UNIFORM TRANSFER OF STOCK.—Turn now to an entirely different matter, the transfer of stock. A stock certificate is one of the quasi-negotiable instruments of commerce, at common law not fully negotiable like bills and notes, but, nevertheless, having some of the attributes of negotiability, especially in States where what is called the Uniform Transfer of Stock Act has been enacted. This statute applies only to corporations of those States which have passed the statute.

TWO METHODS OF TRANSFERRING STOCK.—Stock may be transferred in two ways: first, by delivery of the certificate with the indorsement upon it of the owner of the stock, indicating that he assigns or authorizes the assignment of the stock, and second, by delivery of the certificate, with a separate document of assignment attached stating that the owner of the certificate assigns or authorizes the transfer of the stock. This second method is not so completely good as the first, where the assignment is on the certificate itself, because if for any reason the separate document should become detached from the certificate, the transferee\'s right would not be apparent, and therefore the Transfer of Stock Act provides that if a purchaser should get possession of the stock certificate with an indorsement upon it, he would take precedence over even a[Pg 239] prior assignee who had a separate paper assigning the certificate to him. Of course, after the transfer is duly registered on the books of the company, then it makes no difference whether that transfer was secured by means of a separate power or assignment or by means of one written on the certificate itself.

EFFECT OF TRANSFER ON THE BOOKS OF THE COMPANY.—What is the effect of transfer on the books of the company? Under the common law, stock was originally transferable just like any intangible right, merely by agreement of the parties, to which requirement was added, as a necessity when stock certificates became common, the delivery of the certificate itself. But it was convenient for the company to know who was owner of its stock. It was inconvenient to have stockholders buy and sell without any notice to the company, and therefore a common by-law was that stock should be transferred only on the books of the company. The Uniform Transfer of Stock Act goes back partially to the old rule, since the transfer of the certificate with the indorsement or separate assignment is what transfers the stock, not the transfer on the books of the company; but in order that the corporation may not be inconvenienced it is provided that the corporation shall have the right to pay dividends to any one registered on the books of the company, such persons being the apparent owners, and that only such persons have the right to vote. An analogous custom that shows the importance of registration of stock transfers on the books of the company is the registry[Pg 240] of deeds in the transfer of real estate. It is the deed, not the record of it, which creates a title, but an unrecorded deed may be defeated by creditors or purchasers without notice, so that to protect himself fully the owner of land is obliged to record his deed.

OWNERSHIP OF STOCK, INDIVIDUALLY, IN COMMON, JOINTLY AND BY FIDUCIARIES.—Stock may be owned by a man individually, it may be owned by several persons in common, or it may be owned by several persons jointly, or it may be owned by a person in a fiduciary capacity, as trustee, executor or guardian. What is the difference, may be asked, between the case of ownership of stock by several persons in common and ownership by several persons jointly. The common law drew this distinction between joint right and rights merely held in common; that a joint right survived to the survivors when one of them died, whereas a right held in common passed, on the death of one of the owners, pro rata to the personal representatives of the deceased. Therefore if A, B and C own stock jointly, when C dies A and B are the owners. If A, B and C own the stock in common, A, B and the executors of C would own it on the death of C. Generally where several persons own a right now, they own it in common, but there are two notable exceptions—the case of partnerships and the case of trustees. Stock held in the name of A, B and C, when A, B and C are either partners or trustees, will pass to A and B on the death of C. C\'s executor will not have to join in the transfer.[Pg 241]

DIFFICULTIES IN TRANSFER AFFECT PURCHASER AND ALSO CORPORATION.—The difficulties in the transfer of stock may be looked at (1) from the standpoint of a purchaser of the stock, including within the name of purchaser one who lends money on the stock as well as one who buys it, and (2) from the standpoint of the corporation whose duty it is to transfer the stock on its books. Generally the difficulties which confront the purchaser are the same which confront the corporation when it is asked to transfer. If the purchaser should get a defective right when he bought, then the corporation, if it should transfer, would generally get into trouble also.

