In a North Dakota case, 32 in which the claim involved arose out of work done by a stock subscription solicitor in obtaining subscribers to the capital stock of a corporation to be organized, it was said:

It is elementary that a corporation is not liable upon contracts entered into by its promoters. Before the corporation comes into existence, it can have no representative, and no one is capable of acting for it. Those interested in promoting it may nevertheless contemplate the ultimate payment by the corporation of the legitimate promotion expenses. But the corporation does not become liable for such expenses, in the absence of a subsequent undertaking in some form.

In a Montana case 33 appears the following:

In the absence of statute, a corporation will be held liable for services rendered by its promoters before incorporation, only when by express action taken after it becomes a legal entity it recognizes or affirms such claim; and a mere silence of the board of directors, or failure to object when the claim is mentioned, is not such an assumption or adoption as will bind the corporation.

It is true that, as a rule, a corporation usually pays the necessary legitimate expenses and costs incurred by those who brought about its formation, but the corporation is not liable for such charges unless it elects to pay them.34 On the other hand, of course the promoters are liable for such expenses and costs and may, in addition, be liable for injuries to their employees and others.35

Limitation on Indebtedness

The common law places no limit upon the amount which a corporation may borrow. The amount borrowed may be greater than the capital stock. The general rule is that a debt contracted by a corporation in excess of the limit fixed by statute or by the charter is valid and enforceable against the corporation. A national bank purchased furniture and executed three promissory notes in payment thereof at a time when the amount of its indebtedness exceeded that allowed by a Federal statute. In a suit brought on the notes it was held that the notes were enforceable against the bank. In this case, it was said, "We hold, therefore, that an indebtedness which a national bank incurs in the exercises of any of its authorized powers, and for which it has received and retains the consideration, is not void from the fact that the amount of the debt surpasses the limit prescribed by the statute, or is even incurred in violation of the positive prohibition of the law in that regard." In an Iowa case 38 it was said, "A corporate

99 37

debt contracted in excess of the maximum limitation in its articles of incorporation is not void because of such excess." In the case of a corporation there are no public records by which one about to extend credit to it can ascertain the amount of indebtedness already incurred at the time credit is extended, and this furnishes a sufficient reason for holding a corporation liable in cases like those just discussed.

As pointed out elsewhere, officers and directors are liable to the corporation for all damages suffered by it if they exceed the limit of indebtedness fixed by the statute, charter, or bylaws. And directors and officers are made

32

33

Davis v. Joerke, 47 N. D. 39, 181 N. W. 68, 70.

Kirkup v. Anaconda Amusement Co., 59 Mont. 469, 197 P. 1005, 1007, 17 A. L. R. 441; Cushion Heel Shoe Co. v. Hartt, 181 Ind. 167, 103 N. E. 1063, 50 L. R. A. (N. S.) 979.

34 Kridelbaugh v. Aldrehn Theatres Co., 195 Iowa 147, 191 N. W. 803.

35 Farmers' Gin and Milling Company v. Jones, 147 S. W. 668 (Tex. Civ. App.). 36 Cook on CORPORATIONS, 8th ed., sec. 760.

37 Weber v. Spokane National Bank, 64 F. 208. See also Scherer & Co. v. Everest, 168 F. 822; Grand Valley Water Users' Association v. Zumbrunn, 272 F. 943.

38

Junkin v. Plain Dealer Pub. Co., 181 Iowa 1203, 165 N. W. 339.

personally liable by statute in some States to third persons for debts in excess of the statutory amount.

39

In a Nebraska case involving a cooperative the directors executed their accommodation notes therefor in an amount greatly in excess of the indebtedness which the association was authorized to incur under its charter. Ultimately suit was brought against the association, and it was claimed that no recovery could be had because the amount of indebtedness exceeded that allowed by the charter. The court held, however, that the association was liable because the money had been used in the business for the benefit of the association and had not been returned, the court saying, “The right of recovery depends upon the receipt and retention of benefits under or by virtue of the ultra vires contract." 40 An association may be estopped from denying liability for debts created in excess of the amount fixed in its charter.11

It appears to be the general rule that, if a corporation exceeds its debt limit, no objection can be raised by either the corporation itself or persons who became its creditors after the debt limit had been reached 42 In Kentucky, however, when a corporation becomes insolvent, until the creditors whose debts do not exceed the charter limits have been paid in full, creditors whose debts are in excess of the charter limits are not entitled to

