ing for goods so purchased is valid as against subsequent creditors and a receiver appointed on the company becoming insolvent after the accrual of such an indebtedness on the part of a stockholder to the corporation, and that such indebtedness was discharged by a tender of stock to the amount thereof and its acceptance at an annual meeting of the corporation held after the appointment of the receiver, and that it could not be subsequently collected by the receiver.73

Whether the corporation is only obligated to redeem when there are net earnings or surplus available for that purpose, or whether it is obliged to appropriate a portion of its capital or assets to redeem the stock when there is no such surplus depends upon the terms of the contract.74 A contract binding the corporation to appropriate a portion of its capital for redemption purposes is valid and enforceable, provided its enforcement will not affect the collection of the claims of corporate creditors, 75 even though it will result in the winding up and dissolution of the corporation.76 So such an agreement may be en

73 Butler v. Beach, 82 Conn. 417, 74 Atl. 748. In this case it was further held that if the dissolution of the corporation by a decree of court after the indebtedness had been contracted rendered it impossible to redeem the stock in the manner contemplated, the same object could be attained by directing the receiver to refrain from attempting to collect the debt which had been equitably discharged by a tender of the necessary amount of stock.

74 In Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477, it was held that, where the articles of incorporation provided for the payment of cumulative preferred dividends out of profits, and gave the holders of preferred stock a preference in the distribution of assets on the dissolution of the corporation, and unequivocally required the corporation to redeem the preferred stock on demand without providing from what source the funds for redemption were to be obtained, it was not limited to the use of surplus or net profits in redeeming stock but could be compelled to appropriate a portion of its

capital to that purpose, where the rights of creditors would not be impaired thereby.

Where the contract under which preferred stock was issued by a real estate company provided that the company should at all times be bound to apply any funds remaining in its treasury or resulting from the sale of real estate to the redemption of any such stock upon demand of the holder, and the charter authorized it to provide for the redemption of such stock provided no injustice should thereby be done to the existing rights of other stockholders or creditors, it was held that no holder had a right to redemption out of any specific assets other than the proceeds of sales of real estate, nor out of moneys in the treasury when such payments would work injustice to creditors or stockholders, as where it would result in crippling or breaking down the business of the corporation. Culver V. Reno Real Estate Co., 91 Pa. St. 367.

75 Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477.

76 Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477.

forced where it appears that after the redemption of the preferred stock and the payment of all the creditors there will be a surplus remaining for distribution among the stockholders.77

In the absence of a statutory or contract provision to the contrary, the corporation is under no obligation to establish a sinking fund for the redemption of the preferred stock on the dissolution of the company, although the preferred stockholders are entitled to a preference in the distribution of the assets in the event of dissolution, and though the capital of the company is largely invested in property of a wasting nature, such as patents.78

Upon a valid retirement of the stock, the stockholder thereby becomes a stranger to the company, without further voice or right of participation in its intracorporate acts and relations.79 And hence he has no concern with what may be done with the stock of the company after that time,80 and no right to subscribe to common stock issued after that time to take the place of the retired preferred stock unless his contract gives him that right.81

§ 3646. Matters elsewhere considered. The redemption or retirement of preferred stock necessarily involves a reduction of the capital stock of the corporation,82 or a conversion of such stock into common stock,83 and may also involve a conversion of such stock into bonds,84 and reference should therefore be had to the sections dealing specifically with these subjects. The right of the corporation to purchase shares of its own stock for the purpose of retiring it is considered in the sections dealing with the right of a corporation to purchase shares of its own stock.85

§ 3647. Interest bearing stock. A corporation has the same power to issue stock under an agreement to pay a certain rate of interest

77 Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477.

78 Mellon v. Mississippi Wire Glass Co., 77 N. J. Eq. 498, 78 Atl. 710.

79 Weidenfeld v. Northern Pac. R. Co., 129 Fed. 305.

See also § 3472, supra.

80 Hackett v. Northern Pac. R. Co., 36 N. Y. Misc. 583, 73 N. Y. Supp. 1087.

81 Weidenfeld v. Northern Pac. R. Co., 129 Fed. 305; Hackett v. Northern Pac. R. Co., 36 N. Y. Misc. 583, 73 N. Y. Supp. 1087.

