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of office, said that the provision did Dunham v. Tilma (1916) 191 Mich. not apply, since the office of judge of 688, 158 N. W. 216. a special municipal court is not a con- In Cotten v. Ellis (1860) 52 N. C. stitutional office, but one which may be (7 Jones, L.) 545, where the state created and abolished by the legisla legislature had undertaken to abolish ture at will (citing State ex rel. the salary of an office created by an Martin v. Kalb (Wis.) supra); and act of Congress, the court stated that moreover that it had long been held the salaries of all persons holding that the constitutional provision ap- offices under the appointment of the plies only to officers having a fixed state were within the control of the salary from the state.

legislature, except those protected by In Somers v, State (1894) 5 S. D. the Constitution, and that the salary 584, 59 N. W. 962, which holds that a could be increased or reduced during deputy superintendent of public in- the term of office, for it was presumed struction, appointed to hold office dur- that officers accepted office with refering the pleasure of the principal, does ence to this general power, of which not hold office for a "term" within the the legislature had not devested it. constitutional inhibition against any self. change in the compensation of any And in Mills v. Deaton (1915) 170 public officer during his term of office, N. C. 386, 87 S. E. 123, it was stated the court cited the Kalb Case (Wis.) that the legislature could within reaand the Timme Case (Neb.) supra, as sonable limits diminish the emoluholding that a constitutional provision ments of the office of sheriff by the similar to that in the case at bar ap- transfer of a portion of its duties to plied only to officers created by the another office, or by reducing the Constitution, without affecting the salary or fees, since the incumbent power of the legislature with respect took the office subject to the power of to offices created by it, but stated that, the legislature to make such changes as this question was not presented in as the public good might require, but the argument, it would not notice the that there were offices created by the point or examine its tenability.

Constitution which were placed beIt has been held that under a consti- yond the control of the legislature, so tutional provision that the salaries of that that body could neither abolish public officers, except the circuit the office nor reduce the compensation. judges, shall not be increased after It should be noted, however, that in election or appointment, the salary neither of the North Carolina cases of a judge of the superior court, which cited does anything appear as to what court, though authorized and per- were the specific provisions of the mitted by the Constitution, is not Constitution in regard to the reduccreated by it, but by the legislature, tion or increase of the salaries of pub. and is not a court of general jurisdic- lic officers, and the court in the Mills tion in the sense in which that term Case observed that while the office of is applied to circuit courts, does not sheriff is a constitutional one, yet the come within the exemption allowed by regulation of its fees is within the the Constitution to the circuit judges. control of the legislature. G. S. G.



United States Circuit Court of Appeals, Eighth Circuit - May 7, 1923.

(290 Fed. 87.) Corporations — what controls rights of stockholders.

1. The provisions of the charter and by-laws of a corporation are to


(290 Fed. 87.) be considered, and not alone the recitals in certificates of preferred stock issued by it, in determining the rights of the holders of such stock.

[See note on this question beginning on page 1326.] - effect of issuing shares of stock. in dividends declared in any calendar

2. The issuance by a corporation of year before any dividends shall be denew certificates of stock to persons clared upon the common stock, and, purchasing shares from existing stock- after a like dividend shall be declared holders is an express acceptance by common stock for any calendar the corporation of them as stockhold- year, both kinds of stock shall particers, and gives them the right possessed ipate equally in further dividends, by their predecessors in title.

holders of preferred stock cannot in[See 7 R. C. L. 213; 2 R. C. L. Supp. sist on declaration of their dividend in 316.)

any year before surplus profits of - right to dividend.

former years from which the regular 3. Under a provision of the articles dividends were paid can be divided of a corporation that the holders of between holders of both kinds of preferred stock shall be entitled to

stock, receive for and in respect of the calen

[See notes in 6 A.L.R. 802; 13 A.L.R. dar year within which profits were

426.] made from which dividends are de- Estoppel — representation as to rights clared, and for and in respect of each of stockholders effect. and every calendar year out of the

4. Representations as to the rights profits of which any dividend shall be

of holders of preferred stock, made by declared, a dividend of a certain per

the officers of cent without cumulation, and, after a

corporation to secure like dividend has been declared upon

a listing of its stock on a stock excommon stock, further dividends shall

change, do not estop the corporation be divided equally between both kinds

from relying on the provisions of the of stock, and a provision in the stock

articles of incorporation with respect certificate that preferred stock is en

to such rights, when they conflict with titled to a preference of such per cent the representations made.

