, and a contract upon consideration whose mutual sufficiency is essential; 1 and further that contracts of this character are controlled

1 As to conditions precedent which have failed, see Abb. Dig. 793, and cases cited; Penobscot, &c. R. R. Co. v. Dunn, 39 Me. 587; Burlington R. R. Co. v. Boestler, 15 Iowa, 555. As to alteration of circumstances, see McMillan v. Maysville, &c. R. R. Co., 15 B. Monr. 218; McCully v. Pittsburgh R. R. Co., 32 Penn. St. 25; Ang. & Ames, $$ 536-544; Union Locks Co. v. Towne, 1 N. H. 44; Ticonic Water Power Co. v. Lang, 63 Me. 480. See, also, Terre Haute R. R. Co. v. Earp, 21 Ill. 291; City Hotel v. Dickinson, 6 Gray, 586; Milwaukee R. R. Co. v. Field, 12 Wis. 340; South Bay Co. v. Gray, 30 Me. 547; Cork R. R. Co. v. Paterson, 18 C. B. 414; Abb. Dig. 808, 811; Poughkeepsie Pl. R. Co. v. Griffin, 24 N. Y. 156. As to fraudulent indorsement, see Abb. Dig. 795; Atkinson v. Pocock, 12 Jur. 60; Ang. & Ames, § 531; Troy R. R. Co. v.

A

Newton, 8 Gray, 596; Central Pl. R. Co. v. Clemens, 16 Mo. 359; Pittsburgh R. R. Co. v. Graham, 2 Grant Cas. 259; Downie v. White, 12 Wis. 176; White Mt. R. v. Eastman, 34 N. H. 124; Jennings r. Broughton, 19 E. L. & Eq. 420; Abb. Dig. 796; Ang. & Ames, 8th ed. § 531; Connecticut, &c. R. R. Co. v. Bailey, 24 Vt. 465. As to agency, see Ang. & Ames, § 517; Mississippi R. R. Co. v. Harris, 36 Miss. 17; 154 Ill. 261. subscription once fully received cannot be cancelled. Walker v. Mobile R. R. Co., 34 Miss. 245; Lowe t. R. R. Co., 1 Head, 659; Abb. Dig. Corp. 795. Not even by the directors. Bedford R. R. Co. v. Bowser, 48 Penn. St. 29. As to the contract of membership, see, generally, Morawetz, c. iv.; Field Corp, §§ 77-92; Taylor Corp. §§ 91-112; 143 N. Y. 537.

and explained by the charter or enabling act of incorporation, together with articles and by-laws made in conformity thereto.

§ 491. The Same Subject. As a general rule, the corporation which seeks to enforce a subscription must show that the terms of its charter have been carefully complied with in the matter of organization; but in some cases compliance will be presumed, and in others it may be waived.1 And as concerns the subscriber who claims that the subscription in his name does not bind him, it is one thing to defend against the corporation, and another to avoid the demands of persons who are creditors of the corporation; while, furthermore, any defence on the ground of conditions unfulfilled, or material alterations in the charter, or fraudulent misrepresentation, may fail altogether where the subscriber by his acts and conduct shows that he was a party to the fraud, or that he meant to waive his right to annul the subscription. On the other hand one's agreement to take shares ought not to be divested by any pretended assignment or transfer on his part of his interest, to an irresponsible person; nor ought he, as to bond fide third persons in interest, to be permitted to set up any secret understanding with the promoters of the scheme inconsistent with his apparent undertaking as a subscriber.1

2

§ 492. Promoters; Preliminary Subscribers, etc. -Persons often subscribe before the incorporation of a joint-stock corporation; in which case a mutuality is raised which renders the subscriber liable to the company after its charter has been obtained and the organization is completed. And it has been held that a subscriber in a proposed corporate undertaking cannot withdraw during the progress of a bill in the legislature, so as to exonerate himself from liability.

1 Maltby v. Northwestern, &c. R. R. Co., 16 Md. 422; Abb. Dig. 789.

2 See Ogilvie v. Knox Ins. Co., 22 How. 380; Ang. & Ames, § 531; Deposit Ass. Co. v. Ayscough, 6 Ell. & B. 761.

3 See Taylor, § 101; Graff v. Pittsburgh R., 31 Penn. St. 489; Williams, Re, 1 Ch. D. 546.

4 White Mountains R. v. Eastman, 34 N. H. 134; Taylor, § 105.

5 Ang. & Ames, 8th ed. §§ 523525; Lane v. Brainerd, 30 Conn. 577 ; Abb. Dig. 801.

6 Ib.; Selma, &c. R. R. Co. v. Tipton, 5 Ala. 786; 2 Price, 93.

But in this latter respect the English rule differs somewhat from that in this country; for "promoters," as they are called, of certain enterprises, organize into a preliminary association, in England, before their measure has gone through Parliament; while in most parts of the United States no provision is made by law for preliminary associations, and where application to the legislature is required at all, it is usually made by individuals who have neither organized nor called for general subscription; the charter or act of special incorporation itself or some general law prescribing the method of subscribing and organizing.1

§ 493. Subscribers to New Stock; New Shareholders, etc. A subscription to an increase of stock not authorized by the charter is void.2 But it is no uncommon thing for a company to issue new stock, while keeping within the capital sum authorized by the charter, and to give existing stockholders a privilege to purchase in preference to the public at large. There are cases which treat this privilege of existing stockholders as an exclusive right, though its true extent is to be determined greatly by the language of each charter in question, or of general statutes applicable; and certainly an original subscriber is not compelled to take the new stock, but he may waive or sell out his right. Nor, again, can the corporate power of increasing the stock be so exercised as to cause a discrimination in favor of any set of old stockholders; but the right of each to subscribe for the new stock should be pro rata and in proportion to the shares one already holds in the old.4

A third person may become a shareholder in a corporation already in existence, by an increase of the number of its

1 See 1 Redf. Railw. 3d ed. 5 et seq.; Burke v. Lechmere, L. R. 6 Q. B. 297. The binding force of preliminary papers is diminished by statutes in some States, as in New York. See Lake Ontario R. R. Co. v. Mason, 16 N. Y. 451.

