a course would be to deprive the guaranteed stockholders of their, clearly defined rights.

STOCKHOLDERS

CEIVE

STOCK

It is useless to prolong this opinion. We are fully satisfied that the guaranteed stockholders are entitled to receive like GUARANTEED dividend obligations, and any dividends that may have ENTITLED TO REbeen declared on them. The decree of the circuit DIVIDEND EQUALcourt of the city of Richmond must be reversed, and the cause be remanded to be further proceeded in to final decree in accordance with the views herein announced.

The decree was as follows:

LY WITH COMMON

This day again came the parties, by their counsel; and the court, having maturely considered the transcript of the record and the argument of counsel, is of opinion, for reasons stated in writing. and made a part of this decree, that the decree aforesaid is erroneous. Therefore it is considered that the said decree be reversed and annulled, and that the appellants recover of the appellee, the Richmond, Fredericksburg & Potomac R. R. Co., their costs by them expended in the said circuit court and in this court.

And the court, proceeding to make such decree as the said circuit court ought to have rendered, dǝth adjudge, order, and decree that the respective holders of all the guaranteed stock of the defendant company-the Richmond, Fredericksburg & Potomac R. R. Co.-are entitled to receive from said company dividend obligations of said company of the form and character authorized by the resolutions of the stockholders of said company of November 16, 1881, and by the resolutions of the board of directors of said company of the 8th day of December, 1881, which have been issued to the holders of the common stock of said company, and that said dividend obligations shall be issued to the holders of the guaranteed stock aforesaid at the same rate at which they have been issued to the holders of common stock-namely, at the rate of seventy dollars of such dividend obligations for each and every share of guaranteed stock; and that on the dividend obligations so to be issued there shall be paid the dividends which have been heretofore declared on similar dividend obligations issued to the common stockholders, excepting that the guaranteed seven-percent stock shall not receive the dividend declared on the dividend obligations as of January 1, 1882; and as to the dividend which was paid on July 1, 1882, the same shall be abated by ten cents per share, and that the guaranteed six-per-cent stock shall receive of said dividend of January 1, 1882, on the dividend obligations only the sum of forty cents per share.

And it is further ordered that these causes be remanded to the circuit court of the city of Richmond for proper proceedings to carry out this decree, and also for such proceedings as may appear proper in reference to the prayer of the plaintiffs for the allowance of counsel fees against the guaranteed stockholders not already rep

resented by counsel in these causes. All of which is ordered to be certified to the circuit court of the city of Richmond.

Decree reversed.

Stock Dividends.—A stock dividend may be defined to be the issue by a corporation, as a dividend of new shares which have been paid up by the transfer from the surplus or profit-and-loss account to the account representing capital stock, of a sum equal to their par value. M. Dwight Collier, Am. Bar Assn. Proceedings, 1885, p. 268. It has been said, that in England stock dividends are not lawful-Morawetz on Corporations, § 351--and the decision cited to sustain this proposition is Hoole v. Great West. Ry. Co., L. R. 3 Ch. 262. The decision, however, does not, on examination, appear to bear out this statement, for in that case there was a statute in substance prohibiting any dividends but those paid in money. The case cannot therefore be considered to indicate what the English courts would declare to be the law upon this point in the absence of such a statute. The facts were these: A railway company had power to raise additional capital by the issue of shares, and to allot to them a preferential dividend, it being enacted, however, that dividends should not be paid out of any moneys received for shares, and that no share should be issued until one fifth of the amount had been paid. The revenue of the company during a particular half-year was sufficient to pay a dividend, after providing for all charges properly payable out of the revenue; but, owing to the refusal of creditors of the company to give time, the revenue was absorbed in payment of sums properly chargeable to capital. In these circumstances the company in general meeting sanctioned a plan for offering to each shareholder, at par, preference shares to an amount equal to the dividend which would have been payable to him if the revenue had not been diverted for capital purposes. These shares were salable, but only at considerable discount. On a shareholders' bill to cancel such shares already issued, and to restrain their further issuance and the payment of dividends upon them, held, that the scheme was ultra vires, for assuming that the shares could lawfully be issued at a discount (an issue under this scheme being in reality an issue at a discount); and, assuming that owing to the diversion of the revenue to capital purposes they could lawfully be treated as assets for payment of a dividend, each shareholder who was not willing to accept an allotment of them in specie had a right to insist that the proceeds of the whole should be applied ratably in payment of a dividend to all the shareholders. Hoole v. Great West. Ry. Co., L. R. 3 Ch. 262.

