§ 3633. Change of contract or impairment of rights. The contract between a corporation and the holders of its preferred stock cannot be changed, or their rights in any way impaired, without their consent, by any subsequent action of the corporation.79 Changes, however, may be made with the consent, express or implied, of the preferred stockholders, just as any other contract may be changed by mutual consent of the parties, and if a new arrangement is made by a majority of the stockholders, a preferred stockholder, who accepts. the benefit thereof impliedly consents.80 A preferred stockholder may waive his right to a preference and consent that the stock shall thereafter be regarded as common stock, and he may do this notwithstanding he has previously pledged the stock, although such arrangement will be subject to the pledgee's lien. A subsequent purchaser of the stock who recognizes the validity of the agreement changing the character of the stock will be estopped to contend that the corporation had no authority to make it.81 § 3634. Rights subordinate to those of creditors. As against creditors of the corporation, preferred stockholders have no greater rights than common stockholders. 82 They have no preference over them, either in respect to dividends or capital,83 and have no lien upon the property of the corporation to their prejudice, except where the statute provides otherwise.84 On the contrary, their rights, both in 79 See Hazeltine v. Belfast & M. L. R. Co., 79 Me. 411, 1 Am. St. Rep. 330, 10 Atl. 328; McLaughlin v. Detroit & M. Ry. Co., 8 Mich. 100; Willcox v. Trenton Potteries Co., 64 N. J. Eq. 173, 53 Atl. 474; Pronick v. Spirits Distributing Co., 58 N. J. Eq. 97, 42 Atl. 586; West Chester & P. R. R. v. Jackson, 77 Pa. St. 321; Ashbury v. Watson, 30 Ch. Div. 376. See also Martin v. Remington-Martin Co., 95 N. Y. App. Div. 18, 88 N. Y. Supp. 573. 80 Compton v. The Chelsea, 13 N. Y. Supp. 722, 128 N. Y. 537, 28 N. E. 662. 81 Pendleton v. Harris-Emery Co., 124 Iowa 361, 100 N. W. 117. 82 Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477; Smith v. Southern Foundry Co., 166 Ky. 208, 209, 179 S. W. 205; Fryer v. Wiedemann, 148 Ky. 379, 39 L. R. A. (N. S.) 83 Warren v. King, 108 U. S. 389, 27 L. Ed. 769, aff 'g King v. Ohio & M. R. Co., 2 Fed. 36; Coggeshall v. Georgia Land & Investment Co., 14 Ga. App. 637, 82 S. E. 156; Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477; Fryer v. Wiedemann, 148 Ky. 379, 39 L. R. A. (N. S.) 1011, 146 S. W. 752; Rider v. John G. Delker & Sons Co., 145 Ky. 634, 39 L. R. A. (N. S.) 1007, 140 S. W. 1011. 84 Jefferson Banking Co. v. Trustees of Martin Institute, 146 Ga. 383, 91 S. E. 463; Smith v. Southern Foundry respect to dividends and capital are subordinate to the rights of such creditors,85 and consequently they are not entitled to any part of the corporate assets until the corporate debts are fully paid.86 Nor can Co., 166 Ky. 208, 179 S. W. 205; Rider v. John G. Delker & Sons Co., 145 Ky. 634, 39 L. R. A. (N. S.) 1007, 140 S. W. 1011. That preferred stockholders are not creditors, see § 3628 et seq., supra. That the statute may make them creditors and give them a lien, see § 3629, supra. 85 United States. Warren v. King, 108 U. S. 389, 27 L. Ed. 769; Mercantile Trust Co. v. Baltimore & O. R. Co., 82 Fed. 360. Indiana. Reagan v. First Nat. Bank, 157 Ind. 623, 62 N. E. 701, 61 N. E. 575. Kentucky. Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477; Rider v. John G. Delker & Sons Co., 145 Ky. 634, 39 L. R. A. (N. S.) 1007, 140 S. W. 1011. Maine. Spear v. Rockland-Rockport Lime Co., 113 Me. 285, 93 Atl. 754. Pennsylvania. Warren v. Queen & Co., 240 Pa. 154, 87 Atl. 595. Texas. Reagan Bale Co. v. Heuermann, Tex. Civ. App. 149 S. W. 228. Vermont. Chaffee v. Rutland R. Co., 55 Vt. 110. In the absence of some express provision, holders of preferred stock have no rights against the corporation, by way of lien or otherwise, superior to the lien of mortgage bondholders. Mercantile Trust Co. v. Baltimore & O. R. Co., 82 Fed. 360. 86 United States. Warren v. King, 108 U. S. 389, 27 L. Ed. 769, aff'g King v. Ohio & M. R. Co., 2 Fed. 36. Kansas. Inscho v. Mid-Continent Development Co., 94 Kan. 370, Ann. Cas. 1917 B 546, 146 Pac. 1014. Kentucky. Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477; Fryer v. Wiedemann, 148 Ky. 379, 39 L. R. A. (N. S.) 1011, 146 S. W. 752; Rider v. John G. Delker & Sons Co., 145 Ky. 634, 39 L. R. A. (N. S.) 1007, 140 S. W. 1011. Maryland. Heller v. National Marine Bank, 89 Md. 602, 45 L. R. A. 438, 73 Am. St. Rep. 212, 43 Atl. 800. Texas. Reagan Bale Co. v. Heuermann, Tex. Civ. App. 149 S. W. 228. "The law is perfectly well settled that as between creditors and ordinary preferred stockholders, the latter, as owners of the property of an insolvent corporation, are, upon a distribution of its assets, entitled to nothing until its creditors are first fully paid. There is a palpable difference between the relation of a stockholder and a creditor to the corporate property. Stock, whether preferred or common, is capital; and generally speaking, a certificate of stock merely evidences the amount which the holder has contributed to or ventured in the enterprise. Such a certificate, representing nothing more than the extent of his ownership in the capital, cannot well be treated as indicating that he is, by virtue of it alone, also to the same extent a creditor who may compete with other creditors in the distribution of the fund arising from a conversion of the corporation's assets into money. He cannot, if he is simply an ordinary preferred stockholder, in the nature of things, so far as third persons are concerned, be at one and the same time and by force of the same certificate, both part owner of the property and creditor of the company for that portion of its capital which stands in his name. His certifi cate, therefore, in such circumstances, merely measures the quantum of his ownership. As his chance of gain the corporation give them any preference, either in respect to the payment of principal or dividends, which will be superior to the rights of creditors, unless by virtue of express statutory authority. In the absence of such authority, any attempt to so prefer them is contrary to public policy and void.87 It is only in cases where the corporation throws on the stockholder, as respects creditors, the entire risk of the loss of his contribution to the capital, it is a fixed characteristic of capital stock that no part of it can be withdrawn for the purpose of repaying the principal of the capital until the debts of the corporation are satisfied." Heller v. National Marine Bank, 89 Md. 602, 45 L. R. A. 438, 73 Am. St. Rep. 212, 43 Atl. 800. 87 United States. Spencer v. Smith, 201 Fed. 647, rev'g 190 Fed. 105; Ellsworth v. Lyons, 181 Fed. 55; Guaranty Trust Co. v. Galveston City R. Co., 107 Fed. 311; Hamlin v. Toledo, St. L. & K. C. R. Co., 78 Fed. 664, 36 L. R. A. 826, rev'g 72 Fed. 92. Georgia. Jefferson Banking Co. v. Trustees of Martin Institute, 146 Ga. 383, 91 S. E. 463. Indiana. Reagan v. First Nat. Bank, 157 Ind. 623, 62 N. E. 701, 61 N. E. 575. Kentucky. Smith v. Southern Foundry Co., 166 Ky. 208, 209, 179 S. W. 205; Fryer v. Wiedemann, 148 Ky. 379, 39 L. R. A. (N. S.) 1011, 146 S. W. 752; Sumrall v. Commercial Bldg. Trust's Assignee, 106 Ky. 260, 44 L. R. A. 659, 90 Am. St. Rep. 223, 50 S. W. 69. Missouri. Kidd v. Puritana Cereal Food