3. MEMBERSHIP IN A CORPORATION Stockholders. Membership in a private stock corporation is acquired by the ownership of one or more shares of the capital stock in the corporation. This may be acquired by subscription to the capital stock either before or after incorporation, by purchase from the corporation, or by a transfer from the owner. The certificate of stock is a written acknowledgment of the interest of the holder in the corporation. When the stock is subscribed for after the incorporation of the company, it is simply a contract between the corporation and the subscriber.

Greer was soliciting subscriptions for the building of a railway, and took a subscription book, signed therein himself, and persuaded others to subscribe. He kept the book about six months, and then, because of a disagreement with the company, he cut out his own name from the book and returned it to the company. Held, that by placing his name in the book he had perfected a contract with the company, and was just as much bound as if he had left his name in the book. Greer v. Railway Co., 96 Pa. State 391.

Rights of the Stockholders. While the individual stockholder has but little part in the management of the corporation, he has certain rights as a holder of common stock which may be stated as follows:

1. To be notified of all stockholders' meetings.

2. To cast one vote, in person or by proxy, for each share of stock held, on all matters which come before the stockholders for action.

3. To share proportionately in all dividends declared on the common stock.

4. To share proportionately in the net assets, in the event of dissolution.

5. To inspect the corporate books and accounts.

6. To sell and transfer stock which he owns.

The rights of holders of preferred stock are the same as those of the common stockholder except as extended or restricted by conditions under which the stock was issued.

Stock Subscriptions. The subscriptions of several persons to an agreement to take stock in a corporation thereafter to be formed, is a continuing offer to the corporation to be formed, which may be accepted by the corporation, and is binding.

The delivery of the certificate is merely evidence of the ownership of the shares, and is not necessary to make a subscriber a stockholder.

Dividends. Out of the surplus or net profits of the corporate business the directors may vote a dividend. This is a certain per cent upon the capital stock, and when the dividend is declared the stockholders are entitled to their respective shares. Until such dividend is declared, a stockholder has no legal right to a share of the profits, although upon its being wrongfully withheld a suit in equity may be brought to compel the corporation to declare a dividend.

Whether the earnings of a corporation shall be distributed among its stockholders is purely discretionary and until a dividend has actually been declared, the stockholder has no claim thereto.

Lauman v. Foster, 157 Iowa 275.

Preferred Stock. The dividend declared must be equal on all the stock except where a part of the stock is preferred. In many corporations a certain part of the capital stock is declared in the certificates to be preferred and the balance common stock. The preferred stock gives the holder rights and privileges not enjoyed by the holders of the common stock. These rights usually include a prior claim for dividends. Six per cent preferred stock would entitle the holder to a dividend of 6 per cent before any dividend could be declared on the common stock. Cumulative preferred stock entitles the holder to dividends at the prescribed rate in every year. If the dividend is omitted in any year it must be made up in subsequent years. Preferred stock usually has also a prior right to the corporate assets in case of dissolution. Preferred stock is generally considered a safer investment than common stock, because of its prior rights, but may not be so profitable, as the dividends are limited to the rate fixed.

Transfer of Stock. Shares of stock are transferred from one holder to another by an assignment which is usually upon the back of the certificate of stock and in a form somewhat like the following:

For value received I hereby sell, assign, and transfer unto James D. Scott twenty shares of the capital stock represented by the within certificate, and do hereby irrevocably constitute and appoint William A. Willis my

attorney to transfer the said stock on the books of the within named corporation, with full power of substitution in the premises.

Dated November 10, 19-
In the presence of

GEORGE W. ELLIS.

E. A. WAGNER.

The attorney named to transfer the stock is generally the secretary of the company.

Stock in a corporation is subject to sale and transfer like any other kind of personal property.

The transfer of stock must be recorded in the books of the corporation and a new certificate issued to the transferee before. he is legally a stockholder. Until such transfer is made he cannot exercise the rights of a stockholder, such as voting and receiving dividends, although as between him and his transferor he is the owner of the stock and entitled to the benefits therefrom.

