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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.


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 fraudulent 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. Zeller. bach, 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 stock dividend, as the stock represents undi. vided 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

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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 conrpany 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, in. crease 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.)” (Ex celsior 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 stock. holder, 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 div. idends 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

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fieial owner, is a sufficient demand and refusal to start the statuto 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. 8. 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 di. vide 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.)

So, also, a corporation organized under title 1, part IV, of this code, being forbidden to withdraw any part of its capital stock, except upon its dissolution, cannot make a valid by-law providing that a stockholder may surrender his stock and withdraw from the corporation by giving sixty days' notice, and that he may thereupon be entitled to receive the amount paid in upon the stock. (Vercoutere v. Land Co., 116 Cal. 410, 48 Pac. 375.)

Neither can a benevolent association, incorporated to promote cause of temperance and not for pecuniary profit, divide any part of the corporate property or funds among its members, and every member of such association may sue to prevent or set aside such a plain misappropriation of corporate funds. (Ashton v. Dashaway Assn., 84 Cal. 61, 22 Pac. 660, 23 Pac. 1091.)

The payment of an assessment by a corporation as a stockholder in another corporation is an investment of capital and not a current expense. (Excelsior W. & M. Co. v. Pierce, 90 Cal. 142, 27 Pac. 44.)

Debts in Excess of Subscribed Capital.—This section does not prevent a corporation from creating debts in excess of its subscribed capital stock, or make such indebtedness void, but merely provides a remedy in favor of the corporation and its creditors against the directors. So, it is held, notes and mortgages, issued to secure an indebtedness beyond the subscribed capital stock of the corporation, are not void. (Underhill v. Santa Barbara etc. Co., 93 Cal. 300, 28 Pac. 1049.)

The debts of constituent corporations, while not primary obligations of the consolidated corporation, are charges upon its property, which will reduce it so much, and hence come within the rule limriting the indebtedness to the amount of the subscribed capital steek. (Market St. Ry. v. Hellman, 109 Cal, 596, 42 Pac. 225.)

The prohibited debts are ordinary subsisting debts in excess of the capital stock, and not the aggregate debts of the corporation, created during its entire corporate existence. The prohibition applies to debts in excess of all the subscribed capital stock, whether it has all been paid in or only part of it, and regardless of the disposition which may have been made of it. And a purchase of mines for the full amount of the capital stock, to be paid for in the stock of the corporation, a portion of which only is paid in, does not make all debts thereafter created in excess of the subscribed capital stock. (Moore v. Lent, 81 Cal. 502, 22 Pac. 875. Note citation: 22 Am. St. Rep. 530.)

Director's Liability.-The statute which provides to make one person individually liable for the debts of another, and prescribes how and under what circumstances he shall be held liable is penal in its nature, and like other statutes which create a forfeiture or impose a penalty, is to be strictly construed against the liability. (Moore v. Lent, 81 Cal. 502, 22 Pac. 875.)

The directors of a corporation are not liable for a loss resulting from an unprofitable investment, where the investment was considered judicious when made, and the loss could not have been reasonably anticipated. Such a loss is a loss of capital and not a current expense. (Excelsior W. & M. Co. v. Pierce, 90 Cal. 145, 27 Pac. 44.)

So, also, the directors of a mining corporation, which has become indebted, are not guilty of an infraction of this section, because they declare and pay dividends out of the net proceeds of their mine with. Gut paying the whole of its debts other than for current expenses. (Excelsior W. & M. Co. v. Pierce, 90 Cal. 142, 27 Pac. 44.)

There is no conflict between this section and section 359 of the Code of Civil Procedure. This section relates to the liability of directors of corporations, while section 359 of the Code of Civil Procedure refers to the liability of stockholders. (Santa Rosa Nat. Bank v. Barnett, 125 Cal. 412, 58 Pac. 85.)

The statute of limitations does not run against the enforcement of a director's liability. (Dictum: Wells, Fargo & Co. v. Enright, 127 Cal. 674, 60 Pac. 439.)

The subscribed capital stock of a corporation is the fund upon Fhich the transactions of a corporation are to be mrade and is the guaranty of creditors that all obligations to that amount will he met; but it cannot be considered as the debt of a corporation, whether paid in or not, in estimating the amount of the indebtedness beyond which the directors of a corporation may make themselves personally liable. Debts to be thus considered are only those created by voluntary acts of the directors. (Moore v. Lent, 81 Cal. 502, 22 Pac. 875.)

In order to make the directors of a corporation personally liable under this section for the debt created beyond subscribed capital stock, it must appear that the corporation must have been indebted at the same time in an aggregate amount exceeding the amount of capital stock. (Moore v. Lent, 81 Cal. 502, 22 Pac. 875.)

Corporate officers and directors who form a fraudulent combination and agreement for the payment of an excessive price for work done for the corporation are liable for the excess of price paid. (Fox v. Fíale & Norcross etc. Co., 108 Cal. 369, 41 Pac. 408. Note citation: 57 Am. St. Rep. 65.)

Actions Against Directors.- An action against trustees of a corporation for misappropriation of its funds must generally be brought in the name of the corporation, but the stockholders may sue in their own names when the corporation, on a proper demand from a stockholder, refuses to institute action. When the action is by the stockholder, it is necessary to aver a demand and refusal without which the action will not be sustained. (Cogswell v. Bull, 39 Cal. 320. To same effect: Waymire v. 8. F. etc. Co., 112 Cal. 650, 44 Pac. 1086. Note citations: 41 Am. Dec. 368; 53 Am. Dec. 644.)

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