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LIBRARY 
 
 UNIVERSITY OF ILLINOIS 
 
 ' URBANA 
 
 lien* ^ovk $uperiot <2T outt. 
 
 GENERAL TERM. 
 
 RUFUS HATCH. 
 
 J he Western Union Telegraph Company and others. 
 
 BRIEF FOR PLAINTIFF. 
 
 Counsel for Plaintiff. 
 
 WILLIAM A. BEACH, 
 A. P. WHITEHEAD, 
 WM. FULLERTON, 
 ROBT. SEWELL, 
 
 R. W. RUSSELL. 
 
 JERSEY CITY : 
 
 The Evening Jovrnai. Job Print. 87 Montgomery Street. 
 
 1882. 
 
 

Digitized by the Internet Archive 
 in 2016 
 
 https://archive.org/details/rufushatchvswestOOhatc 
 
X? W 
 
 
 3S.r 
 
 INDEX. 
 
 PAGES. 
 
 Statement of the Case 1-3 
 
 As to the opinion of Judge Truax as reported in the Reg- 
 ister 3-4 
 
 The Findings of Fact and Law by Judge Truax in Regard 
 to the Alleged Estoppel 4-9 
 
 Judge Truax's Construction of 2 Rev. St., 6 Ed., p. 398. . . . 9-12 
 
 No Stock Dividend can be made to Represent Net Earnings 
 Applied Years Ago to the Extension of the Company’s 
 Works or Lines, &c 11-13 
 
 Judge Truax’s Proposition that Companies May Enlarge 
 their Stock to the Extent of the Estimated Value of their 
 Property from Time to Time 13-16 
 
 Personal Liability of Stockholders for Watered Stock 17-19 
 
 Judge Truax on the Original Articles of Association 19 
 
 Point 1. 
 
 Plaintiff Not Estopped 20 
 
 Point 2. 
 
 J 
 
 The Act of 1870, Ch. 568, not to be Construed so as to 
 Authorize Purchases of Competing Parallel Lines 21 
 
 Point 3. 
 
 The Proceedings had Under the Supposed Authority of the 
 Act of 1870 were not in Accordance with the Provisions 
 r of that Act and were Inoperative 22 
 
 Point 4. 
 
 The W. U. could not Acquire by Purchase the Competing 
 — Lines in Pa. and Ohio 23 
 
 Point 5. 
 
 ’The Am . Un. and A. and P. could not make Title to the 
 Lines Outside of the State of New York 
 
 - 
 
 
 
 2069 
 
 23 
 
ii 
 
 Point 6. 
 
 PAGES. 
 
 The Contract of 19 Jan’y, 1881, became Void by its Own 
 Terms (Section 10) 25 
 
 Point 7. 
 
 Increased Shares of Stock must be Paid for 26 
 
 Point 8. 
 
 Stock Dividends cannot be Made to Represent Earnings 
 made Many Years Before, and which have been In- 
 vested 26 
 
 Point 9. 
 
 The Plaintiff can Maintain this Action, although the W. U. 
 
 Tel. Co. might not be able to maintain an Action to re- 
 scind the Contract in Question 27 
 
 Point 10. 
 
 The Plaintiff is not Dependent on the Action of the Attor- 
 ney General 27 
 
 Point 11. 
 
 The Denial of the Motion for an Injunction in the Case of 
 Hatch v. W. U. Tel Co. in the Supreme Court is no 
 Estoppel 27 
 
 Point 12. 
 
 There is no Equitable Estoppel in pais 28 
 
 Point 13. 
 
 As to the Decree Prayed for. 
 
 Effect of the Partial or Complete Performance of an 
 Illegal Act.. 28-33 
 
 Opinion of Judge Truax in the Hatch Case as Reported in 
 the N. Y. Register 28-33 
 
 Opinion of Judge Truax in the Williams Case 37-46 
 
 f 
 
38 ^ 
 
 P) 3 2 ^ LIBRARY 
 
 UNIVERSITY OF ILLINOIS 
 
 iku? <Moth J^upetiut Couit. 
 
 GENERAL TERM. 
 
 Rufus Hatch 
 
 v. 
 
 The Western Union Telegraph 
 Company, and others. 
 
 BRIEF FOR PLAINTIFF ON APPEAL, 
 
 This action is brought by plaintiff, as a stockholder 
 of the Western Union Telegraph Company, to obtain an 
 adjudication that a certain contract purporting to be 
 made by the Western Union Telegraph Company with 
 the American Union Telegraph Company and the At- 
 lantic and Pacific Telegraph Company, dated 19th Jan- 
 uary, 1881, with a supplement thereto, dated 3d Feb- 
 ruary, 1881, for the purchase of the telegraph lines and 
 privileges of the two last-named telegraph companies was 
 ultra vires, and especially that a stock dividend made by 
 the Western Union Telegraph Company for distribution 
 amongst its stockholders of 155,265 shares ot its stock 
 was illegal. 
 
2 
 
 The answers of the defendants claim that the contract 
 in question is valid, and that it has been fully performed, 
 and that plaintiff has no cause of action. 
 
 An action was brought by Mr. Hatch in the Supreme 
 Court on 19th January, 1881, to prevent the consolida- 
 tion of the rival telegraph companies. The complaint 
 (see Case, p. 400) alleged that a scheme for such consolida- 
 tion was projected, but in what manner it was to be ac- 
 complished, whether by leasing or purchasing plaintiff 
 knew not. 
 
 Case , p. 355-400. 
 
 In that case amotion for a preliminary injunction was 
 made before J udge Barrett, and the objection was taken 
 that the Act of 1870 did not authorize the consolidation 
 of competing lines, and that the contract for the consoli- 
 dation was made corruptly and fraudulently. Judge 
 Barrett held otherwise, and refused the injunction. 
 
 See 1 laintiff s Brief in the present case, before Judge 
 Truax, page 19 to 26, as to the construction of the Act ' 
 of 1870. | 
 
 The action in the Supreme Court was discontinued by 
 Mr. Hatch (Case, p. 355). 
 
 Mr. William S. Williams brought an action in this j 
 Court on February 12th, 1881, to prevent the consolida- j 
 tion. An injunction order was obtained, and a motion 
 to dissolve that injunction was refused by Chief ! 
 Justice Sedgwick. 
 
 His opinion is printed in Plaintiff’s Brief in Court below, 
 p. 106 to 115, and was that the Western Union had no' 
 legal power to make a stock dividend of shares of its 
 stock to represent the earnings of the Company which 
 had been invested during sixteen years in making addi- 
 tions and improvements to the lines of the Company. 
 
Thereupon Mr. Hatch, on March 14, 1881, brought 
 the present action to prevent the Western Union from 
 issuing and paying out the 155,265 shares of its stock, 
 and to obtain a decree that the contract for the consoli- 
 dation is invalid. 
 
 The question was fully argued before Judge Speir on 
 motion to dissolve an injunction order. The motion was 
 refused. 
 
 Judge Speir’s opinion will be found in plaintiff’s Brief 
 in Court below , page 116 to 123. 
 
 As to the Opinion of Judge Truax in 
 this Case. 
 
 The New York Register of 23d June, 1SS1, contains 
 what purports to be a report of the opinion of Judge 
 Traux in this case. See copy, post page 21. 
 
 But his opinion was not filed (affidavit of White- 
 head. Case, fob 1148); and it is not known whether the 
 report in the Register is correct. 
 
 Judge Truax, in his opinion as reported in the Regis- 
 ter, refers to his opinion in the case of Williams v. W. 
 U. Tel. Co ., and declines to repeat that opinion. 
 
 In his opinion, in the present case, he discusses the 
 question whether the sales by the American Union and 
 Atlantic and Pacific Telegraph Companies violate the 
 laws of the United States and of Ohio and Pennsylva- 
 nia, and quotes at length the opinion of J ndge Blatcli- 
 ford on Section 5265 R. S. U. S. 
 
 See on this question Plaintiff's Brief in the Court be- 
 low, pp. 30, 31. 
 
4 
 
 Judge Truax s opinion in this case makes no 
 reference to his finding that plaintiff is estopped on the 
 ground that he bought part of his stock on which he 
 sues, viz., 100 shares, a day before the contract in ques- 
 tion was made between the telegraph companies, and 
 that he was aware of the intention to make that contract, 
 and that he bought 400 shares after the contract had been 
 made, knowing that fact. 
 
 Nor does his opinion allude to the point made in his 
 6th finding of law, thus : 
 
 E\en if the said agreements were ultra vires of the 
 Western Union Tel. Co., while executory, they are so far 
 executed that no stockholder of said company has any 
 equity to bring an action to restrain their complete per- 
 formance.” 
 
 Case , fol. 566. 
 
 The Findings of Facts and Law by Judge Truax m ‘ 
 Regard to the Alleged Estoppel . 
 
 The 1st Finding of facts (fol. 533) is that the plaintiff ' 
 Hatch owned on 18th January, 1881, 100 shares of the ! 
 W. U. stock. ; 
 
 “ bought the said 100 shares, knowing that the ■ 
 agreement dated January 19th, 1881, mentioned in the 1 
 5th article of the complaint, was being negotiated and 
 substantially agreed to ; and he bought the said 400 
 shares knowing that the said agreement had already been 
 made.” 
 
 An exception was taken to this finding (Case, fol. 
 1121, exception 1.) 
 
