Elkins v. Camden etc. R. R. Co. 36 N. J. Eq. 233. Contra, Belfast etc. R. R. Co. v. Belfast, 77 Me 445; Hazeltine v. Belfast & M. H. L. R. R. Co. 79 Me. 411.

3 Henry v. Great Northern etc. R'y Co. 1 De Gex & J. 606.

4 26 & 27 Vict. ch. 16, § 14; Henry r. Great Northern etc. R. R. Co. 1 De Gex & J. 606. Cf. Dent v. London Tramways Co. 16 Ch. 344. a full discussion of this subject, see Cook on Stock & Stockh. § 272.

For

5 Boardman v. Lake Shore etc. R. R. Co. 84 N. Y. 157; Cook on Stock & Stockh. § 272.

1

§ 67. Preferred shareholders not creditors— Preferred shareholders are not creditors, and are entitled to dividends only from profits. A contract to pay dividends on preferred stock, whether any profits are made or no, would be contrary to public policy and void;2 for dividends on preferred stock can be paid only out of the bona-fide earnings of the company.

1 Warren v. King, 108 U. S. 389; Belfast etc. R. R. Co. v. Belfast, 77 Me. 445; Chaffee v. Rutland etc. R. R. Co. 55 Vt. 110; Taft v. Hart.ord etc. R. R. Co. 8 R. I. 310; 5 Am. Rep 575; Pittsburg etc. R. R. Co. v. County of Allegheny, 63 Pa. St. 126; Lockhart v. Van Alstynes, 31 Mich. 76; Bates v. Androscoggin etc. R. R. Co. 49 Me. 491.

2_Lockhart v. Van Alstyne, 31 Mich. 76 (18 Am. Rep. 156), per Cooley, J.; Evansville etc. R. R. Co. v. City of Evansville, 15 Ind. 395; Cook on Stock & Stockh. § 270.

3 Union Pacific R. R. Co. v. United States, 99 U. S. 402; Nichals v. New York etc. R. R. Co. 15 Fed. Rep. 575; Boardman v. Lake Shore etc. R. R. Co. 84 N. Y. 157; Thompson v. Erie R'y Co. 45 N. Y. 465; Prouty v. Lake Shore etc. R. R. Co. 52 N. Y. 363; Elkins v. Camden etc. R. R. Co. 36 N. J. Eq. 233; Belfast etc. R. R. Co. v. Belfast, 77 Me. 445.

§ 68. Of special stock.-In Massachusetts there is a peculiar kind of stock distinctly provided for by statute, called "special stock," the characteristics of which are that the corporation is bound to pay a fixed half-yearly sum or dividend upon it as a debt; its holders are in no event liable for the debts of the corporation beyond their stock; all the general stockholders are liable for all the debts and contracts of the corpor tion until the special stock is fully redeemed; it is subject to redemption at par

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after the time designated in the certificate; and it is limited in amount to two-fifths of the actual capital of the corporation. These statutory requirements are to be strictly complied with, otherwise the issue is invalid. The guaranty of dividends upon special stock is absolute and the payment thereof is in no wise dependent upon the earnings of the company. Special stock can be issued only by a three-fourths vote of the general stockholders at a meeting called for that especial purpose; and it is essential to the validity of its issue that the record of the meeting, kept by a clerk who has been sworn, shall show that three-fourths of the general shareholders actually voted for its issue. Nothing will be presumed.'

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1 Mass. Stats. 1855, ch. 290; 1870, ch. 224, §§ 25, 39, cl. 4; Mass. Pub. Stats. ch. 106, §§ 42, 61, cl. 3.

2 American Tube Works v. Boston Machine Co. 139 Mass. 5; the statutes cited supra; Cook on Stock & Stockh. § 275.

3 American Tube Works v. Boston Machine Co. 139 Mass. 5.

4 Williams v. Parker, 136 Mass. 204; Allen v. Herrick, 81 Mass. 274.

5 Mass. Stats. 1870, ch. 221, § 25; Reed v. Boston Machine Co. 141. Mass. 454; American Tube Works v. Boston Machine Co. 139 Mass. 5; Cook on Stock & Stockh. § 275.

