VI CONDITIONAL SUBSCRIPTIONS.

A. Nature and effect. A conditional subscription which appears upon the face of the stock subscription or which is known to subsequent creditors and stockholders of the corporation, is operative, and such subscription cannot be enforced until such condition is performed, if the condition was precedent: Chamberlain v. Railroad, 15 O. S. 225; Railway v. Fisher, 39 O. S. 330; see, also, Trott v. Sarchett, 10 O. S. 241; Armstrong v. Karshner, 47 O. S. 276.

Upon performance of conditions, a conditional subscription becomes absolute: Chamberlain v. Railroad, 15 O. S. 225; Railway v. Smith, 15 O. S. 328.

A secret provision in a contract of subscription to the effect that such a subscription should not be enforced against the subscriber, it being made for the purpose of inducing the public to believe that a greater amount of stock had been taken than really was taken, is invalid, and a note given for such stock is enforceable: Bates v. Lewis, 3 O. S. 459.

If the condition is subsequent rather than precedent, it is said that such provision is enforceable by an action in damages for its breach. This is treating such provision as an independent covenant rather than as a condition either precedent or subsequent: Chamberlain v. Railroad, 15 O. S. 225.

A provision in a contract of subscription whereby the corporation agrees to give permanent employment to the subscriber for not less than two dollars per day, is regarded as an independent covenant, probably invalid, but even if valid, the only remedy for breach thereof is by an action for damages, and not an action to recover the amount of the subscription paid: Stunt v. Tube & Steel Co., 22 O. C. C. 120, 12 O. C. D. 170 (citing Henry v. Railway, 17 O. 187; Noble' v. Callender, 20 O. S. 199; Gates v. Stone Co., 57 O. S. 60).

A conditional subscription is regarded as an offer until the condition is accepted by an authorized agent of the corporation: Wallace v. Townsend, 43 O. S. 537.

The defendants executed and caused to be delivered to the Mansfield, Coldwater and Lake Michigan Railway Company which was then engaged in constructing its railroad through the town of Weston, Wood county, Ohio-the bridging and grading being substantially completed, and some portions of the road in running order - an instrument in the following words:

"Weston, May 17, 1871.

"We, the undersigned, heirs of Alexander Brown's estate, of Weston township, Wood county, Ohio, agree to take one thousand dollars in stock in the Mansfield, Coldwater, and Lake Michigan Railroad, if it comes near enough to the town of Weston, Wood county, Ohio, to suit the convenience of said town."

It was held (1) that these facts and circumstances show an agreement between the defendants and the railway company; (2) the condition named in the instrument having been performed, the contract of subscription was absolute; (3) a promise on the part of the defendants to pay, and of the company to issue its stock upon a receipt of the money, are implied from the facts stated: Railroad v. Brown, 26 O. S. 223.

For liability upon a stock subscription which was conditioned upon the payment by another subscriber of his subscription, see Dungan v. Safford, 41 O. S. 15.

B. Waiver. If one who has made a conditional subscription pays a part thereof and gives a note for the balance, he thereby waives the condition precedent: Chamberlain v. Railroad, 15 O. S. 225.

One who has subscribed to stock in a railway and has given his note, payable when the railway is completed, waives the competition of this road as a condition precedent by giving a note subsequently payable in four years: Railway v. Bailey, 18 O. S. 208.

Payment of a part of a subscription for stock, together with voting such stock and acting as president of such corporation, waive the condition precedent and estop the subscriber from denying that he was a stockholder: Railroad v. Hatch, 1 D. 84.

C. Construction. A subscription upon condition that a railroad should "pass through" a certain point means that such road should be located there permanently; and it does not require the construction of such road to make such subscription absolute: Railroad v. Stout, 26 O. S. 241.

A subscription on condition that a "road is built" within a certain distance means the permanent location, and not the final construction of the road; and a subscriber is liable when such road is permanently located, although it may never be completed: Warner v. Callender, 20 O. S. 190.

A subscription payable when the road is "completed" means when the road is in condition for regular and ordinary business: Railroad v. Hinsdale, 45 O. S. 556.

