To pay dividends out of capital, and indeed from anything except actual profits and earnings, should be authorized specially by law; and in fact, when dividends are declared simply as such, but paid out of the capital, the corporation may be pronounced a fraud upon the community. The net earnings should be considered, by deducting expenses from gross receipts; and the payment of interest periodically accruing upon bonded debt should be paid from these net earnings before a dividend can be properly declared.2

The duty which rests upon a corporation of declaring dividends, where profits are in hand, is indefinite and discretionary, though it doubtless exists; and the right to compel that duty belongs rather to the community of members, or, if government be thereby defrauded of the opportunity to tax, to the public especially, than to any particular member of the corporation. Not even a preferred shareholder can claim a dividend simply because profits exists. Profits might be bona fide applied at discretion in payment of floating or funded debts, or to develop the corporate business; but if a dividend or distribution of profits be wrongly withheld, any aggrieved stockholder may, as a last resort, seek relief in equity. When, however, a dividend is once declared, it becomes a debt due from the corporation to the individual stockholder; and, as it is said, the right to the profits becomes individualized, while the duty to distribute in certain proportions becomes attached as a right to each

terest on preferred stock can only be made out of profits bona fide earned. Ib. And see Taylor, § 565. But the directors have not the broad discretion to declare or withhold a dividend as in the case of ordinary stock; but courts of equity will here insist upon payment according to the terms of the contract, if the current earnings permit of it. Field Corp. § 121, and cases cited; St. John v. Erie Co., 22 Wall. 136. Dividends on preferred stock are naturally cumulative, and take full precedence of ordinary dividends. But they

may be issued as definitely upon a non-cumulative or qualified basis. See 17 Wall. 96; Hazeltine v. Railroad Co., 79 Me. 411; 119 U. S. 296.

1 Painesville R. R. Co. v. King, 17 Ohio St. 534. As to the rule applicable to the holder of "preferred and guaranteed stock," see Taft v. Hartford, &c. R. R. Co., 8 R. I. 310.

2 Mobile R. v. Tennessee, 153 U. S. 486.

$ 119 U. S. 296; 162 Mass. 388.

Morawetz, § 348; Pratt v. Pratt, 33 Conn. 446; Smith v. Prattville Man. Co., 29 Ala. 503; Taylor, §§ 562, 563.

member distributively. Accordingly, where a dividend is declared, and the money is deposited in a bank, and the bank fails, it is held that the corporation must pay to the stockholders notwithstanding.2 For the dividend is strictly demandable by each stockholder at the office of the company; and where it is paid through some bank, the bank is merely an agent of the company. Dividends are declared by some formal act of the corporation or its directors.

One who purchases stock has the right, upon completion of his transfer, to all dividends subsequently declared by the corporation; and it makes no difference, so far as his rights are concerned, that the surplus fund from which a dividend is declared was earned in great part before he became a stockholder.

A genuine stockholder may proceed in equity to restrain the payment of dividends to the holders of spurious stock, and the directors of the corporation may be enjoined from misapplying the funds for any such wrongful purpose. To enforce the payment of one's own rightful dividend, a suit in assumpsit is properly brought against the corporation; but a demand should first be made.5 Peculiar considerations apply, however, to the holder of guaranteed and preferred stock in this respect; and the right of such shareholder to compel the declaration of a dividend where funds which are applicable exist is strongly asserted.7

§ 511. Liabilities of a Stockholder; how far liable for CorFourthly, concerning a stockholder's liabili

porate Debts.

1 Jackson v. Newark P. R. Co., 31 N. J. Law, 277; Abb. Dig. 301; King v. Paterson R. R. Co., 5 Dutch. 82, 504. And see Le Roy v. Globe Ins. Co., 2 Edw. 657; Morawetz, § 351.

2 Ib.

3 March v. Eastern R. R. Co., 43 N. H. 515; Goodwin v. Hardy, 57 Maine, 143. See, as to the bequest of shares, stock dividends, &c., supra, §§ 143, 483.

4 Abb. Dig. Corp. 302; Morawetz, § 351; 2 Edw. Ch. 657; Beers v. Bridgeport Spring Co., 42 Conn. 17.

5 Abb. Dig. 303; King v. Paterson R. R. Co., 5 Dutch. 504; Morawetz, § 351; Hagar v. Union Nat. Bank, 63 Me. 509.

6 See Williston v. Michigan, &c. R. R. Co., 13 Allen, 400; supra, § 483.

7 Boardman v. Lake Shore R., 84 N. Y. 157; 119 U. S. 296; Taylor, § 563.

so.

ties. Now, these are to be viewed both with relation to the public and to the corporation itself. As concerns the public, a stockholder may be regarded as personally responsible to a greater or less degree for debts incurred by or on behalf of the corporation, though perhaps only remotely How far, then, is he responsible? At the common law there is a distinction taken between the personal liability of members of private corporations, and that of members of such public corporations as towns and counties; for, as to the former class, no individual liability attaches to the members, though the corporation may be sued directly; while as to the latter, though the power to sue is first conferred by statute, each inhabitant is liable to satisfy the judgment. So far as a joint-stock corporation is concerned, which is only a species of private corporation, there is at law no immediate personal liability of the members at law for corporate debts; and as statutes usually read, liability in any case is limited by the actual investment; and herein consists a great advantage which these corporations enjoy over partnerships, since, as we have seen, every member of a firm is responsible for all the debts.2

Coming, however, more directly to the individual liability of shareholders in a joint-stock corporation, we observe that in daily practice the subject is found to depend almost

1 See 2 Kent Com. 221; Ang. & Ames, § 629.

2 Ib.; Abb. Dig. Corp. 376-412; Merchants' Bank v. Cook, 4 Pick. 414; supra, §§ 215, 247. Of course, by a joint-stock corporation we mean one that is regularly incorporated under a charter or act of the legislature; for a joint-stock company, so called, is much the same as a partnership, so far as the personal liability of its members is concerned. See supra, §§ 201-205.

