though they have no right to demand a gratuitous distribution of it to them97 and may lose their right to take precedence of other purchasers by failing to act within the time specified, or within a reasonable time.98 The capital stock may also be increased, when authorized, by means of stock dividends.99 The ordinary method of reducing the capital stock is by refunding to each stockholder a proportionate part of the surplus over and above the amount of the capital stock as reduced. So, a corporation v. Kittanning Brewing Co., 259 Pa. St. 510, 103 Atl. 340, L. R. A. 1918D, 738, and note Ann. Cas. 1918D, 769: It has, however, been questioned whether this rule applies to a railroad company existing independently of the stockholders with its economy and modes of action defined by statute. And it does not apply to old shares purchased by the corporation and reissued. State v. Smith, 48 Vt. 266; nor it seems, to original shares of authorized stock remaining undisposed of. Curry v. Scott, 54 Pa. St. 270, 275, or stock issued to purchase property which will become part of the common property. Meredith v. New Jersey, &c. Co., 55 N. J. Eq. 211, 37 Atl. 539, (affirmed 56 N. J. Eq. 454, 41 Atl. 1116); Bonnet v. First Nat. Bank, 24 Tex. Civ. App. 613, 60 S. W. 325. 97 Miller v. Illinois, &c. R. Co., 24 Barb. (N. Y.) 312, 330; Brown v. Florida, &c. R. Co., 19 Fla. 472. 98 Hart v. St. Charles St. R. Co.. 30 La. Ann. 1, 758; Baltimore City Pass. R. Co. v. Hambleton, 77 Md. 341, 26 Atl. 279. See also Crosby v. Stratton, 17 Colo. 212, 68 Pac. 130; Terry v. Eagle Lock Co., 47 Conn. 141; Brown v. Florida, &c. R. Co., 19 Fla. 472; Sewall v. Eastern R. Co., 9 Cush. (Mass.) 5; Hammond v. Edison, &c. Co., 131 Mich. 79, 90 N. W. 1040, 100 Am. St. 582. 99 4 Thomp. Corp. (2d ed.), § 3629; See also Lantz v. Moeller, 76 Wash. 429, 136 Pac. 687, 50 L. R. A. (N. S.) 68, and note, where many additional authorities are cited and reviewed. In one sense, perhaps, a stock dividend does not increase the capital stock as the theory is that, while it may increase the number of shares, the aggregate interest of the stockholders is the same as before; in other words, it simply dilutes the existing share to the extent that new shares are issued. Williams v. Western Union Tel. Co., 93 N. Y. 162. Therefore it is not taxable under the Federal Income Tax Law as income of a stockholder. Eisner v. Mecomber (U. S.); 40 Sup. Ct. 189. 1 Seeley v. New York Exchange Bank, 8 Daly (N. Y.) 400, affirmed in 78 N. Y. 608; Strong v. Brooklyn &c. R. Co., 93 N. Y. 426; Currier v. Lebanon &c. Co., 56 N. H. 262. See also 4 Thomp. Corp. (2d. ed.), § 3864. But a stockholder in a bank which reduces its capital stock to the extent that its capital has become impaired on account of bad debts, to prevent an assessment upon the stockholders, cannot com may effect a reduction by purchasing and cancelling its own shares, where it has authority to do so.2 This, however, will not necessarily operate as a reduction, unless so intended, for they may be resold and reissued. And the mere power to reduce the capital stock does not authorize the corporation to purchase the shares of particular shareholders, over the objection of others, on such terms or in such a way as to benefit the former at the expense of the latter. Nor is the "writing off" of a loss, which the corporation has suffered, such a reduction as is generally authorized.5 § 103 (88). Watered stock.