 The 7th Finding of matter of law is thus (Case fol 
 567): * 
 
Seventh — “ The plaintiff, having purchased his stock 
 w (th notice of the said agreements, has no standing in 
 court to bring an action to restrain their complete per- 
 formance.’' 
 
 An exception was taken to this finding. 
 
 {Case, f 61. 1140, 29 th Excep.) 
 
 The above-mentioned findings of Judge Truax are not 
 sustainable either in fact or in law. 
 
 There is no proof that plaintiff knew that the agree- 
 ment dated 19th January, 1881, “ was being negotiated 
 and substantially agreed to." 
 
 Nobody could tell before the several Board of Direct- 
 ors took action in the matter what contracts would be 
 made by them. And nobody could tell what action the 
 stockholders of the three companies would take. 
 
 The plaintiff could at most have merely heard rumors 
 about a proposed consolidation. 
 
 It is proved by the stock ledger of the W. IT. Tel. Co. 
 that on January 1 8th, 1881, there was a transfer of 100 
 shares of the stock of that company to Rufus Hatch. 
 Testimony of Morton (Case, fob 578 . 
 
 The defendants put in evidence Hatch’s complaint in 
 the case of Hatch v. The W. U. Tel. Co. in the Supreme 
 Court (which was discontinued). 
 
 (Case, p. 355, fol. 1063 and p. 400.) 
 
 The Judge held it to be admissible for the purpose of 
 showing Hatch’s knowledge on 19th January, 1881, of 
 the contract of that date. 
 
 (Case, p. 355 ,fol. 1063.) 
 
 The complaint in Supreme Court (Case, p. *00) alleges 
 that the defendants intended to establish a monopoly of the 
 telegraph business and to establish the former higher 
 rates for telegraph messages. 
 
 (Case, fol. 1213.) 
 
6 
 
 ; But in what way [foh 1214-1219] or by what means 
 it is intended to accomplish that object this plaintiff is 
 unable more particularly to set forth to the Court, as the 
 said companies and their directors, conspiring as afore- 
 said,. have. not yet divulged to the public the exact man- 
 ner in which the end aforesaid is to be accomplished.” 
 
 ” But this plaintiff positively charges that negotiations 
 are now on foot between the three defendant corpora- 
 1011 s or their directors having in view the accom- 
 
 r , view me aceom- 
 
 p ishment of some such consolidation or amalgamation 
 as will attain the end of re-establishing the v. onopoly of 
 the Western Union Telegraph Company in the entire 
 business of telegraphing throughout the United States 
 of America to the manifest disadvantage and damage of 
 the public, contrary to good morals and to the mani- 
 fest detriment, hindrance and annoyance of trade and 
 commerce between the States and to the great damage of 
 tlns.phimtiff and all other stockholders in the American 
 Vnion Tel. Co., who have subscribed to the stock of 
 said Company in the belief and expectation that said 
 Company would be maintained as a., independent line 
 and would gradually obtain the patronage of a large 
 majority of the business public of this country. 
 
 “And unless the defendants are prevented therefrom bv 
 an order of this Court, or of some other court of compe- 
 tent jurisdiction, they will immediately enter into such 
 mlawfu agreement, in violation of law and of the rights 
 of the plaintiff and all other stockholders in the Ameri- 
 can t nion Company similarly situated with him not- 
 withstanding that such proposed lease, consolidation 
 purchase sale or agreement has not been ratified by the 
 consent thereto in writing, or by vote at a general Let 
 ing duly called for the purpose, of three-fifths in interest 
 fend^ feithei ‘ 0Ue ° f tLe col Torations de- 
 
 “ And pla ;‘ Utiff ’ 011 '“formation and belief, alleys that 
 
 such consent cannot be obtained ° 1 
 
 
 
4 
 
 “ That said defendants, their agents, directors and offi- 
 cers threaten and intend, and this plaintiff verily believes 
 they will accomplish, unless they are stopped by an order 
 of this honorable Court, the amalgamation or consolida- 
 tion of all of the corporations defendant herein in some 
 shape or another , whether the same will take place by 
 leasing of the lines of the American Union Tel. Co. by 
 the Western Union Tel. Co. or by a consolidation of the 
 several corporations defendant, or by the purchase of the 
 lines of the American Union Tel. Co. by the Western 
 Union Tel. Co. 9. 
 
 But exactly in what manner it is intended to accom- 
 plish said unlawful purpose this plaintiff is unable to 
 state definitely and certainly until he has obtained dis- 
 covery thereof in this action.” 
 
 There is no testimony showing that plaintiff knew the 
 terms of the proposed contract before he became a stock- 
 holder of the W. U. on 18tli January, 1881, nor that he 
 knew the terms of it on the 19th January — the date of 
 the verification by him of his complaint in the Supreme 
 Court, and the date of the contract in question. 
 
 And even if there had been- such testimony it would 
 have been of no legal importance. 
 
 See Plaintiff's Brief in Court below , 
 page 73. 
 
 The defendants took the following testimony on this 
 point : 
 
 John Van Horne, Case, p. 328. 
 
 James H. Banker, Case,p. 355. 
 
 Washington E. Connor, Case, p. 348 to 355. 
 
 Ct. P. Morosini, Case, p. 353. 
 
 Dr. Creen, Case, p. 261, 262. 
 
 The two first-named gentlemen were directors of the 
 W. U. They testify that they knew a few days before 
 
8 
 
 19th January, 1881, that a consolidation or amalgama 
 tion scheme would be proposed and submitted to tin 
 boards of directors and stockholders of the three com 
 panies. / 
 
 Mr. Connor says (Case, pages 348 to 355) that Mr 
 Hatch, as early as the 16th January, complained of somt 
 proposed project for uniting the telegraph com 
 panies, but does not show that either Hatch or himsell 
 knew what the project was. 
 
 Mr. G. P. Morosmi states that before the date of the 
 contract of 19th January, he had conversation with 
 plaintiff, who said he would oppose the consolidation 1 
 unless they would take in his American Union stock at 1 
 11*1. W itne'ss says that plaintiff asked witness forinfor- ^ 
 mation “ about some pending agreement,” but does not 
 state that he gave such information, or that he himself ' 
 knew the particulars of the scheme. ; ' 
 
 Case , page 353. ( 
 
 Pr. Green testifies that it took to the 19th January to' 
 get the contract ready, and he adds that “it was kept 
 profoundly secret from everybody ; so far as I am con- 
 cerned as to that I can answer.” ! ] 
 
 And he adds : “ When parties applied to me, I said; i 
 that an agreement had been reached by the Board, hut! 1 
 until it was confirmed I declined to give its terms.” a 
 
 Case, page 261 and 262. • ; „ 
 
 There is nothing in the testimony of those witnesses 
 to gainsay the sworn statement of Mr. Hatch in his com- 
 plaint m the Supreme Court (which defendants have 
 made evidence), that he did not know whether the plan ei 
 was to take leases, or make purchases or pooling arrano-e- 4 
 ments. ^ 0 ! 
 
 And it appears very clearly on the face of that com- C 
 plaint that he did not know that a part of the scheme C( 
 was to make an illegal issae of watered stool'. st 
 
9 
 
 See Points 18, 19, 20 in Plaintiff’s Brief in the Court 
 beloio, in reply to the argument of defendants" counsel 
 that plaintiff is equitably estopped from bringing this 
 action ( pa/jes 83 to 96). 
 
 This action was brought March 15, 1S81. 
 
 Judge Sedgwick had before that time delivered an 
 opiuion in the Williams case that the Western Union 
 had no legal right to issue the 155,265 shares. 
 
 And yet the W. U. Tel. Co., as shown by the complaint 
 in the present case, persisted in paying out on account of 
 that stock the funds of the Company to the parties who, 
 according to the contract of 19th January, 1881, were to 
 have had that stock. 
 
 Of course Mr. Hatch, as a stockholder of the West. U. 
 Tel. Co. had the right to object to such misappropriation 
 of that Company’s funds. 
 
 See on that point Plaintiff's Brief in Court 
 below, pp. 92, 93. 
 
 Judge Truax holds that the laws of the State of New 
 York do authorize the West. U. Tel. Co. to issue stock 
 for the value of property which it had accumulated since 
 1st July, 1866; and further, that any company cau issue 
 additional stock to represent any additional value which 
 may have accrued to the property of the company. 
 
 (Opinion of Judge Truax on page of this 
 brief.) 
 
 Judge Truax holds that the act, 2 Rev. St. (6 Ed.), p.398, 
 enacting that it shall not be lawful for any company “ to 
 divide, withdraw, or in any way pay to the stockholders, 
 or any of them, any part of the capital stock of such 
 Company, or to reduce the capital stock, without the 
 consent of the Legislature,” does not refer to shares of 
 stock, but means the property of the company, and that 
 
10 
 
 the value oi the additions made to the plant of the W. U. 
 Tel. Co. since I860 (which is undoubtedly the pi’operty of 
 the Company forming part of its capital stock, may be di- 
 vided amongst the present stockholders, and that the Board 
 of Directors may decide that the stockholders shall 
 not have a cash dividend to the amount of such 
 value, but shall have additional stock allotted to them. 
 
 This theory is thoroughly refuted in Judge Sedgwick’s 
 opinion. 
 
 Judge Truax does not explain why he holds a different 
 opinion, and in fact takes no notice of the reasoning of 
 Judge Sedgwick. 
 