Co., 145 Mo. App. 502, 122 S. W. 784. New York. Cass v. Realty Securities Co., 148 App. Div. 96, 132 N. Y. Supp. 1074, aff'd 206 N. Y. 649, 99 N. E. 1105. North Carolina. Weaver Power Co. v. Elk Mountain Mill Co., 154 N. C. 76, 69 S. E. 747. Pennsylvania. Warren v. Queen & Co., 240 Pa. 154, 87 Atl. 595. Texas, Reagan Bale Co. v. Heuer mann, Tex. Civ. App. 149 S. W. 228. Preferred stockholders cannot have a lien superior to the claims of creditors though the stock in terms is accorded a lien. Cass v. Realty Securities Co., 148 N. Y. App. Div. 96, 132 N. Y. Supp. 1074, aff'd 206 N. Y. 649, 99 N. E. 1105. "A corporation has no right to make any rules by which the holder of stock, common or preferred, may be preferred in the liquidation of its assets over the creditors of the company." Warren v. Queen & Co., 240 Pa. 154, 87 Atl. 595. A provision that if the company fails to pay the dividends on the preferred stock for two years the owners may mature the stock into an obligation of the company to pay on demand the par value thereof with interest, is contrary to public policy and void in so far as the rights of creditors are concerned. Reagan Bale Co. v. Heuermann, Tex. Civ. App. 149 S. W. 228. A corporation cannot lawfully, as against its prior or subsequent creditors, secure the retirement of preferred stock by an appropriation of the assets of the company otherwise available to creditors. For example, it cannot do so by paying for an endowment policy of insurance out of the assets of the corporation, and providing that the proceeds thereof shall be used for the purpose of redeeming and retiring the preferred stock. And such an arrangement is invalid as to subsequent creditors although there is no showing that they extended credit to the company on the assumption that the policy was a corporate asset for is solvent and where the rights of creditors will not be injuriously affected thereby that agreements among the stockholders as to preferences may be enforced.88 Statutes in some states specifically provide that in case of insolvency or the dissolution of the corporation the debts or liabilities of the corporation shall be paid in preference to the preferred stock.89 And where such is the case a mortgage given to secure preferred stockholders as to dividends and principal will not give them a preference over unsecured creditors in case of dissolution or insolvency, even though their claims arose after the recording of the mortgage.90 And especially is this true where the mortgage itself provides that the preferred stockholders shall be entitled to priority after the payment of the corporate debts and liabilities.91 Nor is it material that the postponement of the claims of the preferred stockholders to those of the general creditors may render the security of the preferred stockholders of little or no value and may enable the promoters of the corporation to perpetrate a fraud on persons who become preferred stockholders on the strength of the mortgage.92 .Under such a statute a mortgage given by an insolvent corporation securing preferred stock In Hamlin v. Toledo, St. L. & K. C. R. Co., 78 Fed. 664, 36 L. R. A. 826, rev'g on other grounds 72 Fed. 92, where certificates of preferred stock recited that they were a lien on the company's property, it was held that the holders were stockholders, and not creditors. "If the purpose,'' said the court, "in providing for these peculiar shares was to arrange matters so that under any circumstances a part of the principal of the stock might be withdrawn before the full discharge of all corporate debts, the device would be contrary to the nature of capital stock, opposed to public policy, and void as to creditors affected thereby.", Quoted with approval in Spencer v. Smith, 201 Fed. 647, rev'g 190 Fed. 105; Weaver Power Co. v. Elk Mountain Mill Co., 154 N. C. 76, 69 S. E. 747; Warren v. Queen & Co., 240 Pa. 154, 87 Atl. 595. 