-What is known as "watered stock" is fictitiously paid-up stock or stock which does not repre pel a distribution of money afterward realized on the "bad debts," as in case of a reduction where the capital is unimpaired. McCann v. First Nat. Bank, 112 Ind. 354, 14 N. E. 251. 2 Chicago &c. R. Co. v. Marseilles, 84 III. 145; Williams v. Savage &c. Co., 3 Md. Ch. 418; Berger v. United States Steel Corp., 63 N. J. Eq. 809, 53 Atl. 68; Taylor v. Miami &c. Co., 6 Ohio 176; State v. Smith, 48 Vt. 266; Gatling Gun &c., Re, 62 L. T. R. 312; British &c. Trustee &c. v. Couper (1894), A. C. 399. See article in 8 So. Law Rev. U. S. 369; Tulare &c. Dist. v. Waweah &c. Co., 112 Cal. xvii, 44 Pac. 662. 3 State Bank v. Fox, 3 Blatchf. (U. S.) 431; Bank v. Wickersham, 99 Cal. 655, 34 Pac. 444; Clapp v. Peterson, 104 Ill. 26; Jefferson v. Burford (Ky.), 17 S. W. 855; Commonwealth v. Boston &c. R. Co., 142 Mass. 146, 7 N. E. 716; City Bank v. Bruce, 17 N. Y. 507; Vail v. Hamilton, 85 N. Y. 453. See also Western Imp. Co. v. Des Moines Nat. Bank, 103 Iowa 455, 72 N. W. 657; Leonard v. Draper, 187 Mass. 536, 73 N. E. 644; Porter v. Plymouth Gold Min. Co., 29 Mont. 347, 74 Pac. 938, 101 Am. St. 569; Berger v. United States Steel Corp., 63 N. J. Eq. 809, 53 Atl. 68; San An• tonio Hdw. Co. v. Sanger (Tex. Civ. App.), 151 S. W. 1104. 4 Chetlain v. Republic Life Ins. Co., 86 Ill. 220; Gill v. Balis, 72 Mo. 424; Currier v. Lebanon &c. Co., 56 N. H. 262. See also Pacific Fruit Co. v. Coon, 107 Cal. 447, 40 Pac. 542; Coquard v. St. Louis Cotton Compress Co. (Mo.), 7 S. W. 176. In a somewhat similar case where the majority attempted a fraudulent reduction of stock at the expense of the minority, although the authorized form was followed, the court annulled the entire transaction. Theis v. Durr, 125 Wis. 651, 104 N. W. 985, 1 L. R. A. (N. S.) 571n, 110 Am. St. 880. 5 Ebbow Vale &c. Co., In re, L. R. 4 Ch. Div. 832; Seignouret v. Home Ins. Co., 24 Fed. 332. sent its face or par value in money or money's worth added to the assets of the corporation, but which is issued as a bonus or exchanged for money, property, services, or demands upon the company of a less value than the par value of the stock. Such issues of stock are frequently said to be contrary to public policy,10 and a fraud upon those who take it as full paid stock,11 6 Handley v. Stutz, 139 U. S. 417, 418, 11 Sup. Ct. 530, 35 L. ed. 227; Cook Corporations (7th. ed.), § 28. See also State v. Citizens' Light &c. Co., 172 Ala. 232, 55 So. 193; Lantz v. Moeller, 76 Wash. 429, 136 Pac. 687, 50 L. R. A. (N. S.) 68, and note. 7 Capital stock to an amount far beyond the actual cost of the road is frequently issued to the construction company in payment for building it and this method is not subject to condemnation. Cook Corp. (7th. ed.), § 29. 8 Such stock is frequently issued in the shape of a stock dividend when no corresponding amount has been added to the value of the company's property. 9 Sturges v. Stetson, 1 Biss. (U. S.) 246, Fed. Cas. No. 13568; Tobey v. Robinson, 99 Ill. 222, 228; Oliphant v. Woodburn &c. Co., 63 Iowa 332, 19 N. W. 212; Barnes v. Brown, 80 N. Y. 527, 534. But see Scovill v. Thayer, 105 U. S. 143, 26 L. ed. 968; Lorillard v. Clyde, 86 N. Y. 384. Mere inflation, or gratuitous distribution of stock upon no increase of value in the corporate property, is condemned by law. Williams v. Western Union Tel. Co., 93 N. Y. 162. 