 The words u capital stock, as used in this section, 
 mean the shares of stock. It prohibits the reduction of 
 those shares, not the reduction of the property of the 
 Company, for it might become reduced by losses in the 
 regular and proper course of business. 
 
 The act means that shares of the Company’s stock ! 
 held by the Company shall not be divided amongst the 
 stockholders. Here the Company, after having increased \ 
 the number of its shares undertook to distribute ' 
 them amongst the existing stockholders in violation of 
 the act. 
 
 The Company could not sell the additions made to the ! 
 plant since 1866 and divide the proceeds amongst the 5 
 present stockholders by devoting the proceeds to the pay- \ 
 ment of a cash dividend, for these additions form an in- j 
 separable part of the plant. 
 
 Such additions consist of additional wires, offices 
 patent rights, etc. 
 
 Testimony of John B. Van Evenj, Case, 
 pages 323 to 328. 
 
 If the Company chooses to dispose of part of its 
 property it may apply the proceeds to the payment of a 
 cash dividend, but it cannot make a stock dividend. 
 
11 
 
 The stockholders have a right to a cash dividend. 
 Stock dividends cannot be made in this State, and the 
 stock of the Company cannot be divided amongst the 
 stockholders. 
 
 9 
 
 The provision, 2 R. S., 5 Ed.,p. 599, sec. 2, that no in- 
 corporated company of this State shall “ make dividends, 
 “ excepting from the surplus profits arising from the 
 “ business of such corporation ” is a prohibition of stock 
 dividends. 
 
 That section reads thus : 
 
 “ Sec. 2. — It shall not be lawful for the directors of 
 managers of any incorporated company in this State to 
 make dividends , excepting from, the surplus profits arising 
 from the business of such corporation ; and it shall not 
 be lawful for the directors of any such company to divide, 
 withdraw, or in any way pay to the stockholders, or any 
 of them, any part of the capital stock of such company, 
 or to reduce the said capital stock without the consent of 
 the Legislature.” 
 
 Was not this provision overlooked by the Board of Di- 
 rectors of the W. U. Tel. Co. when it passed a resolu- 
 tion on March 2d, 1881, affirming that “it was the in- 
 tention of the Directors in approving said contract of 
 January 19, 1881, that the said $15,523,590 should be a 
 stock dividend ?” 
 
 Case, page 23 ±,fol. 701. 
 
 Moreover, independently of any legislation on the sub- 
 ject of a distribution of the capital stock, or the making 
 of dividends, common sense forbids the idea that the 
 Western Union Telegraph Company could make a stock 
 dividend to represent net earnings, which the Board of 
 Directors have for a series of years applied to the exten- 
 sion of its works, &c. 
 
 See Plaintiff ’s Brief in the Court belov. v, Point 13, p. 
 
 47 to 71. 
 
 See that brief, pages 106 to 123, opinions of 
 Judges Sedgwick and Spier. 
 
12 
 
 Judge Trnax takes no notice of our point that the New 
 York statute forbids the making of dividends except from 
 surplus profits. He refers only to that part of Sec. 2 It. S., 
 5 Edn., part 1, oh. 18, title 4, page 599, which provides 
 that it shall not be lawful for the Directors of any such 
 company to divide, withdraw, or in any way pay to the 
 stockholders, or any of them, any part of the capital 
 stock of such Company, or to reduce the capital stock,” 
 &c. 
 
 Tt has been argued by defendants’ counsel that the 
 Western Union Company, in making the stock dividend 
 in question, made a dividend from the surplus profits. 
 But, as observed by J udge Sedgwick, “ the monies already 
 paid nut and expended, are not in possession of the cor- 
 poration to he divided 
 
 Bait of the surplus profits have been invested for many 
 years in enlarging the operations of the Company, and 1 
 the stockholders for the time being have always had the : 
 benefit of such investment in the shape of increased i 
 earnings and profits. ' 
 
 Sometimes in the absence of any legislation on the 
 subject, the funds available for a cash dividend are 
 needed for an extension of the plant, and a stock divi- , 
 dend is made in lieu of a cash dividend. This mode of j 
 proceeding, however, is illegal. \ 
 
 The object can be accomplished in a legal manner, as ■ 
 shown in Plaintiff’s Brief in the Court below, pages 70 1 
 and 71. 
 
 Thus a cash dividend is made, the number of shares is 
 inc 1 eased, each stockholder has the option to subscribe 
 for his fair proportion of the new shares and to have his 
 cash dividend applied to the payments of his subscription 
 for the additional shares. 
 
 this, which is the proper form of proceeding, provid- 
 ing, as it does, for the just rights of the stockholders, has 
 not always been followed in States where the Legislature 
 
13 
 
 has not limited the manner of making dividends, but a 
 simple resolution has sometimes been adopted that the 
 fund at present available for a dividend shall be applied 
 to the account of capital, and that a stock dividend shall 
 be made instead of a cash dividend. • 
 
 The decision of the Board of Directors that the net 
 earnings shall be applied to the capital account ma\ be 
 complained of bv any stockholder when such decision is 
 unjust towards him. 
 
 See Brief in Court below, p. 60. But it cannot be dis- 
 turbed by him if he has acquiesced or failed to complain 
 promptly. If net earnings have been improperly applied 
 to the account of capital when they should have been 
 used for a dividend the error may he corrected. 
 
 See per Lord Hatherly (Lord Chancellor) in Z. It., 
 5 Ch. Ap., p. 621, Plaintiff's Brief in Court Below , 
 page 60. 
 
 It is not alleged in this case that any part of the earn- 
 ino-s during the last 16 years have been unfairly diverted 
 from the dividend account. 
 
 The idea that the Company, many years after electing 
 to apply its earnings in whole or in part to account of 
 capital, can decide that it should have been applied to 
 dividends, or that it shall now be applied to dividends, 
 and that new shares of stock shall now be issued to 
 represent the amount so carried to capital account, receives 
 no countenance from any legal authority. It is contrary 
 to principle and common sense. 
 
 As observed by Judge Sedgwick, “ Surplus profits that 
 have once existed, but that no longer exist, cannot be the 
 basis of a dividend.” 
 
 Judge Truax places his decision mainly on the broad 
 proposition that the shares of stock of any incorporated 
 company in this State may be increased from time to 
 time at the will of the Company by stock dividends, to 
 the extent of the true value of the property of the com- 
 pany. 
 
14 
 
 
 That is the real question presented in this case, and it 
 is a question of great public importance. 
 
 See Plaintiff’s Brief in Court below, pages 
 97, 98. 
 
 If Judge Truax’s proposition be correct, incorporated 
 companies in this State may “water” their stock as much 
 and as often as they please. 
 
 Judge Truax holds that a corporation has the right to 
 issue certificates of stock to the amount of the value of 
 its property. 
 
 If that be so, a corporation may, when its business is 
 prosperous, increase the amount of its shares of stock by 
 issuing new shares without anything being paid for them. 
 
 And yet the law would not recognize those new shares 
 as fully paid up shares. And stockholders in Telegraph 
 Companies incorporated in the State would be held per- 
 sonally liable to creditors for an amount equal to 25 per 
 cent, of such additional stock. 
 
 Laws of 1853, chap. 471, sec. 4. 
 
 See Judge Sedgwick’s reference to this enactment, 
 
 Plaintiff' s Brief in Court below, p. 63-109. 
 
 Judge Truax refers to — 
 
 Pierce on Laic of Railroads, p. 123. 
 
 Howell v. Chicago cfc JV. IV. R. R Co., 51 
 Barb., 378. 
 
 Miller x. Illinois Central R.R., 24 Barb., 331. 
 Jones v. Tt rre Llaute R.R. Co., 57 N. Y., 196. 
 Boston & Lowell R. R. Co., 100 Mass., 399. 
 
 See these cases, commented on in Plaintiff' s Brief in 
 Court below, page% 52 to 60. 
 
 See also that Brief , pages 110-111, Judge Sedgwick’s 
 comments on Howell v. Chicago, 51 Barb., 378. 
 
15 
 
 Judge Truax says: “ I do not mean to be understood 
 as saying that a corporation lias a legal right to issue 
 certiti cates of stock beyond the value of the corporate 
 property— in other words, that a corporation has a right 
 to “ water” its stock. I do not pass on that question.” ^ 
 
 He says : “ Within the last quarter of a century a great 
 many corporations have “ watered ” their stock, and such 
 transactions have frequently been before the courts of this 
 and other States, and that no disapproval of such trans- 
 actions has been expressed.” 
 
 It is to be observed that the validity of the “ watering” 
 process could not be questioned collate rally . 
 
 Thus in many of the cases referred to by defendants, 
 where stock dividends have been made, the questions be- 
 fore the Court, related to the rights of legatees, &c., to 
 such stock ; and the court had nothing to do with any 
 qneston as to the legality of the action of the corporation 
 in the issue of the stock. 
 
 See review of cases cited by defendants , 
 Plaintiffs Brief in ( ’ onrt below , p. 48 to 
 50. 
 
 Judge Truax holds that an incorporated company may 
 make stock dividends for gratuitous distribution amongst 
 its stockholders, provided that the total amount of the 
 stock issued shall not exceed the real value of the prop- 
 erty of the company. 
 
 Suppose the company, forming an over-estimate of the 
 value of its property, gives its stockholders additional 
 shares of its stock, is the validity of the stock in the 
 hands of an assignee thereof dependent on the ques- 
 tion as to the real value of the stock when the increase is 
 made ? 
 