APPEAL by complainants from a decree of the District Court of the United States for the District of Minnesota (Booth, J.) in favor of defendant in a suit to enjoin the carrying out of that part of a resolution declaring and directing a dividend to be paid on the common stock of a corporation. Affirmed.

The facts are stated in the opinion of the court.

Argued before Stone, Lewis, and class whose interests are thereby Kenyon, Circuit Judges:

prejudiced may have recourse to relief Messrs. Nathan H. Chase and M. H. by way of injunction. Boutelle, for appellants:

1 Morawetz, Corp. $ 280; 6 Fletcher, Broadly speaking, and as applied to Cyc. Corp. p. 6255; Elkins v. Camden causes in general, the ordinary signif- & A. R. Co. 36 N. J. Eq. 233; Boardicance attached to preferred stock is man v. Lake Shore & M. S. R. Co. 84 that it is preferred over the common N. Y. 157. stock whenever dividends are de- The contract expressed in the preclared.

ferred certificates was conclusive. 1 Cook, Corp. 7th ed. § 267; 6 Fletch- Merritt v. American Steel Barge Co. er, Cyc. Corp. pp. 6027, 6250; Warren 24 C. C. A. 530, 49 U. S. App. 85, 79 v. King, 108 U. S. 389, 27 L. ed. 769, 2 Fed. 228; United States Radiator Corp. Sup. Ct. Rep. 789; New York, L. E. & v. State, 208 N. Y. 144, 46 L.R.A.(N.S.) W. R. Co. v. Nickals, 119 U. S. 296, 30 595, 101 N. E. 783; 1 Cook, Corp. 7th L. ed. 363, 7 Sup. Ct. Rep. 209; 1 ed. $ 269, pp. 774–778; Warren v. King, Machen, Corp. $ 540; 1 Cook, Corp. 7th 108 U. S. 389, 27 L. ed. 769, 2 Sup. Ct. ed. $ 269, p. 777.

Rep. 789; Boardman v. Lake Shore & Where profits regularly appropri- M. S. R. Co. supra; Scott v. Baltimore ated for dividends are sought to be & O. R. Co. 93 Md. 475, 49 Atl. 327; apportioned contrary to contractual Seitz v. Brewers' Refrigerating Mach. rights of the shareholders inter se, the Co. 141 U. S. 510, 35 L. ed. 837, 12 Sup. Ct. Rep. 46; 1 Greenl. Ev. $ 275; Smith the accumulated surplus earnings v. Cork & B. R. Co. 5 Ir. Rep. Eq. 65. of the years ending December 31, The defendant under the facts here

1909, to 1919, inclusive, both dividisclosed was estopped to deny the

dends to be paid April 15, 1922. contract expressed in the preferred

The part of the resolution to which certificates. 1 Machen, Corp. $ 534; 1 Cook, Corp.

objection was made and injunctive 7th ed. § 268, p. 770; 6 Fletcher, Cyc.

order sought was the dividend deCorp. pp. 6011, 6012; Banigan v. Bard,

clared and directed to be paid on 134 U. S. 291, 33 L. ed. 932, 10 Sup. Ct. the common stock; the contention Rep. 565; Wilson v. Parvin, 56 C. C. A. being that inasmuch as a dividend 268, 119 Fed. 652; Ingraham v. Nation- of 7 per cent on the preferred stock al Salt Co. 65 C. C. A. 54, 130 Fed. 676; had not been declared theretofore in Toledo, St. L, & K. C. R. Co. v. Conti

1922, the common stock was not nental Trust Co. 36 C. C. A. 155, 95

entitled to receive a dividend until Fed. 497; Kent v. Quicksilver Min. Co. 78 N. Y, 159, 4 Mor. Min. Rep. 47.

that was done. This insistence is Defendant is concluded by the prac

based wholly on the phraseology tical construction placed on its pre

found in the certificates for the preferred certificates.

ferred shares issued to appellants, Continental Ins. Co. v. United and in all certificates theretofore States, 259 U. S. 156, 66 L. ed. 871, 42 issued for preferred shares, reading Sup. Ct. Rep. 540.

thus: “This preferred stock is enThe feature which distinguishes

titled to a preference of 7 per noncumulative from cumulative preferred stock is that the former's divi

centum, noncumulative, in dividends dends are payable from the profits of

declared in any calendar year bea particular year.

fore any dividends are paid upon 1 Machen, Corp. $ 551; 6 Fletcher, the common stock of the said comCyc. Corp. p. 6249; Palmer, Company pany and after dividends have been Prec. 11th ed. pt. 1, p. 812.

paid upon the common stock to a Where the subject-matter of an in- like amount of 7 per centum for any strument relates to something which

calendar year then both classes of has received settled legal construc

stock shall participate without distion, that construction will be assumed to have been intended and the instru

tinction or preference in any furment itself as drawn in reference

ther dividends for such year." thereto.

