involving the purchasers in the liabilities of partly paid stock. This is the most common source from which treasury stock is derived.

Also if a corporation purchases its own outstanding stock, or secures possession of it in any other way, such stock is treasury stock as long as it remains in the possession of the corporation.

From the bookkeeping standpoint treasury stock is an asset of the corporation (See § 186), though for all purposes of practical business the only difference between treasury stock and unissued stock lies in the fact that the treasury stock may be sold at less than par without involving the purchaser in liability, while with unissued stock this cannot be done.

Stock donated to the corporation which issued it, or secured in any other way, is usually assigned to the corporation in the corporate name, though occasionally it is assigned to the treasurer, or to the treasurer as trustee for the corporation. Whatever the form of assignment, such stock is the property of the corporation and, unless otherwise specially provided at the time of the donation, subject to disposal by its directors.

When certificates of stock are assigned to the corporation, they should be cancelled and the proper entries be made in the stock book to show that the stock they represent has been transferred to the corporation. It is not, however, necessary to issue new certificates as long as the stock is held in the treasury. When a sale of such stock is made, a certificate for the amount sold is issued in the name of the purchaser.

Stock owned or held by the corporation, whether treasury stock or unissued stock, can neither vote nor draw dividends.

§ 337. Common and Preferred Stock.

When all the stock of the corporation is on an absolute equality as to voting, dividends and participation in assets, it is all common stock. No one stockholder then has any right

or privilege over another stockholder and no one share of stock has any advantage over any other share. They are all on a common basis and fare alike.

If, however, a certain portion of the stock of a corporation is to receive benefits not accorded all the stock, or is in some other way differentiated from the remaining stock of the corporation, such stock is termed "preferred stock," as opposed to the remaining or common stock of the corporation which has no special rights or privileges. Preferred stock is treated at some length in the succeeding chapter of the present volume.

§ 338. Watered Stock.

"Watered stock or fictitiously paid-up stock is stock which is issued as fully paid-up stock, when in fact the whole amount of the par value thereof has not been paid in. All stock which has been issued as paid-up stock, but the full par value of which has not been paid into the corporation in money or money's worth, is watered to the extent that the par value exceeds the value actually paid in. Watered stock is, accordingly, stock which purports to represent, but does not represent, in good faith, money paid into the treasury of the company, or money's worth actually contributed to the capital of the concern."1

As stated, any stock which is issued without property values to support it, i. e., without receipt by the corporation of money, property or labor to its face value, is watered stock. Thus a railroad company, the issued stock of which is perhaps already in excess of the real value of its property, may find its dividends so uncomfortably large as to attract public attention. Then, entirely regardless of the real values behind its stock, it will perhaps add a few millions to its capitalization and issue this increased stock in the form of a stock dividend.

I Cook on Corps., § 28.

No material values have been added to the capital of the corporation to serve as a basis for this increase of stock, and the value of each share of stock has therefore been diminished by the issue of the stock dividend, i. e., the stock has been diluted or watered.

CHAPTER XXXI.

PREFERRED STOCK.

§ 339. How Created.

If all the stock of a corporation is on an equality, it is all common stock. If by proper procedure some of the stock has been given rights as to dividends or assets not enjoyed by the remaining stock of the corporation, such stock is preferred stock.

In a number of the states the statutes are entirely silent as to the method of creating preferred stock. In these states preferred stock may be created by charter provision—if the statutes permit special provisions in the charter-or otherwise by by-law enactment or direct action of the stockholders. All the stockholders must, however, agree. A preferred stock issued against the wishes or without the concurrence of a portion of the stockholders would—unless permitted by the statutes of the state-be illegal.1 If, however, all consent to give certain stock particular rights or privileges there is no legal objection.2

In a large number of states the statutes provide expressly for the creation of preferred stock and regulate its issue. In some of these it must be created by charter provision or amendment, as in Massachusetts and Delaware. In others. as in Maine, it may be created by by-law provision or by direct action of the stockholders. In other states, as in Kansas, it

1 Campbell v. Zylonite Co., 122 N. Y. 455 (1890).

Roberts

2 Kent v. Quicksilver Min. Co., 78 N. Y. 159 (1879); Roberts v. Wicks Co., 184 N. Y. 257 (1906); Toledo, etc. R. R. v. Trust Co., 95 Fed. Rep. 497 (1899).

is created only by action of the stockholders, which might, however, take the form of a by-law provision.

In some few states, as in West Virginia, it may be created by charter provision, by-law provision or by direct action of the stockholders.

When the statutes provide for or permit the creation of preferred stock by charter provision, the matter is at the time of organization merely one of agreement among the incorporators or among those who sign the charter application. When it is to be created after organization and the statutes are silent as to the method to be followed, the assent of all the stockholders is, as already stated, required. If, however, the statutes provide for the creation of preferred stock by amendment of the charter, by by-law provision or by direct action of the stockholders, it is usually specified that it may be effected by the assent of some specified proportion of the stock,3 ranging from a bare majority as in Maine and Minnesota, or a majority in interest as in Pennsylvania, to the unanimous consent of all the stockholders as required in Kansas and Missouri.

3

The regulations as to the issue of preferred stock vary materially in the different states in which such provisions are found. Some of the more important of these are as follows: (a) Amount of Issue. In Alabama, Delaware, Michigan, Montana, Nevada, New Jersey, New Mexico, and Ohio the issue of preferred stock must not at any time exceed twothirds of the actual paid-in capital. In Tennessee it must not exceed two-thirds of the total authorized capital stock. In Indiana it must not exceed double the amount of common stock.

(b) Dividends. Preferred dividends must not exceed seven per cent. in Wyoming and net earnings beyond that amount must be shared equally among the stockholders. They must not exceed eight per cent. in Delaware, Indiana, Michigan, Missouri, Montana, New Jersey and Ohio; ten per cent.

3 Hinckley v. Schwartzschild & S. Co., 107 App. Div. (N. Y.) 470 (1905).