redeemed at a fixed time and price to be expressed in the certificate of stock is removed. (Mandamus will not lie to compel redemption of unauthorized issue. State ex rel. Smith v. Ferracute Mach. Co., 52 Atl. Rep., 231.)

(3) The rate of dividends and other conditions as to the issue of preferred stock must be set forth in the original or amended certificate of incorporation.

(4) If the original or amended certificate of incorporation so provides, dividends on common stock may be paid concurrently with dividends on the preferred stock.

Classes of stock.

The present act is broad and authorizes the creation of a number of kinds of stock, the only restriction being that the total amount of preferred stock issued at any time shall not exceed two-thirds of the paid up capital stock.

Stock may be preferred as to dividends, as to capital (either or both) or otherwise, or may 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).

Calling stock "preferred stock" does not, per se, define the rights of such stock, but in order to determine in what respect the holder of such stock is to be preferred to the holder of ordinary stock, resort must be had to the statute or contract under which it is issued. Elkins v. Camden & Atlantic R. R. Co., 36 N. J. Eq., 233, 236.

The creation of preferred stock by a corporation not authorized by the special act incorporating it, nor under general laws existing at that time, and against the objection of a shareholder, violates the obligation of the contract between the corporation and the shareholder, and is therefore illegal. Einstein v. Raritan Woolen Mills, 70 Atl. Rep., 295.

Stock with preferences may have any name and designation that the stockholders see fit to give it.

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

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.

Nature of preferred stock.

"There are certain legal principles pertinent to this discussion which I think are so firmly established that they may be taken for

granted, without argument or the citation of authorities. First, stockholders are not creditors, and until the winding up of the corporation are entitled to nothing from it but a distribution of its net earnings; second, dividends can only be paid out of profits; third, calling stock preferred stock does not, per se, define the rights of such stock, but in order to determine in what respect the holder of such stock is to be preferred to the holder of ordinary stock, resort must be had to the statute or contract under which it is issued; and, fourth, where the statute or contract under which preferred stock is issued declares or promises that the holder of such stock shall receive a dividend of a fixed and certain rate per annum without limiting the annual sum to be paid as dividends to profits earned or made within a designated period, as for example, that he shall receive a dividend of seven per cent. per annum before any dividend shall be paid on the ordinary stock, there the preferred stockholder is entitled to seven per cent. per annum from the date of the issuing of the stock held by him, whether profits sufficient to pay him each year are made or not; and if, at the first division of profits, sufficient shall not have been made to pay him the whole sum due, he may carry the arrears due him over to the next dividend, and continue to do so until he has received the whole sum due him, calculated at seven per cent. per annum from the date of issue of the stock held by him." Elkins v. Camden & Atlantic R. R. Co., 36 N. J. Eq., 233, 236.

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.

Where one corporation made an agreement with another, by which the former was to reduce the dividends payable on its preferred stock, and the latter was to pay such reduced dividends direct to the stockholders, the alteration of the certificate of incorporation of the former so as to provide for such reduced dividends was enjoined at the instance of a non-assenting holder of the preferred stock, since his legal remedy would be inadequate. Pronick v. Spirits Distributing Co., 58 N. J. Eq., 97.

Rights of preferred stockholders on winding up.

Section 86, which 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," does not create a statutory preference. McGregor v. Home Ins. Co., 33 N. J. Eq., 181, 186-7, construing the provisions of 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 are to be first paid the par value of their shares, before anything is paid to the general stockholders. But this case is not applicable to the Revision of 1896 and its amendments. notes to Section 86, post.

See

Holders of preferred stock paying cumulative dividends may not enforce their claim under a mortgage in preference to general creditors. Black v. Hobart Trust Co., 64 N. J. Eq., 415; aff'd 65

Id., 769.

Preferred stockholders are entitled only to the preferences set forth in the certificate of incorporation, and in the absence of express stipulation in the certificate of incorporation, preferred stock gives the holder a preference only in the division of profits. Lloyd v. Penn. Electric Vehicle Co., 72 Atl. Rep., 16.

Liability of preferred stock for assessments.

The provision that "in no event shall a holder of preferred stock be personally liable for the debts of the corporation" does not affect the liability of preferred stockholders to calls or assessments for unpaid instalments up to the par value of the stock, to which such stockholders are subject under sections 21 and 22 equally with holders of common stock. Kirkpatrick v. American Alkali Co., 140 Fed. Rep., 186, 190. See also Campbell v. American Alkali Co., 125 Id., 207.