Appellee, in justification of its acWallis v. Smith, L. R. 21 Ch. Div. tion in passing the resolution, re254, 52 L. J. Ch. N. S. 145, 47 L. T. lies on article 11 of its articles of N. S. 389, 31 Week. Rep. 214–C. A.; consolidation, by which four railBainbridge v. Smith, L. R. 41 Ch. Div.

way companies were consolidated in 462, 60 L. T. N. S. 879, 37 Week. Rep.

1888 into and under the name of ap594—C. A.; Cooper v. Griffin [1892] 1 Q. B. 740; New York, L. E. & W. R.

pellee company, which article reads Co. v. Nickals, 119 U. S. 296, 30 L. ed.

thus: “That if and whenever any 363, 7 Sup. Ct. Rep. 209; Elkins v.

dividend shall be declared upon the Camden & A. R. Co. 36 N. J. Eq. 233; capital stock of the consolidated corDent v. London Tramwavs Co. L. R. poration, hereby formed, out of 16 Ch. Div. 344, 50 L. J. Ch. N. S. 190, the profits of its business, the hold44 L. T. N. S. 91.

ers of the preferred stock of such Mr. Henry S. Mitchell for appellee. corporation shall be entitled to re

Lewis, Circuit Judge, delivered ceive for and in respect of the calthe opinion of the court:

endar year within which such prof. This suit was instituted by ap- its were made and for and in repellants, two preferred stockholders spect of each and every calendar in appellee company, to enjoin the year out of the profits of which any carrying out of a resolution passed such dividend shall be declared, by its board of directors on March semiannual dividends of not exceed10, 1922, declaring a dividend of ing 3} per centum each upon such $2 per share on both the common preferred stock, before the holders and preferred stock, payable out of of any shares of common stock shall

shares of stock.

(290 Fed. 87.) be entitled to receive any dividends it are $100 each. In December, whatever for or in respect of the 1919, one of the appellants purprofits of such calendar year; but chased from a member of the New the right of the holders of such pre- York Stock Exchange 500 shares, ferred stock to such dividends shall and the other at about the same time not be cumulative. That is to say and in the same way purchased 800 if the aforesaid dividends of 7 per shares. They each purchased a cent upon the preferred stock shall right theretofore enjoyed by its not be actually declared by the di- vendor and his predecessors in inrectors, as earned for and in respect terest, a right to participate thereof any calendar year, no right shall after in the privileges and benefits exist in favor of the holders thereof of the corporation pro rata with to have said dividends afterwards other stockholders, as those rights added to the dividend declared for were determined by its articles of in respect of another calendar year. incorporation or association, or othThat, after the declaration of divi- er agreement binding upon all stockdends as aforesaid, amounting to 7 holders. The issuance to them of per cent in all, of any calendar year, new certificates on surrender of the to the holders of shares of preferred old ones held by their vendor was an stock, then the directors of said con- express acceptance by the corporasolidated corporation shall be at tion of each of the

Corporations liberty, in their discretion, to de- appellants as a effect of issuing clare in favor of the holders of stockholder in the shares of its common stock, not ex- corporation. The certificates, howceeding two semiannual dividends ever,

were not the things purof 31 per cent each for and in chased; they only represented the respect of such calendar year; right which was purchased. 1 Cook, and that, after the holders of such Corp. 4th ed. § 12; Richardson v. common stock shall have received Shaw, 209 U. S. 365, 62 L. ed. 835, dividends for and in respect of any 28 Sup. Ct. Rep. 512, 14 Ann. Cas. calendar year, equal to 7 per cent 981. It is said in Cecil Nat. Bank v. upon the shares held by them, re- Watsontown Bank, 105 U. S. 217, spectively, then all further divi- 222, 26 L. ed. 1039, 1042: “This dends declared with respect to such legal relation and proprietary intercalendar year shall be divided equal- est, on which it is based, are quite ly and pro rata among all the share- independent of the certificate of holders of said consolidated cor- ownership, which is mere evidence poration, whether the stock held by of title. The complete fact of title them be common or preferred.' may very well exist without it. All

