tion, except for money, labor done, or money or property actually received, are contained in the constitutions of Pennsylvania, Missouri, Arkansas, Texas, California, Colorado, Alabama and Louisiana; and in Illinois and Nebraska like constitutional provisions exist with respect to railway companies. In all these States such a fictitious increase of stock is void, and in Louisiana the corporation will also forfeit its charter.8

1 Howell v. Chicago etc. R. R. Co. 51 Barb. 378; Leland v. Hayden, 102 Mass. 542; Deland v. Williams, 101 Mass. 571; Boston etc. R. R. Co. v. Commonwealth, 100 Mass. 399; Minot v. Paine, 99 Mass. 101; 96 Am. Dec. 705; Atkins v. Albree, 12 Allen, 359, and see cases cited infra, n. 2.

2 Williams v. Western Union Tel. Co. 93 N. Y. 162, 188; Howell v. Chicago etc. R. R. Co. 51 Barb. 378, Clarkson v. Clarkson, 18 Barb. 646; Gordon v. Richmond etc. R. R. Co. 78 Va. 501; Howell v. Chicago etc. R. R. Co. 51 Barb. 373; Miller v. Ilinois Central R. R. Co. 25 Barb. 312; State v. Baltimore etc. R. R. Co. 6 Gill, 363; Commonwealth v. Pittsburgh etc. R. R Co 74 Pa. St. 83; Rand v. Hubbell, 115 Mass. 461, 474; 15 Am. Rep. 121; Boston etc. R. R. Co. v. Commonwealth, 106 Mass. 399; City of Ohio v. Cleveland etc. R. R. Co. 6 Ohio St. 489; Barton's Trust, Law R. 5 Eq. 239. But see Hoole v. Great Western R'y Co. Law R. 3 Ch. 262.

3 Ill. Const. art. 11, § 13.

4 Wis. Rev. Stat. (1878) § 1753, amended by Laws of 1881, ch. 93.

5 Except under authority of court: Mass. Pub Stat. ch. 112, § 61. This act, how ver, is held not to prohibit a company from purchasing its own shares and distributing them among its stockholders: Commonwealth v. Boston etc R. R. Co. 25 Am. & Eng. R'y Cas. 17.

6 Ala. Const. art. 13, § 6.

7 Fitzpatrick v. Dispatch etc. Co. (1887) 83 Ala. 604. 8 Stirason's Am. Stat. Law (Jan., 1886), § 452.

§ 286. Stock dividends-To be declared by stockholders-Sundry considerations. --The power of a corporation to increase its capital stock being generally vested in its shareholders, it is usually with them that the power to declare a dividend of stock resides.1 A vote of the shareholders declaring a stock dividend may be revoked at any time before the certificates have been issued. The holders of preferred stock are entitled to share equally with common stockholders in a distribution of

A stock divi

stock by way of stock dividend. dend may be issued to the corporation instead of to its shareholders, and be subsequently sold for its benefit. In case of an issue of new stock in lieu of a dividend, it has been held that the company may give its shareholders "the privilege of taking it at par or less than par, although the stock so issued is worth more than par." 15 Where sums chargeable to capital account were paid out of revenue, it was held on the construction of the special acts relative to the company, that shares which the directors had power to issue, but which could only have been sold at a discount, could not be issued at par in lieu of the dividend which might have been paid if the revenue had not been diverted. A State court will not inquire into the legality of an issue of stock dividends by a foreign corporation.

1 Williams v. Western Union Tel. Co. 93 N. Y. 162; Terry v. Eagle etc. Co. 47 Conn. 141.

2 Terry v. Eagle etc. Co. 47 Conn. 141.

3 Gordon v. Richmond etc. R. R. Co. 78 Va. 501; Phillips v. Eastern R. R. Co. 138 Mass. 122.

4 Cook on Stock & Stockh. § 537, citing Jones v. Morrison, 31 Minn. 140. 5 Wood's Railway Law, § 72, citing Moss's Appeal, 83 Pa. St. 265; Wiltbank's Appeal, 64 Pa. St. 256.

6 Hook v. Great Western R'y Co. Law R. 3 Ch. 262. 7 Howell v. Chicago etc. R. R. Co. 51 Barb. 378.

§ 287. Dividends upon preferred stock. The holders of preferred or guarantied stock do not occupy the position of creditors of the company with respect to the payment of dividends. They are entitled to dividends only out of the net profits of the enterprise; for a guaranty of dividends upon stock is always accompanied by the condition, either expressed or implied, that they should be paid

2

only from the earnings of the enterprise. A contract to pay at all events, would be ultra vires and wholly void. Where the company has contracted to pay dividends upon stock at certain intervals, the shares, with respect to which the agreement was made, partake of the nature of preferred stock; and like other holders of preferred shares, their owner cannot enforce the payment of dividends except ont of the net profits of the enterprise. In the case of guarantied and preferred stock the holders are entitled to dividends before a payment of dividends to the holders of the common stock; 5 and equity will restrain the payment of dividends upon common stock until the holders of guarantied or preferred stock have been paid; neither are earnings to be devoted to payment of a floating debt in preference to the payment of dividend upon preferred stock; nor, after payment of current expenses and interest upon its bonded indebtedness, can a company, in lieu of paying the remaining het earnings as a dividend to preferred shareholders, set it apart to provide a sinking fund for the payment of its bonded debt.8

1 Vide supra, § 67.

6

7

2 Vide supra, § 63; Chaffee v Rutland R. R. Co. 55 Vt. 110, 126; Pierce on Railroads, 125. Cf. § 64, supra.

3 Curran v. State, 15 Ho304; Taft v. Hartford etc. R. R. Co. 8 R. I. 335; 5 Am. Rep. 575; Willi ston v. Michigan Southern, 13 Allen, 400; Pittsburg etc. R. R. Co. v. Alleghany Co. 63 Pa. St. 126; Lockhart v. Van Alstyne, 31 Mich. 76: 18 Am. Rep. 156; Evansville etc. R. R. Co. v. Evansville, 15 Ind. 395; In re Bristol etc. R'y Co. Law R. 6 Eq. 484.