10 Sturges v. Stetson, 1 Biss. (U. S.) 246, Fed. Cas. No. 13568; Oli phant v. Woodburn Coal &c. Co., 63 Iowa 332, 19 N. W. 212; State v. Atchinson &c. R. Co., 24 Nebr. 143, 38 N. W. 43; Morrow v. Iron &c. Co., 87 Tenn. 262, 10 S. W. 495, 5 R. & Corp. L. J. 206. Quo warranto does not lie against a corporation in Minnesota merely because it issues its stock below par. State v. Minnesota &c. Co., 40 Minn. 213, 41 N. W. 1020, 3 L. R. A. 510n. But such act is said to be clearly ultra vires. Fisk v. Chicago &c. R. Co., 53 Barb. (N. Y.) 513. And it is held that a forfeiture may be decreed for ultra vires acts which are detrimental to the interests of the public. People v. Utica Ins. Co., 15 Johns. (N. Y.) 358, 8 Am. Dec. 243; People v. Improvement Co., 103 Ill. 491; State v. People's &c. Assn., 42 Ohio St. 579; Commonwealth Delaware &c. Canal Co., 43 Pa. St. 295. See also Holman v. State, 105 Ind. 569, 5 N. E. 702. And the constitutions and laws of many of the states provide that railroad corporations shall not issue stock excepting for money or its equivalent actually received. And the modern railroad commission and public utilities laws usually regulate the matter. See also Fitzpatrick v. Dispatch &c. Co., 83 Ala. 604, 2 So. 727, 19 Am. & Eng. Corp. Cas. 423. V. 11 Barnes v. Brown, 80 N. Y. 527. and are sometimes said to be cause for the forfeiture of the company's charter. In Louisiana the constitution provides that this penalty shall follow such action.12 § 104 (89). Watered stock not absolutely void.-The stock so issued is not, however, absolutely void, where it is not an overissue, even though there is a constitutional provision declaring fictitious issues void, if there is a consideration to support it, as where it is sold below par, or issued in payment for work or property of less than its face value.13 The general rule, however, is that if it is an overissue in excess of the amount limited by charter, it is ultra vires and void even in the hands of a bona fide purchaser.14 And the stock, if issued gratuitously,15 or such a proportion of it as will reduce the face value of the shares held 12Const. La., § 266. 13 Scovill v. Thayer, 105 U. S. 143, 26 L. ed. 968; Coit v. Gold Amalgamated Co., 119 U. S. 343, 7 Sup. Ct. 231, 30 L. ed. 420; Memphis &c. R. Co. v. Dow, 120 U. S. 287, 7 Sup. Ct. 482, 30 L. ed. 595; Gasquet v. Cresent City &c. Co., 49 Fed. 496; Northern Trust Co. v. Columbia &c. Co., 75 Fed. 936; Dickerman v. Northern Trust Co., 80 Fed. 450; Lindsey v. Pasco Power &c. Co., 203 Fed. 251; Stein v. Howard, 65 Cal. 616, 4 Pac. 662; California Trona Co. v. Wilkinson, 20 Cal. App. 694, 130 Pac. 190; Peoria R. Co. v. Thompson, 103 I. 187; Knapp v. Publishers, 127 Mo. 53, 29 S. W. 885; Lorillard v. Clyde, 86 N. Y. 384; Barr v. New York &c. R. Co., 125 N. Y. 263, 26 N. E. 145; Ambrose &c. Co., In re, L. R. A. 14 Ch. Div. 390, 394. But see New Castle &c. R. Co. v. Simpson, 21 Fed. 533, 23 Fed. 214; Sturges v. Stetson, 1 Biss. (U. S.) 246, Fed. Cas. No. 13568; Fisk v. Chicago &c. R. Co., 53 Barb. (N. Y.) 513. 