43

participate in the distribution of assets. In some jurisdictions, before a contract which would cause a corporation to exceed its debt limit has been performed by either party, it may be repudiated by the corporation.1

Lien on Stock

44

If a statute under which a corporation is incorporated or the general law of the State gives a corporation a lien on the stock of a stockholder for debts due the corporation by him, strangers, even though without actual notice, and residents of other States, buy the stock subject to the lien. The Supreme Court of the United States has said: 45 "When, by general law, a lien is given to a corporation upon the stock of a stockholder in the corporation for any indebtedness owing by him to it, that lien is valid and enforceable against all the world * * *” If the statute under which an association or corporation is to be incorporated authorizes the inclusion of a provision in the articles of association or the certificate of incorporation giving the corporation a lien on its stock for any indebtedness due it by a stockholder, such a provision, if included, is also valid against all the world.46

In a New York case the articles of association provided that "No shareholder of the association shall be permitted to transfer his shares or receive a dividend or interest thereon, who shall owe to the association a

39 Annotation "Right of individual creditor to enforce for his own benefit personal liability of directors or officers of corporation for incurring excessive debts," 43 A. L. R. 1147. 40 Simmons v. Farmers' Union Coop. Association of Bradshaw, 114 Neb. 463, 208 N. W. 144.

41 New York Canning Crops Coop. Association, Inc., v. Slocum, 126 Misc. Rep. 30, 212 N. Y. S. 534.

42 Sioux City Terminal Railroad & Warehouse Company v. Trust Company of North America, 82 F. 124, aff'd in 173 U. S. 99, 19 S. Ct. 341, 43 L. Ed. 629; 7 Fletcher CYCLOPEDIA CORPORATIONS, Perm. Ed. sec. 3619.

43

First National Bank of Covington v. D. Keefer Milling Company, 95 Ky. 97, 23 S. W. 675; American Southern National Bank v. Smith, 170 Ky. 512, 186 S. W. 482, Ann. Cas. 1918B 959; Anderson v. Kentucky Title Trust Company of Louisville, 5 F. Supp. 384.

44

Lewis v. Fifth-Third National Bank of Cincinnati, 274 F. 587.

45 Hammond v. Hastings, 134 U. S. 401, 10 S. Ct. 727, 33 L. Ed. 960.

48 Union Bank of Georgetown v. Laird, 2 Wheat. 390, 4 L. Ed. 269.

47 Gibbs v. Long Island Bank, 83 Hun. 92, 31 N. Y. Š. 406, 63 N. Y. St. Rep. 854.

debt which shall have become due, until such debt be paid, unless by and with the consent of the board of directors of the association." On the face of each certificate of stock involved was the statement "Subject to the conditions and stipulations contained in the articles of association." Although the plaintiff had no actual knowledge of the limitation on the transfer of stock, he was held bound by the provision in the articles of association.

At least in some States if the purchaser or assignee of stock has actual or constructive notice of a bylaw giving the corporation a lien on the stock, it is effective, and the corporation is not obliged to recognize the purchaser or assignee of the stock unless the lien is given effect."

Subscriber, Stock, Capital Stock

"A subscriber is one who has agreed to take stock from the corporation on the original issue of such stock." 49 The shares of stock into which the capital stock of the corporation is divided may consist of common stock or common and preferred stock. In Cook on Corporations it is also said: 50

By common stock is meant that stock which entitles the owners of it to an equal pro rata division of profits, if any there be; one stockholder or class of stockholders having no advantage, priority or preference over any other shareholder or class of stockholders in the division. By preferred stock is meant stock which entitles its owners to dividends out of the net profits before or in preference to the holders of the common stock. Common stock entitles the owner to pro rata dividends equally with all other holders of the stock except preferred stockholders; while preferred stock entitles the owner to a priority in dividends.

Usually the dividend rate on preferred stock is fixed, whereas that on common stock in commercial corporations is generally not fixed.

Under the statutes of many States the right to vote at meetings of the stockholders is limited to the common stockholders, and many of the statutes providing for incorporation of cooperatives authorize bylaws that limit the right to vote to common stockholders of the corporation.

