have a restriction or qualification of voting powers. The power to vote may be wholly taken from any class of stock. (Miller v. Ratterman, 24 N. E. Rep., 496, [Ohio, 1890.])

This stock with preferences may have any name and designation that the stockholders see fit to give to it. The restriction in the statute means that every company must always have at least one-third of the stock issued and outstanding, full paid common stock.

Heretofore it was assumed by some that "guaranteed stock" issued pursuant to the Act of 1889 (P. L. 1889, p. 415) could be issued in any amount, yet this was a mistaken theory, because guaranteed stock is nothing more nor less than another kind of preferred stock. (Cook on Stock, Vol. 1, Section 267.)

The terms of these preferences and qualifications and restrictions must be stated in the certificate of incorporation and it is wise to insert them as well in the certificates of stock in order that there may be no question about the holder's having full notice of the terms, conditions and limitations of the stock.

One more suggestion is pertinent. All preferences as to dividends and guarantees of dividends are contingent; they must be made payable only out of the net profits of the company and can be paid in no other way.

They are not a debt of the company to the stockholders until after the net profit had been made and the surplus arising therefrom is in hand and applicable to the payment of dividends. There is no such thing as absolute interest bearing stock under the laws of New Jersey. In other words, there is no law in New Jersey which allows stockholders of one class to agree with stockholders of another class that they will absolutely pay them dividends, or pay them interest, whether earned or not.

The same result has sometimes been sought to be accomplished in another way through the medium of separate companies and by the guaranteeing of the payment of dividends of the stock of one company by the other company.

Founders' shares.- Founders' shares, as they are called in England, may now be created. They are in common use in England and have been traced back as far as 1873. They are practically unknown in the United States. (Cook on Corporations, Section 14.)

They are ordinarily issued to founders or to promoters to remunerate them for guaranteeing to place the shares of the company offered for public subscription. They are also occasionally issued as part consideration of the purchase of property, especially as consideration for the good will of an existing business. Then, too, they are sometimes held out as an inducement to subscribers for the ordinary or common shares.

In England it was declared in re Faure Electric Accumulator Co. (40 C Div. 141, 1888) that a company could not pay commissions to its promoters for placing its capital. Since that time founders' shares have been extensively used as a means of remunerating promoters.

While stock may not, except under Section 50 (see p. 74), be issued directly for services rendered, yet there is nothing to prevent the creation

§ 18 of founders' shares and authorize their issue at par to founders or to promoters. Being issued at par the difference between the par value and the true value is the compensation to the founders or promoters.

Holders of founders' shares are usually entitled pro rata with the holders of the ordinary shares to a certain annual dividend, say 6 per cent., and then as a class to a fixed proportion of the surplus, a third or half, as the case may be. For instance, a company is formed with a capital of $100,000, of which $99,000 are ordinary shares, and $1,000 are founders' shares, the founders' shares being entitled to one-half of the surplus, after 6 per cent. has been paid to all shareholders, ordinary and founders. If the company makes $10,000 the first year, the ordinary shares get $5 940 and the founders' shares get $60, but the surplus of $4,000 is divided equally between the two classes of shareholders. The founders' shares thus get $2,000 more, making a total dividend of 206 per cent.

From the standpoint of the founders' shares it is wise to provide in the certificate of incorporation that the directors shall, on a specified day or days in each year, declare dividends of the whole of the accumulated profits, in accordance with the provisions of the certificate after reserving a specified percentage as working capital, payable to the stockholders on demand. Such a provision would create a vested right in the shareholders and could not be altered without their consent.

Also to provide in the certificate of incorporation that on winding up, the holders of founders' shares shall be paid first, and also share in a fixed proportion of the surplus, after paying the debts and par value of all shares. (McGregor v. Home Ins. Co., 33 N. J. Eq., 181.)

Provision may also be made in the certificate of incorporation, by virtue of this section, giving the holders of founders' shares special voting powers, as for example the power to elect exclusively a class of directors. (Sec. 12.)

In drawing the certificates of stock where there are different or special classes great care should be exercised and the rights of the respective classes should be set out in detail.

