4 Barry v. Missouri, Kansas & Texas R'y Co. 27 Fed. Rep. 1; S. C. 34 Fed. Rep. 829; S. C. 4 R'y & Corp. Law J. 193.

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§ 632. The same subject, continued.-Net earnings. The holders of income bonds are in general bound by the determination of the directors of the company as to what constitutes net income.1 An income mortgage does not preclude a railway company from expending its income upon such improvements and extensions as the developments which time and the competition of new roads or a demand for greater facilities would require. But in determining the amount of net earnings for the payment of income bonds, a railway company is not entitled to deduct from its gross earnings a loss incurred in selling the income bonds at a discount, nor a float ng debt contracted before the income mortgage was executed, nor the full amount of interest on a prior mortgage, the bondholders of which hal agreed to accept a smaller percentage." And the company cannot properly charge against the earnings sums required to be set apart annually for a sinking fund under the provisions of a first mortgage. Where a company had misapplied i s earnings as against an income mortgage, and a decree allowed the income bondholders to move for an injunction against further misapplication, and the company relied on a bare denial of a charge of misapplication, giving no figures from which the condition of its business or the manner of disposing of its earnings could be determined, and giving no explanation of the shrinkage of its semi-annual net earnings from one million and a half dollars to nothing, an injunction was allowed, although for a cause other than the particular one formerly

BEACH ON RAILWAYS-66

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had in view, and although the charge was in part on information and belief."

1 Day v. Ogdensburg etc. R. R. Co. 107 N. Y. 129.

2 Day v. Ogdensburg etc. R. R. Co. 107 N. Y. 129, 146.

3 Barry v. Missouri, Kansas & Texas Ry Co. 27 Fed. Rep. 1; S. C. 34 Fed. Rep. 829; S. C. 4 R'y & Corp. Law J. 198.

4 Barry v. Missouri, Kansas & Texas R'y Co. 27 Fed. Rep. 1, 6; S. C. 34 Fed. Rep. 829; S. C. 4 R'y & Corp. Law J. 198. But see Belfast etc. R. R. Co. v. Belfast, 77 Me. 445; where with respect to dividends upon preferred stock, net earnings were held to be the gross receipts after deducting the interest on the permanent debt, and the sums yearly devoted to a sinking fund for its payment, and all floating liabilities in good judgment actually due.

5 Barry v. Missouri, Kansas & Texas R'y Co. 36 Fed. Rep. 228; S. C. 27 Fed. Rep. 1; S. C. 4 R'y & Corp. Law J. 198.

§ 633

Convertible bonds.-A company having power to increase its capital stock may lawfully receive its own bonds in payment for its new shares.1 It is not unusual for the bonds of corporations to contain a clause to the effect that upon their surrender to the treasurer of the corporation, the company will cause to be issued to the bearer a certain number of shares of its capital stock." Bonds containing such a provision are called "convertible bonds." Statutes authorizing the issue of convertible bonds are held to confer authority upon the corporation to increase its capital stock beyond the amount fixed by its charter, if it be necessary so to do in order to issue shares of stock in exchange for bonds. It is provided by the General Railroad Act of New York that the directors of the company may confer on any holder of any bond issue under that act, the right to convert the principal due or owing thereon into the stock of the company, at any time not less than two nor more than twelve years from the date of the bond, under such regulations as the directors may adopt. But it is provided that if the capital stock already authorized at

the time that the bonds are issued shall not be sufficient to meet the conversion when made, the stockholders shall before the issue authorize, in the manner prescribed in that act, an increase of capital stock to an extent sufficient to meet the deficiency. The issue of bonds convertible int stock being precisely the same in effect as an issue · of stock, the company cannot lawfully sell them at. a discount. The holder of convertible bonds may demand stock in exchange for them at any time be-fore maturity. And it has been said that even though the holder of the bonds demand a conversion into stock just before a dividend is declared, he is entitled to the stock and the dividend thereon." But it seems more reasonable that a holder of convertible bonds who had received interest thereon up to the time that a dividend is about to be paid, cannot, upon then converting his bonds into stock, acquire a right to receive the dividend." Where the time within which the conversion may be made is limited, the right to demand stock for the bonds must be exercised within that time, unless it has been extended. No days of grace are allowable. Thus, where, by the terms of the statute allowing a street railway corporation to issue bonds, it was provided that the holders of the bonds " may convert them into stock as the bonds mature, unless redeemed by the company before maturity," it was held that a bondholder who presented his bonds on the second day after the maturing of the bonds, and demanded stock in exchange, was too late.1 The right to demand the conversion of the bond into stock runs with the bond, and when the bond

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is tran-ferred no right of action for its non-conversion remains in the former owner.'