14 Scovill v. Thayer, 105 U. S. 143, 26 L. ed. 968; Granger &c. Ins. Co. v. Kamper, 73 Ala. 325; McChord v. Ohio &c. R. Co., 13 Ind. 220; Ryder v. Bushwick R. Co., 134 N. Y. 83, 31 N. E. 251; Pruitt v. Oklahoma &c. Baking Co., 39 Okla. 509, 135 Pac. 730; Kampman v. Tarver, 87 Tex. 491, 29 S. W. 768; First Ave. Land Co. v. Parker, 111 Wis. 1, 86 N. W. 604, 87 Am. St. 841, and note. See, however, where it is merely spurious and not an Overissue, American Wire Nail Co. v. Bayless, 91 Ky. 94, 15 S. W. 10; Manhattan Beach Co. v. Harned, 27 Fed. 484, 23 Blatchf. (U. S.) 494; note in 87 Am. St. 849, 850, 856; New York &c. R. Co. v. Schuyler, 38 Barb. (N. Y.) 534. 18 or to the sum paid for the stock,16 may, it has been held, where it is sold below par, be at the suit of a dissenting stockholder,17 recalled for cancellation from the person to whom it is issued, from his grantee.with notice,19 though not, it would seem, from a bona fide purchaser for value.20 Participating stockholders21 and their transferrees with notice22 are estopped to complain of the transaction,23 at least when not absolutely void as an overissue, as is the corporation itself, in the absence of fraud.24 16 Sturges v. Stetson, 1 Biss. (U. S.) 246, Fed. Cas. No. 13568; Fosdick v. Sturges, 1 Biss. (U. S.) 255, Fed. Cas. No. 4956. 17 Since each shareholder may insist that every other shareholder shall contribute his ratable part of the company's capital for the common benefit, he may maintain a suit to cancel an unauthorized issue of shares purporting to be paid-up, when they, in reality, are not. See 5 Fletcher Cyc. Corp., § 3517 et seq. See also Stebbins v. Perry County, 167 Ill. 567, 47 N. E. 1048; Kimball v. New England &c. R. Co., 69 N. H. 485, 45 Atl. 253; note in 87 Am. St. 855, also showing when corporation may maintain such a suit. 18 Gilman &c. R. Co. v. Kelly, 77 Ill. 426. 19 Upton v. Tribilcock, 91 U. S. 45, 23 L. ed. 203; Boulton Carbon Co. v. Mills, 78 Iowa 460, 43 N. W. 290, 5 L. R. A. 649. 201 Cook Corporations, (7th. ed)., $31. 21 Scovill v. Thayer, 105 U. S. 143, 26 L. ed. 968; Wood v. Corry &c. Co., 44 Fed. 146; Richardson v. Chicago &c. Co., 131 Cal. xviii, 63 Pac. 74; Callahan v. Windsor, 78 Iowa 193, 42 N. W. 652; World &c. Co. v. Hamilton &c. Co., 123 Mich. 620, 82 N. E. 528; Gold Co., In re, L. R. 11, Ch. Div. 701, 712. Dissenting Stockholders may have relief. Taylor v. Philadelphia &c. R. Co., 7 Fed. 381; Parsons v. Joseph, 92 Ala. 403, 8 So. 788; Perry v. Tuscaloosa &c. Co., 93 Ala. 364, 9 So. 217. If they act promptly. Taylor v. South &c. R. Co., 13 Fed. 152. 22 Syracuse &c. R. Co., In re, 91 N. Y. 1; Foster v. Seymour, 23 Fed. 65; Ffooks v. Southwestern R. Co., 1 Sm. & G. 142. 23 Scovill v. Thayer, 105 U. S. 143, 26 L. ed. 968; St. Louis &c. R. Co. v. Tiernan, 37 Kans. 606, 15 Pac. 544, where the giving of $3,600,000 of stock and payment of $200,000 to directors of the company for an old road-bed which cost them $15,000, when all the stockholders and directors knew all the facts, was held to give the corporation no cause to complain, 40 Am. & Eng. R. Cas. 525, 544. See also Arkansas &c. Co. v. Farmers' &c. Co., 13 Colo. 587, 22 Pac. 954; First Nat. Bank v. Gustin &c. Co., 42 Minn. 327, 44 N. W. 198, 6 L., R. A. 676n, 18 Am. St. 510. 24 See Dickerman V. Northern Trust Co., 176 U. S. 181, 20 Sup. Ct. 311, 44 L. ed. 423. See also |