to vote thereon, in which case only the pledgee or his proxy may § 38 represent said stock and vote thereon.

P. L. 1846, p. 72; P. L. 1849, p. 308; Act of 1875, $$ 39, 40.

A formal transfer of stock on the books of the company is not necessary to enable an executor, administrator, etc., to vote. The corporation books are evidence of the ownership of the stock by the testator or intestate, and this section gives to the executor or other representative virtute officii the right to vote thereon in his representative capacity. (In re Election of Cape May, &c., Nav. Co., 51 N. J. Law, 78.)

This right is held to extend to foreign executors. "An executor taking "title under a grant of letters of probate at the testator's domicile is the "holder of stock belonging to his testator within the meaning of this sec"tion, and is entitled to vote thereon as such.' The letters testamentary issued by the foreign court were held to be conclusive proof of the executor's title to the stock, and of his right to vote in respect thereof. (In re Election of Cape May, &c., Nav. Co., 51 N. J. Law, 78.)

38. Shares of stock of a corporation belonging to said corporation shall not be voted upon directly or indirectly.

P. L. 1825, p. 82; R. S. (Ed. of 1846), p. 139, § 6; Act of 1875, § 43.

Power of corporation to purchase its own stock.-There is at common law nothing to prevent a corporation from taking its own stock in payment or satisfaction of debts, and some cases hold that at common law a corporation may purchase its own stock, provided the purchase is bona fide and not in fraud of creditors. (Verplanck v. Mercantile Ins. Co., 1 Edw., Ch. 83; Iowa Lumber Co. v. Foster, 49 Iowa, 25; Barton v. Port Jackson, &c., Co., 17 Barb., 397; Cooper v. Frederick, 9 Ala., 738; Gillet v. Moody, 3 N. Y., 479; Taylor v. Miami Exporting Co., 6 Ohio, 176; Ohio State Bank v. Fox, 3 Blatch., 431; Columbus Bank v. Bruce, 17 N. Y., 507.)

The general rule is that a corporation may take its shares by way of gift or bequest, or in satisfaction of debts due it which cannot be collected in any other manner. "Under these circumstances, it is said, the shares "do not become merged, but remain temporarily in abeyance, and may 'be sold again by the corporation. As a matter of fact, however, the "shares are extinguished, and new shares are subsequently created in their "place. By a fiction, these new shares are considered in all respects as if they were the old shares and the corporation merely an intermediary 'transferee; but it would be an absurdity to say that a corporation can really hold shares in itself." (Morawetz on Corporations, Section 115. See Clark on Corporations, p. 153; State v. Smith, 48 Vermont, 266; Chicago, &c., Ry. Co. v. Town of Marseilles, 54 Ill., 145.)

44

The rule in the United States would appear to be that in those States where there is not a positive prohibition by statute, corporations may purchase, may temporarily hold, and may sell and issue again shares of their own stock, if in good faith and without attempt to injure creditors. (See cases cited, Amer. & English Encyclopedia of Law, Vol. VII. (2d

§ 38 Edition), p. 818; Thompson on Corporations, Section 2062, and cases

cited.)

The question whether a corporation may hold its own shares does not appear to have been directly passed upon by the courts of New Jersey until 1898, when the case of Chapman v. Ironclad Rheostat Co. (41 Atl. Rep., 690) was decided, although in a case decided in 1833 it was assumed that a company properly owned its own stock. (McNeely v. Woodruff, 13 N. J. Law, 360. See also Thompson v. Moxey, 47 N. J. Eq., 538.) Section 30 expressly forbids corporations from dividing, withdrawing, or in any way paying to the stockholders, or any of them, any part of its capital stock, or reducing its capital stock, except according to this act, and Section 29 prescribes the manner in which the capital stock may be decreased or reduced, one of which is by the purchase at not above par of its stock.

The statute contains no express grant of power to a corporation to hold its own shares, but impliedly it does, and it was so held in Chapman v. Ironclad Rheostat Co. (41 Atl. Rep., 690). In that case it was held that under the General Corporation Act of 1896 there is an implied grant of power to corporations to purchase shares of their own capital stock whenever such purchase is required for legitimate corporate purposes. Section 29 authorizes a company to decrease its stock by "retiring shares owned "by the corporation." Corporations are expressly given the power to purchase, hold, sell, assign, transfer, mortgage, pledge or otherwise dispose of the stock and securities of other corporations (Section 51).