* *

* the capital stock is usually divided into equal portions called shares; and a share of the capital stock of a corporation is, therefore, the interest or right which the owner has in the management of the corporation, in its surplus profits, and upon dissolution, in all of its assets remaining after the payment of its debts.51

Shares of stock usually are represented by certificates. A certificate of stock is not the stock itself but simply evidence of its ownership, just as a deed is evidence of the ownership of land. A stockholder or shareholder is one who owns one or more shares of stock. One may be a stockholder, although no certificate of stock has been issued to him,52 just as one may be the owner of other personal property, although he has never received a bill of sale thereto.

A stockholder is not by reason of this fact a creditor of an association, and the possession of a certificate of stock, whether common or preferred, represents not indebtedness but ownership.53

48 Iowa-Missouri Grain Co. v. Powers, 198 Iowa 208, 196 N. W. 979, 33 A. L. R. 1268. For a discussion of the question of priority between the lien of the corporation and the rights of a pledgee or bona fide purchaser of corporate stock, see the Annotation in 81 A. L. R. 989.

51 14 C. J. 384.

52 In re Culver's Estate, 145 Iowa 1, 123 N. W. 743, 25 L. R. A. (N. S.) 384; Bushnell v. Elkins, 34 Wyo. 495, 245 P. 304, 51 A. L. R. 13.

53

Sternbergh v. Brock, 225 Pa. 279, 74 A. 166, 24 L. R. A. (N. S.) 1078; Wineinger

v. Farmers & Stockmen's Loan & Investment Association, 278 S. W. 932 (Tex. Civ. App.), affirmed, 287 S. W. 1091 (Tex. Com. App.).

However, when a provision of a certificate of preferred stock absolutely obligated a corporation to pay the par value thereof on a certain date with cumulative dividends, it was held that the holder of the certificate was a creditor and that his rights should be determined accordingly.

54

An overissue of stock by an association is void.55 Apparently the association would at least be liable for the purchase price of the over-issued

stock.56

When the constitution of a State imposes double liability on stockholders, a stockholder is not subject to such double liability on stock which the corporation was not authorized to issue.57

Stock may be assigned or transferred only by those who are authorized to do so. A warehouse corporation issued stock to growers of tobacco who were members of a tobacco marketing association. The stock was paid for through deductions made by the association from the proceeds derived from the sale of tobacco. The certificates of stock were retained by the warehouse corporation. Later the association claimed that the growers were indebted to it for liquidated damages for breach of their marketing agreements. The warehouse corporation thereupon canceled the certificates of stock issued in favor of the growers and issued new certificates of stock in favor of the marketing association. It was held, however, that as the growers had not authorized the transfer or assignment of their certificates of stock and as the marketing association and the warehouse corporation were not authorized to determine and adjust the claims of the association against the growers, the marketing association was not entitled to receive any part of the liquidating dividends declared by the warehouse corporation on the stock. It was further held that the warehouse corporation was not estopped from showing that the issuance of the stock to the marketing association was without authority.58

It is not always indispensable that a person sign a subscription for stock to hold him as a subscriber; and where a stockholder attended a meeting of stockholders at which he voted in favor of organizing a new corporation for the purpose of taking over the stock of the old corporation, it was held that such a stockholder who signed the articles of incorporation of the new company should be deemed to have subscribed for the amount of stock which he held in the old.59

Where a person subscribed for stock of a cooperative on condition that the subscription would be "used to do business on the Rochdale System," failure to so operate was held to be no defense to a suit on the subscription, as the corporation had incurred debts on the strength of the subscription and as it would have enhanced "the burden of those stockholders who had paid in full." Neither did a previous refusal to accept the amount of his subscription release him "as against creditors or other stockholders.” 60

54 Oklahoma Wheat Pool Elevator Corporation v. Bouquot, 180 Okla. 159, 68 P. 2d 97. See also 14 C. J. 416; O'Brien Mercantile Company v. Bay Lake Fruit Growers' Association, 178 Minn. 179, 226 N. W. 513.

55 Graf v. Neith Cooperative Dairy Products Association, 216 Wis. 519, 257 N. W. 618; Scovill v. Thayer, 105 U. S. 143, 26 L. Ed. 968; 1 Cook on CORPORATIONS, 8th ed., sec. 292.