6 Mass. Stats. 1870, ch. 221, §§ 15, 18; Mass. Pub. Stats. ch. 106, §§ 23, 26. 7 American Tube Works v. Boston Machine Co. 139 Mass. 5.

§ 69. Of interest-bearing stock. -Interest-bearing stock is ordinary common stock upon which the company has promised to pay interest. This interest, however, is regarded as in the nature of a dividend, and its payment can be enforced only when the affairs of the company are in such condition as to admit of dividends being declared and paid. If the agreement on the part of the combe to pay the interest or dividend at all events, whether its earnings be sufficient or no, it is illegal

pany

and void.1 The holder of interest-bearing stock may participate in the corporate meetings and elections as do the owners of ordinary stock.3

1 Troy etc. R. R. Co. v. Tibbits, 18 Barb. 297; Barnard v. Ver nont etc. R. R. Co. 89 Mass. 512; Waterman v. Troy etc. R. R. Co. 74 Mass. 433. Wright v. Vermont etc R. R. Co. 66 Mass. 68; Cunningham v. Cuaningham, 78 Mass. 411; Richardson v. Vermont etc. R. R. Co. 41 Vt. 613; Rutland R. R. Co. v. Thrall, 35 Vt. 513; Miller v. Pittsburg etc. R. R. Co. 40 Pa. St. 237; 8) Am. Dec. 570; Lockhart v. Van Alstyne, 31 Mich. 75; 18 Am. Rep. 156; McLaughlin v. Detroit etc. R. R. Co. 8 Mich. 190; Evansville etc. R. R. Co. v. City of Evansville, 15 Ind. 395; City of Ohio v. Cieveland etc. R. R. Co. 6 Ohio St. 489; Painesville etc. R. R. Co. v. King, 17 Ohio St. 534; Pittsburgh etc. R. R. Co. v. County of Allegheny, 63 Pa. St. 126.

2 McLaughlin v. Detroit etc. R. R. Co. 89 Mass. 512.

§ 70. Of watered or fictitious stock.—Watered or fictitious stock is that which is issued as fully paid up, when in fact the whole amount of the par value thereof has not been paid to the company.1 The decisions are conflicting with respect to the legality of the issue of fictitiously paid-up stock. While on the one hand such issues are said to be a fraud upon the law, the stockholders and subsequent purchasers, and contrary to public policy,' on the other hand it has been held that the nature of the transaction is not necessarily fraudulent nor in violation of any principle of public policy, and that as between the corporation and the stockholder it is a perfectly valid transaction, although, of course, invalid if it appear that the issue were a device to defraud the public by putting valueless stock upon the market.1

1 Cook on Stock & Stockh. §§ 9, 21.

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2 Barnes v. Brown, 80 N. Y. 527, 534 obiter; Oliphant v. Woodhaven etc. Co. 63 Iowa, 332; Osgood v. King, 42 Iowa, 478; Tobey v. Robinson, 99 Ill. 222, 228; Lx parte Daniell, 1 De Gex. & J. 372.

3 Schoville v. Thayer, 105 U. S. 143; Spring Co. v. Knowlton, 103 U. S. 49, obiter; Flinn v. Bagley, 7 Fed. Rep. 785; Lorillard v. Clyde, 86 N. Y. 331; Otter v. Brevort Co. 50 Barb. 247, obiter; In re Ambrose etc. Co. 14 Ch. 390, 394, 395.

