Pac. 373; Wickersham v. Brittan, 93 Cal. 38, 39, 28 Pac. 792, 29 Pac. 51; Salfield v. Sutter Co. L. R. & Co., 94 Cal. 549, 29 Pac. 1105; Smith v. Dorn, 96 Cal. 82, 30 Pac. 1024; Dulin v. Pacific Wood & Coal Co., 103 Cal. 363, 35 Pac. 1045, 37 Pac. 207; Porter v. Lassen County etc. Co., 127 Cal. 267, 59 Pac. 563; Curtin v. Salmon River etc. Co., 130 Cal. 348, 349, 80 Am. St. Rep. 132, 62 Pac. 552; Sims v. Petaluma Gas Co., 131 Cal. 659, 63 Pac. 1011.

Annotation.

Election of President.-The election of one not a member of the board of directors as president is void, and neither the board that elected him nor the court can make him president. (Dulin v. Pacific etc. Co., 103 Cal. 357, 35 Pac. 1045, 37 Pac. 207. To same effect: Sims v. Petaluma Gas Co., 131 Cal. 659, 63 Pac. 1011. See subd. 5, sec. 303, C. C., and notes, ante.)

The word "election," as first used, refers to the election by the stockholders, and is the proper term to signify the choice by the votes of the entire body, whereas in its subsequent use it signifies only the appointment by the board of its own officers. The provisions of section 315, Civil Code, have reference only to the first class of elections. (Wickersham v. Brittan, 93 Cal. 38, 28 Pac. 792, 29 Pac. 51.)

Quorum, "When Duly Assembled," May Act: See title "Quorum and Meetings," in notes to sec. 305, C. C., ante, and title "Meetings," in notes to subd. 1, sec. 303, C. C., ante.

Powers and Duties of Directors: See title "Powers of Directors," in notes to sec. 305, C. C., ante.

DIVIDENDS TO BE MADE FROM SURPLUS PROFITS-INCREASE AND REDUCTION OF CAPITAL STOCK.

Sec. 309, C. C. The directors of corporations must not make dividends, except from the surplus profits arising from the business thereof; nor must they divide, withdraw, or pay to the stockholders, or any of them, any part of the capital stock; nor must they create debts beyond their subscribed capital stock; nor must they divide, withdraw, or pay to the stockholders, or any of them, any part of the capital stock, except as hereinafter provided, nor reduce or increase the capital stock, except as herein specially provided. For a violation of the provisions of this section, the directors under whose administration the same may have happened (except those who may have caused their dissent therefrom to be entered at large

on the minutes of the directors at the time, or were not present when the same did happen) are, in their individual and private capacity, jointly and severally liable to the corporation, and to the creditors thereof, in the event of its dissolution, to the full amount of the capital stock so divided, withdrawn, paid out, or reduced, or debt contracted; and no statute of limitations is a bar to any suit against such directors for any sums for which they are liable by this section; provided, however, that where a corporation has been heretofore or may hereafter be formed for the purpose, among other things, of acquiring, holding, and selling real estate, water, and water rights, the directors of such corporation may, with the consent of stockholders representing two-thirds of the capital stock thereof. given at a meeting called for that purpose, divide among the stockholders the land, water, or water rights so by such corporation held, in the proportions to which their holdings of such stock at the time of such division would entitle them. All conveyances made by the corporation in pursuance of this section. shall be made and received subject to the debts of such corporation existing at the date of the conveyance thereof. Nothing herein shall prohibit a division and distribution of the capital stock of any corporation which remains after the payment of all its debts, upon its dissolution, or the expiration of its term of existence. En. March 21, 1872. Amd. 1891, 468. Increasing and diminishing capital stock: See post, sec. 359. Penalties: See Pen. Code, secs. 560, 563, 564, 569, 570, post. For liability of directors for embezzlement and misappropriation of corporate funds, see sec. 3, art. XII, Const., and notes, ante.

For further liability of directors, see sec. 3, art. XII, Const., ante, and sec. 316, C. C., post, and sec. 300, C. C., ante, and secs. 504, 560, Pen. Code.

Legislative History:

The original section is the same as the above, with the omission of the words "nor must they divide, withdraw or pay to the stockholders, or to any of them, any part of the capital stock, except as hereinafter provided," and with the omission of the proviso and all that follows down to the last sentence, which is in the original.

Similar provisions to the above section are found in the incorporation act of 1850, page 348; the incorporation act of 1853, page 89; the railroad act of 1861, page 626, and the insurance act of 1866, pages 747, 757.