LEGAL AND EQUITABLE DIFFICULTIES IN TRANSFERS.—The main difficulties which arise may be divided into legal and equitable difficulties. By legal difficulties are meant cases in which the purchaser will not get a good legal title. By equitable difficulties, cases in which the purchaser will get a good legal title but which will be subject to an equitable right in favor of some other person. The person who has an equitable right cannot reclaim the stock from one who is, or succeeds to the rights of, a bona fide purchaser for value without notice.

LEGAL DIFFICULTIES—FORGED CERTIFICATE.—First, in regard to legal difficulties. The certificate of stock may be forged. The purchaser of a forged certificate of stock, of course, gets nothing in the way of stock. He does get the right, however, to sue the person who sold him the stock on[Pg 242] an implied warranty of genuineness. Analogous to the situation of the purchaser is the situation of the corporation if, on receiving a forged certificate with a request for a transfer, it should transfer ownership on the books, completing the transfer by issuing a new certificate; for any person who took the new certificate, even though he was a bona fide purchaser for value, would not get any stock in the corporation, if all authorized stock had previously been issued. The corporation has no power to overissue stock; it cannot emit any more even if it tries, and therefore the purchaser gets no stock. He does, however, get a right against the corporation. The corporation has issued what purports to be new stock to him, or if he is a remote purchaser he has paid for stock in reliance on a certificate which the corporation has issued. The corporation is estopped, as the legal phrase is, to deny the validity of that certificate as against one who has thus relied on its acts. The result is that the corporation is bound to pay to him value equivalent to that of real stock, because the corporation has put out something which seems to be good stock, and owing to the act of the corporation the purchaser has been deceived.

FORGED ASSIGNMENTS.—A second legal difficulty arises where the indorsement or assignment of the certificate is forged. Only the owner of stock can sell it. Consequently, if anybody else attempts by forgery or otherwise to make a transfer, the transfer will be ineffectual. The result will be the same as though the whole certificate were forged. The purchaser[Pg 243] under the forged indorsement will get nothing. If the corporation relies on the forged indorsement and issues a new certificate, it will, in the same way as in the case of a new certificate issued for a wholly forged one, be liable to a purchaser for value. It is, of course, of vital importance, therefore, to make sure that indorsements are correct, and generally it is desirable to take indorsed certificates only from reliable persons. If you take such a certificate from a reliable person, even though there is no express guaranty of signatures by a brokerage house or other third person, as there often is, you will be practically safe because of the implied warranty of genuineness by the seller which applies to the indorsement on certificates as well as to cases of wholly forged certificates.

ASSIGNMENTS BY UNAUTHORIZED AGENT.—A third case is where the indorsement is made by an agent, and the agent has no authority to act. A corporation transferring stock should require, and a purchaser should require, the clearest evidence of an agent\'s authority if the signature of the transferor is made by an agent. It is not only necessary to be sure that the agent\'s authority originally existed, but it is necessary to be sure that his power has not been revoked, either by the death of the principal or by express revocation during his life. A question that sometimes is troublesome, in regard to the agent\'s authority to make such an indorsement, arises where the terms of the power given the agent are general; where he is authorized to do a very broad class of[Pg 244] acts for the principal, but no specific mention is made of the particular certificate which he seeks to transfer. Such a power, if it certainly includes the transfer of that certificate, is legally good, but a corporation would object to make a transfer under a power which did not specifically mention the particular certificate, unless it was absolutely certain from its terms that this certificate in question was included.

LACK OF CAPACITY TO ASSIGN.—A fourth case is lack of capacity on the part of the owner of the stock to make a transfer. This lack of capacity may arise from a variety of causes, insanity or infancy, for instance. A totally insane person is as incapable of transferring stock as of transferring other property. An infant, that is, a minor, though not wholly without capacity, if not under guardianship, becomes, presumably, wholly without capacity to transfer stock if under guardianship. An elderly person under the charge of a conservator would be incapacitated to transfer his property. An infant who has had no guardian appointed, though he could make a transfer, could also, by virtue of his infant\'s privilege, revoke that transfer, which, therefore, would be too insecure either for a purchaser to take or for a corporation to allow. If stock is owned by an infant, a purchaser or a corporation should require that a guardian be appointed and that the transfer be made by the guardian.