VI Priv. Corp.-5

Even if he has such a right, injunction will not issue to prevent the carrying out of the plan of retirement on the ground that it has been denied them, where the corporation is solvent, since he has an adequate remedy by an action for damages. Hackett v. Northern Pac. R. Co., 36 N. Y. Misc. 583, 73 N. Y. Supp. 1087.

82 See § 3470, supra.
83 See § 3643, supra.
84 See § 3648, infra.
85 See § 1134 et seq., supra.

thereon as it has to issue ordinary preferred stock.86 Such stock, called "interest bearing stock," is in effect preferred stock entitling the holders to the payment of the stipulated interest before payment of dividends to common stockholders, and gives the holders the same rights as stockholders, and renders them subject to the same liabilities. as stockholders, as ordinary preferred stock would.87 The interest cannot be lawfully made payable or paid except out of net earnings or surplus profits available for the payment of dividends.88 As we have seen, a corporation may agree to pay subscribers interest on sums paid in by them on their subscriptions before the time when they are bound to pay by the terms of their contract, or prior to the commencement of regular business, or until it commences to pay dividends, provided such an agreement is not prohibited by the charter or general law, and creditors and other stockholders are not prejudiced thereby.89

XV. CONVERTIBLE STOCK

§ 3648. Exchange of stock for bonds or property. A right to convert stock into bonds may be given to the stockholder by the contract under which he acquires the stock.90 If no time is specified within which such an option must be exercised, a reasonable time is implied, for it is a general principle that, "where an option to be exercised or a condition to be performed is not limited by the agreement, such option must be acted upon and the condition performed or abandoned within a reasonable time.'' 91

86 Barnard v. Vermont & M. R. Co., 7 Allen (Mass.) 512; McLaughlin v. Detroit & M. Ry. Co., 8 Mich. 100; Miller v. Pittsburgh & C. R. Co., 40 Pa. St. 237; Richardson v. Vermont & M. R. Co., 44 Vt. 613. See also Ohio College of Dental Surgery v. Rosenthal, 45 Ohio St. 183, 12 N. E. 665; Ohio v. Cleveland & T. R. Co., 6 Ohio St. 489.

87 McLaughlin v. Detroit & M. Ry. Co., 8 Mich. 100.

88 Massachusetts. Barnard v. Vermont & M. R. Co., 7 Allen 512; Cunningham v. Vermont & M. R. Co., 12 Gray 411.

Michigan. Lockhart v. Van Alstyne, 31 Mich. 76, 18 Am. Rep. 156. Ohio. Painesville & H. R. Co. v. King, 17 Ohio St. 534.

Pennsylvania. Pittsburg & C. R. Co. v. County of Allegheny, 63 Pa. St.

126.

Vermont. Richardson v. Vermont & M. R. Co., 44 Vt. 613.

England. In re National Funds Assur. Co., 10 Ch. Div. 118.

As to compelling a corporation to pay an interest dividend according to a vote to pay the same when it should be able, and the discretion of the directors in such a case, see Barnard v. Vermont & M. R. Co., 7 Allen (Mass.) 512.

89 See § 605, supra, and § 3680, infra. 90 Catlin v. Green, 120 N. Y. 441, 24 N. E. 941.

91 Catlin v. Green, 120 N. Y. 441, 24 N. E. 941. In this case, it was held that the owners of stock convertible

Preferred stock secured by a mortgage, issued for the purpose of obtaining a loan, and providing for its redemption or conversion into common stock at the option of the holder, may, by agreement of the parties, be exchanged for bonds, and the holders of such bonds thereupon become entitled to claim as bona fide creditors of the corporation.92

Stock issued by land companies is sometimes made convertible into land at the option of the holder, and when such is the case, and the corporation refuses to perform its contract, the stockholder may maintain a suit in equity for specific performance.93

A corporation may provide for carrying out a duly authorized reduction of its stock by exchanging for it pro rata stock of another corporation which it owns.94

Statutes in some states give corporations the right to retire stock by converting the same into bonds. So the New Jersey statutes permit the redemption and retirement of preferred stock out of bonds or the proceeds of bonds under certain circumstances,95 and also per

into bonds at their option were chargeable with laches in the exercise of the option, and had waived all right to exercise the same.