Founders' shares.

Founders' shares, as they are called in England, may now be created. They are in common use in England.

18a.* Conversion of Preferred Stock into Bonds; Issue of Bonds Convertible into Common Stock.

With the consent of two-thirds in interest of each class of the stockholders present in person or by proxy at a meeting called in the manner provided in section. twenty-seven, every corporation organized under this act that shall have issued preferred stock, entitling the holders thereof to receive dividends at a rate exceeding five per centum per annum, and that shall have continuously declared and paid dividends at such rate, on such preferred stock for the period of at least one

*Arbitrary number; section inserted here merely for convenience of reference.

year next preceding the meeting, and whose floating or unfunded debt at the time of the stockholders' meeting shall, in the certificate thereof filed with the secretary of state, be certified not to exceed ten per centum of the par amount of the preferred stock then outstanding, and whose assets at such time, after deducting the amount of its indebtedness, shall be certified in the judgment of the officers making such certificate to be at least equal to the amount of preferred stock issued and outstanding, may, with the consent of the holder of any such preferred stock, redeem and retire the preferred stock of such holder, out of bonds or out of the proceeds of bonds of the corporation, bearing interest at a rate not exceeding five per centum per annum, the principal of such bonds being made payable at a date not less than ten years from the date thereof; every corporation organized under this act may, from time to time, in the manner above provided, issue bonds, which, if therein so declared, shall be convertible at par at the option of the holder, into fully-paid common stock of the corporation at par, within any period therein prescribed not less than two years from the issue thereof; and in such case the board of directors may authorize the issue of the common stock into which such bonds, by their terms, shall be convertible.

(Supplement of March 28, 1902; P. L. 1902, p. 217.)

For the statute allowing the sale of bonds under par, see Section 49a and notes.

The written consent of the stockholders is not required to be filed with the Secretary of State as in Sec. 27.

Conversion of preferred stock into bonds.

The constitutionality of this act was sustained by the Court of Errors and Appeals in Berger v. United States Steel Corporation (63 N. J. Eq., 809).

Venner v. United States Steel Corporation, 116 Fed. Rep., 1012,

held that this act did not effect such an alteration in the status of a stockholder of the defendant as to impair the obligation of his contract with the corporation within the meaning of the Federal Constitution.

A holder of common stock cannot question the plan of the company for the conversion of its preferred stock into bonds. Raymond v. United States Steel Corporation, 63 N. J. Eq., 830.

Mandamus will not lie to compel redemption of preferred stock issued in disregard of the provisions of the organic law of the company, even although all persons interested acquiesce in the unauthorized issue. State ex rel. Smith v. Ferracute Machine Co., 68 N. J. Law, 237.

A copy of the certificate filed by the Steel Corporation in the office of the Secretary of State will be found among the precedents (Form 13, post).

This act authorizes corporations having preferred stock to retire, with the consent of the holders, all or any of the preferred shares. Its primary purpose is to enable corporations to refund their preferred stock in whole or in part and thereby to cut down the fixed charges, with a consequent increase of funds available for the declaration of dividends on the common stock, or on any of the preferred stock not retired.

The practical effect of the act is that such corporations may change their stockholders into bondholders, giving them the advantage a bond has as an investment security over preferred stock, in return for which the stockholder accepts a smaller rate of interest than the return as dividends on the preferred stock.

The act places certain restrictions on the exercise of this important power with the view to prevent an improper use of it:

(1) The retirement must be authorized by the affirmative vote of two-thirds in interest of each class of the stockholders present in person or by proxy at a meeting specially called for the purpose.

(2) No share can be retired without the consent of its holder. (3) No corporation can avail itself of this act unless it has declared and paid dividends on its preferred stock at a rate exceeding five per cent. per annum for the period of at least one year before the meeting. As it is unlawful to pay dividends unless earned, this requirement would tend to deter a corporation insolvent, or contemplating insolvency, from attempting to defeat or impair the claims of its creditors by changing its stockholders into creditors.

(4) As a further safeguard, the president and secretary must make a certificate that the floating or unfunded debt does not exceed ten per cent. of the par value of the preferred stock outstanding, and that the assets, after deducting all indebtedness, are at least equal to the par amount of the preferred stock issued and outstanding.