 It could not be said that a stock dividend, made on an 
 estimate of the increased value of the property of the 
 company, is made from surplus earnings — such stock 
 
16 
 
 dividend not being for or on account of any surplus 
 earnings in band, but on account of a supposed increase 
 in the value of the property of the company. 
 
 Such increased value may arise from various causes 
 such as the removal of competition, the introduction of 
 improved machinery, &e., from which it may be reason- 
 ably supposed that there will be in the future large 
 surplus earnings although there are none now in hand. 
 
 It is evident that Judge Truax wholly overlooked the 
 statutory provision limiting dividends to “surplus 
 earnings, when he says that a company may increase its 
 shares of stock by making stock dividends, provided the 
 total amount of the stock shall not exceed the real value 
 of the property of the company. 
 
 d he law is, that additional shares of stock must be 
 paid for. 
 
 Plaintiff's Brief in Court below, pages 41 to 
 43—47 to 71—27, 28. 
 
 It has been argued that a stockholder of an incorpo- 
 lated company has no solid ground of objection to the 
 doubling of the shares of its stock, because he gets his 
 proportionate share— that he is not injured by the 
 “ watering ” process. 
 
 As to this argument, see Plaintiff's Brief in Court 
 bflow, pp. 75 to 78. 
 
 Evidently a stockholder has a good right to object to a 
 wateiing of the stock (although he may get his propor- 
 tionate share) thereof when such watering is prohibited. 
 
 The additional shares are distributed as a stock divi- 
 dend, and that is prohibited by the statute (2 R. S., 5th 
 Ed., p. 599, Sec. 2), which forbids the making of divi- 
 dends except from the surplus profits. 
 
 It follows that any stockholder has the right to object 
 to such action. 
 
17 
 
 If, in the first instance, the capital is fixed at a high 
 figure and is paid for in part only, the stockholder may 
 be compelled to pay up the balance. 
 
 No advantage can be obtained by fixing the capital at a 
 low figure, paying for it in full, and then “ watering ” it 
 under the pretence that it is worth more than the original 
 capital stock, and that the watering stock is to be treated 
 as full paid up stock. 
 
 The personal liability of a stockholder on account of 
 stock only partly paid could not be thus sucessfully 
 evaded. 
 
 In the case of a Telegraph Company incorporated un- 
 der the laws of the State of New J orlc, there are special 
 reasons why a stockholder can object to the “ watering” 
 of the stock, for in addition to its illegality it imposes up- 
 on him au onerous liability. 
 
 Formerly, a stockholder in a Telegraph Company in 
 New York was liable for the debts of the Company to 
 the extent of 25 per cent, of the amount of the stock held 
 by him. 
 
 The original Telegraph Act {Laws of 1848, Ch. 265 
 Sect. 10) reads thus : 
 
 u The stockholders of every association organized in 
 “ pursuance of this Act shall be jointly and severally 
 personally liable for the payment of all debts and de- 
 mands against such association which shall be contract- 
 “ ed, or which shall be or shall become due during the 
 “ time of their holding such stock, but such liability of 
 “ any stockholder shall not exceed twenty-five per cent. 
 
 “ in amount the amount of stock held by him.” 
 
 By the Act of 1853, Chap. 471, Sec. 4, that liability 
 is reduced, but it is 25 per cent, of the amount due by 
 the stockholder on his stock. 
 
 This act is quoted by Judge Sedgwick in his opinion in 
 the Williams case (see page of this Brief). 
 
18 
 
 When, therefore, the stockholder gets his stock doubled 
 by the watering process, he becomes personally liable for 
 the debts of the company to the extent of 25 per cent, of 
 the amount of such additional stock. 
 
 It cannot, therefore, be truly said that a stockholder is 
 merely caviling when he objects to that watering. 
 
 Moreover the doubling of the shares of stock may 
 cause a doubling of the taxation of the company. 
 
 Even if, as suggested by Judge Truax, there is no ob- 
 jection to the watering of stock when it is not prohibited 
 by legislation, there can be no watering of the stock of 
 a company in Hew York by making stock dividends — 
 such dividends being prohibited. 
 
 And Telegraph companies, especially, have no right to 
 water their stock, seeing that the stockholders are thereby 
 subjected to a heavy personal liability. That liability 
 cannot be imposed upon a stockholder by the action of a 
 majority of the board of directors and of the stock- 
 holders. 
 
 Ho authority is needed for the proposition that a ma. 
 jority of the board of directors and of the stockholders 
 can have no power at common law to subject an individ- 
 ual stockholder to such liability. 
 
 If more capital is required to be raised by the issue of 
 additional shares, such issue is amply provided for by the 
 Hew York laws relating to Telegraph Companies, and 
 by the General Act of 1872, ch. Gil, sec. 1, but the stock 
 so issued must be paid for in cash or its equivalent. 
 
 Judge Truax refers to the act of 1875, ch. 319, pro- 
 viding that where the Articles of Association of a Tele- 
 graph Company fail to provide for an increase of their 
 capital stock, such increase may be made after the publi- 
 
19 
 
 cation of a certain notice, with the written consent of 
 shareholders holding or owning f in amount of the then 
 capital. 
 
 And the Judge adds: 
 
 “The Articles of Association of the West. Un. Tel. 
 Co., although they were before Chief Judge Sedgwick 
 and Judge Spier, were not offered in evidence on the 
 trial of this action. 
 
 “ In the absence of evidence to the contrary a corpora- 
 tion will be presumed to have acted in conformity to its 
 corporate powers. 
 
 “Chautauqua Co. Bank v. Risley, 19 N. Y., 
 369. 
 
 “ De Groof v. American Linen Thread Co., 
 21 id., 124. 
 
 “The Western Union Tel. Co. has complied with the 
 requirements of this law. It has published the notice as 
 required, and has obtained' the written consent of share- 
 holders owning and holding three-fourths in amount of 
 its capital stock.” 
 
 As to the original Articles of Association see Plain- 
 tiff's Brief in the Court below, Point 12, p. 11-16. 
 
 It is not to be presumed in the absence of proof that 
 the Western Union Tel. Co. was authorized by its origi- 
 nal Articles of Association to increase its shares of stock 
 without restriction and for gratuitous distribution, and it 
 will not be asserted that the laws for the formation of 
 telegraph companies authorized the issue of stock with- 
 out payment of for the same dollar for dollar. 
 
 The above cited Act of 1875, in authorizing telegraph 
 companies to increase their shares of stock, did not mean 
 that such increased shares need not be paid for. 
 
 There is no legal presumption that the Western Union 
 has acted in conformity to its corporate powers in the 
 purchase of the rival telegraph lines or in making the 
 stock dividend in question. 
 
20 
 
 Point 1. 
 
 The plaintiff is not estopped fro in bringing this action 
 by the fact that before he became a stockholder in the 
 Western Union Telegraph Company a project had been 
 formed by some of the Directors of that Company for 
 the consolidation of rival telegraph companies with that 
 Company, and rumors concerning some such scheme had 
 reached him. 
 
 See Judge Truax’s findings on this point, as matter of 
 fact and law. 
 
 Case, fol. 533, 1st finding of fact. 
 
 Case,fol. 567, 1th finding of law. 
 
 See ante page 4, a full examination of this question 
 in the discussion of Judge Truax’s opinion. 
 
 See Plaintiff's Brief in Court below, page 83, 91, 92, 
 93. 
 
 A stockholder has the absolute right to object to any 
 act of the Company which is ultra vires or illegal. He 
 may object to the continuance of such act, although 
 it may have had its commencement before he became a 
 stockholder- 
 
 Even if the illegal contract in question bad been made 
 before plaintiff became a stockholder, he could object to 
 the future payment of dividends on the stock illegally 
 issued. 
 
 Plaintiff's brief in Court below, p. 92, 93. 
 
21 
 
 Point 2. 
 
 The Telegraph Act of 1870, Chap. 5(58, does not au- 
 thorize the purchase of the telegraph lines of the Ameri- 
 can Union and Atlantic and Pacific Telegraph Com- 
 panies, the principal portions of those lines being worked 
 in competition with parallel lines of the Western Union. 
 
 See Case, p. 10, Bill of Complaint , Art. 5, 
 fols. 27 to 30. 
 
 And Case, p. 42, Answer of the Western 
 Union, fol. 125. 
 
 See argument in Plaintiff's Brief in Court below, 
 pages 19 to 26. 
 
 The Act of 1870 should not be construed so as to 
 favor the suppression of competition in the telegraph 
 business. 
 
 See testimony of Dr. Green, the President of the 
 West. Un. Tel. Co., 
 
 (Case, fols. 823, 824, 833 to 855,) 
 showing that the substantial objects of the consolidation 
 was to remove the opposition of the Am. Un. Company, 
 and bring over Mr. Jay Gould and his influential asso- 
 ciates, having great influence in railroad companies. 
 
 See also the testimony of Mr. Wilson G. Hunt one of 
 the Directors of the W. U., 
 
 (Case, fols. 1068 to 1072,) 
 
 showing that the suppression of the competition was the 
 great object of what he calls the “foundation of all that 
 consolidation.” 
 
22 
 
 Point 3. 
 
 The proceedings had under the supposed authority of 
 ? 6 . Act of 18( 0 were not in accordance with the pro- 
 visions of that act, and were inoperative. 
 
