a corporation are binding upon it and enter into the contracts of those who subscribe on the faith of such prospectus. While opinions and predictions therein stated must be regarded as such, yet in the statement of facts the prospectus must be honest and fair. And it must not give wrong impressions by omitting material facts.50

Where a company is yet to be incorporated, the promoters or commissioners have no real or seeming authority from it to make representations, and therefore it has been held that the defense of fraud cannot be made in such cases, but the subscriber is left to his action for damages against such promoters or commissioners.51

Where one has a right to withdraw on account of fraud, he must act diligently. Unexplained delay for more than a reasonable time will amount to a ratification and bar him of his defense.52

Usually it is also held that the insolvency of the corporation prevents an assertion of fraud, because the apparent assets of the corporation would be thereby depleted to the injury of creditors.53

This subject of fraud and misrepresentation by the corporation through its agents must not be confused with that of a sale of outstanding shares by the owners thereof. Whatever fraudulent or other assertions are made in such cases are of course not made in behalf of the corporation, for such owners are not acting as agents of the corporation, but as their own principals.

50. Morgan v. Skiddy, 62 N. Y. 319. (In this case the suit was brought against the directors themselves who authorized the prospectus.)

51. St. Johns Mfg. Co. v. Munger, 64 N. W. (Mich.) 3, 29 L. R. A. 63.

52. Burwash v. Ballou, 230 Ill. 34.

53. Gress v. Knight, 135 Ga. 60, 31 L. R. A. N. S. 900.

Sec. 36. SUBSCRIPTIONS UPON CONDITION. A subscription made upon some condition cannot be enforced unless the condition is performed, provided the condition is not secret and therefore a fraud on other subscribers and on creditors, and, provided, it is not objectionable as an oral variation of a written contract.

By a contract properly drawn subscribers could succeed in imposing a condition to be performed by the corporation before their liability is to attach, but more frequently it seems that where a defense is made that a condition has not been performed, the contract of subscription is a seemingly absolute one, and the condition is secret and perhaps oral. Now the capital stock of a corporation is a fund paid in or to be paid in by its subscribers and stockholders that it may conduct its business and pay its liabilities. Whenever, therefore, a subscriber imposes some secret condition that he shall not be compelled to pay his apparent obligation unless some land of his is purchased, or some work is done to his advantage, or some property of the corporation is located near his property, or some other undertaking of some sort is accomplished, he is imposing a condition, which, if enforced, may go to deplete the fund to which creditors have a right to look for the payment of their debts. It is accordingly held that such secret conditions are void and the subscription may be enforced as an absolute one.

Example 14. A subscription given on a secret condition assented to by the promoter that subscriber should not be bound unless certain other parties subscribed. They did not subscribe. Held, no defense.54

54. Minneapolis Threshing Machine Co. v. Davis, 40 Minn. 110.

CHAPTER 7.

PAYMENT FOR STOCK.

Sec. 37. LIABILITY UPON UNQUALIFIED SUBSCRIPTION. The liability of a subscriber to stock is to pay the corporation the par value thereof, unless otherwise agreed; and no more can be called for or assessed, unless otherwise agreed.

When one subscribes to the stock of a corporation either before or after the charter is secured, his liability, upon the acceptance of his subscription, is to pay the par value of the stock subscribed for, and no more or less unless it has otherwise been agreed. When he has paid that amount, no further calls can be made upon him and he is liable to no further assessments. We have already considered that one purpose of incorporation, very often the chief or perhaps the only one, is to limit one's liability to a definite amount-the par value of the shares taken.

But a contrary agreement may be made. Stock may be offered to a subscriber below par; or assessments may be provided for as a part of his contract of subscription. In all such cases the agreement really made would be binding upon the corporation and the subscriber. Whenever other stockholders would be thereby defrauded or, as we shall see, creditors would be deprived of payment of their debts, such special agreement would not stand.

Sec. 38. MEDIUM OF PAYMENT. Payment of stock may be either in money or other property as agreed upon.

Whether stock must be paid in money or in other property depends upon the agreement between the subscriber and the corporation. There is no reason for holding that a corporation may not receive payment of stock in any kind of property. The corporation must have property of various sorts, and may as well pay for it with certificates of stock as in money which it receives for such certificates. Often the corporation is organized to take over an existing business and they who are to own the shares are the owners of the business to be taken over by it. In such a case, the business is valued and then transferred for that value to the corporation, and shares are issued to its owners. To provide that payment must be in money would in many cases mean that money must be paid to the corporation by the person to whom it is to be immediately returned for the property he is to convey.55

Payment for shares may even be in services rendered to the corporation, but these services must be actually given, and they must be given pursuant to and in consideration of the issuance of the stock. And if the stock is issued for services, which are yet to be rendered, it is unpaid stock until the services are actually rendered and if they are never given the stock must be paid for in some other way, or else it is unpaid.

Sec. 39. DEFINITION OF "WATERED STOCK." Stock is said to be "watered" when it is issued by a corporation either under an agreement with the subscriber that he need not pay the whole or that he need not pay some part of the par value of such stock. In other words, it is stock

55. Garrett v. K. C. Coal Co., 113 Mo. 330, 20 S. W. 965, 35 Am. St. Rep. 713.

which in whole or part does not represent real value, but which purports to represent such value.

"Watered stock" is that stock which is issued at some discount, usually a heavy one, from the par value or which indeed is issued entirely as a bonus to the subscribers of other stock. It is stock which is meant to pass upon the market as "fully paid and non-assessable" when, as a matter of fact, it has never been paid and really represents no value whatever or, at best, represents only part of the value expressed upon its face. It is usually issued, for the purpose of enabling those to whom it is issued to resell it upon the market at an advance over what they have paid for it in order to profit heavily. Frequently it is issued in exchange for property or services purposely overvalued. We shall see in subsequent sections what rights creditors have in respect to the payment of such stock, and consider some of the difficulties connected with this subject, the chief one of which perhaps is the difficulty of discovering whether or not property received in full payment for stock has been purposely and dishonestly overvalued.

Sec. 40. LIABILITY OF STOCKHOLDER FOR PAYMENT OF STOCK FOR BENEFIT OF CREDITORS. Where creditors of a corporation remain unpaid by it, they may require, through proper court action in their behalf, payment by the subscriber, or (in some cases) his successor in title, to the limit set by his subscription if that much is necessary for the payment of their indebtedness, and fraudulent overvaluations of property received in payment may in such creditor's proceedings be ignored and set aside.

(1) General observations.

We know that a main object of incorporation is to limit stockholder's liability. When a person pays for stock