Section Cited.

Burke v. Badlam, 57 Cal. 602; Kohl v. Lilienthal, 81 Cal. 384, 387, 389, 390, 396, 397, 20 Pac. 401, 22 Pac. 689; Excelsior W. & M. Co. v. Pierce, 90 Cal. 135, 136, 139-142, 27 Pac. 44; Underhill v. Santa Barbara Co., 93 Cal. 309, 310, 311, 28 Pac. 1049; Market St. Ry. Co. v. Hellman, 109 Cal. 596, 42 Pac. 225; Vercoutere v. Golden State L. Co., 116 Cal. 415, 48 Pac. 375; Sacramento Bank v. Pacific Bank, 124 Cal. 149, 71 Am. St. Rep. 36, 56 Pac. 787; Santa Rosa Nat. Bank v. Barnett, 125 Cal. 412, 58 Pac. 85; Wells, Fargo & Co. v. Enright, 127 Cal. 674, 60 Pac. 439; Schaake v. Eagle etc. Can Co., 135 Cal. 428, 63 Pac. 1025, 67 Pac. 759.

Annotation.

Policy of the Section.-The policy which dictated this provision is obvious. Persons dealing with corporations do so upon the faith that its property and all its assets, of whatever nature, are vested in trustees or managers, to be held by them as a fund which shall be primarily liable for its debts. Although the stockholders, and in some events the trustees, may be individually liable to creditors, it is the property and capital of the corporation to which creditors chiefly look, and which give it credit in the community. To protect the rights of creditors and to guard against improvident or fraudu lent conduct on the part of trustees and stockholders, this provision was made that the capital stock of the corporation shall remain intact, and shall not be devoted to the stockholders, either in shape of dividends, payments or withdrawals; nor by way of a reduction of capital stock, except on a dissolution in the manner prescribed by law. (Martin v. Zellerbach, 38 Cal. 307, 99 Am. Dec. 365; Kohl v. Lilienthal, 81 Cal. 385, 20 Pac. 401, 22 Pac. 689.)

Dividends-Declaration of.-The language of this section is direct, explicit and unmistakable. But it was not intended to interfere with the plenary power of the directors over the legitimate business of the corporation. They may manage, control and alienate its property in the regular course of business, but they cannot devote the proceeds, beyond the surplus profits, to the stockholders, either directly or indirectly, until all its debts are paid. (Martin v. Zellerbach, 38 Cal. 307, 99 Am. Dec. 365; Kohl v. Lilienthal, 81 Cal. 385, 20 Pac. 401, 22 Pac. 689.)

And a stockholder is not entitled to undivided profits, or to a money dividend, in lieu of a stock dividend, as the stock represents undivided profits, and one who receives his share of the stock acquires his due interest in the undivided profits. (Harris v. S. F. Sugar Co., 41 Cal. 393. Note citation: 99 Am. Dec. 762.)

This inhibition, however, does not extend to the net proceeds of mining operations; for a mining corporation, like any other corporation organized for the purpose of utilizing a wasting property-a

property that can be used only by consuming it—as a mine, a lease, or a patent, is not deemed to have divided its capital merely because it has distributed the net proceeds of its operations, although the necessary result is that so much has been subtracted from the substance of its estate. (Excelsior etc. Co. v. Pierce, 90 Cal. 140, 27 Pac. 44.)

If the directors of a corporation fairly and honestly apply toward the payment and extinguishment of the debts of the company a share of the net earnings satisfactory to its creditors and reasonably proportioned to the indebtedness of the company, they may properly and safely pay out the remainder in dividends, because the remainder may in such cases be regarded and treated as surplus profits of the business. "For a definition of net earnings used in the sense of surplus profits, we refer to Union Pacific R. R. Co. v. United States, 99 U. S. 420; note to Goodwin v. Hardy, 99 Am. Dec. 762. The case in 99 United States and Park v. Grant Locomotive Works, 40 N. J. Eq. 114, 3 Atl. 162, and Minot v. Paine, 99 Mass. 101, 96 Am. Dec. 705, are also authority for the proposition that the apportionment of net earnings to the payment of cash dividends, stock dividends, increase of capital, reserve or contingent fund, or to provide for future obligations, is largely one of policy, intrusted to the discretion of the directors, which, when honestly and intelligently exercised, will not be lightly overruled. (See, also, Stringer's Case, L. R. 4 Ch. App. Div. 490, and Williams v. W. U. T. Co., 93 N. Y. 162.)" (Excelsior etc. Co. v. Pierce, 90 Cal. 146, 27 Pac. 44. To same effect: Zellerbach v. Allenberg, 99 Cal. 71, 33 Pac. 786.)