4 Lorillard v. Clyde, 86 N. Y. 384.

BEACH ON RAILWAYS-7

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§ 71. Constitutional and statutory prohibitions of fictitious stock.—In several of the American States there are constitutional provisions declaring fictitiously paid-up stock void. In others there are statutes to the same effect. But these provisions have been construed to be applicable only in case of the issue of entirely fictitious stock, and "not intended to interfere with the usual and customary methods of raising funds by railroad companies for the purpose of building their roads, or of accomplishing other legitimate corporate purposes, ,"3 such as the issue of stock below par,* or for labor, property, or contract work." So also, under such a constitutional provision, it has been held that mortgage bondholders, who buy in the property and franchise of a corporation at a foreclosure sale under their mortgage, are not prohibited from fixing the terms upon which they will surrender those interests; and that they may reorganize upon substantially the same basis, as to capital stock and bonded indebtedness, as that of the old corporation and its predecessor prior to the adoption of the constitutional provision, although under that arrangement they receive both stock and bonds in a large amount, of which the amount of the stock alone is sufficient to cover the full value of the property, rights and privileges of the reorganized company. In England the issue of stock at a price less than par was formerly forbidden by the Companies' Clauses Consolidation Act of 1863;& but this was afterwards amended, and at the present time directors may issue stock on such terms as may seem best."

1 Ala. Const. (1875), art. 14, § 6: Ark. Const. (1874), art. 12, § 8; Mo. Const. (1875), art. 12, § 8; Tex. Const. (1876), art. 12, § 6; La. Const. (1879).

§238; Cal. Const. (1873), art. 12, § 11; Ill. Const. (1870), art. 11, § 13; Neb. Const. (1875), art. 11, § 5; Pa. Const. (1875), art. 16, § 7.

2 2 N. Y. Rev. Stats. 507, § 49; 504, § 38; 505, §§ 40, 41; N. Y. Session. Laws, 1848, ch. 40, §§ 38, 40, 41, 49; Wis. Rev. Stats. (1878), § 1753; Wis. Laws of 1881, ch. 93; Mo. Gen. Stats. ch. 62, § 11. Cf. Ohio Rev. Stats. § 3313.

3 Peoria & S. R. R. Co. v. Thompson, 103 Ill. 187.

4 Stein v. Howard, 65 Cal. 616; New Castle R. R. Co. v. Simpson, 21. Fed. Rep. 535.

5 Peoria & S. R. R. Co. v. Thompson, 103 Ill. 187.

6 Ark. Const. (1874), art. 12, § 6.

7 Memphis & L. R. R. Co. v. Dow, 120 U. S. 287.

8 8 & 9 Vict. ch. 16, § 21.

9 32 & 33 Vict. ch. 48, § 5; The Railway Companies Act, 30 & 31 Vict.. ch. 127, § 27.

§ 72. Watered stock not void, but voidable only. In the absence, however, of some constitutional or statutory provision declaring fictitiously issued stock to be void, it is not absolutely void, but voidable only, either on the ground of fraud,1 or on the ground of its issue being an ultra vires act, to be questioned only at the instance of persons affected thereby." Accordingly, at the suit of a dissenting stockholder a court of equity will decree a redelivery of the stock to the corporation for cancellation,3 provided always, of course, that no supervening equities have arisen, as by the sale of the stock to bona-fide purchasers for value without notice.

1 Gilman C. & S. R. R. Co. v. Kelly, 77 Ill. 426; Campbell v. Morgan, 4 Bradw. 100; Fosdick v. Sturgess, 1 Biss. 255; Sturgess v. Stetson, 1 Biss. 246.

2 Fisk v. Chicago, R, I. & P. R. R. Co. 53 Barb. 513; Brown's Case, 2 DeGex, F. & J. 275; Ex parte Daniell, 1 De Gex & J. 372; Cook on Stock & Stockh. § 29.

3 Gilman, C. & S. R. R. Co. v. Kelly, 77 Ill. 426. Cf. Sturgess v Stetson, 1 Biss. 246, obiter; Fosdick v. Sturgiss, 1 Biss. 255.