A corporation may exercise such power if contained in its charter. (Yeaton v. Eagle Oil Co., 4 Wash., 183; Iowa Lumber Co. v. Foster, 49 Iowa, 25; Rollins v. Shaver Wagon Co., 80 Iowa, 680.)

In New Jersey, there being no express prohibition, it would seem that by appropriate language in the certificate of incorporation, power may be vested in a corporation to hold, acquire and issue again its own stock, especially if it be purchased out of the surplus of the company, or be taken to secure a debt. The following clause is suggested:

"The company may use and apply its surplus property, earnings or ac"cumulated profits, in the absolute discretion of the directors, to the "creation and maintenance of a surplus fund, or to the purchase and "acquisition of property real and personal, and to the purchase and acqui"sition of its own capital stock, and may take said capital stock in payment "or satisfaction of any debt due the company from time to time, and to "such extent, and in such manner and upon such terms as its board of directors shall determine, and it may reissue said stock so acquired."

The company may not vote upon such shares either directly or indirectly. (McNeely v. Woodruff, 13 N. J. Law, 352, 360; Matter of St. Lawrence Steamboat Co., 44 N. J. Law, 529, 539; see also Hilles v. Parrish, 14 N. J. Eq., 380.) This includes all stock standing in the name of an officer, a trustee, or in the name of any person, if the stock is the property of or belongs to the company. This pro

hibition includes what is commonly, but often erroneously, called "Treas- § 39

ury Stock."

A corporation has no lien on its stock held by its debtor. (D., L. & W. R. R. Co. v. Oxford Iron Co., 38 N. J. Eq., 340, and cases cited.)

No person shall be elected a director of any corporation issuing stock unless he shall be, at the time of his election, a bona fide holder of some of the stock thereof; and any director ceasing to be a bona fide holder of some of the stock thereof, shall cease to be a director; any corporation may, by its certificate of incorporation or by-laws, determine how many shares a person shall hold to qualify him to be a director.

Act of 1875, §§ 47, 48.

Under a similar provision of the English law, it has been held that the election of a person not already holding stock is invalid, and that the subsequent acquisition of stock does not render his election valid or qualify him to act as a director.

(Barton's Case, 5 Ch. D., 963; Jenner's Case, 7 Ch. D., 132.)

It was held in an Oregon case that, "although the by-laws of a cor"poration provided that transfers of stock shall be made only on the "corporate books, and that the transfer book shall be closed for ten days "previous to the day of the annual meeting of the stockholders, a bona "fide owner of shares of stock is eligible as a director, although the "transfer of his shares to him has not been registered, and although he "might, for that reason, be refused permission to vote or to receive divi"dends."

64

*

(3 Thompson on Corporations, Section 3860; State v. Smith, 15 Or., 98.) "The question of the competency of a person for the directorship is "one exclusively of judicial cognizance over which the inspectors of "election have no jurisdiction. * * Independent of the statute, a "person might be a director of a corporation without being a stockholder. 'The statute is guardedly expressed. It prescribes as the qualification of "a director, that he shall be a bona fide holder of stock. A stockholder "may have purchased stock with a view of becoming a director, or have "obtained it by gift, or he may hold it upon a trust, and be qualified to be "a director. If the stock was legally issued, and is not the property of "the corporation, and the legal title is in him, he is prima facie capable "of being a director, and his right to be a director in virtue of his legal "title to such stock can be impeached only by showing that title was 'put in him colorably with a view to qualify him to be a director for some "dishonost purpose, in furtherance of some fraudulent scheme touching "the organization or control of the company, or to carry into effect some "fraudulent arrangement with the company." (Matter of Election of St. Lawrence Steamboat Co., 44 N. J. Law, 529, 540-1; see also in re Leslie, 58 N. J. Law, 609, 618.)

§ 40

The Supreme Court held that where one is made a director of a corporation solely to make up the number of directors required by law, his right to hold such office cannot be impeached for fraud at the instance of one who was a consenting party to his admission into the company and his election to the office. (In re Leslie, 58 N. J. Law, 609, 618.)