It is clearly shown that the funds of an insolvent corporation are to be dispensed solely for the benefit of its creditors, and, while the stockholder may be compelled to put a great deal into the funds of such a corporation, in the way of assessments, he is not, as a stockholder, permitted to share in its dividends, either by subrogation or otherwise. (Sacramento Bank v. Pacific Bank, 124 Cal. 149, 71 Am. St. Rep. 36, 56 Pac. 787.)

Action for.-Demand for dividends must be made before action is brought, and within reasonable time. (Bills v. Silver King Min. Co., 106 Cal. 9, 39 Pac. 43. To same effect: Ralston v. Bank, 112 Cal. 215, 44 Pac. 476; Thomas v. Pacific etc. Co., 115 Cal. 143, 46 Pac. 899; Williams v. Bergin, 116 Cal. 61, 47 Pac. 877; Meherin v. Produce Exchange, 117 Cal. 217, 48 Pac. 1074.)

And demand for dividends must be alleged in a complaint for recovery thereof. (Ralston v. Bank, 112 Cal. 215, 44 Pac. 476; Bills v. Silver etc. Min. Co., 106 Cal. 9, 39 Pac. 43.)

But an application to officers of a corporation, by an administratrix, for information as to dividends upon stock, and a reply that all dividends on the shares of stock had been paid, and that no money was due or owing on dividends declared during the lifetime of the bene

ficial owner, is a sufficient demand and refusal to start the statute of limitations. (Hill v. King Min. Co., 106 Cal. 9, 39 Pac. 43.)

In an action by executors to recover dividends when the stock was transferred and assigned under a decree of distribution, which was reversed on appeal, the assignees should be made parties to the action, but the objection on that ground is waived unless taken by a demurrer or answer. (Ashton v. Zeila Min. Co., 134 Cal. 408, 66 Pac. 494.)

And, while there is litigation between one director and the other directors, as to his indebtedness to the directors and as to the possession of pledged stock, it is proper exercise of discretion for the directors to suspend operations upon a mine, to declare no dividends from the profits, and to hold the assets until the litigation is determined, and they cannot be compelled to account for the money in such litigation. (Zellerbach v. Allenberg, 99 Cal. 57, 33 Pac. 786.)

In order to recover, from a corporation, dividends on its stock, the plaintiff must have been the owner of the stock at the time the dividend accrued. Mere possession of the stock or a special property therein is not sufficient. (Dow v. Gould & Curry etc. Co., 31 Cal. 629.)

Capital Stock-Division, Withdrawal or Payment to Stockholders. The term "capital stock,' "" as used in this section, has a different meaning from that of "shares of the capital stock," as representing the interest which the holders thereof have in the business and property of the corporation. "Capital stock" is frequently otherwise and as well expressed by the simple word "capital," and means the money and property with which the company carries on the corporate business. (Martin v. Zellerbach, 38 Cal. 309, 99 Am. Dec. 365. To same effect: S. F. v. S. V. W. W., 63 Cal. 531; Kohl v. Lilienthal, 81 Cal. 385, 20 Pac. 401, 22 Pac. 689; Excelsior etc. Co. v. Pierce, 90 Cal. 140, 27 Pac. 44.)

Where a corporation sold its property to a new corporation, taking, in payment therefor, the shares of the new corporation, the stock so received in exchange stands in the place and stead of the property sold, precisely the same as if it had been money or any other kind of property, instead of stock; and the directors are forbidden to divide it among the stockholders. (Kohl v. Lilienthal, 81 Cal. 386, 20 Pac. 401, 22 Pac. 689. To same effect: S. F. etc. Co. v. Bee, 48 Cal. 404; Martin v. Zellerbach, 38 Cal. 300, 99 Am. Dec. 365, and note 384.)

So, also, it is held the transfer by a subsisting corporation of all its property and assets to another corporation, in sole consideration of the issuance of stock of the latter to stockholders of the former, is, in effect, an attempted distribution to them of all of the property and assets of the first corporation, in violation of positive law. (Schaake v. Eagle Automatic Can Co., 135 Cal. 472, 63 Pac. 1025, 67 Pac. 759.)