The terms of the preferences and qualifications and restrictions must § 18

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 con tingent; they must be made payable only out of the net profits of the company and can be paid in no other way.

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Nature of preferred stock.--"There are certain legal principles perti"nent to this discussion which I think are so firmly established that they may be taken for granted, without argument or the citation of authori "ties. 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, calcu"lated 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.)

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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. (Pronik v. Spirits Distributing Co., 58 N. J. Eq., 507.)

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 re

§ 19-20 strict 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.)

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.)

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.

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 evidence of the ownership of the stock." (Cook on Corporations, Section 13.) 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.

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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.)

To face p. 38, Dill on New Jersey Corporations, 3d cloth and 4th paper edition.

Amendment of 1902.

18a.

CONVERSION OF PREFERRED STOCK INTO BONDS.

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 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. (Chap. 58, Sec. 2, Laws of 1902, approved March 28, 1902, repealing inconsistent acts and taking effect immediately.)

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

The practical effect of the act is that such corporations may change their stockholders into bondholders, giving them the advantage which 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 twothirds 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 of preferred stock 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 it is required that the President and Secretary of the Company shall make a certificate that the floating or unfunded debt of the Company does not exceed ten per cent. of the par value of the preferred stock outstanding, and that the assets of the Company, after deducting all indebtedness, are at least equal to the par amount of the preferred stock issued and outstanding. It is, therefore, necessary that a Company shall not only be solvent, in the business sense of the term, in order to avail itself of the act, but its preferred stock must be unimpaired.

The act also provides that bonds may be issued with the privilege of the holder to convert them into common stock of the Company. The right of conversion does not appear, by express language, to be restricted to bonds issued for the purpose of retiring preferred stock, but would seem to include any series of bonds as to which the privilege of conversion is given.

"A certificate of stock accompanied by an irrevocable power of attor- § 20 ney, either filled up or in blank, is, in the hands of a third party, pre"sumptive 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 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 vol"unteers, the gift is complete and irrevocable, if inter vivos." (Id., p. 490; see Walker v. Dixon Crucible Co., 47 N. J. Eq., 342.)

In the absence of provision in the charter creating a lien for indebtedness of stockholders, a by-law, of which a transferee of a certificate of stock had no notice, is insufficient to create such a lien. A provision in the charter that the stock should be transferable in accordance with the by-laws relates only to the formality of transfer. (Drexel v. Long Branch Gas Co., 3 N. J. L. J., 250.)

It is not necessary to endorse certificates of stock in order to pass the title where a deed has been executed authorizing the transfer on the books of the company. (Curtis v. Crossley, 45 Atl. Rep., 905, 907; see also Tarbox v. Grant, 56 N. J. Eq., 199, 204.)

Fraud in sales of stock.-Defendant (an officer of a corporation) knew that the corporation had made a favorable sale of property which enhanced the value of the stock, which fact was known only to the directors and officers. Plaintiff had no knowledge of it, and no knowledge of facts to put him on inquiry as to it. Defendant bought the plaintiff's stock at much less than its real value, at a price for which the plaintiff in his ignorance was willing to sell it. Held, that there was no fraud and that there was no duty from the officers to the stockholders to make any disclosure. (Crowell v. Jackson, 53 N. J. Law, 656.)

A person making false representations in the sale of stock is liable for the loss which the purchaser suffers by retaining the stock under the belief that the representations are true. In such cases the market value of the stock while the fraud is operative on the conduct of the purchaser is unimportant, the measure of damages is the difference between the amount paid for the stock and the value of the stock after the fraud ceased to be operative. (Duffy v. Smith, 18 N. J. L. J., 217; aff'd Smith v. Duffy, 57 N. J. Law, 679. See also Crater v. Binninger, 33 N. J. Law, 513.)