Benedict was the owner of ten shares of the stock of the D. L. & W. R. R. Co., transferable only on the books of the company upon surrender of the certificate. In 1856 he sold his stock to Brisbane and executed a power of attorney to Brisbane to transfer the shares on the books of the company. Brisbane took the certificate, but the transfer on the books was not made. Benedict died and after his death, in 1876, his administrator procured a transfer of the shares to himself and also procured the payment of dividends credited to Benedict between 1856 and 1876. Brisbane sued the company for the value of the ten shares transferred to the administrator and also for the amount of the dividends paid to him. Held, that the company was liable for the value of the ten shares, as it had no right to issue a new certificate without the surrender of the old one, but it was not liable for the dividends paid, as it was entitled to pay such dividends to the person who should appear on their books as the stockholder of record.

Brisbane v. D. L. & W. R. R. Co., 25 Hun (N. Y.) 438.

QUESTIONS

1. How is membership in a corporation acquired?

2. What are the rights of the individual stockholder?

4. Is the one who subscribes for stock bound to take it?

5. Under what conditions has a stockholder a legal right to a share

of the profits?

6. What is preferred stock?

7. Is stock in a corporation subject to sale and transfer? Explain.
8. How may shares of stock be transferred from one holder to another?
9. Must a transfer of stock appear on the books of the company?
10. What is the liability of a stockholder to creditors?

4. MANAGEMENT OF CORPORATIONS

Vote of Stockholders. As a general rule, each stockholder in a corporation is bound by all acts adopted by a vote of a majority of the stockholders of the corporation, provided such acts are within the scope of the powers and authority conferred by the charter.

A corporation was authorized to receive and hold for the benefit of a high school any land by gift, devise, or purchase. A stockholder brought action to restrain the corporation from purchasing certain real estate, claiming that it could not afford it and the result would be the bankruptcy of the corporation. Held, that the action could not be maintained, as the majority of the stockholders had voted for the purchase. Every stockholder contracts that the will of the majority shall govern in all matters coming within the limits of the act of incorporation.

- Dudley v. Kentucky High School, 72 Ky. 576.

But the majority cannot bind the minority by any acts outside of the powers conferred by the charter.

It was provided in the articles of association of the Enterprise Loan Association that it should continue in operation eight years, unless it should sooner have sufficient funds to pay its debts and redeem its stock. A resolution was passed by a majority of the stockholders dissolving the association before the time limit, and it was held that without the consent of all the stockholders and with unredeemed stock outstanding, such a resolution is of no effect. Barton v. Enterprise Loan Association, 114 Ind. 226.

In most cases, the management of the corporation is vested in the directors, and then the authority vested in the stockholders is the election of the directors. The directors alone are authorized to act in the management of the business. The right to make by-laws is generally in the majority of the stockholders, although in some cases that power is by charter vested in the directors.

Meetings and Voting. Notice of the time and place of the stockholders' meeting must be given to each stockholder unless it is definitely designated by the charter or by-laws. Each stockholder is usually entitled to one vote for each share of stock owned by him, although at common law each stockholder had but one vote without regard to the number of shares of stock he owned. It is sometimes provided that each share of stock is entitled to as many votes as there are directors to be

elected, and that these votes may all be cast for one director, or divided as the stockholder may desire. This is called "cumulative voting" and is designed to secure to a minority interest representation on the board of directors. At common law the right to vote could be exercised only in person, but now the right to vote by proxy is generally conferred by statute. The proxy or authority to vote is in the form of a written power of attorney, and is revocable at the pleasure of the person executing it.

Directors. As stated above, the active management of the corporate business is usually vested in a board of directors selected by a majority of the stockholders. The directors act by a majority vote. The powers and duties of the directors and other officers are generally fully defined in the by-laws.

A director is not personally liable for the acts of the corporation, but he is considered in the nature of a trustee for the stockholders. He must act prudently and with reasonable diligence in their interest and is liable for his negligence or wrongdoing which results in loss to them. He must act with the utmost good faith, and any personal dealings he may have with the corporation, such as borrowing money or selling goods, are regarded with suspicion.

QUESTIONS

1. Does "majority rule" apply to the stockholders of a corporation? Explain.

2. To what extent can a majority of the stockholders bind all?

3. How is a corporation managed?

4. When must stockholders be notified of a meeting?

5. (a) How do stockholders vote? (b) What is "cumulative voting"? 6. Explain the proxy vote.

7. How are the powers and duties of directors defined?

8. What officers are usually selected to manage a corporation?

5. RIGHTS OF CREDITORS OF CORPORATIONS

In General. The creditors of a corporation generally have the same rights and remedies against the corporation and its property that they would have against a natural person. They may obtain a judgment against it and issue an execution against its property, or adopt the other remedies that they would have