his legal rights, it would become liable to make good his damages; and if it should issue a new certificate to the transferee, it would become liable upon both the outstanding certificates to innocent purchasers for value.

Preferred Shares.

Shares which confer upon the holder special privileges or benefits that do not belong to the other members of the corporation are called Preferred Shares. The precise nature of the privileges or benefits thus conferred depends upon the terms of the resolution under which the shares are issued, and the form of the certificate delivered to the holders.

Thus, it is often provided that the holders of the preferred shares shall have priority in the distribution of profits, and shall receive annual dividends at a specified rate before the other shareholders receive anything; the payment of these dividends is sometimes expressly guaranteed. The agreement of a company to pay to preferred shareholders certain annual dividends is always subject to an implied condition that the payments shall be made only out of net profits which are legally applicable to the payment of dividends.

If a corporation has agreed or guaranteed that the holders of preferred shares shall be paid dividends at a certain rate per annum, and the profits at the time are insufficient to enable the company to perform its agreement, the arrears must be made up out of the profits subsequently earned, and no dividends can be paid to the holders of the common stock until the preferred shareholders have been fully paid.

Ordinarily, preferred shareholders have no preference in the distribution of the company's capital when the business is wound up. A right of this kind cannot be presumed from the fact that a preference has been given in the payment of dividends; but, under an express agreement, a preferred shareholder may be entitled to withdraw the amount of his shares before the other stockholders can take anything.

Forfeiture of Stock.

The members of a corporation may be compelled to contribute their respective shares of the capital stock by an act on at law brought in the name of the corporation; and, at common law, this is the only remedy which can be resorted to. A corporation has no lien upon the shares of its members to secure the payment of assessments, unless it be expressly conferred by provision of the charter, by general statute,

or by special agreement between the parties. Nor can the shares of a member be declared forfeited and sold by the agents of the company for non-payment of assessments, except by virtue of an express grant of authority. Even the holders of a majority of shares in a company have no authority to bind the minority through a by-law providing for a forfeiture and sale of the shares of those members who failed to contribute their proportion of the capital; there must be an express grant of authority.

In many instances, however, it has been provided in charters and general incorporation laws that the shares of a stockholder may be declared forfeited and sold for non-payment of assessments.

A valid forfeiture can take place only by action of the legally appointed agents of the company having the requisite authority under the charter.

A forfeiture and sale of the shares of a stockholder wholly dissolves the delinquent member's connection with the company. He is not entitled thereafter to any of the privileges of membership, and ought not to be compelled to bear any of the burdens which are incidental to that position.

The liability of a shareholder ceases at the time when the forfeiture is complete and his connection with the company has been severed.

If the charter provides that the shares of a delinquent member shall be declared forfeited and be sold to pay the unpaid calls, the holder's connection with the company would not ordinarily be deemed severed and the forfeiture complete until after a sale has taken place and a new party become invested with the shares. Hence, the owner would be entitled to pay the calls and discharge the default at any time before the shares were actually sold; but after a sale has taken place it would be impossible to reinstate the owner in his rights, and, therefore, no right of redemption could exist.

A forfeiture for the purpose of escaping liability to creditors is void.

Dividends.

The ultimate object for which every ordinary business corporation is formed is the pecuniary profit of its individual members. Any net increase of the capital of an institution of this kind is a gain upon the united investment of its shareholders, and may be distributed amongst them as profits, each shareholder being entitled to his proportionate dividend or share.

It is a fundamental rule, that dividends can be paid only out of

the profits or the net increase of the capital of a company, and cannot be drawn upon the capital contributed by the shareholders for the purpose of carrying on the company's business.

The right to declare a dividend depends upon the state of the company's finances at the time when the dividend is declared. The question usually is, whether or not there would remain a net increase upon the original investment, after deducting from the assets of the company all present debts and making provision for future or contingent claims. It is immaterial at what time the increase was earned.

A company may be largely indebted and yet be entitled to pay dividends to its shareholders before the indebtedness has been paid; and it is even proper to borrow money for the purpose of paying a dividend, provided a surplus would remain after deducting the amount of the company's capital and indebtedness from the fair value of the assets which it owns.

If the capital of a banking, manufacturing, railroad, telegraph, insurance or other similar company is invested in machinery, land or fixtures used in carrying on its business, the machinery, land and fixtures may be valued at their original cost, provided they be kept up in their original condition.