Whatever may be the law in England, there does not seem to be much question that stock dividends are sanctioned by the courts of the several States. Their validity appears to have assumed without question in Commonwealth v. Pitts., Ft. W. & C. Co., 74 Pa. St. 85, wherein it was decided that "water" injected into a company's capital was not taxable as a dividend or profit to stockholders.

In Brown v. Lehigh Coal & N. Co., 49 Pa. St. 270, a corporation restricted to six-per-cent dividends out of profits to stockholders on the basis of an increased business and enhanced value of the works and property, in accordance with a resolution of stockholders, issued scrip certificates from time to time entitling the holder to additional shares of stock, distributing them ratably among share and scrip-holders in proportion to amount held at the date of issue. The resolution, embodied in the scrip, provided that the scrip should not be entitled to any cash dividend until the funded debt of the company should be paid off, or adequate provision made for its discharge when due, and payment demanded, nor until conversion of said scrip into stock. After conversion certain of the scrip-holders demanded by bill in equity the back dividends which had been declared on the stock from the issue to the date

of conversion. Held, (1) that the rights of scrip-holders were measured by the contract under which it was issued, of which the scrip alone was evidence; (2) that the contract was but an engagement that the holders of the scrip might become shareholders after payment of the funded debt or provision made therefor; (3) that the scrip-holders were only entitled to dividends accruing on the stock after the conversion of scrip into stock.

In Bailey v. Citizens' G. L. Co., 27 N. J. Eq. 197, while negotiations were pending between two gas companies for their consolidation, upon a certain basis of indebtedness, one of the companies, without the knowledge of the other, declared a scrip dividend of 10 per cent on the amount of its capital stock, with interest payable at the option of the company, thus increasing their indebtedness to that amount without the knowledge or consent of the other company. After the consolidation, the scrip was declared void; and that as such certificates are not within the rules applicable to negotiable paper, they should have put purchasers upon inquiry; and the order for their cancellation was enforced against a purchasee without knowledge.

The latest case upon stock dividends is Williams v. Western U. Tel. Co., 3 Am. & Eng. Corp. Cas. 139, wherein it was held that the term "capital stock" in the provision of the Revised Statutes of New York (1 R. S. 601, § 2) prohibiting the directors of a corporation from making dividends except from the surplus profits of a corporation, or from dividing, withdrawing, or in any way paying to the stockholders "any part of the capital stock of such company," means the property of the corporation, contributed by the stockholders or otherwise obtained to the extent required by its charter. The object of the provision was to prevent a withdrawal of the property which would reduce the value of its assets below the sum limited for its capital in its charter or articles of association. When the property exceeds that limit, the excess is surplus, which may be divided among stockholders either in money or property.

Where, also, a corporation has accumulated such a surplus and an increase of its share capital has been lawfully authorized, a dividend of shares is not prohibited by said provision, and where such a dividend does not exceed in amount the amount or value of the surplus it is not in conflict with any principles of public policy.

The facts of this case were, briefly, these: The directors of the defendant, the W. U. T. Co., entered into a contract with two other telegraph companies each operating lines nearly parallel, but extending to places not reached by the lines of either of the other companies, by which contract said defendant agreed to purchase, and the other companies agreed to convey to it all their property, rights, privileges, and franchises. The capital stock of the W. U. T. Co. was at that time $43,073,410. It was agreed that it should take steps to increase its capital to $80,000,000, the addition to be used as follows: $15,526,590 as a dividend to its then stockholders, and $23,400,000 in payment for the property and interests so transferred." The agreement was approved at a meeting of the stockholders of the W. U. T. Co., and the increase of its capital stock duly authorized as prescribed by the acts relating to the incorporation of telegraph companies. In an action brought by a stockholder to test the validity of and restrain the carrying-out of said agreement, it was found that the value of the property rights and interests purchased was equal to the par value of the stock paid therefor, and that the W. U. T. Co. owned and possessed at the time, over and above its then capital, property equal in value to the amount of the stock dividend; that the object of the agreement was to extend and perfect the telegraph systems established by the companies, and no fraud or collusion was found. Held, that the purchase and stock dividend were valid and lawful. Williams v. W. U. T. Co., 93 N. Y. 163; s. c., 3 Am. & Eng. Corp. Cas. 139.

22 A. & E. R. Cas.-4

MCHENRY et al.

v.

NEW YORK, PENNSYLVANIA AND OHIO R. R. Co. et al.