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1 Lohman v. New York etc. R. R. Co. 2 Sand. (Super. Ct.) 39; Reed v. Hayt, 51 N. Y. Super. Ct. 121.

2 E. g. Chaffee v. Middlesex R. R. Co, 146 Mass. 224.

3 Belmont v. Erie R'y Co. 52 Barb. 637, 669; Ramsey v. Erie R'y Co. 33 How. Pr. 193, 216; Cook on Stock & Stockh. § 283. Cf. Ramsey v. Gould, 57 Barb. 338; S. C. 8 Abb. Pr. N. S. 17; Pratt v. American Bell Telephone Co. 141 Mass. 225; S. C. 12 Am. & Eng. Corp. Cas. 110; 55 Am. Rep. 465. Contra, Manufacturers' etc. Ins. Co. v. Middlesex R. R. Co. 146 Mass. 224.

4 N. Y. Laws of 1850, ch. 143, § 10, as amended by N. Y. Laws of 1880, ch. 133.

5 Cook on Stock & Stockh. § 233. Cf. Van Allen v. Illinois Central R. R. Co. 7 Bosw. 515.

6 Jones v. Terre Haute etc. R. R. Co. 57 N. Y. 196.

7 Jones v. Terre Haute etc. R. R. Co. 57 N. Y. 196.

8 Sutliff v. Cleveland etc. R. R. Co. 24 Ohio St. 147.

9 Muhlenburg v. Philadelphia etc. R. R. Co. 47 Pa. St. 16.

10 Chaffee v. Midd esex R'y Co. 146 Mass. 224.

11 Denny v. Cleveland etc. R. R. Co. 23 Ohio St. 108, 114.

§ 634. Of recitals and references in mortgages, bonds, and coupons.-References in bonds to the mortgage by which they are secured,' and references in coupons to the bonds from which they have been detached, put the purchaser upon inquiry, and charge him with notice of the terms of the instrument referred to. For example, references in coupons to the bonds, and in bonds to the mortgage, charge the holders both of the coupons and the bonds with notice of a provision in the mortgage with respect to waiver of defaults in payment of the moneys thereby secured, by the written consent of a majority of the bondholders; and by a provision of this nature subjecting the time of payment to a contingency over which the holder has no control, and which may postpone payment indefinitely, the negotiability of the paper is destroyed.3 For, although a coupon be detached from its bond,

it still remains a part thereof in contemplation of law, and is protected by and subject to the covenants in the bond.* Where a bond merely refers to the mortgage by which it is secured, the recitals in the mortgage will control with respect to the bond. But where the bond itself sets forth the terms of the contract, and there is a variance between it and the mortgage deed, the bond will control."

1 McClelland v. Norfolk Southern R. R. Co. 110 N. Y. 469; 4 R'y & Corp. Law J. 515, 546.

2 McClure v Township of Oxford, 94 U. S. 429; McClelland v. Norfolk Southera R R. Co. 110 N. Y. 433, 476; 4 R'y & Corp. Law J. 515, 547; Silliman v. Fredericksburg etc. R. R. Co. 27 Gratt. 119.

3 McClell mnd v Norfolk Southern R. R. Co. 110 N. Y. 469; 4 R'y & Corp. Law J 5.5, 546, 517.

4 City of Lexington v. Butler, 11 Wall. 483; City of Kenosha v. Lawson, 9 Wall. 483; State v. Spartanburgh etc. R. R. Co. 8 S. C. 129, 183.

5 Caylus v. New York etc. R. R. Co. 10 Hun, 295.

6 Indiana etc. R.R. Co. v. Sprague, 103 U. S. 756. Cf. Morgan v. United States, 113 U. S. 502; Rouede v. Jersey City, 18 Fed. Rep. 72).

Where

§ 635. Of fraud or irregularities in the issue of bonds. Want of consideration.-A company duly organized according to law and in possession of a railway, wholly or partly construc ed, is presumptively the owner thereof, and nothing appearing as of record to the contrary, a pu chaser of its bonds may assume that it had the legal right to mortgage the property and to issue bonds thereon.1 bonds have been properly executed, it is immaterial that the coupons were signed by only one of the officers that signed the bonds. A printed fac-simile of the autograph signatures upon the bond, will be a sufficient signing of the coupons. The issue of bonds imports compliance with all the required perequisites, and a bona-fide purchaser is under no obligation to inquire whether those prerequisites

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