Example 15. A. owns a share of stock in the M. corporation, as shown by certificate No. 50 made out to him. A. indorses his name in blank on the transfer clause on the back and hands to B, merely to keep it for him. B sells to C., an innocent purchaser. C. gets good title.

Example 16. In the above situation assume that B. had to forge A.'s name to the transfer. C. gets no title.

Example 17. Assume in the case of the forgery C. takes the forged transferred certificate to the corporation, who not knowing of the forgery issues C. a new certificate reciting him to be owner. Still C. has no title, and B. can cause cancellation of the transfer.

Example 18. In the above case after C. gets his new certificate he sells to D. D. now has rights against the corporation. But so has A., for he has lost nothing by the forgery of his name. The corporation must issue new stock to D., or if it have none, must pay him damages.

Sec. 75. LIABILITIES OF TRANSFEREE TO CORPORATION. A transferee is liable for unpaid subscriptions unless the corporation by recitals or representations, on which the transferee relied, that the stock was paid, is estopped to claim it is unpaid.

The general rule is that one who buys stock on which the subscription is not called is liable to the corporation for the unpaid subscription; but if the certificate recites that the stock is paid, a purchaser in good faith can rely upon that recital, as against the corporation. One of the purposes of such recital is to aid transfer, and the corporation cannot deny such recital upon which the purchaser relies. So if the certificate recites that all stock is nonassessable, that is binding on the corporation.

Sec. 76. LIABILITY OF TRANSFEREE TO CREDITORS OF THE CORPORATION.82 A transferee of stock is liable for the benefit of creditors of the corporation for the unpaid amount if he has knowledge that the stock is unpaid.

If a corporation becomes insolvent, one of its assets is the amount due on unpaid subscriptions. Are purchasers of stock from the subscriber liable at the suit of the creditors in such event? If when they purchase they know they are purchasing unpaid stock, even though it is recited in the certificate that it is paid, they are liable according to the law in many states. In a recent Illinois case 83 the rule is laid down that an assignee of stock is bound to know that it is unpaid if from the circumstances, a reasonable man would have concluded the stock had never been paid in, as for instance where he purchases stock from the subscribers to a highly capitalized concern which he knows never to have had to have any valuable assets.

The recitals in the certificate that the stock is paid are binding upon the corporation, but not upon creditors of the corporation, and they can hold the holder of such certificate, regardless of such recital.

If stock has been paid in property, we have heretofore noted that if the property was fraudulently valued, or, in some states, overvalued without fraud, the transaction may, on the insolvency of the corporation, be set aside and the subscriber of the stock held for the par value of the stock so far as necessary to pay the debts of the corporation. The assignee of such subscriber may likewise be held where he purchased with real or constructive knowledge of the circumstances.

82. See sec. 40, supra, for full discussion.

83. Garden City Sand Co. v. Crematory Co., 205 Ill. 42.

Example 19. A corporation was organized with a capital stock of $1,000,000. The directors agreed to receive and did receive a worthless patent in full payment for the stock subscribed by and issued to one Johnson to the extent of $998,000. Johnson's certificate read that this stock was "fully paid and non-assessable." He transferred his stock and assigned his certificate to one Rutan. Thereafter the corporation became insolvent and an attempt was made by one of the creditors to compel Rutan to pay the debt. The concern never had any tangible assets, as Rutan knew. The court held him responsible for the corporate indebtedness, saying, "It therefore appeared to have a paid up capital of $1,000,000 in money or property, and was possessed of nothing but the interest in the patent. It is not conceivable that a person of ordinary intelligence and prudence, buying shares of stock in such a corporation, would not become advised as to what property the corporation had." 84

If stock is bought on the open market, the circumstances would usually be such that there was no knowledge of fraudulent over-valuation.

Sec. 77. LIABILITY OF TRANSFEROR TO TRANSFEREE. The transferor of shares impliedly warrants that the stock is genuine, that he has good title, unencumbered, and with right to transfer. If a further warranty is claimed it must be shown to have been expressly made.

The doctrine of caveat emptor applies in sales of stock beyond a few implied warranties, which are above recited. If the transferee desires further protection, he must exact express warranties.85 These would consist of any state

84. Garden City Sand Co. v. Crematory Co., 205 Ill. 42. 85. Burwash v. Ballou, 230 Ill. 34. Uniform Stock Tr. Act, Sec. 11.

ment of fact made prior to or during the sale for the purpose and with the effect of inducing it, whether known to be false or not. But mere predictions and opinions do not constitute warranties. The vendor of stock would also be liable to his transferee for fraudulent statements of fact. that is, statements known to be false. The rules discussed concerning fraud in subscriptions are applicable in respect to sales by a stockholder. Defense could be made and rescission granted under the same circumstances.

CHAPTER 11.

DIVIDENDS.

Sec. 78. DEFINITION AND KINDS.

Dividends are the funds or the property set aside by a declaration of directors for payment to stockholders as profits earned upon the stock.

A corporation is organized for purposes of profit to its stockholders. All profit is ultimately to go to them. It comes to them by way of dividends. Stockholders are not entitled to a division of the profits except upon a declaration of a dividend out of such profits.

Dividends are payable out of profits. It is improper to declare dividends where no profits have been made, and illegal where the corporation is insolvent, and in such case they may be recovered back, for their payment is a fraud on creditors.

There are the following kinds of dividends: First, the ordinary money dividend, which is declared in the vast majority of instances. Second a script dividend, which is a dividend of certificates usually issued to anticipate the conversion of property now representing profits into cash at a later date. These certificates set forth the rights of the holder. Third, a stock dividend, or a dividend of the stock of the corporation, virtually representing a sale of unissued stock in return for the accumulated profits. A corporation would of course have to have unissued stock which it could issue without exceeding its capitalization in order to declare such a dividend.