The trial court held that the ar- that is necessary, when the transfer ticle just quoted, notwithstanding is required by law to be made upon the excerpt above from the certif

the books of the corporation, is that icate, was controlling, that it au- the fact should be appropriately rethorized the board to pass the reso- corded in some suitable register or lution, and dismissed the bill of stock list, or otherwise formally encomplaint. The issue thus present- tered upon its books. For this pured on appeal from that order raises pose the account in a stock ledger, the inquiry, Do the terms used in showing the name of the stockthe certificates issued to appellants holders, the number and amount of conclusively determine their rights the shares belonging to each, and as preferred stockholders? Or are the source of their title, whether by those terms restrained, or avoided, original subscription and payment if need be, by article 11?

or by derivation from others, is Appellee's authorized and issued quite suitable, and fully meets the capital is in the proportion of two requirements of the law." thirds common to one third pre- It is a question for corporators ferred, and the shares representing or stockholders upon the incorporation of the company to decide and above 7 per cent, upon both, in whether a part of the stock shall be any one year.” All of the bondholdpreferred stock, and, if so, what ers subscribed to the plan. The compreference rights the holders of it pany's board of directors appointed shall have over the rights of the a committee to carry out the plan. holders of preferred stock, and as For that purpose the committee relong as their agreement in that reported an "indenture" to be executed spect is not against public policy or by the company and the bondholders in contravention of the laws of the or the trustees of the mortgage. state which grants the corporate This indenture was referred to a charter, the preference rights may stockholders' meeting, which "inbe whatever all agree they shall be. structed the board to procure and Such agreements primarily and al- adopt, on behalf of the corporation, most exclusively affect rights only such certificates in relation to the of stockholders among themselves. preferred stock, to be issued under Morawetz, Priv. Corp. 2d ed. $$ 316, said agreement, as may be necessary 1047; 1 Cook, Corp. 4th ed. $ 268; to carry the same into effect, and Belfast & M. L. R. Co. v. Belfast, 77 cause the same to be executed in beMe. 445, 1 Atl. 362. It is conceded half of this corporation in such manin appellants' brief that officers of ner as they may think best.” The a corporation exceed their authority indenture made no reference to the in the issuance of preferred shares plan, but it undertook to describe if they act contrary to the basic the preferences to be given to preagreement, and that they may be en- ferred stock. In doing so it did not joined from doing so; but it is ar- show that common as well as pregued that if authority in this respect ferred was to receive 7 per cent in is exceeded and the certificates which dividends before any remaining surthey put out represent that the hold- plus could be divided between them, er has greater or less or different but rather that they should share preference rights than the articles of equally after the preferred only had association give to him, the corpora- received 7 per cent. The certificates tion is bound to him according to issued for the preferred made no the terms of the certificate, and that reference to the original plan, but it represents the contract obligations stated that they were issued in ad

of the corporation justment of the bonds of the com-what controls rights of stock, to the holder. This, pany, with the rights set forth in

of course, ignores and subject to the terms and condisubstantial rights of the holders of tions of the indenture. The court stock of every other class, and vio- held that the original plan must lates the fundamental agreement be- be considered with the certificates tween all stockholders. We think for the purpose of determining Bailey v. Hannibal & St. J. R. Co. the rights of holders of preferred 17 Wall. 96, 21 L. ed. 611, is a com- shares, and that, although the plan plete refutation of the claim. There was admitted in evidence without the railroad company issued to the objection, still objections could not holders of its mortgage bonds a cir- have availed even if they had been cular which set forth a plan for ex- made. tricating the company from its finan- We find nothing to the contrary cial difficulties. The plan proposed in Warren v. King, 108 U. S. 389, to the bondholders that they ex- 27 L. ed. 769, 2 Sup. Ct. Rep. 789. change their bonds in part for other There the terms of a prior written bonds and in part for preferred instrument specifically fixing prefstock; "the preferred stock to be 7 erence rights were put into the cerper cent, and not cumulative, but to tificates for preferred shares; hence share with the common stock any when that appeared, it was not necsurplus which may be earned over essary to consider anything but the


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