104. By-Laws, Rules and Regulations of a Corporation. The by-laws of a corporation are the rules and regulations by which the corporation is governed. Sometimes a distinction is drawn between the term by-law, and the term regulation. For example, the statutes of some states provide that the stockholders may pass regulations for the government of the corporation relating to the time, place and manner of holding corporate meetings, the number of stockholders that shall constitute a quorum, the time and manner of electing directors, the duties and compensation of officers, and the qualification of officers; while the directors have the power to pass by-laws relating to the government of the corporation, not inconsistent with the charter of the corporation and the regulations. This distinction between regulations and by-laws does not seem to be generally recognized. The entire government of the corporation is generally included in the term by-laws. If the charter does not provide otherwise, the by-laws shall be passed by the stockholders rather than by the board of directors.
A resolution is not a by-law. By resolution is meant the recorded and legally passed determination of a corporation to perform some particular thing or item of business. A vote of a board of directors to make certain bids on certain contracts is an example of a resolution. By-laws must not be contrary to the corporation's charter, or to general law. They are not presumed to be known by third persons, but if third persons dealing with a corporation have actual knowledge of them, they are bound by notice of their provisions.
105. Capital Stock of Corporations. The capitalization of a corporation is the aggregate amount of stock it is authorized by its charter to issue. If a corporation is authorized to issue one hundred thousand dollars ($100,000.00) of stock, it is said to be capitalized at one hundred thousand dollars ($100,000.00). This does not mean that the corporation has property worth one hundred thousand dollars ($100,000.00). A corporation is usually authorized to elect directors after one tenth of its stock has been subscribed, and after one tenth of the amount subscribed is paid in. Thus, a corporation capitalized at one hundred thousand dollars ($100,000.00), may elect directors and start business with only one thousand dollars ($1,000.00) actually paid in. The term, capital stock of a corporation, is used in many different ways. It is commonly used to designate the capitalization. Sometimes it is used to designate the amount actually subscribed. Strictly, it probably means the money actually paid in on subscriptions. A corporation's assets may be far in excess of its capitalization, or far below its capitalization. It may have property worth five hundred thousand dollars ($500,000.00) and be capitalized at one hundred thousand dollars ($100,000.00) more or less, or it may be capitalized at one hundred thousand dollars ($100,000.00) and have no assets.
106. Payment of Shares of Stock. It may be stated as a general rule that a corporation has no authority to dispose of its stock for less than par value. If a corporation is solvent, ordinarily no objection is raised, but if the corporation becomes insolvent, creditors may complain, and force, by proper legal action, the shareholders to pay the difference between the face value of their stock and the amount actually paid.
In the absence of a statute requiring stock subscriptions to be paid in cash, there is nothing to prevent a corporation from accepting property at a fair valuation in payment of stock. The rule is usually stated to be, that shares of stock must be paid for in money or in money's worth. Shares of stock may be paid for in bonâ fide services. The rule by which purchasers of stock are compelled to pay the full par value either in money or money's worth applies only to those who purchase direct from the company, or who purchase from stockholders with notice that the shares have not been fully paid for. If the certificates of stock state that they are fully paid for and the purchaser has no notice otherwise, or if the purchaser does not know that the stock has not been paid for in full, he cannot be made to suffer for the act of the corporation in unlawfully issuing the stock.
107. Calls and Assessments. An assessment may be defined to be a levy by a corporation upon a shareholder for an unpaid portion of his stock subscription; a call is a notice to a shareholder of an assessment. Ordinarily, assessments may be made by call, at the direction of the directors, until the entire par value of subscriptions are paid in full. Stock cannot be assessed beyond its par value, unless so provided for by the corporate charter, or unless the subscriber so contracts.
108. Watered Stock. In case property or services are accepted in payment for stock at an inflated valuation, or if stock is issued as fully paid up when it is not, the stock is said to be watered. For example, if A, a promoter of a corporation, turns over options to the company, actually worth one thousand dollars ($1,000.00), and receives stock in payment, the par value of which is five thousand dollars ($5,000.00), the stock is said to be watered, and the four thousand dollars ($4,000.00) excess valuation is said to represent the amount of water in the stock.
109. Increasing or Decreasing Capitalization. A corporation has no power, by reason of being a corporation, to increase or decrease its capitalization. The states generally provide by statute for the increasing or decreasing of the capitalization. The corporation must comply with these statutes, before its capitalization can be changed. In case the capitalization is increased, the purchasers of such stock are subjected to pay the full face value at the instance of creditors, the same as purchasers of an original issue. That is, if a corporation is unable to pay its debts, one who has purchased direct from the company, shares of stock upon an increased capitalization, at a price below par, may be compelled by creditors to pay the difference between what he has actually paid and the par value. In case of an increase of capitalization, the present stockholders, in the absence of express statutory regulations to the contrary, are entitled to receive the increased shares in proportion to their holdings. This is usually called a stock dividend.
110. Common and Preferred Stock. Stock of a corporation may be of two kinds, common and preferred. When stock is issued by a corporation without any agreement to pay certain dividends out of the profits, or to repay the original stock investments if the corporation ceases doing business, in preference to other stock, it is called common stock. Corporations are sometimes authorized by their charters to issue what is called preferred stock. That is, the corporation pledges to pay a certain percent of its profits, as dividends to the preferred stockholders, before paying anything to common stockholders. If the corporation ceases doing business, preferred stockholders are first paid the amount of their subscriptions, and if any balance remains, it is paid to common stockholders. In the absence of statutory authority, probably an existing corporation has the right to issue preferred stock by the unanimous consent of all the common stockholders. This is commonly done for the purpose of raising additional funds.
111. Dividends. Dividends is the term applied to the money distributed to shareholders, out of the profits of a corporation. The directors are usually empowered to declare dividends. A stockholder cannot compel the corporation to pay him a percentage of the profits until a dividend has been declared. After a dividend has been declared, it is regarded as a debt of the corporation in favor of the shareholder. When a dividend has been declared at the discretion of the board of directors, the preferred stockholders must first be paid the amount of their preference, and the balance must be distributed equally between the common stockholders. No partiality can be shown stockholders. They must be treated alike. Dividends can be declared only out of the profits, except when a corporation ceases doing business, in which event the property of the corporation, after paying liabilities, is distributed as dividends.