Where partners, or the associates in an unincorporated joint-stock company, procure an act of incorporation, and go on with their former business, complicated questions may

arise as to the transfer of individual liabilities, by reason of the act of incorporation. The general principles of the law of partnership (which apply to such cases) have been marked out already; and we need only say here that, while an act of incorporation might operate as a dissolution of the previous company, yet the members remain liable still as partners to those who had no notice of the dissolution, where they go on using the old name of the company as before. See Ang. & Ames, 8th ed. § 592 and n.; Goddard v. Pratt, 16 Pick. 412; Whitwell v. Warner, 20 Vt. 425. And see supra, §§ 192, 193.

entirely upon the construction of charters and of special or general statutes; nor does it appear that a uniformity of construction is applied to statutes of this description. We have said that by common law the shareholders or members of such corporations are not individually liable for the corporate debts; and since positive law fastens the obligation, if any, and defines its limits, so is it fair that provisions imposing the obligation should be construed strictly. Where neither a charter nor any act of the legislature creates this individual liability, a mere by-law of the corporation is not enough to give it a legal existence.1 The common-law rule of individual exemption from liability has been frequently asserted, and in extreme cases; as, for instance, where the members manifested a mistaken impression, in the corporate dealings, that they were personally responsible. A stockholder is not answerable for judgments obtained against the corporation; nor can the treasurer be made to respond in his personal capacity for liabilities which are properly presentable to him as a corporate officer. Not even does a decree of dissolution per se make the stockholders personally liable for the debts of the concern. Judgments enforced directly against the corporation might, however, exhaust the corporate property, leaving the corporate stock worthless.

§ 512. The Same Subject; Rule of Equity. —Now how far is a stockholder personally liable in equity for the corporate debts? It was ruled by Judge Story, in a leading case, that the capital stock of a bank is a trust fund for the payment of its notes; and that if, before the expiration of its charter, the capital stock be divided among the stockholders without making adequate provision for the outstanding notes, it may be followed in equity into the hands of the stockholders. In such case the decree against the stockholders before the court should be for their contributory share of the debt, in the proportion which their stock bore to the whole. This

1 Ang. & Ames, § 595 et seq.; Trustees of Free Schools v. Flint, 13 Met. 539.

2 Vincent v. Chapman, 10 Gill & J. 279.

8 French v. Fuller, 23 Pick. 108; Whitman v. Cox, 26 Maine, 335. 4 Tarbell v. Page, 24 Ill. 46.

5 Wood v. Dummer, 3 Mas. 308.

doctrine has since been applied in a number of instances; courts of equity assuming jurisdiction in the premises, and dealing with the capital stock as a trust fund for the like purposes. The liability of subscribers to assessment, their unpaid subscriptions to the capital stock, the surplus funds of the corporation undistributed as dividends,—all of these equity has laid hold of, to enforce payment of the debts of an insolvent corporation. Here the suit should be that of one or more creditors on behalf of all and not for any exclusive or partial benefit; but in general a bill may be brought against the stockholders after the creditors have exhausted all legal means against a corporation which fails to assess and satisfy. And the rule of individual liability has thus been enforced in equity to an extent unknown in courts of law, where general principles offer the only rule of guidance.

§ 513. The Same Subject; Modern Legislative Policy. — But in these later times legislative policy largely discountenances the common law in this respect, and lends a strong support to the doctrines of equity. Thus, in many States, the stockholders of joint-stock corporations are now made personally liable to a considerable extent for the corporate debts; or, at any rate, the liability of each shareholder extends in specific terms to the interest which he holds in the concern. Statutes like these come up frequently for construction in the courts; and sometimes it is found that the legislative provisions are aimed at some particular kinds of joint-stock corporations, such as those organized for manufacturing or mechanical purposes. The fairer rule seems to be to limit the personal liability of stockholders to the nominal value of their shares, except in cases of fraud, or, when the statute is explicit otherwise, in matters of public policy.

1 See Ang. & Ames, 8th ed. §§ 600605 and n.; Cooper v. Frederick, 9 Ala. 742; Dudley v. Price, 10 B. Monr. 84; Bigelow v. Cong. Society, 11 Vt. 283; Ward v. Griswoldville Manuf. Co., 16 Conn. 593.

2 Handley v. Stutz, 137 U. S. 366; 131 U. S. 319.

3 See Ang. & Ames, 8th ed. §§ 605609 and n.; Crease v. Babcock, 10 Met. 547; Hitchins v. Kilkenny R. R. Co., 15 C. B. 459; Rosevelt v. Brown, 1 Kern. 148; Garrison v. Howe, 17 N. Y. 458.