The defendant subscribed to the capital stock of a railroad company, and thereby promised to pay the company the amount of his subscription "when the track of the road should be laid ready for the running of cars" between certain specified points. The subscription contained the further provision that the amount should be payable when the road was completed "on the within terms, provided the location did not run through the defendant's lands: "paid as donation". The subscription was made for the purpose of aiding in the construction of the company's road, and in consideration of the advantages that might accrue to the defendant therefrom, and especially from the construction of that part of the road between the points specified in the subscription, as well as in consideration of like subscriptions for that purpose by others. The railroad company completed the road between the specified points, ready for the running of cars, and the road was not located on the defendants' land. It was held that the subscription was not a mere promise to make a gift to the company; the subscriber's promise to pay was supported by a sufficient consideration, and that the subscription became due and payable when the road was completed between the designated points; it was not necessary that the company should complete its entire road before it could enforce the payment of the subscription: Lesher v. Karshner, 47 O. S. 302.

In a promise to pay money to a railroad company at any time within two years, provided the depot at a certain time was located not farther east than the center of such place, the location of such depot is a condition precedent to the right to recover the amount to be paid: Elder v. Railway, 1 O. C. C. 256, 1 O. C. D. 140.

VII. FORM OF SUBSCRIPTION.

An oral promise to subscribe is said to be invalid; and a note given in pursuance of such oral contract is said to be unenforceable for lack of consideration, since the corporation is not bound to issue the stock: Fanning v. Insurance Co., 37 O. S. 339.

A written subscription is not rendered invalid by the fact that it is not made in a special subscription book opened for that purpose: Railroad v. Smith, 15 O. S. 328.

The fact that a subscription is on a. separate paper and not connected with the subscriptions made by others does not prevent it from being a valid subscription (not a case of subscription to corporate stock): Ohio Wesleyan Female College v. Love, 16 O. S. 20.

VIII. SUBSCRIPTIONS BEFORE INCORPORATION.

A contract of subscriptions for stock in a corporation which is not in existence when such contract is entered into is said to be unenforceable, since it is not binding upon the corporation, and therefore no consideration exists for the promise to pay: Turnpike Co. v. Coy, 13 O. S. 84.

On the other hand, it seems to be held that subscriptions before the formation of the corporation are binding: Turnpike Co. v. Brush, 10 O. 111.

If the stock book shows a subscription after the incorporation of the company, the subscribers cannot set up the fact that such subscription was made before the corporation was incorporated: Royce v. Tyler, 2 O. C. C. 175, 1 O. C. D. 428.

IX. WATERED STOCK.

Where, pursuant to an agreement among themselves, partners capitalize the partnership property at a valuation greatly in excess of its true value; create a corporation under the laws of this state to continue the former partnership business, fixing its capital stock at a sum equal to the inflated value placed on the partnership property; elect themselves managing officers of the concern; transfer this property, at such inflated value, to the corporation in exchange for its entire capital stock which they cause to be issued, as fully paid up, to each partner, or as he directed, in proportion to his interest in the partnership; and the corporation, continuing the business, afterwards becomes insolvent, the transaction will be regarded as a fraud upon the corporate creditors, although none was intended or contemplated by the parties to such transaction.. In such case each partner will be regarded as an original subscriber for so much of the stock as was thus issued to him, and credited on his subscription for the actual value only of his interest in the partnership property transferred to the corporation in payment of such subscription. The balance left, after applying this credit, will be deemed a debt due from him to the corporation, and therefore corporate assets: Gates v. Stone Co., 57 O. S. 60 (affirming Gates v. Stone Co., 9 O. C. C. 99, 6 O. C. D. 23); see, to the same effect, In re Dairy Co., 23 Am. Bankruptcy Rep. 148, 16 O. F. D. 396, 7 O. L. R. 603; Ford v. Lamson, 17 O. C. C. 539, 9 O. C. D. 374; Sayler v. Simpson, 12 O. D. (N. P.) 148.