4 Scott v. C

entral R. R. etc. Co. of Georgia, 52 Barb. 45. 5 Thomp son v. Erie R. R. Co. 11 Abb. Pr. N. S. 188.

6 Prout 7 Nati

y v. Michigan Southern etc. R. R. Co. 1 Hun, 655.

7 Wall. 33gonal Bank v. Douglass, 1 McCrary, 86; Railroad Co. v. Howard, ber Co. 2: Chaffee v. Rutland etc. R. R. Co. 55 Vt. 110; In re London RubLaw R. 5 Eq. 525; Jones on Railroad Securities, § 620.

8 F

held, a fazeltine v. Belfast etc. R. R. Co. (1887), 79 Me. 411; where it was of div lso, that in such a case a court of equity would compel the payment

idends.

§ 288. Dividends upon preferred stock--The discretion of the directors subject to review in equity. While the directors have a discretion with respect to declaring dividends upon ordinary stock,1 they have none with respect to preferred stock when there are funds on hand from which a dividend thereon may be properly declared, and a court of equity will compel them to declare it; except when, by so doing, an injustice would be wrought upon corporate creditors and the other stockholders by taking money from the treasury without which the enterprise would be crippled. Although preferred shareholders cannot maintain an action at law to enforce the payment of dividends which have not been declared, equity may, in a proper case, decree a specific performance; and, in general, a court of equity will, by injunction and other proper remedies, protect the rights of the holders of preferred stock. 6

1 Vide infra, § 306.

2 Hazeltine v. Belfast etc. R. R. Co. (1887) 79 Me. 411; St. John v. Erie Ry Co. 22 Wall. 136; Bailey V. Railroad Co. 17 Wall. 96; Prouty V. Lake Shore etc. R. R. Co. 52 N. Y. 563; Thompson v. Erie R'y Co. 45 N. Y. 468; Chase v. Vanderbilt, 37 N. Y. Super. Ct. 334; Dickinson v. Railroad Co. 7 W. Va. 390; Williston v. Michigan etc. R. R. Co. 95 Mass. 400; Barnard v. Vermont etc. R. R. Co. 89 Mas.. 512; Davis v. Proprietor etc. 49 Mass. 321; Taft v. Hartford etc. R. R. Co. 8 R. I. 310; 5 Am. Rep. 575; Pelfast etc. R. R. Co. v. Belfast, 77 Me 445; Bates v. Androscoggin etc. R. R. Co. 49 Me. 491; Richardson v. Vermont etc. R. R. Co. 44 Vt. 613; Rutland etc. R. R. Co. v. Thrall, 35 Vt. 536; West Chester etc. R. R. Co. v. Jackson, 77 Pa. St. 321; Bryant v. Ohio College, Cin. Rep. 67.

3 Culver v. Reno etc. Co. 91 Pa. St. 367; Cook on Stock & Stockh. § 271.

4 Williston v. Michigan etc. R. R. Co. 95 Mass. 400.

New York

etc. R. R.

5 Boardman v. Lake Shore etc. P. R. Co. 84 N. Y. 157. 6 Bailey v. Hannibal etc. R. R. Co. 1 Dill. 174; Ellsworth Co. 84 N. Y. etc. R. R. Co. 98 N. Y. 648; Boardman v. Lake Shore etc. R. R. 157; Thompson v. Erie R'y Co. 45 N. Y. 468; Prouty v. Michigan 1; S. C. 1 Co. 1 Hun. 655; Henry v. Great Northern etc. R'y Co. 4 Kay & J De Gex & J. 606; Sturge v. Eastern etc. R'y Co. 7 De Gex, M. & Smith v..Cork etc. R'y Co. Ir. R. 3 Eq. 356. Cf. Chase v. Vanderbilt Y. 307.

62 N.

G. 158;

§ 289. Of arrears of dividends upon preferred stock-The American and the English commonlaw rule. A holder of preferred or guarantied stock is not deprived of his right to dividends, because the earnings out of which they were expected to be made were not realized during the year in which, by the terms of the contract, they ought to have been paid. On the contrary, the unpaid dividends remain a charge upon all subsequently ac cruing profits, and must be paid before anything can be divided among the common stockholders. This is substantially interest, chargeable exclusively upon profits.1 A court of equity will, by injunction, restrain the misappropriation of the dividends to the common stock, until the arrears, with interest, on the guarantied stock shall be paid out of the net earnings of the company. But where there is a statutory provision that dividends on preferred stock shall not exceed a certain percentage, and less than that percentage is paid, the deficit cannot be claimed out of the profits of subsequent years.3 So where a similar provision was made by a by-law declaring that "dividends on the preferred stock shall first be made semi-annually from the net earnings of the road, not exceeding six per centum per annum, after which dividend, if there shall remain a surplus, a dividend shall be made upon the non-preferred stock up to a like per centum per annum, and should a surplus then remain of net earnings after both of said dividends, in any one year, the same shall be divided pro rata upon all the stock," it was held to form part of the contract of the company with subscribers to the preferred stock, and hence that holders thereof were entitled to a dividend in each