CHAPTER XIII.

INCREASE AND REDUCTION OF CAPITAL STOCK.

§ 315. Authority to increase or decrease capital stock dependent upon legislative grant.

§ 316. A court cannot order an issue in excess of the charter limit.

§ 317. When the legislature may authorize increase or reduction of capital stock.

§ 318. Of general statutes authorizing increase or reduction of capital stock.

§ 319. Increase of capital stock-The New York statutes.

§ 320.

§ 321.

Reduction of capital stock-The New York statutes.
Increase of capital stock-The English statutes.

§ 322.

§ 323.

Statutes authorizing increase or reduction strictly construed.
The legislative grant vests in the stockholders, not in the directors.
The manner of effecting an increase or reduction.

§ 325.

§ 324.

The validity of an increase of capital stock not to be questioned collaterally.

§ 326. Stockholders entitled to take new stock at par.

§ 327. Effect of reduction upon stockholders' liability to creditors.

§ 315. Authority to increase or decrease capital stock dependent upon legislative grant.—A corporation having issued stock to the full amount authorized by its charter, can neither increase nor diminish that amount without the consent of the legislature, unless authority to do so has been expressly granted in its charter, or by some general law of the State.' But when the charter of a company does not fix its capital stock more definitely than to declare its maximum and minimum amount, a corporation having begun business with less than the maximum capital, may, without legislative

grant, increase it to the higher limit. Except under those circumstances, the power of the corporate authorities to increase or reduce the capital stock can be derived only from the legislature;3 and without a legislative grant, no by-law of the corporation or resolution of the shareholders, conferring that power upon the directors, is operative, whether it be sought to accomplish it directly by an increase or reduction of the number of the shares, or indirectly, by a change in their par value. The officers, directors and stockholders of a corporation cannot, even by an unanimous agreement, made under an honest misapprehension of their powers, effect a valid increase thereof. An illegal increase or diminution may be restrained by injunction. And where a company has distributed a portion of the capital stock among its shareholders, they may be compelled to return it.7

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1 In re Ebbw Vale etc. Co. 4 Ch. Div. 827.

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2 Gray v. Portland Bank, 3 Mass. 364; 3 Am. Dec. 156; Somerset etc. R. R. Co. v. Cushing, 45 Me. 524.

3 Scoville v. Thayer, 105 U. S. 143; Knowlton v. Congress etc. Co. 14 Blatchf. 334; Sutherland v. Olcott, 95 N. Y. 93, 100; New York etc. R. R. Co. v. Schuyler, 31 N. Y. 30; Mechanics' Bank v. New York etc. R. R. Co. 13 N. Y. 599; Lathrop v. Kneeland, 46 Barb. 432; Salem Mill Dam Co. v. Ropes, 6 Pick. 23; 19 Am. Dec. 363; Moses v. Ocoee Bank, 1 Lea, 398; Grangers' Life etc. Ins. Co. v. Kamper, 73 Ala. 325; Ferris v. Ludlow, 7 Ind. 517; In re Ebbw Vale etc. Co. 4 Ch. Div. 827; Droitwich etc. Co. v. Curzon, Law R. 3 x. 35, 42; Stace & Worth's Case, Law R. 4 Ch. 682; Morawetz on Corp. § 434. Cf. Chelain v. Republic Life Ins. Co. 86 Ill. 220; In re Kirkstall Brewery Co. 5 Ch. Div. 535.

4 In re Financial Co. Law R. 2 Ch. 714; Sewell's Case, Law R. 3 Ch. 131; Smith v. Goldsworthy, 4 Q. B. 430. Cf. Teasdale's Case, Law R. 9 Ch. 54. But see Ambergate etc. R'y Co. v. Mitchell, 4 Ex. 540; S. C. 6 Eng. R'y Cas. 234.

5 People v. Parker Vein Coal Co. 10 How. Pr. 543.

6 O'Brien v. Chicago etc R. R. Co. 53 Barb. 568.

7 Holmes v. N wcastle etc. Co. 45 Law J. Ch. 383.

316. A court cannot order an issue of stock in excess of the charter limit.-When a corpora

tion has issued valid certificates of stock to the full extent of all the shares which, by statute or the charter of the company, it may issue, no court can order the issuance of other shares, because in that respect the powers of the corporation have been exhausted.1 Thus a company that has issued the full amount of its capital stock cannot be ordered to perform specifically a contract by which it has agreed to pay for services or property in the corporate stock; although it has been held in Massachusetts that the company may be compellel to purchase shares of its own stock and reissue them to the aggrieved party by way of specific performance of the contract;3 yet, gene ally, the remedy in such a case is by an action for damages. It is better, however, that in an action upon a contract of this kind the prayer should be in the alternative, asking for specific performance, or for damages in case the former cannot be decreed.5

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1 Mechanics' Bank v. New York etc. R. R. Co. 13 N. Y. 599; Williams v. Savage Manuf. Co. 3 Md. Ch. 418; Smith v. North American Mining Co. 1 Nev. 423.

2 Finley Shoe etc. Co. v. Kurtz, 34 Mich. 89.

3 Machinists National Bank v. Field, 126 Mass. 315. Acc. Boston etc. R. R. Co. v. Richardson, 135 Mass. 473; Pratt v. Machinists' National Bank, 123 Mass. 110.