(Advance Case, Circuit Court, N. D. Ohio, E. D., United States.)

A bill by stockholders to set aside a lease made by a railroad corporation, that avers that before their bill they applied to and requested said corpora tion to take such action as would lead to the annulling of said lease, and stated the grounds on which such lease was claimed to be void, especially alleging the invalidity of the lease for the want of approval of the sharehold ers, and that they were advised by the officers of the corporation that no action could be taken in the premises with a view to such result, and the company wholly refused and neglected to take action for such purpose, or to recognize complainants as having any right to interfere in the matter of said leasing, or to call upon the corporation to take any action therein, is not sufficient under the ninety-fourth rule promulgated by the supreme court. Where stock was issued subject and subordinate to the bonds, and the bonded indebtedness was larger than the value of the road, and the interest on it greater than its income, held, that the stock being worthless, a stockholder has no standing in court to assert rights that, properly, should be asserted by the corporation itself.

IN equity.

Estep, Dickey & Squire and W. W. Boynton for complainants, and Dunning, Edsall, Hart & Fowler of counsel.

R. P. Ranney and Adams & Russell for defendants, and W. W. MacFarland and Benj. H. Bristow of counsel.

FACTS

BAXTER, J.-The original bill in this case was filed by Albert Thomas Pettifer, James A. Riley, and John Corby. It was demurred to. The complainants, submitting to the demurrer, asked for and obtained leave to amend and make new parties. Pettifer and Riley thereupon voluntarily withdrew from the case, and James McHenry and Andrew Agen were substituted complainants in their stead and united with their co-complainant, John Corby, in the exhibition of an amended bill. This amended bill has also been demurred to by one of the defendants, for that, among other causes, the complainants have not, by their averments, brought their case within the requirements of the ninety-fourth rule recently promulgated by the supreme court. This rule was prescribed to enforce the principle enunciated in the cases of Hawes v. Oakland, 104 U. S. 450, and Huntington v. Palmer, Id. 482, to wit, "that before a shareholder is permitted, in his own name, to institute and conduct a litigation which usually belongs to a corporation, he should show to the satisfaction of the court that he has exhausted all the means within his reach to obtain, within

SERT RIGHTS OF

the corporation itself, the redress of his grievances or action in conformity with his wishes." The rule requires that " every bill brought by one or more stockholders in a corporation against a corporation and other parties, founded on a right which may be asserted by the corporation, must set forth with particularity the efforts of the plaintiff to secure such action as he desires on the part of the managing directors and trustees, and, if necessary, of the shareholders, and the cause of his failure to obtain such action." The complainants sue, as stockholders of the New York, Pennsylvania & Ohio R. R. Co., for themselves and other stockholders, to set aside a lease made by said company of its road and other property to its co-defendant, and aver "that, before WHEN STOCKfiling their bill, they applied to and requested said New HOLDER MAY ASYork, Pennsylvania & Ohio R. R. Co. to take such CORPORATION. action against said Erie Co. as would lead to the annulling of said lease, and gave to said former company, as the grounds of said action, substantially the grounds herein stated, especially alleging the invalidity of said lease for the want of the approval of the shareholders of either company, and they were advised by the proper officers of said company that no action could be taken in the premises with a view to such result, and that said company wholly refused and neglected to take action for such purpose, or to recognize said complainants as having any right to interfere in the matter of said leasing, or to call upon said company to take any action in relation thereto." These are the only allegations relating to the questions raised by the demurrer. They are substantially like those which the supreme court, in the cases of Hawes v. Oakland and Huntington v. Palmer, herein before referred to, and the case of Detroit v. Dean, 106 U. S. 537, held to be insufficient for the purpose mentioned. These adjudications are conclusive upon us, and we cannot do otherwise than sustain defendants' demurrer and dismiss complainants' bill.

We have thus far treated the case as if the complainants had an intrinsic interest in the controversy. But this concession is not sustained by the facts. The railroad, which is the subject of this controversy, formerly belonged to the Atlantic & Great Western R. R. Co. It was incumbered with several mortgages to secure as many series of bonds issued by it; and, being in default in the payment of interest, appropriate proceedings were instituted to foreclose said securities. Pending the litigation, the bond and shareholders of said company entered into an agreement, denominated "a scheme of reorganization," to buy said property when sold, and organize another corporation to succeed to the rights and business of the defaulting company. To this end "reorganization trustees" were designated, and authorized to act for the contracting parties. Their object was to transfer their shares and debts from the old to the new organization, cancel the evidences thereof,