Sec. 79. DECLARATION OF DIVIDENDS WITHIN DISCRETION OF DIRECTORS. The declaration of dividends is within the discretion of the directors. But if there is a palpable or fraudulent abuse of such discretion a court may compel a declaration.

The directors have a wide discretion as to whether or not to declare dividends. Even though profits have been made still a court of equity will not at the instance of a stockholder compel the declaration of a dividend unless there is very clear evidence that the refusal on the part of the directors is in bad faith. To hold otherwise would be to give to the stockholders the power through court action to declare dividends. Yet, after all, the purpose of incorporation is to yield profit, and this ultimate purpose cannot be defeated or unduly hindered. The stockholders are the real owners of the business and the directors are trustees for them, and therefore a court of equity in a proper case will compel the declaration of dividends.86

Sec. 80. PAYMENT OF DIVIDENDS. Dividends are payable at the time and place stated in the declaration. If not paid in accordance with the declaration the stockholder may sue upon a debt due him.

After a dividend is declared it becomes a debt maturing at the time stated in the declaration. If not paid at that time the stockholder can sue as upon any other debt. The declaration may state the place at which the dividend is payable, provided it is not unreasonable and oppressive.

Sec. 81. WHO ENTITLED TO DIVIDENDS. Dividends are payable to those who are stockholders at the time of the declaration. A transferee of stock after the declaration of the 86. See Sec. 45.

dividend has no right to an unpaid dividend, though its time of payment is after the transfer.

If a declaration of a dividend is made in January, payable in March, and in February a stockholder transfers his stock, is his transferee entitled to the dividend? It is settled that he is not. The dividend becomes payable to the stockholder who is such at the time of declaration, regardless of the question who shall own it when the dividend is payable or paid.87

The right may be affected by the contract of the parties and the rules of market or stock exchange may form a part of the contract.87a

Sec. 82. DIVIDENDS UPON PREFERRED STOCK. Dividends must, as a usual rule, be declared upon preferred stock if there are profits for the current year out of which they may be paid.

The idea underlying the issuance of preferred stock is that the preferred shareholder shall have an investment on which he can rely for regular returns if the profits permit. Consequently the payment of dividends on preferred stock is not so largely within the discretion of the directors as in case of common stock. Yet undoubtedly they have some discretion. In considering whether there are profits, all the current expenses and indebtedness of the corporation must be deducted, and an item for depreciation should be included. See Sec. 45 supra.

87. Bowers v. Post, 209 Fed. 660.

87a. Hill v. Newichawanick Co., 8 Hun, 459, aff'd 71 N. Y. 593.

PART III.

THE DIRECTORS AND OFFICERS OF A CORPORA

TION.

CHAPTER 12.

DIRECTORS.

A. The Function and Composition of the Directorate.

Sec. 83. THE DIRECTORATE DEFINED. The directorate is the body elected by the stockholders to govern and manage the affairs of the corporation.

We have seen how stock passes readily from owner to owner and that one of the objects of incorporation is to permit the free transfer of shares; and furthermore we know how the stock of a corporation may be divided among many owners, and for these and other reasons it becomes desirable to put the management of the corporation into the hands of some permanent board whose members may be chosen for their known executive and general business ability; hence it has become a universal custom to elect a governing committee or board, which is usually called a board of directors or sometimes, board of managers.

This directorate has the immediate government of the corporation in its hands. It is a council to which is given the conduct of affairs while the stockholders go about their various concerns. It is elected by, and answerable to, and

the representative of, the stockholders who are the real owners. Yet by the creation of this board the stockholders deprive themselves of the power to have an immediate voice in the management of the corporation.

The directors must act as a board.88 Their power is exercisable in their collective capacity; and they must attend in person. They cannot delegate their discretionary duties. It is not necessary, however, that every director be present, for a majority (unless some other number is specially provided) constitutes a quorum for the transaction of business.

Sec. 84. QUALIFICATIONS FOR MEMBERSHIP IN THE BOARD. The director must usually be a stockholder. By law in some states he must be a resident of the state. The by-laws should specifically provide the qualifications.

By-laws usually provide that a director must be a stockholder. If there is no statutory prohibition, they may provide that he need not be a stockholder and this is sometimes, but not usually, done. A provision is often made that if during the tenure of his office he ceases to be a stockholder, it shall amount to a resignation by him.

Frequent statutory requirements are that a director be a stockholder and that some of the directors, at least, be residents.

The by-laws should, and usually do, set out in detail his qualifications.

Sec. 85. ELECTION OF DIRECTORS. Directors are elected by the stockholders acting in person or by proxy at a

88. Ames v. Goldfield Merger Mines Co., 227 Fed. 292.

regular stockholders' meeting. The legality of an election may be tested in the courts.

The stockholders in meeting assembled elect the directors. They may vote in person or by proxy and may cumulate their vote as heretofore explained.

Usually there is an election of directors at the annual meeting. The terms of office of the various directors need not expire contemporaneously. Often the board of directors is composed of directors whose terms of office expire relatively after the manner of the terms of the United States Senators, so that the board is never completely renewed at one time. In the smaller corporations there is usually no need for such a provision.

If an election of directors is illegal, recourse may be had to the civil courts to contest it. The court will in this way prevent usurpation of office and will protect the rights of minority stockholders.89

If no election is had at the appointed time the offices do not become vacant, but those in office continue to hold. This is indeed usually provided for in the by-laws which state that such directors shall hold office "until their successors have been elected and qualified.”

Vacancies occurring by resignation, death or removal can only be filled by the stockholders, unless the by-laws give the directors power to fill vacancies.90

Sec. 86. RIGHT TO REMOVE DIRECTOR DURING TERM. The stockholders may remove a director for serious

89. Wright v. Central Calif. Col. Water Co., 67 Cal. 532, 8 Pac. 70.

90. Sylvania & G. R. Co. v. Hoge, 129 Ga. 734, 59 S. E. 806.