4 Finley Shoe etc. Co. v. Kurtz, 34 Mich. 89.

5 Cook on Stock & Stockh. § 284.

₫ 317. When the legislature may authorize increase or reduction of capital stock.-When the amount of the capital stock of a corporation has been prescribed by its charter, the power of the legislature to authorize its increase or reduction depends either upon the unanimous consent of the stockholders or upon an express reservation to the

BEACH ON RAILWAYS-32

State of the power to amend.' This rule rests upon the general principle as laid down in the Dartmouth College case, that the charter is a contract which, under the federal constitution, no State can impair br any subsequent legislation. Although, when the power to amend the corporate charter has been reserved by the State, dissenting shareholders are not ordinarily released from their duties and liabilities by an amendment authorizing an increase or diminution of the capital stock, yet, if the increase or reduction authorized is so great as to work a material change in the liability of the shareholders, creating in effect a new contract, dissenting shareholders are thereby discharged. And the legislature cannot, under the power to amend, authorize a reduction prejudicial to the vested rights of prior corporate creditors.5

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1 Buffalo etc. R. R. Co. v. Dudley, 14 N. Y. 333; Joslyn v. Pacific etc. Co. 12 Abb. Pr. N. S. 329; Illinois River R. R. Co. v. Zimmer, 20 111. C54 Peoria etc. R. R. Co. v. Elting, 17 Ill. 429.

2 Dartmouth College v. Woodward, 4 Wheat. 513.

3 East Lincoln v. Davenport, 94 U. S. 801: Nugent v. Supervisors, 19 Wall. 241; Mowey v. Indianapolis etc. R. R. Co. 4 Biss. 78; Buffalo etc. R. R. Co. v. Dudley, 14 N. Y. 336; Schenectady e.c. Co. v. Thatcher, 11 N. Y. 102; Troy etc. R. R. Co. v. Kerr, 17 Barb. 531; Moore v. Hudson River R. R. Co. 12 Barb. 156; Whitehall etc. R. R. Co. v. Meyers, 15 Abb. Pr N. S. 34; Pacific R. R. Co. v. Hughes, 22 Mo. 291; 41 Am. Dec. 265; East Tennessce etc. R. R. Co. v. Gammon, 5 Sneed, 507; Danbury etc. R. R. Co. v. Wison, 22 Conn. 435; Noyes v. Spaulding, 27 Vt. 4.0; Dish v. Johnson, 21 Ind. 299; Ottawa etc. R. R. Co. v. Black, 79 Ill. 252; Hay v. Ottawa etc. R. R. Co. 61 Ill. 422; Newhall v. Galena etc. R. R. Co. 14 Ill. 273; Burlington etc. R. R. Co. v. White, 5 Iowa, 409.

4 Hughes v. Antietam etc. Co. 34 Md. 316; Oldtown etc. R. R. Co. v. Veazie, 39 Me. 571.

5 In re State Ins. Co. 14 Fed. Rep. 28; S. C. 11 Biss. 301; Cooper v. Frederick, 9 Ala. 742; Palfrey v. Paulding, 7 La. An. 333; In re Credit Foncier, Law R. 11 Eq. 356; In re Telegraph Construction Co. Law R. 10 Eq. 384.

§ 318. Of general statutes authorizing increase or reduction of capital stock.-General provision for the increase and reduction of capital

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stock is made by the statutes of New York,' Massachusetts, New Jersey, Pennsylvania, Missouri,5 Illinois, and Ohio." And by the constitution and statutes of Louisiana corporations are authorized to increase but not to reduce their capital stock.9 The constitutions of Illinois and Nebraska provide that no railway corporation shall increase its capital stock except under general laws,1o and with the consent of the holders of a majority of the shares." The constitutions of several States make similar provisions applicable to all corporations. The consent of the shareholders must be given at a special meeting, and notice of the intention to increase must be given, thirty days before in some States,13 and in others sixty.14

1 Vide infra, §§ 319, 320.

2 Mass. Pub. Stat. ch. 106, § 31; ch. 112, § 60.

3 Rev. Stat. of N. J. (1877) p. 131, § 24; p. 1290, § 29.

4 Brightley's Purdon's Dig. p. 343, § 3334; p. 348, § 55. et seq.; Laws of Pean. pril 29, 1874.

5 Mo. Rev. Stat. § 939; State v. McGrath, 86 Mo. 239.

6 Ill. Ann. Stat. (1385) ch. 32, § 5); ch. 114, § 15.

7 Ohio Rev. Stat. (1386) §§ 3262-3264.

8 La Const. art. 26; La. Rev. Stat. § 693.

9 Seignouret v. Home Ins. Co. 24 Fed. Rep. 332.

10 Stimson's Am. Stat. Law (Jan. 1, 1886), § 453.

11 Stimson's Am. Stat. Law (Jan. 1, 1936), § 453, citing the constitutions of Pa., M., Ark., Cal., Colo., Ala, and La.

12 Stimson's An. Stat. Law (Jan. 1, 1383), § 513, citing the constitutions of Penc., Mo., Ark., Cal., Colo., Ala. and La.

13 Stimson's Am. Stat. Law (Jan, 1, 1836), § 453, citing the constitutions of Colo., Ala. and La.

14 Stimson's Am. Stat. Law (Jan. 1, 1836), § 453, citing the constitutions of Pa., Mo., Ark., Cal., Ill. and Neb. In the last two, however, the provisions relate only to railway corporations,

§ 319. Increase of capital stock-The New York statutes.-In New York the increase of the capital stock of railway companies is regulated by