88 Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477; Smith v. Southern Foundry Co., 166 Ky. 208, 89 Reagan v. First Nat. Bank, 157 Ind. 623, 62 N. E. 701, 61 N. E. 575; Lloyd v. Pennsylvania Elec. Vehicle Co., 75 N. J. Eq. 263, 21 L. R. A. (N. S.) 228, 138 Am. St. Rep. 557, 20 Ann. Cas. 119, 72 Atl. 16, rev 'g 73 N. J. Eq. 269, 67 Atl. 834; Black v. Hobart Trust Co., 64 N. J. Eq. 415, 53 Atl. 826. The effect of such a provision is to give the creditors an absolute and unqualified preference in the payment of their claims over the payment of the preferred stock in case the company becomes insolvent or is dissolved. Reagan v. First Nat. Bank, 157 Ind. 623, 62 N. E. 701, 61 N. E. 575. 90 Black v. Hobart Trust Co., 64 N. J. Eq. 415, 53 Atl. 826. 91 Black v. Hobart Trust Co., 64 N. J. Eq. 415, 53 Atl. 826. 92 Black v. Hobart Trust Co., 64 N. J. Eq. 415, 53 Atl. 826. holders, and thus giving them a preference over unsecured creditors, is a fraud on the latter and void, even though it is executed by the corporate officials in the honest belief that they have the right to so secure the preferred stockholders.93 § 3635. Right to certificate. A purchaser of or a subscriber for preferred stock has the same right as a holder of common stock to a certificate of stock as evidence of his rights, and he is entitled to a certificate showing that his stock is preferred.94 And he is entitled to the same remedies as a common stockholder to compel the corporation to issue it.95 § 3636. Right to dividends. The holders of preferred stock are entitled to be paid dividends, in accordance with the terms of their contract, before any dividends can be paid to the holders of common stock.96 § 3637. Rights as to management of corporation. Preferred stockholders have the same rights with respect to the management of the corporation as the common stockholders,97 except in so far as they may be excluded by their contract.98 Their contract may give them greater rights; 99 but, in the absence of express provision to the contrary, their rights are the same. With the exception that they may interfere and maintain proper suits against and on behalf of the corporation, in a proper case, to protect their rights as preferred stockholders, they cannot interfere in any case in which a holder of common stock would have no right to interfere.1 "Holders of 'preferred stock,' have no special control over the corporation or its management. 93 Reagan v. First Nat. Bank, 157 Ind. 623, 62 N. E. 701, 61 N. E. 575. In this case the mortgage secured both the preferred stockholders and certain creditors, and it was held that the contract was inseparable and wholly void as to the unsecured creditors. 94 State v. Cheraw & C. R. Co., 16 S. C. 524. As to whether the issuance and tender of a certificate is a condition precedent to the right of the corporation to recover on a subscription for preferred stock, see § 596, supra. 95 See § 3484, supra. 96 The subject of dividends on pre ferred stock will be considered at length in subsequent sections. See $3751 et seq., infra. 97 Lockhart V. Van Alstyne, 31 Mich. 76, 18 Am. Rep. 156; Thompson v. Erie Ry. Co., 42 How. Pr. (N. Y.) 68, 11 Abb. Pr. N. S. (N. Y.) 188. 98 Morrell v. Geo. Brooks & Son Co., 164 Fed. 501; Miller v. Ratterman, 47 Ohio St. 141, 24 N. E. 496. 99 Mackintosh v. Flint & P. M. R. Co., 32 Fed. 350, 34 Fed. 582. 1 Mackintosh v. Flint & P. M. R. Co., 32 Fed. 350, 34 Fed. 582; Thompson v. Erie Ry. Co., 42 How. Pr. (N. Y.) 68, 11 Abb. Pr. N. S. (N. Y.) 188. |