Rights of preferred stockholders on winding up. Section 86, post, provides that on dissolution the surplus funds, if any, after payment "of creditors, and the costs, expenses and allowances, and the preferred "stockholders, shall be divided and paid to the general stockholders "proportionally, according to their respective shares." McGregor v. Home Ins. Co. (33 N. J. Eq., 181, 186-7), construing this provision in the Act of 1875, held that the legislative intent was that where the law or contract under which the stock is issued does not in any way limit or restrict them, the rights of the holders of the preferred stock were to be first paid the par value of their shares before anything was paid to the general stockholders. (Mayer v. Attorney-General, 32 N. J. Eq., 815.)

19. Stock certificate.

Every stockholder shall have a certificate, signed by the president and treasurer, certifying the number of shares owned by him in such corporation.

P. L. 1846, p. 67; P. L. 1849, p. 303; Act of 1875, § 23.
For further requirements see Section 18.

A subscriber for stock who has complied with the terms of his subscription, and has paid the assessments, becomes a stockholder and is entitled as of right to a certificate in the form prescribed by the statute. If the corporation refuses he may compel it to give him a certificate. (Storage Co. v. Assessors, 56 N. J. Law, 389, 393.)

A certificate is not necessary to constitute the subscriber a shareholder. 'The certificate is merely the stockholder's evidence of title to "his stock. It is not the stock itself, but a convenient representative of "it." (Cook on Stocks, etc., Section 192.) The possession of the certificate by the person in whose name it is issued creates a legal presumption of rightful ownership, which can only be overcome by proof that it was illegally issued or legally forfeited. (Downing v. Potts, 23 N. J. Law, 66, 79.)

Where stock is issued for the purchase of property, it is not now necessary to put on the face of the certificate the words "Issued for "property purchased"; that requirement of the former act was repealed by the revision.

20. The shares of stock in every corporation shall be personal property, and shall be transferable on the books of the corporation in such manner and under such regulations as the by-laws provide; and whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer.

P. L. 1846, p. 67; P. L. 1849, p. 303; Act of 1875, § 26.

A share of stock represents the right which its owner has in the management and profits of the corporation. (Storage Co. v. Assessors, 56 N. J. Law, 389.)

Transfer. The provisions of charters and by-laws, under the statute that stock of the corporation shall be transferable only on the books of the company, are intended for the protection of the company. (Matthews v. Hoagland, 48 N. J. Eq., 455, 486.)

"A certificate of stock accompanied by an irrevocable power of "attorney, either filled up or in blank, is, in the hands of a third party, "presumptive evidence of ownership in the holder. And where the party "in whose hands the certificate is found is a holder for value, without "notice of any intervening equity, his title cannot be impeached. The "holder of the certificate may fill up the letter of attorney, execute the "power, and thus obtain the legal title to the stock, and such a power is "not limited to the person to whom it was first delivered, but enures to each bona fide holder into whose hands the certificate and power may

"

§ 19-20

§ 21 "pass." (Prall v. Tilt, 28 N. J. Eq., 479, 483: Rogers v. N. J. Ins. Co., 9 N. J. Law, 167; Broadway Bank v. McElrath, 13 N. J. Eq., 26; Hunterdon County Bank v. Nassau Bank, 17 N. J. Eq., 496; Mt. Holly Turnpike Co. v. Ferree, 17 N. J. Eq., 117; Del. & Atl. R. R. Co. v. Irick, 23 N. J. Law, 321; State, Bush v. Warren F. Co., 32 N. J. Law, 439; Gibbs v. Craig, 58 N. J. L., 661, 664.)

The reason of the rule is stated in Matthews v. Hoagland (48 N. J. Eq., 455), to be "that the record owner has done everything in his power "to effect the transfer, and by such act has assigned all interest he may “have had and surrendered all indicia of ownership. As to third parties, "holders for value, he is estopped from asserting ownership-as to volun"teers, the gift is complete and irrevocable, if inter vivos." (Id., p. 490; see Walker v. Dixon Crucible Co., 47 N. J. Eq., 342.)

Proceedings to compel company to transfer stock.-Ordinarily mandamus will not lie to compel the transfer of shares of a corporation to a purchaser, or to compel the company to issue certificates of stock. (State, Bush v. Warren F. Co., 32 N. J. Law, 321; Galbraith v. Building Ass'ns, 43 N. J. Law, 389; State v. Timken, 48 N. J. Law, 87, 88.) The owner has an adequate remedy in an action for damages. If it should appear, however, that the stock possesses a peculiar and a special value over other stock of the corporation, as, for example, founders' shares, probably mandamus would lie. A court of equity will compel the transfer of stock to the equitable owner thereof, upon the books of a corporation, when such transfer is fraudulently withheld by the agents of the corporation. (Archer v. American Water Works Co., 50 N. J. Eq., 33.)

