8. Right of stockholders to represent the division of corporate earnings among stockholders. They are the only means, aside from fraud or manipulation, by which the earnings of the company may reach its owners. We shall see later that the dividend policy of a corporation is an impor tant element in its financial management.
Stockholders have no rights to dividends until they have been declared by the directors, and directors have no right to declare dividends unless they have been actually earned. To pay dividends otherwise than out of net earnings impairs the capital of the com pany, and is unlawful unless the stockholders vote to reduce the capital or dissolve the company. Stock holders have a right to know, and directors are under obligation to insist, that the paid-in capital of the company be kept intact so as not to impair the stock holders' investment.
Even tho dividends have been earned, the stock holders cannot compel the directors to declare or pay them unless they can prove to a court that there has been fraud, oppression or gross mismanagement in the affairs of the company, by reason of which divi dends are being improperly 'withheld. The courts are loath to interfere in the management of corpora tions and will not extend relief to stockholders unless it is clear that every other remedy has been exhausted. This rule often seems harsh, but it is for the best interests of all concerned.
9. Right of stockholders to information.—Theoret ically, stockholders have the right to examine the affairs of their company and for this purpose to employ counsel to assist in the examination of the general books. This right is supposed to exist where a stockholder has good reason to suspect fraud, op pression or flagrant mismanagement, and is supposed to be respected by the corporation when the exercise of the right will not interfere materially with the run ning of the business, nor open the affairs of the com pany to the scrutiny of competitors.
As a matter of fact, however, the right of inspec tion does not exist in practice. It is clearly impos sible for large corporations to open their books to the inspection of stockholders. To do so would involve unnecessary inconvenience and place their affairs as an open book before competitors, who could easily gain access by the purchase of a few shares of stock. Companies uniformly refuse requests of this kind, and the courts protect them by demanding very clear circumstantial evidence of fraud, oppression or mis management before ordering such a disclosure of cor porate affairs.
As a matter of policy, most companies submit peri odic reports to the stockholders, containing more or less satisfactory information. It is proper to add
that the management seldom accuses itself of any thing but hard work and good results in such reports.
10. Negotiability of shares.—A' partnership is founded upon mutual consent and confidence. In terests in a partnership are therefore not transferable, except by unanimous consent. Stockholders of cor porations, however, do not have or require a choice of associates, since they are liable for corporate debts only to the extent of their investment and have indi vidually no voice in management. Stock may there fore be sold and transferred, or pledged to secure debt, or proxies given for voting it at the will of the stockholder. Such transfers are facilitated by the fact that the stockholder's liability is limited to his invest ment.
Since the ownership of stock is evidenced by regis tration in the name of the owner upon the books of the company, and by the issue of certificates, a trans fer must usually be recorded upon the books before the new owner has any right to vote or to receive divi dends. The registered owner possesses these rights, and any adjustment of dividends upon the sale of stock is ordinarily made by adding accrued dividends, at the established rate, to the selling price of the stock.
In practice, shares are delivered by merely handing over the certificate, with the power of attorney upon the back signed in blank by the former owner, author izing the holder to register the shares upon the books of the company in the name of the new owner. This new owner's name need not be designated until the certificate is actually surrendered and a new certifi cate taken out. The burden rests upon the purchaser to record his shares properly upon the books of the company. By means of this power of attorney signed in blank certificates may be bought and sold without a formal written assignment each time, and pass freely on delivery, thus facilitating transactions and min imizing expense. Stock certificates technically are not negotiable instruments in the sense that commer cial paper is negotiable, since mere delivery of the tificate, with power of attorney properly signed, does not complete the delivery of the stock. The transfer must be recorded on the company books before it is complete, in order that the company may know who is entitled to vote and receive dividends on its stock. Nevertheless, stock is readily negotiable, that is, it may be easily transferred from one owner to another. Negotiability must not be confused with ity, as stock which is readily negotiable is often not • salable at any price.