92 Totten & Co. v. Tison, 54 Ga. 139. 93 Franco-Texan Land Co. v. Bousselet, 70 Tex. 422, 7 S. W. 761; FrancoTexan Land Co. v. Laigle, 59 Tex. 339. 94 Wellner v. Gerth (N. J. L.), 79 Atl. 895.

95 P. L. 1902, p. 217; 2 Comp. St. 1910, p. 1616, § 29a. Allen v. Francisco Sugar Co., 193 Fed. 825; Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14.

preferred stock out of bonds or the proceeds of bonds legal. Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53. Atl. 68, rev'g 63 N. J. Eq. 506, 56 Atl. 14; United States Steel Corporation v. Hodge, 64 N. J. Eq. 807, 60 L. R. A. 742, 54 Atl. 1, rev'g 64 N. J. Eq. 90, 53 Atl. 601; Alabama Consol. Coal & Iron Co. v. Baltimore Trust Co., 197 Fed. 347. See also Allen v. Francisco Sugar Co., 193 Fed. 825.

Prior to the enactment of the statute, a corporation had power under P. L. 1896, p. 285, § 27 (Comp. St. 1910, p. 1612, § 27), authorizing the retirement of stock by purchase of shares, to retire shares of preferred stock purchased with bonds, or with the proceeds of bonds, issued for that purpose. United States Steel Corporation v. Hodge, 64 N. J. Eq. 807, 60 L. R. A. 742, 54 Atl. 1, rev'g 64 N. J. Eq. 90, 53 Atl. 601; Raymond v. United States Steel Corporation, 63 N. J. Eq. 830, 53 Atl. 1125; Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14; C. H. Venner Co. v. United States

mit the retirement of common stock by purchasing the same with bonds issued for that purpose.96 The statute of that state relating to the redemption of preferred stock expressly requires the consent of two-thirds in interest of each class of stockholders present in person or by proxy at a meeting called for the purpose of considering the question of retirement; 97 provides that the stock to be redeemed and retired must entitle the holders to receive dividends at a rate exceeding five per cent per annum and that the company must have continuously declared and paid dividends thereon at the prescribed rate for the period of at least one year next preceding the meeting at which the retirement is authorized; 98 requires a certificate to be

Steel Corporation, 116 Fed. 1012. See also Lazear v. American Steel Foundries, 86 N. J. Eq. 252, 100 Atl. 1030, 98 Atl. 642; Allen v. Francisco Sugar Co., 193 Fed. 825.

The Act of 1902 changes the mere form of accomplishing that which the Act of 1896 permits to be done, and affects no vested right of a corporation organized under the latter act, in view of the reserved power of the legislature to amend it. Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14. See also Allen v. Francisco Sugar Co., 193 Fed. 825.

Nor, for the same reasons, does it impair the obligations of a preferred stockholder's contract. C. H. Venner Co. v. United States Steel Corporation, 116 Fed. 1012.

This statute applies to all conversions of preferred stock into bonds occurring after it took effect. Alabama Consol. Coal & Iron Co. v. Baltimore Trust Co., 197 Fed. 347; United States Steel Corporation v. Hodge, 64 N. J. Eq. 807, 60 L. R. A. 742, 54 Atl. 1, rev'g 64 N. J. Eq. 90, 53 Atl. 601; Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14.

96 Under P. L. 1896, p. 285, § 27 (Comp. St. 1910, p. 1612, § 27), authorizing the retirement of stock by purchase of shares, a corporation had authority to purchase its own stock

either preferred or common, for the purpose of retiring the same, and to pay for the same by exchanging its bonds therefor. Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14.

The Act of 1902 (P. L. 1902, p. 217) provides an exclusive method for retiring preferred stock by purchasing the same with bonds or the proceeds of bonds. See preceding note.

But it applies exclusively to preferred stock, and does not repeal the provision of the Act of 1896 in so far as the redemption and retirement of common stock are concerned, and such stock may still be converted into bonds under it, the same as before. Allen v. Francisco Sugar Co., 193 Fed. 825.

97 Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14.

66

Even if this provision is invalid, it does not taint the entire act, but it may be rejected, and the remainder of the act will stand, subject to be availed of when the proposed retirement receives the vote of two thirds in interest of each class of stockholders' required by § 27 of the Act of 1896. Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14.

98 P. L. 1902, p. 217; 2 Comp. St. 1910, p. 1616, § 29a. United States