 See Plaintiff’s Brief in Court below, page 30 
 to 34. 1 y 
 
 The proceedings taken by the three telegraph com- 
 panies were all of a loose and hasty character, the parties 
 thereto being impressed with the belief that they had 
 onh to hurry up the transfer of the property proposed to 
 lie sold, and that all objections would thus be sur- 
 mounted. 
 
 See Plaintiff's Brief in Court below, p. 30 
 3 1 > showing the irregularities in the ac- 
 tion taken under the Act of 1870. 
 
 An illustration of this is shown by the fact that the 
 Western Union Board of Directors did not make the 
 contract for the purchase, but left a material part of the 
 contract to be made by the Ex. Committee. The Presi- 
 dent of the Western Union innocently observes that he 
 supposed the Ex. Committee had all the powers of the 
 Board. 
 
 Case, fo. 79 S. 
 
 ) Certainly the Ex. Committee had not the powers of the 
 Board in regard to proceedings under the Act of 1870 
 for the purchase of telegraph lines from other com- 
 panies. 
 
23 
 
 Point 4. 
 
 The Western Union could not acquire by purchase 
 the competing lines in Pennsylvania and Ohio. 
 
 See Plaintiff's Brief in Court below, p. 35. 
 
 Point 5. 
 
 The American Union and Atlantic and Pacfic Tele- 
 graph Companies could not sell and convey the telegraph 
 lines in States other than the State of- New York under 
 the authority of the New York Act of 1870. 
 
 See Plaintiff’ s Brief in Court below , p. 36. 
 
 This Court will take judicial notice of the fact that 
 telegraph lines run over public streets and higways by 
 virtue of privileges conferred by the local authorities to 
 parties to be exercised for the public good. 
 
 Such privileges are on common law principles inalien- 
 able. 
 
 Terhune v. Phillips , 99 U. S., 529. The Court will take 
 judicial notice of a thing which is in the common knowl- 
 edge. 
 
See case of Thomas v. Railroad Co., 101 US S3 
 81 Ihe Court held (page 82) « that the powers of corpo 
 lations organized under legislative statutes are such, and 
 such only,. as those statutes confer,” and that “there is 
 another principle of equal importance and equally con- 
 clusive against the validity of this contract, which, if not 
 coming exactly within the doctrine of ultra vires, as we 
 have just discussed it, shows very clearly that the rail- 
 load company was without the power to make such a con- 
 
 “That principle is that where a corporation like a 
 railroad con, pany has granted to it by charter a franchise 
 intended in a large measure to be exercised for the pub- 
 ic good, the due performance of those functions beino- 
 
 whiehT 1 ° f thG PUbHc ^ rant ’ contract 
 
 Inch disables the corporation from performing those 
 
 functions which undertakes without the consent of the 
 
 f , ° t r anst i er to otbers the rights and powers con- 
 ferred by the charter and to relieve the grantees of the 
 burden which it imposes, is a violation of the contract 
 " i h the State, ami is void as against public policy. 
 
 This doctrine is asserted with remarkable clearness by 
 ' ' "" lce ampbell in The York and Maryland Line 
 Railroad Company v. Winans, 17 How., 30.” 
 
 cLtlCn\tVT^ Blaek DdaWOre & 
 
 anal C o 22 N T. Ey., 130, Chancellor Zabriskie says • 
 
 I may be considered as settled that a corporation cam 
 net lease or alien any franchise or any property necessary 
 o perform its obligations and duties to the State without 
 i^ffori^’i M99. For this he cites some 10 
 lw decided eases 111 England and in this country.” 
 
 It the W. U. Tel. Comp, desired to suppress the com 
 petition of rival telegraph companies it should not have 
 sought to accomplish that object by any action under the 
 supposed authority of the Act of 1870 ; it should have been 
 
25 
 
 content to purchase the stock of those companies as held 
 bv the stockholders thereof. 
 
 That, however, would not have been in accordance 
 with the grand and dazzling financial scheme for raising 
 the capital to eighty millions. 
 
 The stock of the Western Union could have been in- 
 creased under either of the acts of IS 72 and 1875, and 
 with that stock they could have purchased the stock of 
 the American Union and American and Pacific Tele- 
 graphic Companies from the stockholders at the actual 
 value thereof. 
 
 Point 6. 
 
 The contract in question was void by its own term.. 
 
 (See. 10). 
 
 * 
 
 See Plaintiff’s Brief in Court l>elow,p. 40. 
 

 26 
 
 Point 7. 
 
 Increased shares of Stock must be fully paid for. 
 
 Such increased shares may be issued under the general 
 act of 1872, Ch. 611, Sec. 1 , or under the Telegraph Act 
 of 1875, Gh. 319. 
 
 See Plaintiffs Brief in Court below , p. 27, 
 28, 41. 
 
 See review of Judge Truax’s opinion on this 
 point, ante pages 
 
 Point 8. 
 
 A telegraph company incorporated under the laws of 
 this State cannot increase the number of its shares of its 
 capital stock to be distributed amongst its present stock- 
 holders as a stock dividend to represent net earnings 
 which the Board of Directors have for a series of years 
 applied to increase the extent of its telegraph lines, pur- 
 chases of patent rights, &c., with the consent and au- 
 thority of those who were the stockholders at the sev- 
 eral times when such applications have been made. 
 
 See ante p. 10, review of Judge Truax’s 
 opinion. 
 
 And see Plaintif s Brief in Court below , 
 p. 47 to 71. 
 
 And see ante, Point 7. 
 
27 
 
 Point 9. 
 
 The plaintiff can maintain this action, although the W. 
 IT. Telegraph Co. might not be able to maintain an action 
 to rescind the contract and sale in question. 
 
 See Plaintiff's Brief in Court below, p. 72 - 
 
 to 78. 
 
 Point 10. 
 
 The plaintiff has the right to complain of the violation 
 of the law by the W. TJ. Telegraph Co., and is not de- 
 pendent upon the action of the Attorney-General. The 
 plaintiff has a personal interest in the matter. 
 
 Point 11. 
 
 The denial of the motion for an injunction by Judge 
 Barrett in the case of Hatch v. The W. TJ. Tel. Co. is 
 no estoppel. 
 
 See Plaintiff's B/iefin Court below, p. 81. 
 
Point 12, 
 
 There is no equitable estoppel in pais. 
 
 bee Plaintiff’s Brief in Court below, popes 
 83 to 88, 91 to 96. 
 
 And ante page 4 <*t seg. of this brief. 
 
 Point 13. 
 
 As to the Decree prayed for. The Court is bound to 
 adjudge that the issue of the 155,265 shares of the Wes- 
 tern [ nion Telegraph Stock is invalid, and that the con- 
 tract in question is void, notwithstanding the fact that 
 the contract has been acted upon by the Telegraph Com- 
 panies parties thereto. 
 
 See Plaintiff’s Brief in Court below, p. 99 to 
 105. 
 
 And see ante review of Judge Truax’s opinion. 
 
 The proposition that the Decree prayed for cannot be 
 had because the purchase by the W. U. of the other tel- 
 egraph lines has been consummated by the delivery 
 
29 
 
 of the lines to the W. IT., and the issue and delivery of 
 the W. U. stock to or for the vendors is untenable. 
 
 The proposition amounts to this : An illegal act can- 
 
 not be judicially pronounced to be illegal if it has been 
 actually perpetrated. 
 
 We maintain, on the contrary, that the contract in 
 question, and the issue of the 155,265 shares must be ad- 
 judged to be illegal, and that the legai consequences of 
 such adjudication must follow. 
 
 Of course there can be no injunction forbidding the 
 doing of what has been already finally done and com- 
 pleted. In such case the legal remedy of the party in- 
 jured may be confined to a claim for damages. 
 
 In the present case the question is not now whether 
 the defendants shall be restrained by injunction from 
 doing what they have done, and which has received the 
 sanction of the judgment of Judge Truax; the question 
 is whether the contracts are legal, and especially whether 
 the W. IT. Tel. Co. had legal authority to issue and dis- 
 tribute amongst its stockholders as a stock dividend 
 155,265 additional shares of its stock. 
 
 The question as to the validity of that act cannot be 
 affected by the fact that the W. IT. Tel. Co. has actually 
 committed it. 
 
 And it is to be observed that that Company, and all 
 the parties concerned who have taken the stock, have 
 acted with full knowledge of the pendency of this litiga- 
 tion. 
 
 This case presents to the Court a gross instance of the 
 violation of the law against stock watering. Public 
 policy demands the enforcement of the law forbidding 
 such acts. 
 
30 
 
 The ease also presents to the Court a flagrant attempt 
 to make a huge monopoly by a perversion of the laws re- 
 lating to Telegraph Companies in this State. 
 
 It can avail nothing to say that the wrongdoers have 
 accomplished what they set out to do— the validity of 
 their acts is now the subject of legal scrutiny. 
 
 Upon the rendition of a decree that the sale and pur- 
 chase of the American Union and Atlantic & Pacific 
 Telegraph Companies’ lines by the Western Union was 
 unlawful, or a decree that the issue of the 155,265 shares 
 t° fh e stockholders of the Western Union was illegal, the 
 3 Companies will find it necessary to submit to such de- 
 cree, and devise some plan of adjustment of the equities 
 between them. 
 