The legal propriety of a corporation issuing any of its stock at less than par depends entirely upon the good faith of those participating in the transaction. While, ordinarily, a corporation is expected to receive the par value of the stock issued by it, yet, where a corporation has become embarrassed, for the purpose of saving its corporate life and prosecuting the ends for which it was organized, it may issue its stock for the best price it can secure therefor, as in the cases of Peter v. Manufacturing Co., 56 O. S. 181, and Handley v. Stutz, 139 U. S. 417. The doctrine laid down in the above cases is not to be extended to the organization of a corporation or to the financing and flotation of new enterprises, and especially not to those of speculative character and problematic success. Neither will said doctrine be applied to permit those having the management and control in the organization and promotion of such enterprises to obtain any of the corporate securities on terms more favorable than those accorded to the other shareholders or offered to the public: Kinsey v. Cable Co., 6. O. C. C. (N. S.) 305, 17 O. C. D. 633 (affirmed, without report, Kinsey v. Seasongood, 75 O. S. 602).

The section of the constitution of the state of West Virginia, relating to the organization of corporations which provides that the stockholders of all corporations shall be liable for the debts of such corporations to the amount of their stock subscribed, is intended as a security to creditors, and the original subscribers to the stock of the corporation organized under the constitution and laws of that state cannot avoid liability to pay full par value of their stock for the purpose of paying corporate creditors by inserting in the articles of incorporation a provision that the stock shall be sold at fifty cents on the dollar, and when that is paid the stock shall be issued as fully paid and nonassessable: Trust Co. v. Ford, 75 O. S. 322. The directors and managing officers of a corporation for profit should be held to strict good faith in all dealings between them

selves and the corporation. Where, however, the corporation is deeply in debt and pressed for money to continue its business; where a large proportion of its capital stock remains unsubscribed, a great part of which was created by an unauthorized increase of the same for which such directors and managing officers were chiefly responsible, though acting in good faith and in the belief that their action was regular; where such directors and managing officers believe the only practicable means of obtaining money to relieve the necessities of the corporation is by disposing of this stock; where, accordingly, they make diligent but unsuccessful efforts to dispose of the stock at par; where they offer it at a large discount to all its stockholders and generally to others without takers, such directors and managing officers and some others, without intending to secure personal advantage, but with a view to aid the corporation, take parts of the stock at the discount price, either paying cash therefor or cancelling debts due to them from the corporation, and they do not afterwards derive any profit on account of such stock, bad faith should not be imputed to them, either in respect to such in crease of capital stock or their acquisition of it. If the corporation subsequently becomes insolvent, the difference between the discount price and the par value of the stock thus purchased should not be regarded as assets of the corporation, as between those stockholders who bought at a discount and those who did not. In such case the holders of previously issued stock for which they had paid par should not be allowed to assert the invalidity of the issue of the discounted stock without consenting that its purchasers be placed in statu quo: Peter v. Manufacturing Co., 56 O. S. 181. Even if subscriptions for stock prior to the formation of the corporation must be payable in money only, a corporation may use its stock which has not been subscribed for the purpose of paying debts or for acquiring property or services: Railroad v. Hatch, 1 D. 84.

X. DISCHARGE.

A. New contract. After debts have been incurred, the subscribers to the capital stock in a corporation who are also its promoters and organizers, cannot by a new agreement release themselves from liability upon such subscriptions: Gaff v. Flesher, 33 O. S. 107.

An agreement between the officers of a corporation and a subscriber, whereby he is relieved from his subscription to take a certain number of shares of stock in pay therefor, and instead thereof, he is to take a smaller number of shares, is invalid as far as prejudicial to subsequent subscribers, who subscribed in reliance upon the validity of such subscription: Jewett v. Railway, 34 O. S. 601.

Neither a promoter nor some of the stockholders called at a meeting can release subscriptions on the ground of misrepresentations made by the promoter: Royce v. Tyler, 2 O. C. C. 175, 1 O.