Stockholders liable until subscriptions are fully paid.

Where the whole capital of a corporation shall not have been. paid in, and the capital paid shall be insufficient to satisfy its debts and obligations, each stockholder shall be bound to pay on each share held by him the sum necessary to complete the amount of such share, as fixed by the charter of the corporation, or such proportion of that sum as shall be required to satisfy such debts and obligations.

P. L. 1846, p. 16; P. L. 1846, p. 68; Act of 1875, § 5.

Individual liability of stockholders did not exist at common law. (Bank v. Hendrickson, 40 N. J. Law, 52.)

General creditor's bill.-The meaning of this section, as construed by the Court of Errors and Appeals (Wetherbee v. Baker, 35 N. J. Eq., 501) is that, where the capital, i. e., the property of a corporation has proved insufficient to satisfy its debts and obligations, then each stockholder is liable for the amount of his unpaid subscription, or such proportion thereof as shall be necessary to satisfy the debts of the company and meet the expenses of winding up its affairs, but no more. (Hood v. McNaughton, 54 N. J. Law, 425, 427; Cumberland Land Co. v. Clinton Hill Co., 42 Atl. Rep., 585.) The unpaid subscriptions constitute a trust fund for the payment of the debts of the corporation. A creditor may file a bill to enforce this liability only after he has exhausted

his remedies at law by judgment, issue of execution and its return unsatisfied. He must sue in behalf of all the creditors of the corporation and not for himself alone; the corporation must be made a party; and all the property and assets of the corporation must be brought into the suit and put in course of administration. The proceedings are in the nature of an equitable accounting. (Bickley v. Schlag, 46 N. J. Eq., 533.)

Action at law by receiver. The stockholders are liable for the payment in full of their subscriptions, if such payment be necessary to discharge the debts of the company. (Hood v. McNaughton, 54 N. J. Law, 425.) The Court of Chancery may direct a receiver to make calls and proceed at law to collect the unpaid subscriptions. (Barkalow v. Totten, 53 N. J. Eq., 573.) Where the Chancellor decrees the payment of the entire amount of unpaid subscriptions, the validity of the decree cannot be questioned in the law court, as by showing that the entire amount is not necessary to satisfy claims of creditors. If there is a surplus he will distribute it to the stockholders equitably. (Hood v. McNaughton, 54 N. J. Law, 425.)

Liability of original subscriber for stock. The subscription to stock and the acceptance of a certificate for shares constitute a contract between the subscriber and the company by which the subscriber agrees to pay the remaining installments on demand by the corporation. (Hood v. McNaughton, 54 N. J. Law, 424.)

From this agreement the subscriber cannot recede without the assent of the company. (Id.)

This assent is evidenced by the consummation, in the form required by the statute, of the transfer by the entry of the name of the transferee on the registry of stockholders in the place of the subscriber, and the delivery of a new certificate to and in the name of the transferee. (Id.)

An original subscriber may transfer his stock without the consent of the company thus evidenced and thereby vest in the purchaser his right in the shares and as between himself and such purchaser cast upon the latter the obligation to pay him such installments as are called upon the stock, but the original subscriber cannot thereby impair or affect the contract rights of the company. (Id.)

His liability to the company does not become extinguished until the purchaser is accepted by the company as the stockholder of record in his place. (Id.)

Liability of transferee of stock.-A distinction is drawn between one who holds the stock by transfer and an original subscriber. The former may, it seems, in the absence of a fraudulent purpose, discharge himself of liability for unpaid installments by due transfer of his shares, although the transfer may not be recorded on the books of the company. (Hood v. McNaughton, 54 N. J. Law, 425, 428.)

The latter cannot obtain immunity in that way. (Id.)

Bonus stock.-Holders of stock given as bonus are liable on it to creditors, but not to the company. (Hebberd v. Southwestern Cattle Co., 55 N. J. Eq., 18.)

§ 21