 See various plans suggested in Plaintiff’s 
 Brief in the Court below, p. 104. 
 
 Some difficulty (not, however, insurmountable) may 
 arise from the high-handed way in which the companies 
 have carried out their scheme in disregard of this litiga- 
 tion and the opinion of two of the Judges of this Court. 
 
 Disregarding these opinions the defendants have 
 blended the stock paid to the stockholders of the Ameri- 
 can Union and Atlantic & Pacific Telegraph Companies 
 with the stock of the Western Union. 
 
 The contracts of Jan’y 19 and Feb’y 3, 1881, should be 
 treated as naught for the reasons before stated, especially 
 on account of the invalidity of the 155,265 shares of the 
 Western Union stock. Without the issue of that stock 
 to the stockholders of the Western Union, the contract 
 fails entirely. 
 
 See 1 laintiff's Hr rej in Court below, pages 
 37, 38, 40. 
 
 The question is, What should be done to adjust the 
 
31 
 
 equities of the parties ? That may be accomplished thus : 
 Let the Western Union purchase the stock held by the 
 stockholders of the American Union and Atlantic and 
 Pacific. The Western Union can make that purchase 
 from the stockholders or their assignees, paying therefor 
 in shares of the W. U. Com’y, to be issued under the 
 Act of 1875. 
 
 See Plaintiff's Brief in the Court below , 
 pages 104, 105. 
 
 The shares of stock issued under the articles of Jan’y 
 19 and Feb. 3, 1881, should be cancelled, and in lieu 
 thereof there should be issued new shares as follows (the 
 Western Union retaining its original 400,000 
 
 shares) 400,000 
 
 Stockholders of the Am. Union 91, 775 J- 
 
 “ “ Atlantic and Pacific .... 51,394§- 
 
 543,170 
 
 Thus making the capital stock 543,170 shares instead of 
 800,000. 
 
 In Thomas v. Railroad Co., 101 TJ. S., 71, there was a 
 full discussion of “ the principle that executed contracts 
 originally ultra vires shall stand good for the protection 
 of. rights acquired under a completed transaction,” and it 
 was held that the principle did not apply to that case. 
 
 The R. R. Co. made a lease of its railroad for 20 years, 
 and the lessors resumed possession at the end of five 
 years, and the accounts for that period were adjusted and 
 paid. There was a condition in the lease to pay the value 
 of the unexpired term, and the question was whether 
 that condition could be enforced. It was held that it 
 could not. 
 
 The Court held that the lease was ultra vires, and said 
 
32 
 
 that a contract by which the company renders itself in- 
 capable of performing its duties to the public, or attempts 
 to absolve itself from its obligation without the consent 
 of the State, violates its charter and is forbidden by public 
 policy. It is therefore void.” 
 
 The argument of the plaintiff's counsel was as follows 
 p. 77—78 : 
 
 “ The authorities establish the proposition that a con- 
 tract not forbidden may be enforced where the share- 
 holders have assented. In this case there was a prior 
 unanimous assent and a subsequent unanimous ratifica- 
 tion, and the illegal parts, if any, of the contract has been 
 completely executed. 
 
 “ The defence of ultra vires is inadmissible to an action 
 against a corporation upon 'its contract duly made , where 
 (if not wholly executed) all the shareholders have ac- 
 quiesced in its performance, or where the contract has 
 been wholly performed by the other paity without ob- 
 jection on the part of the corporation or any of the share- 
 holders. 
 
 “ Where the transaction is complete and nothing re- 
 mains to be done by the party seeking relief, the plea of 
 ultra vires is not available by the corporation in an ac- 
 tion brought against it for not performing its side of the 
 contract.'’' 1 
 
 For these propositions a great number of decisions of 
 the Supreme Court of the United States, and of the 
 States of Hew York, Pennsylvania and Hew Jersey and 
 other States are cited. 
 
 The Court, per Miller, J, after referring to the decision 
 of the House of Lords that a contract ultra vires when 
 made by the Directors cannot be enforced, although it 
 has been ratified by the shareholders, says that the con- 
 tract in question was a contract forbidden by public 
 policy ) and beyond the powers of the defendants to make. 
 
33 
 
 ‘•Having entered into the agreement, it was the duty of 
 the Company to rescind or abandon it at the earliest mo- 
 ment. This duty was independent of the clause in the 
 contract which gave them the right to do it. Though 
 they delayed its performance for several years it was 
 nevertheless a rightful act when it was done. Can this 
 performance of a legal duty, a duty both to stockholders 
 of the Company and to the public give to plaintiffs a 
 right of action ? Can they found such a right on an 
 agreement void for want of corporate authority and for- 
 bidden by the policy of the law ? ” 
 
 “ To hold that they can is, in our opinion, to hold that 
 any act performed in executing a void contract makes 
 all its parts valid, and that the more that is done under a 
 contract forbidden by late, the stronger is the chain to 
 its enforcement by the Courts .” 
 
 A company may well be estopped from setting up the 
 plea of ultra vires to escape from a contract which it 
 has entered into, and on the faith of which the other 
 parties to the contract have acted. But’ this is not a 
 question abont the right of the Company to repudiate its 
 contract — the question is as to the rights of a stockholder 
 to object to the violation of the law. 
 
 The illegal stock dividend cannot be made valid by the 
 obstinacy of the Western Union in insisting upon making 
 that dividend and distributing the stock in defiance of 
 the plaintiff in this case, and another now before this 
 Court. 
 
 It is to be observed that the Western Union could by 
 virtue of Clause ID of the contract have set it aside on 
 account of wants of the corporate capacity to issue and 
 distribute the 155,265 shares of its stock amongst its 
 stockholders. 
 
34- 
 
 Copy Opinion of Judge Truax in this 
 Case, as Reported in the N. Y. Reg- 
 ister 23d June, 1881. 
 
 Truax, ./. — “I do not consider it worth while to go 
 over again the grounds gone over in the Williams case. 
 The plaintiff contends that the agreements made by the 
 telegraph companies should be set aside because they 
 violate laws of the United States, and of Ohio and Penn- 
 sylvania. The law of the United States above referred 
 to is as follows : 
 
 ' 1 Section 52b3. — Any telegraph company now organ- 
 ized, or which may hereafter be organized under the 
 laws of any State, shall have the right to construct, 
 maintain and operate lines of telegraph through and 
 over any portion of the public domain of the United 
 States, over and along any of the military or post roads 
 of the United States which have been or may hereafter 
 be declared such by law, and over, under or across the 
 navigable streams or waters of the United States ; but 
 such lines of telegraph shall be so constructed and main- 
 tained as not to obstruct the navigation of such streams 
 and waters, or interfere with the ordinary travel on such 
 military or post roads. 
 
 “ ‘Sec. 5265. — The rights and privileges granted under 
 the provisions of the Act of July, ; 1866, entitled “ An Act 
 to aid in the construction of telegraph lines, and to secure 
 to the Government the use of the same for postal, mili- 
 tary and other purposes,” or under this title, shall not be 
 transferred by any company, acting thereunder, to any 
 other corporation, association or person. 
 
 u ‘Sec. 5268. — Before any telegraph company shall ex- 
 ercise any of the powers or privileges conferred by law, 
 such company shall file their written acceptance with the 
 Postmaster-General of the restrictions and obligations re- 
 quired by law.’ 
 
35 
 
 “ Judge Blatcliford passed upon this law in the ease of 
 the Direct Cable Company against the Atlantic and 
 Pacific Telegraph Company, et a/., as follows : 
 
 “ The Court — I perceive that your argument about 
 the act of Congress proceeds upon a certain view of the 
 provisions of the statute. As you seem now to be passing 
 from that subject, I will state that it occurs to me that 
 the view which you take of this act of Congress is not 
 at all admissible. The way it strikes me is this : This 
 company, the Western Union Company, had a right, by 
 the provisions of the statute, to maintain and operate its 
 lines of telegraph, and they are to-day, after this transfer, 
 if it has taken place, as they were before the 19th of Jan- 
 uary. 
 
 “ The statute says that before any telegraph company 
 shall exerercise any of its powers — in other words, before 
 it shall operate its line it shall file a written acceptance 
 with the Postmaster-General of the restrictions and obli- 
 gations required by law. The Western Union has done 
 that. It has filed its acceptance. What is the other con- 
 dition which is imposed by that statute ? It is that the 
 rights and privileges granted shall not be transferred by 
 any company acting thereunder to any other corporation, 
 association or person. 
 
 “ What is the meaning of all that taken together \ It 
 is simply that anybody, any corporation which is going 
 to exercise any function under this act shall file its writ- 
 ten acceptance. The question is simply a question be- 
 tween the United States and these people— that they shall 
 not acquire the rights by transfer, but by filing an accept- 
 ance. There is nothing else in it. It has nothing to do 
 with the question of consideration of the stock of tha com- 
 panies. The United States do not undertake to regulate 
 anything of the sort. This differs altogether from any 
 view of it that has been taken, but that is the way it 
 strikes me.” 
 
# 
 
 36 
 
 “ ^ r - Oelafikld — As I read these acts they provide 
 that, the telegraph companies, after having tiled their as- 
 sent to the provisions of the statute, may then obtain 
 certain rights which are described in the statute. These 
 rights and privileges were valuable, and they are the only 
 rights and privileges under which the Atlantic and Pacific 
 Company could operate outside of the State of New York, 
 or, in fact, get outside of the City of New York, as in 
 the doing so it had to pass the public waters of the United 
 States.. The condition of the statute is that the rights 
 and privileges granted under it shall not be transferred. 
 