When a director makes an assignment of his estate for the benefit of creditors he ceases to be a director de jure, and the company may declare his office vacant and elect his successor, but as to the third parties dealing in good faith with the company, without notice of any infirmity in the title of the director, he must be regarded as a director de facto. (Kuser v. Wright, 52 N. J. Eq., 825, reversing Wright v. First Natl. Bank, 52 N. J. Eq., 392.)

A person is not a director though nominated and elected until he has accepted the office either expressly or impliedly. (Whittaker v. Amwell Natl Bank, 52 N. J. Eq., 400, 415.)

This section is held not to apply to the first directors of a consolidated company. (Camden, &c., Co. v. Burlington Carpet Co., 33 Atl., Rep. 954-)

40. Stock books to determine who may vote.

In case the right to vote upon any share of stock shall be questioned, the inspectors of the election shall refer to the stock books of the corporation to ascertain who are the stockholders, and in case of a discrepancy between the books, the transfer book shall control and determine who are entitled to vote.

P. L. 1825, p. 83; R. S. (Ed. of 1846), p. 139, § 8; Act of 1875, § 45. As to what are "stock books" and "transfer books" see Section 33, as amended in 1898, pp. 48-9.

Inspectors of election.-The statute does not in express language require inspectors of election; the election must be by ballot, unless the certificate of incorporation otherwise provides (Sec. 34). It is usual, however, to provide in the by-laws that at all elections of directors two judges or inspectors shall be appointed by the chairman of the meeting. The provision is generally as follows:

"Such election shall be conducted by two inspectors appointed by "the presiding officer of the meeting, which inspectors shall be duly "sworn, and shall in writing certify to the returns; but no person who is "a candidate for the office of director shall act as inspector, judge or clerk of such election."

44

They are ordinarily sworn to a faithful performance of their duty and when the polls are closed they present a written report. Except at the first election, no person who is a candidate for election as director can be an inspector, and if elected his election is void (Sec. 35). The powers of inspectors are purely ministerial. They must receive the votes, count them and certify to the result.

If the right to vote is challenged they must refer to the books and § 41-42 ascertain whether the person offering the vote is a registered holder of stock. The books of the company are the only evidence they may receive on this question, and where this evidence is conflicting the transfer book controls. If a share has been transferred within twenty days next preceding the election, any vote offered on it must be rejected. (Election of St. Lawrence Steamboat Co., 44 N. J. Law, 529, 539; Downing v. Potts, 23 N. J. Law, 66.)

Representatives, executors, guardians and the like, must be permitted to vote on the shares they represent upon producing satisfactory evidence of their representative capacity. (See Section 37; Election of Cape May, &c., Nav. Co., 51 N. J. Law, 78.)

Inspectors of election cannot reject a vote offered by proxy because the written proxy was not acknowledged or proved. If the proxy is regular in form and apparently the act of the stockholder, the inspectors should receive the votes offered under it. (Election of St. Lawrence Steamboat Co., 44 N. J. Law, 529, 539.)

41. If the election for directors of any corporation shall not be held on the day designated by the act or certificate of incorporation or by-laws the directors shall cause the election to be held as soon thereafter as conveniently may be; no failure to elect directors at the designated time shall work any forfeiture or dissolution of the corporation, but any justice of the supreme court may summarily order an election to be held upon the application of any stockholder, and may punish the directors for contempt of court for failure to obey the order.

R. S. (Ed. of 1846), p. 139, § 9; P. L. 1874, p. 37; Act of 1875, § 46. (Hoboken Building Assoc'n v. Martin, 13 N. J. Eq., 427.)

42. Supreme court may summarily investigate complaints touching elections.

The supreme court, upon application of any person who may be aggrieved by or complain of any election, or any proceeding, act or matter in or touching the same, reasonable notice having been given to the adverse party, or to those who are to be affected thereby, of such intended application, shall proceed forthwith, and in a summary way hear the affidavits, proofs and allegations of the parties, or otherwise inquire into the matter or causes of complaint, and thereupon establish the election so complained of, or order a new election, or make such order, and give such relief in the premises as right and justice may require; the court may, if the case require it, either order an issue to be made up in manner and form as it may direct, to try the rights of the respective parties to the office or franchise in question, or