Any depreciation of the value of the company's property resulting from the uncertainty of the speculation in which the company has embarked, or from a failure to carry on business profitably by reason of the state of trade, or similar causes, may be disregarded; but any depreciation caused by design, accident, or wear and tear in using the property, should be made up out of the earnings before any dividend is declared.

The capital of a mining company is not designed to be used like that of a banking or manufacturing company, in carrying on business permanently. The working of a mine necessarily causes it to become exhausted and to depreciate in value, and this depreciation cannot be repaired.

A mining company has no right to draw upon its capital by borrowing money, or by selling a portion of its property, in order to declare a dividend. It can only use the net proceeds of working the mine for this purpose, and clearly no dividend can be declared without considering the rights of creditors and providing for future liabilities.

Money obtained by a company upon the sale of forfeited stock, or as compensation for property taken under the power of eminent domain, or as interest or penalty on account of the failure of a contractor to complete his work, cannot be treated as profits.

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A dividend properly declared by the directors of a company can not subsequently be revoked. Stockholders have a legal claim against the company for the payment of the amount of the dividend. It is a positive liability as soon as declared.

The strictly legal right to require payment of a dividend is in those persons who were shareholders on the books of the company at the time when the dividend was declared, but the rights of equitable assignees will be protected by the courts.

A corporation which has earned a surplus may, in many instances, retain the money for the purpose of making improvements, or for the payment of debts, instead of dividing it among the shareholders.

The actual capital of the company is thus increased, while the nominal or share capital remains unchanged; consequently, the value of its shares will be increased. If the charter of a company authorizes it to increase the amount of its capital stock by the issue of new shares, this may be done either by receiving new stock subscriptions or by selling paid up shares at par for cash. The only essential is, that each share be represented at its par value by real capital.

If there is stock unsubscribed, it may be issued in payment of dividends; the above is the method when the capital is all subscribed. Dividends payable in cash do not apply to dividends payable in stock.

Negotiable Instruments.

Corporations have authority to execute negotiable promissory notes, whenever the use of commercial paper is appropriate as a means of accomplishing their chartered purposes.

Corporations have an implied right to draw and accept drafts and bills of exchange, and to execute other classes of commercial securities. A corporation has implied authority to endorse negotiable paper for any authorized purpose, and the power of endorsement may be exercised both for the purpose of transferring the legal title from the corporation, and for the purpose of guaranteeing payment to the transferee.

A corporation cannot lend its credit without a consideration, or sign its name to negotiable paper for the accommodation of others.

A law forbidding certain corporations from issuing negotiable paper as a circulating medium, or from dealing in commercial paper, does not affect the implied right of issuing and receiving negotiable paper in ordinary trading transactions, or for any purpose incidental to the legitimate business for which the corporation was formed.

The agents of a corporation can be enjoined, at the suit of a shareholder, from issuing negotiable instruments in the name of the corporation for any unauthorized purpose; for if passed into the hands of a bona fide purchaser, may become binding.

Liability of Shareholders and Rights of Creditors.

Creditors of a corporation have the same rights as creditors of an individual to enforce their claims against the property of their debtor. They may subject any legal. or equitable assets belonging to the corporation to the payment of their claims.

Under the common law, the members of a corporation are not individually liable to any extent for its debts, unless there is an express provision in the company's charter creating a liability. The obligation assumed by a shareholder to contribute the amount of Lis shares as capital for the common benefit, is regarded as assets belonging to the association as an entity. Creditors can obtain the benefit of this obligation only after having established their claims by judgment against the corporation.

The courts of law recognize a corporation only as an entity, without regard to its membership; the real relation between creditors of a corporation and the shareholders composing it is ignored. Obligations of the corporation are recognized only as obligations of the corporate entity, and only property of which the legal title is in the corporate name can be subjected to the payment of the corporate debts. Under the common law, the dissolution of a corporation destroys all legal remedy of its creditors.

A corporation cannot indirectly deprive its creditors of the security to which they are justly entitled, by executing certificates of indebtedness, or a mortgage on its property, to persons from whom it has not received a valuable consideration in return. The holders of the securities so issued would not be entitled to share with the bona fide creditors in the distribution of the company's assets. If, however, securities so issued are of a negotiable character, and have passed into the hands of bona fide purchasers, the latter would be accorded the same rights as other creditors to share in the corporate assets.

Creditors of a corporation are entitled to an injunction to restrain any threatened waste or diversion of the corporate assets which would result in the destruction of their security, and thereby cause them irreparable loss.

In considering the right of a creditor of a corporation to restrain a misapplication of the company's assets, it is therefore necessary to