 The ( ourt But they do not get their rights and 
 privileges by transfer at all. That is not what they 
 get by the transfer. They get the poles and the wires 
 and the batteries by the transfer. They get these 
 rights and privileges by having themselves already filed 
 an acceptance. There is the distinction. It seems to be 
 perfectly clear. I do not think the statute has anything 
 to do with it. 
 
 “ I am of the opinion that this transfer should not be set 
 aside on the ground that it’conflicts with the statutes of 
 Pennsylvania and ( )hio, which say that no telegraph com- 
 pany owning a competing line therein shall acquire by 
 purchase or otherwise the lines of any other competing 
 telegraphic corporation, nor shall any such telegraph coim 
 pany be consolidated with or merged into any other tele- 
 graph company. 
 
 “ I am of the opinion that these statutes apply only 
 to telegraph companies organized under the laws of 
 these States, and neither of the parties to this suit 
 was organized under the laws of either of these States. 
 But at most, if the law does apply, then the Western 
 Union Company cannot take possession of the lines of the 
 American Union Telegraph Company in the States of 
 Pennsylvania and Ohio. There is no proof of the value 
 or extent of the lines in those States, but is a partial fail- 
 ure of consideration — how much of a failure has not been 
 proved. The contracts will not be set aside on the 
 ground of partial failure of consideration.” 
 
Opinion of Judge Truax in the Williams 
 
 Case. 
 
 [Printed in the “Case on Appeal ” in Williams v. The 
 TT. (J. Tel. Co ., now before this Court.] 
 
 I have found, as matters of fact, that the defendants, 
 Jay Gould, Russell Sage and Thomas T. Eckert, did not 
 enter into an unlawful combination or agreement with 
 divers persons connected with the Atlantic and Pacific 
 Telegraph Company, The Western Union Telegraph 
 Company and the American Union Telegraph Company, 
 for the purpose of uniting together large amounts of 
 capital, and for the purpose of depressing the stocks of 
 the several telegraph companies in the market, in order 
 that they might get control of the three companies, after 
 the holders of the stock of said companies had been 
 frightened into the belief that a “telegraph war” was 
 impending, and had sold their stock. 
 
 I have also found that the other allegations of fraud 
 and conspiracy made in the complaint against the said 
 defendants and others were not proved on the trial. 
 
 One of the very able counsel for the plaintiff, in his 
 argument at the close of the trial of this case, said that he 
 was not going to lament the fact that he had failed to 
 show such a combination ; that he had not been able to 
 prove certain things by the defendants. 
 
 I have also found that the property of the American 
 Union was worth $15,000,000, and that of the Atlantic 
 and Pacific $8,400,000. 
 
 The plaintiff alleges in his complaint that the real 
 value of the property of these two companies does 
 not exceed the sum of $8,000,000, and to prove that 
 allegation called, among others, Mr. Eckert, Dr. Green, 
 
38 
 
 Mr. Bates, Mr. Shivley, Mr. Van Horne, Mr. Sanford 
 and Mr. Scliaffner. Mr. Schaffner could not say whether 
 lie was or was not an expert in determining the cost of 
 the construction of the telegraph lines, but said he could 
 tell pretty well what a line would cost if he knew the 
 market price ot the materials. I have endeavored to as- 
 certain from his testimony what the value of the prop- 
 erty of the American Union was, and I have come to the 
 conclusion that this witness would have fixed the value, 
 if he had named it, at about 1-4,000,000 to $6,000,000. 
 
 Mr. Sanford thought the poles and wires could be put 
 up for $7,000,000, while Gen. Eckert testified that on the 
 19th day of January, 1881, it would have cost about 
 $10,000,000 “ to build a set of telegraph lines, plants and 
 other appurtenances to the telegraph business of the ex- 
 tent and capacity of those possessed by the American 
 Union, and sold to the Western Union,” and that now 
 it would cost more because materials and labor are 
 higher. In this he is corroborated by Mr. Shivler. 
 
 Gen. Eckert said that he considered the property 
 of the American Union to be worth $20,000,000, 
 and that he estimated its value from the earning capacity 
 of the property. Besides this the American Union had 
 a great many valuable contracts with railroads which it 
 would have been impossible in January, 1881, to replace 
 • oi- reproduce. 
 
 In the case of the Commonwealth against the Hamil- 
 ton Manufacturing Company, 12 Allen, 302, Chief Jus- 
 tice Bigelow says : “ Undoubtedly the amount of property 
 belonging to a corporation is one of the considerations 
 which enters into the market value of its shares, but such 
 market value also embraces other essential elements. It 
 is not made up solely by the valuation or estimate which 
 may be put on the corporate property, but it also includes 
 the profits and gains which have attended its operations, 
 the prospect of its future success, the nature and extent 
 
39 
 
 of its corporate rights and privileges, and the skill and 
 ability with which its business is managed. In other 
 words, it is the estimate put on the potentiality of a cor- 
 poration, on its capacity to avail itself profitably of its 
 franchise, and on the mode in which it uses its privileges 
 as a corporate body which materially influences, and often 
 controls its market value.” 
 
 I think the evidence warrants the conclusion that the 
 property of these two companies was worth the sum paid 
 for it by the Western Union. At any rate the difference 
 between the actual value and the sum paid, the inade- 
 quacy of price is not so great that 1 would be authorized 
 in finding that the agreement was fraudulent and there- 
 fore should be set aside on that ground alone. 
 
 2 Kent’s Com., 477. 
 
 1 Pars, on Cont., 492, and cases there cited. 
 
 I have also found that the scrip dividend of $15,526,- 
 590 represents surplus earnings of the Western Union 
 Telegraph Company, made since the first day of July, 
 1866, which had. by and with the consent of the stock- 
 holders of said company, been invested from time to time 
 in property necessary and useful in and about the busi- 
 ness of said company ; that said property was in the pos- 
 session of the company on the 19th day of January, 1881, 
 and that said property was then worth the sum of 
 $15,526,590. 
 
 The question then arises upon these findings, is a cor- 
 poration organized under the laws of the State of New 
 
 ork authorized by these laws to issue scrip dividends 
 to represent its surplus earnings, which have from time 
 to time been used to purchase new plant, or rather, is it 
 prohibited by the laws of the State of New York from 
 so doing? 
 
 1 have held as matter of law, that the laws of the 
 State of New York, do authorize the Western Union Tel- 
 
 I 
 
40 
 
 egraph Company to issue stock for this $15,526,590 sur- 
 plus earnings. 
 
 The plaintiff contends that such issuing of stock 
 is prohibited by the laws of this State, and calls the 
 attention of the Court to the following portion of the 
 Revised Statutes: “It shall not be lawful for the di- 
 rectors or managers of any incorporated company in this 
 State to make dividends excepting from the surplus 
 profits arising from the business of such corporation ; 
 and it shall not be lawful foj- the directors of any such 
 company to divide, withdraw or in any, way pay to the 
 stockholders, or any of them, any part of the capital 
 stock of such company, or to reduce the capital stock, 
 without the consent of the Legislature.” 2 Rev Stat 
 (6th Ed.), 398. 
 
 If the defendant, The Western Union Telegraph Com- 
 pany, has divided any portion of its capital stock among 
 its . stockholders, it comes within this statute, and the 
 plaintiff is entitled to maintain the injunction already is- 
 sued. 
 
 What is the meaning of the words, “capital stock,” in 
 the statute above cited % 
 
 1 be capital stock is not only the money put into the 
 corporate fund; it is also the property put into that 
 fund; it is to be distinguished from the certificates is- 
 sued by the corporation usually called stock certifi- 
 cates, which are simply the written evidence of the 
 holder’s right to participate in the surplus profits of the 
 corporation during its existence in the proportion that 
 the shares held by him was to the whole number of 
 shares into which the corporate property is divided, and, 
 on the dissolution of the corporation to participate in the 
 bume proportion in the division of the corporate property 
 aftei payment of the debts of the corporation. 
 
 Hyatt v. Allen, 55 U. Y., 553. 
 
 Jones v. Terre Haute R. R. Co., 57 N Y 
 196. '» 
 
 Burrell v. Bushwick R. R. Co., 75 id., 216. 
 Pierce on Railroads (2d Ed.), 110. 
 
11 
 
 A holder of such a certificate acquires uo right to take 
 away any portion of the corporate property (75 N. Y., 
 216). 
 
 The corporate property — the “ capital stock ” of a 
 corporation — is not divided, or withdrawn, or reduced 
 by the issuing of such certificates. 
 
 The corporate fund— the capital stock — still remains 
 the same. 
 
 “The word stock,” said the Court of Appeals in Burn 
 v. Wilcox, 22 N. Y., 551, *has various significations, 
 but, as applied to joint stock associations or corporations, 
 it means the property and franchises of the company. 
 It is sometimes used to designate the certificate or scrip 
 issued to the stockholders, but this is an inappropriate use 
 of the word. The scrip is not the stock.” 
 
 I am of the opinion that the statute means that no 
 corporation shall divide among its shareholders any por- 
 tion of “the property and franchises of the company,” 
 and that the action of the defendant, The Western Union 
 Telegraph Company, in issuing the said $15,526,590 of 
 certificates of stock, of which action the plaintiff com- 
 plains, is not prohibited by the statute above quoted. 
 