2 McCord v. Ohio R. R. Co., 13 Ind. 220. And see supra, § 485.

3 Gray v. Portland Bank, 3 Mass.

364; Ang. & Ames, §§ 554, 555; Southampton Dock Co. v. Richards, 1 Man. & Gr. 448; Abb. Dig. Corp. 741; Rutland R. R. Co. v. Thrall, 35 Vt. 546.

4 Ib.; Taylor, § 569. The same pro rata doctrine applies in a decrease of capital stock. 93 N. Y. 426; Taylor, § 570.

shares; in which case the relation assumed is that of adding a new party to the original contract.1

§ 494. The Contract of Membership, and Subscription in General. The contract by which the stockholders of a corporation are bound together is, in fact, a purely statutory contract; for under the common law the right to form a corporation is a special privilege which only legislation can confer, and otherwise there is a simple voluntary association.2 Special charters and general acts of incorporation usually express specifically how corporations shall be formed and how original subscriptions shall be received. The subscribers do not become stockholders, strictly speaking, until the number of shares required by law have been taken; nevertheless the subscription itself is a contract upon consideration, and the subscription binds from the time it is made. A subscription for shares will be held valid if made in substantial conformity with the requirements of the charter or act of incorporation.6

Unpaid subscriptions to the stock of a corporation constitute a trust fund for the benefit of creditors; 7 and where shares are voted to a person as a bonus and accepted by him, he is properly subject to the liabilities of a shareholder who has taken stock but has not paid for it.8

We

§ 495. Transfer of Stock; General Mode considered. are now brought to the more common method of constituting a person a shareholder in a joint-stock corporation; namely, by means of a transfer of its stock. Any original shareholder may transfer his shares to another person, and that person to a third, and so on; and each new holder of

1 Morawetz, § 262. The new subscriber is not properly a shareholder until, by issue of a certificate, or otherwise, the company has recognized him. Ib.; Clark v. Continental Ins. Co., 57 Ind. 138; St. Paul R. v. Robbins, 23 Minn. 440.

2 Morawetz Corp. §§ 4, 257. 8 Morawetz, § 258; Buffalo R. v. Dudley, 14 N. Y. 337.

Johnson, 30 N. H. 390; Franklin Fire Ins. Co. v. Hart, 31 Md. 60; Morawetz, § 259.

5 Lake Ontario R. v. Mason, 16 N. Y. 451; Morawetz, § 260.

6 Ashtabula R. v. Smith, 15 Ohio St. 328; Morawetz, § 269. And see, at length, Morawetz Corp. c. iv.

+ New Hampshire Central R. v. 30.

7 Fogg v. Blair, 139 U. S. 118.

8 Washburn v. Green, 133 U. S.

the shares, who holds them under a perfected transfer, takes by substitution the rights and liabilities of the shareholder preceding him, or of the original subscriber. Shares of stock are transferable on the general principles which have been elsewhere considered, being capable of assignment like other modern species of incorporeal property, though by methods somewhat peculiar; and one has also to consider that the mode of transfer may be affected by express provisions contained in the charter.1 Formalities are often imposed by the by-laws of a corporation in this respect, which, if reasonable, are usually observed, since all will admit that it is a great public convenience for a corporation to have books regularly kept, which may show the names and interests of its members and stockholders, and to use certificates of stock which can be recognized in the market as genuine; yet a corporation cannot impose unreasonable restraints upon the right which each stockholder has of disposing of his own shares at pleasure, and any unusual and onerous restriction of this character will be deemed void.2 Formalities expressly prescribed, however, by charter or general enactment, must be respected; but, as we have seen, the fundamental right of any stockholder to transfer his shares and let in others as members in his place is a very liberal one.1

§ 496. The Same Subject. Certificates of stock are usually issued in the first place by the corporation, and have a blank form of assignment, accompanied by a power of attorney, on

1 Supra, §§ 72-82; Morawetz, § 320; 1 Redf. Railw. 3d ed. 111; Ang. & Ames, § 565; Abb. Dig. Corp. 749.

2 Ib.; Brightwell v. Mallory, 10 Yerg. 196; State v. Franklin Bank, 10 Ohio, 91; Morawetz, § 321; Farmers' Bank v. Wasson, 48 Iowa, 339; Stebbins v. Phoenix Ins. Co., 3 Paige, 350.

Even where the charter provides a mode of transfer, the disposition of the courts is to regard the provision as merely directory, so as not to disturb a title acquired fairly in some

other way, unless, indeed, it is evident that the charter contemplated this as the only mode of transfer. And if the express provisions concerning a transfer exist only in the by-laws of the corporation, still less reason can there be for giving them any exclusive force. See 1 Redf. Railw. 112, 113.

3 Northrop . Newton Turnpike Co., 3 Conn. 544; Union Bank v. Laird, 2 Wheat. 390; Morawetz, § 323.

4 See § 488.