LACK OF DELIVERY—THEFT OF CERTIFICATE.—A fifth case is where the signature on the back of the certificate of stock is genuine, but[Pg 245] where there has been no valid delivery by the owner. This is rather a troublesome case to detect. In the case of full negotiable instruments, like bills and notes, if the signature of an indorser is genuine, a purchaser for value of the instrument will get title even though he purchases from a thief, or though for any reason there was no intention on the part of the owner who wrote his name on the back to make a transfer of the instrument. But by the common law stock certificates were not negotiable to this extent. This case occurred in a law office in Boston: the head of the firm rather carelessly kept "street certificates" for stock (that is, certificates made out in the name of the brokerage firm which was the former owner and indorsed in blank), not having the certificates transferred to his own name. The stock was not at the time dividend-paying, so that a transfer on the books seemed unimportant. He put the certificates into the office safe to which the office boy had access. This boy took the certificates and sold them through a broker, and the loss was not discovered for several years. After it was discovered the loss was traced by the numbers of the certificates, and action was brought against the brokers who were unfortunate enough to have taken the stock from the office clerk. Now, if the certificates had been negotiable paper, the brokers would not have been liable, but under the law then existing it seemed so probable that they were liable that they settled the case by paying more than half the value of the stock. The only thing that could have prevented their being liable was[Pg 246] that, under the circumstances, the contention was possible that the owner of the stock had been so negligent in his dealing with the certificates as to preclude him from asserting any right. Now the Transfer of Stock Act changes the law in this respect so far as Massachusetts stock certificates are concerned. The act makes them fully negotiable, but the common law would apparently still apply to certificates of stock of corporations incorporated in other States. And similar principles would be applicable in other States which have passed the same statute.

DEATH OF OWNER OF INDORSED CERTIFICATE.—A somewhat similar case is this: suppose that after the owner of stock has written his name on the back of it, he dies; that is a common enough case. Many men have used their stock certificates to borrow money on, and therefore, after paying the loan they have them in their possession with their signatures on the back. They put those certificates back in their safe deposit boxes. Then suppose the owner dies and an attempt is made to transfer the stock by virtue of that signature written on the certificate. That is not a valid transfer at common law. The certificate was owned only up to the time of his death by the man whose name is on the face; on his death his executor becomes the owner and the executor\'s signature is necessary to transfer the title, and the signature of the man himself written before his death is not effective for that purpose; and yet a purchaser may not be aware that that signature is invalid; he may not know that the man who signed[Pg 247] it is dead, and similarly the corporation may allow the transfer to go through in ignorance that the signer is dead. If the money which is the proceeds of the stock actually reaches the executor of the estate, of course he could not object to the validity of the transfer, and he could not object if he were in any way a party to the transfer of the stock by means of the signature of the dead man; but if the proceeds did not get to the hands of the executor and he was in no way responsible for the transfer, he could assert that the transfer was invalid and that that stock belonged to him. This, again, is changed by the uniform law so far as applies to corporations in the States which have enacted that law. To avoid misapprehension it should be said that if an indorsed certificate has been delivered for value by the owner, during his lifetime, to a purchaser or lender, the death of the indorser does not impair the validity of the signature even at common law. The purchase of the stock or a loan made on the stock gives the purchaser or lender a power which cannot be revoked by death or otherwise.

BANKRUPTCY OF THE OWNER OF STOCK.—One other important case, in which a genuine signature of one who was the owner cannot transfer a good title, is the case of bankruptcy. The Federal bankruptcy law provides absolutely that title to property which a bankrupt ............