 The defendants contend that the increase in the capital 
 stock of the Western Union to $80,000,000 was author- 
 ized by Chapter 319 of the Laws of 1875. The plaintiff 
 contends that when, under that act, an addition is made 
 to the capital, it must be paid for, and that, unless legis- 
 lative authority is given to issue stock for a consideration 
 other than money, it must be paid for in money or in 
 money’s worth. 
 
 I have held, as matter of fact, that the $15,526,590 of 
 stock was issued for a valuable consideration, and that it 
 has been paid for with $15,526,590 of property. 
 
 It is the law in this State that in the absence of any 
 statutory restriction a corporation has power to receive 
 
42 
 
 payment otherwise than in money for subscription to the 
 capital stock. 
 
 East New York, &c., R. R. Co. vs. Light- 
 hull, 5 Abb., N. S., 458. 
 
 This is one of the common law powers of a cor- 
 poration. “Such common law powers,” - said the 
 General Term of this Court in the case cited above, 
 “are the same as those possessed by individuals, 
 and may be employed in the same manner, unless 
 restricted by some positive of clearly implied prohibition 
 of law (Barry v. Merchants’ Exchange Co., 1 Sandf. C., 
 ,580; De Groff v. Am. Linen Thread Co., 21 N. Y., 124) 
 and the objection that an act of a corporation is ultra 
 mres rests upon the absence of either express or implied 
 power, and not upon the wrong use of it.” 
 
 In the case of Barry y. Merchants’ Exchange Com- 
 pany, it was held that the capital stock of a corporation 
 mentioned in its charter, is not per se a limitation of the 
 amount of property, either real or personal, which it may 
 own. It may divide its profits among the stockholders 
 at such times and to such amount as the directors may 
 deem expedient. Instead of dividing the profits they 
 may, in their discretion, permit the surplus of property 
 to accumulate beyond their oiiginal capital as the inter- 
 est of the corporation shall appear to dictate. 
 
 It seems to me, then, that if a corporation has a right 
 to allow its corporate fund— its capital stock — to increase 
 beyond the limit fixed for its capitalization by its char- 
 ter, it has, in the manner provided by law, a right to 
 increase the number of certificates which represent the 
 interest its stockholders have in its corporate fund. 
 
 I do not mean to be understood as saying that a cor- 
 poration has a legal right to issue certificates of stock be- 
 yond the value of its corporate property — in other words, 
 that a corporation has a right to “ water ” its stock. I do 
 not pass upon that question. 
 
4:3 
 
 I have held, as a matter of fact, that the Western 
 Union Telegraph Company has not watered its stock. 
 
 It was proved on the trial of this action that money 
 earned by the said company, and which was the profits 
 of the . business of the company and as such was avail- 
 able for the purpose of dividends, had been used by the 
 company in purchasing new permanent assets for which 
 no stock had been issued. 
 
 It is not an unusual thing for corporations to allow a 
 surplus to accumulate and to be held by the corporation 
 either in money or in other property, until in course of 
 time, certificates of capital stock are issued to the stock- 
 holders to rep%sent their interest in these accumulations. 
 
 Such a transaction is neither in law or in fact a “ water- 
 ing’’ of the stock of a corporation. -F or the certificates 
 of stock the corporation holds either the money or the 
 property to the full amount of certificates issued, and it 
 falls neither within the spirit nor the letter of 'the law, if 
 there be such a law, against the inflation of the capital 
 stock of a corporation like the Western Union Telegraph 
 Company. 
 
 The true test of the transaction is, has the money of 
 the stockholders to the amount represented by the pro- 
 posed issue of certificates been retained, and is it held 
 bv the company either in money or in property ? 
 
 If so it is proper that the interest of the stockholders 
 in such accumulation should be represented in his hands 
 by certificates of stock. Courts have frequently been 
 called upon to determine whether such accumulations be- 
 long, when they come to be divided, to the stockholders 
 of record, at the time the accumulations were made, or 
 to the stockholders at the time of making the division. 
 
 It is now well settled that a shareholder in a corpora- 
 tion has no legal title to its accumulated profits until they 
 are divided, and when divided they go to their share- 
 holders. 
 
 Ilyatt v. Allen, 55 N. V., 553. 
 
 Jones v. Terre Haute It. It. Co., 57 id., 196. 
 
44 
 
 Incident to the ownership of stock in a corporation and 
 passing with the assignment of shares thereof is the right 
 to receive the proportional share of all the profits not di- 
 vided at the time of the purchase of the shares, and it is 
 immaterial at what time and from what source these pro- 
 fits have been earned. 
 
 1 have, therefore, reached the conclusion that the pro- 
 posed issue of new stock upon the evidence in this case 
 does not come within the spirit or the letter of the law 
 against watering stocks, if there be such a law. 
 
 \Y itliin the past quarter of a century a j^eat many cor- 
 porations have “ watered ’ their stock, and such transac- 
 tions have frequently been before the courts of this and of 
 other States, and the able counsel for the plaintiff have 
 not found any case in which the Court has, in express 
 terms, expressed its disapproval of such transaction. 
 
 There are, on the other hand, cases in which the courts 
 have approved “ the issue of dividends of stock where 
 there were not earnings properly applicable to the pur- 
 poses of a dividend in cash, and it was deemed expedi- 
 ent to retain the amount in order to make permanent 
 improvements or pay debts.” I quote the language of 
 Pierce on Law of Railroads (p. 123), a recognized author- 
 ity. The question was also decided by a Judge of the 
 Supreme Court of the State in Howell v. Chicago and 
 N. W. Railroad Company, 51 Barb., 378. 
 
 There are also numerous cases in which the question 
 has been collaterally before the courts, and in no instance 
 have the courts denied the rights of corporations to issue 
 an increased amount of stock to represent accumulations. 
 Dividends of stock have been issued to pay interest on stock 
 (Ohio City v. Cleveland and T. R. Co. 6 Ohio St., 489). 
 
 “ Whatever disposition was made ” (of such a distribu- 
 tion of stock) said the General Term of the Supreme 
 
Court in Miller o. Illinois Central Railroad, 21 Barb., 
 331, “ whatever disposition was made of it, the stock- 
 holders get the benefit of it directly or indirectly. See 
 also Jones v. Terre Haute Railroad Company, 57 N. Y., 
 196 ; State v. Baltimore and Ohio Railroad Company, 6 
 Gill, 363; Boston and Lowell Railroad Company o. 
 Commonwealth, 100 Mass., 399. 
 
 Chapter 319 of the Laws of 1875 provides the manner 
 in which a company organized under the laws providing 
 for the incorporation of telegraph companies can increase 
 the number of shares of its capital stock. 
 
 It says : “ It shall be lawful for any association of per- 
 sons organized under this act, by their articles of associa- 
 tion to provide for an increase of their capital, and the 
 number of shares of the capital stock of the association, 
 hut if any such association shall have omitted to so pro- 
 vide for an increase of their capital, it shall he lawful, 
 after notice of the intention so to do, published once a 
 week for six weeks successively in the State paper, and 
 in any newspaper of general circulation published in the 
 county where the principal office of such company is 
 located, and with the written consent of shareholders hold- 
 ing and owning three-fourths in amount of the then 
 capital, to provide for an increase thereof, and the num- 
 ber of shares into which the same shall be divided.” 
 
 The articles of association of the Western Union Tele-, 
 egrapli Company, although they were before Chief Judge 
 Sedgwick and Judge Spier, were not offered in evidence 
 on the trial of this action. 
 
 In the absence of evidence to the contrary, a corpora- 
 tion will be presumed to have acted in conformity to its 
 corporate powers. 
 
 Chautauqua Co. Bank v. Risley, 19 N. Y., 
 369. 
 
 I)e Groff v. American Linen Thread Co., 21 
 Id., 124. 
 
46 
 
 The Western Union Telegraph Company has complied 
 with the requirements of this law. It has published the 
 notice as required, and has obtained the written consent 
 of shareholders owning and holding three-fourths in 
 amount of its capital stock. 
 
 I am also of the opinion that this increase of capital 
 stock, authorized as it is by the laws of this State, is not 
 against public policy. It may be against the public 
 good, I nit it cannot be against public policy — or as it is 
 sometimes called, the policy of the law-because the law 
 making power of the State has allowed it. Courts since 
 the tune of Henry V. have held that*- contracts in 
 restraint of trade are against public policy. Such 
 contracts are neither expressly nor impliedly author- 
 lZi( statute ’ vet if the Legislature should de- 
 <• are that hereafter no such contract should be 
 against public policy, such contract would not be against 
 public policy. It is within the power of the Legislature 
 to say what is and what is not against public policy, and 
 having said it is the duty of the Courts “ to declare the 
 law and not to make law.” 
 
 Holding as I do upon the main question in this action 
 I do not consider it worth while to discuss whether the 
 plaintiff is a “litigious volunteer,” whether he is “hawk 
 mg the process of the Court,” whether the fact that the 
 agreement of January 19th has been executed, or whether 
 the plaintiff has acquiesced in the agreement is a defense 
 to the action. 
 
 Judgment for the defendants is ordered with costs, 
 
 wtC. 
 
 CHARLES H. TRUAX, 
 
 J udge. 
 

 
 
 
 
 
 
 
 
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UNIVERSITY OF ILLINOIS-URBAN A 
 
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