C. D. 428.

An oral agreement made between a subscriber to corporate stock and the president of the corporation, that a third person will assume and pay part of such subscription, and that the corporation will only hold the original subscriber for the difference between the amount of the original subscription and the amount which such third person agrees to pay, is inoperative in an action for the benefit of the creditors of such corporation: Bank v. Varnish Co., 8 O. C. C. 563, 4 O. C. D. 511.

B. Change in purpose of corporation. A material change in the purpose of the corporation after contracts of subscription are entered into renders such contracts invalid and unenforceable as against the objection of the subscriber; Railroad v. Elliot, 10 O. S. 57; James v. Railroad, 2 D. 261.

An immaterial change does not, however, release the subscribers: Turnpike Co. v. Brush, 10 O. 111. (In this case an immaterial change in the route of a turnpike.)

An extension of the line of a railway made in pursuance of a statute in force when the subscription was made, which authorized

such extension, does not operate as a discharge of the subscription: Jewett v. Railway, 34 O. S. 601.

If by statute in force, when a stock subscription is made, a railway corporation may sell a part or all of its road, a sale made under such statute, does not discharge subscribers to its stock: Armstrong v. Karshner, 47 O. S. 276.

C. Assignment by Corporation. Before the performance of the conditions or covenants upon which a stock subscription was made, a railway corporation cannot sell and assign its subscriptions to another corporation: Railroad v. Hinsdale, 45 O. S. 556.

D. Assignment by Subscriber. An assignment by a subscriber to stock of his interest in such stock made to a third person before a call, relieves him from liability for following calls upon his subscription: Gilmore v. Bank, 8 O. 62; Porter v. Laws, 6 Âm. L. Rec. 756, 3 Bull, 384.

An assignment by a subscriber to a fictitious person (in this case, Richard Doe) is inoperative as a defense against an action on subsequent calls: Turnpike Co. v. Ward, 13 O. 120.

In Gaff v. Flesher, 33 O. S. 107, however, it was said that transfer of stock would not discharge subscribers from liability on their subscription as against the rights of creditors.

E. Irregularity in Organization. Irregularities or failure to comply with statutory requirements in the organization of a corporation are not defences to the subscribers in actions on their subscription even if such corporation has subsequently been ousted by proceedings in quo warranto on account of such irregularities: Gaff v. Flesher, 33 O. S. 107.

In a proceeding by the receivers of a bank against the stock holders to compel them to pay up their stock, the defendants will not be permitted to defend, upon the ground that they were guilty of a violation of law, in assuming to do business under the act of incorporation in pursuance of which their organization was effected, or intended to be effected: Voorhees v. Receivers, 19 O 463. (The irregularity in this case consisted in the fact that the bank began business, although the governor had not given the notice required by the charter to the effect that the provisions of the law had been complied with. Application had, however, been made to the governor to examine the affairs of the bank and to publish such notice, and the governor refused to do either.)

F. Performance and Abandoment. If a turnpike company began building a turnpike upon its organization, completed a third of it in five years, suspended work for four years because of failure to pay in subscriptions, and then proceeded to complete the work in the next four years, such facts do not amount to an abandonment and do not discharge the subscribers from liability on their subscription: Gibson v. Turnpike Co., 18 O. S. 396.

In the absence of a specific provision in the contract of subscription, a railroad corporation is not bound to construct a railroad which is well constructed and thoroughly built before collecting its subscriptions: Armstrong v. Karshner, 47 Ö. S. 276.

G. Set-off. Where a subscription to the stock of a corporation is paid by the note of the subscriber, money subsequently paid by the stockholder to the corporation for the purpose of repairing its capital stock, under an agreement that as between the corporation and its creditors the payment is a donation, but as between the stockholders, a debt, and upon the further agreement that such payment is to be regarded as a satisfaction pro tanto of the individual liability of the stockholder to creditors, cannot, after the corporation has become insolvent be set off against the stock note: Insurance Co. v. Jones, 35 O. S. 351.

Upon the question of set-offs, see, also Dungan v. Stafford, 41 O. S. 15.

For payment and collection of subscriptions for stock in corporations see, G. C. 8632.