, 1888-02-15

Lnere1rOm, ana Is NglVen an equal snare
afterwards with the other in what earnings
may remain, destroys the equality of the
shares, takes away q right which original
ly existed in it, and materially variee the
effect of the certificate of stock. 1t is
said, that when a corporation can law
fully buy property, or get money on loan,
any known assurance may be exacted and
given which does not fall within the pro-
hibition expressed or implied of same
statute; and that is sought to be applied
here. But the prohibition to such action
as this, is found, not include in a statute
commonly so called, but in the constitu-
tional provision which forbids the impair
ment of vested rights and are for public
purposes. and on due compensation. The
right which a stockhOlder gets on the pur-
chase of his share, and the issue to him
of the certificate therefor, is such a
vested right"
[ would further cite the council to Coo
ley on constitutional legislation, fifth ed.
ition, pages 337 and $40; also to Morame-
tz on Private Corporations, vol. l, second
edition, pages AGA and 4G5. After speak
ing on the subject of issuing preferred
shares, by the consent of all the share
holders and providing for such issue at
the organization of a corporation, the au-
thor pointedly says:
1T has been held that authority to issue
praGarraI cboros NAV ho oon E,rroJ Nv, ~
act of the Legislature amending the char
ter of the corporation. But this doctrine
appears to be untenable. If the directors
of a corporation, or the majority OF share
holders, have no right to issue preferred
stock, because this would be in violation
of the contract rights of the individual
shareholders, the legislature would have
no constitutional power to authorize the
issue of such shares against the will of any
shareholder.
In nearly every case where an opinion
has been given that the legislature may
confer the right to a corporation to issue
preferred stock, when no such right orig
inally existed, it has been in cases of pub
lie corporations such as railroads, bridge
companies, etc., which are distinct from
private corporations in the sense that the
public generally are in no wise interested
or affected. See vol. ii, second edition of
Morawetz, pages l046 and 1860, 1906,
1897 and IO9S. On page 1O66 the author
says: Legislative powers extend over all
matters of public interest, but when the
public are not interested private rights
cannot be interfered with"
Pages 1897 and 1O9S. But it was not
intended by any reservation in a charter
or general law to withdraw the legisla-
ture of a state from its properly legisla-
tive duties and make it the arbiter over
private rights. 1t is not the purpose of
a provision of this nature to give the leg
stature of a state fatherly control over
the affairs Of private corporations. The
right is reserved for the benefit of the
public and can be exercised only for pub
lie purposes" Also see American Law
Register, new series, vol. Xxx, Jan.-Dec.
1881. In closing this point of objection
1t is proper to say that by changing the
proposed measure so as to provide that in
relation to corporations already existing,
preferred shares may be issued only with
the unanimous consent of the entire body
of the stockholders representing the en-
tire capital stock of the corporation, this
objection could be overcome. Second
Tie proposed measure further provides
that the preferred shares shall be either
cumulative or non-cumulative, as the
shareholders, three-fourths in number,
representing three fourths of the entire
capital stock, may elect.
Under this provision the door is opened
wide for the greatest wrongs upon the
holders of common stock, and it would
be a very easy matter for a board of di-
rectors in sympathy with the holders of
preferred stock land such boards are the
rule, as experience has clearly taught US, J
to so manipulate the affairs of a corpora
ton to make the shares of common stock
absolutely and wholly valueless. Let me
llu2llabC. OuppOoC plClClICu SlOGh 10
issued with the provision contained in the
bill under consideration, paying 7 per
centum annual dividends. and securing to
the preferred Shareholders the payment
of this 7 per centum upon such preferred
shares, before any dividend should be
paid upon the common stock. How easy
it would be for a board Of directors,
mindful only Of the interests of the pre-
ferred share holders (and perhaps the di-
rectors are all preferred shareholders, to
declare a dividend for the first year of 9
per cent, the second year 3 per cent, the
third year 4 per cent, the fifth year G per
cent, and the sixth year I per cent;
there would then be due for
the seventh year OF cumulative
dividends unpaid in the first five years, Is
per cent. This, added to the I per cent
dividends due the seventh year, would
make % per cent due at the close of the
seventh year, and which must be paid
before one fraction OF | per cent shall be
allowed to go to the common stockhold-
ers. This is not an extreme but a very