56

1 Cook on CORPORATIONS, 8th ed., sec. 293.

57 Maclaren, as Receiver of Goodhue County Cooperative Company v. Wold, 168 Minn. 234, 210 N. W. 29, 55 A. L. R. 321, 172 Minn. 334, 215 N. W. 428.

58

Burley Tobacco Growers' Coop. Association v. Indiana District Warehousing Corporation, 102 Ind. App. 138, 199 N. E. 436.

59 Zander v. Schuneman, 170 Minn. 353, 212 N. W. 587. But see Jackson v. Sabie, 36 N. D. 49, 161 N. W. 722.

Warren Company Cooperative Association v. Boyd, 171 N. C. 184, 88 S. E. 153. See also Equity Cooperative Association of Roy v. Equity Cooperative Milling Company of Montana, 63 Mont. 26, 206 P. 349; 14 C. J. 512.

A subscriber for stock in Nebraska, when sued on the promissory note which he gave therefor, successfully defended by showing that he was induced to buy stock by representations that within a year "a new $40,000 elevator would be built to take the place of the old one which was dilapidated and out of date”; and that the new structure would be equipped with modern machinery and that he “and other subscribing patrons, would be paid 2 or 3 cents a bushel above local market prices for grain at the new elevator; that the stock would 'carry itself' and that defendant would never be called upon to pay the note except from dividends on his stock which would be derived from increased earnings * * *"61

In the absence of statutory requirements, contracts for the sale or purchase of shares of stock in a fully organized corporation are made in the same manner as other contracts and are governed by like principles.62

It has been held that, if a person in subscribing for stock relies on false representations that others in whom he has confidence have already subscribed, this constitutes a fraud justifying a rescission of the subscription. contract, if such action is taken "promptly and before the rights of creditors have intervened."

99 63

Where an association began business without having all its capital stock subscribed, as required by statute, it was held that a subscriber for stock was not liable, on account of this fact, on his stock subscription and that the corporation was not entitled to apply the purchase price of milk delivered by the subscriber on the payment of his note given for the purchase of stock.64

Even though the bylaws of a cooperative provide for the repurchase of its stock, if the matter is discretionary with the association, a stockholder is not entitled, without the consent of the association, to have his stock retired or to have its value used as an offset to a claim which the association has against him,65 nor under any circumstances is a stockholder entitled to have his stock retired unless all conditions precedent to doing so have been met.66 Where the State statute authorizes the cooperative to repurchase its stock at its par value when the shareholder ceases to be eligible, the shareholder cannot require payment in excess of par.

67

When stock or memberships in an association are repurchased for less than their liquidating value, at least from a liquidating standpoint the remaining members are benefited.68

The stock subscription form employed by cooperatives usually contains, in addition to an agreement to purchase a stated number of shares of stock upon the happening of a specific contingency, an agreement to market certain commodities of the subscriber through the association, when organized. If the subscription is invalid by reason of the fact that conditions

61 Farmers' Cooperative Grain Company v. Startzer, 112 Neb. 19, 198 N. W. 170. See also Divine v. Western Slope Fruit Growers' Association, 27 Colo. App. 368, 149 P. 841.

62

Equity Cooperative Association of Roy v. Equity Cooperative Milling Company of Montana, 63 Mont. 26, 206 P. 349; 14 C. J. 512.

63 Bohn v. Burton-Lingo Company, 175 S. W. 173 (Tex. Civ. App.); Webb v. Tri-State Fair & Racing Association, 238 Ky. 87, 36 S. W. 2d 839. See also Vest v. Farmers Cooperative Elevator Co. of Riverdale, 108 Neb. 407, 187 N. W. 892. Flury v. Twin Cities Dairy Company, 136 Wash. 462, 240 P. 900.

64

65 Lewiston Coop. Soc. No. 1 v. Thorpe, 91 Me. 64, 39 A. 283. But cf. Farmers

Union Coop. Gin Co. v. Taylor, 197 Okla. 495, 172 P. 2d 775.

66 Fillmore v. Farmers' Union Coop. Association, 139 Okla. 38, 280 P. 1072. See also Bylaws, p. 33.

67 Avon Gin Co. v. Bond, 198 Miss. 197, 22 So. 2d 362.

38 Keeler v. New York Hide Exchange, 231 App. Div. 450, 247 N. Y. S. 482.