The original of tiiis book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/cletails/cu31924085514010 CORNELL UNIVERSITY LIBRARY 3 1924 085 5 4 010 THE NATIONAL CYCLOPEDIA OF LAW THE LAW OF Private Corporations EDITED BY THE PUBUSHERS' SPECIAL EDITORIAL STAFF STUDENTS EDITION CHICAGO NATIONAL CYCLOPEDIA PUBLISHING CO. 1913 COPYRIGHT 1913 BY NATIONAL CYCLOPEDIA PUBLISHING GO. TABLE OF CONTENTS PART I THEOBY OF COBPOBATE EXISTENCE [BEIFEBENGES ABE TO PAOES] CHAPTER I OORPOEATIONS DEFINED A^B CLASSIFIED § 1. Dfifinition 1 § 2. The corporation as distinct from its stockholders : 4 § 3. The corporate entity ignored 11 § 4. The corporation a person within stat- utes employing that word 14 § 5. Origin of the theory of corporate exis- tence '. , 16 § 6. Kinds of corporations 18 iii iy! TABLE OF CONTENTS [EEFEREZSTCES ABE TO PAGES] CHAPTER n GENERALLY OP THE POWERS AND RIGHTS OF CORPORATIONS § 7. Explanatory of this chapter 22 § 8. The powers inherent in corporate exis- tence 22 § 9. iGeneral power of a corporation to enter into contracts 24 §10. Power of corporation to commit torts. . 29 § 11. Power of corporation to commit crimes . 38 § 12. Injm-ies to corporations 42 CHAPTER ni OBJECTS AND PURPOSES OE INCORPORATION §13. Introductory „. ... 43 § 14. Difference between corporations and partnerships 43 § 15. Corporations distinguished from joint stock companies 44 § 16. Reasons for the incorporation of com- panies 45 § 17. Disadvantages in incorporation 48 § 18. Purposes for which a corporation may be formed ,.^ 49 TABLE OF CONTENTS v [befebenoes a£e to faoes] PART II THE CREATION AND ORGANIZATION OF CORPORATIONS CHAPTER IV THE CORPORATE CHARTER § 19. In general 51 § 20. Charter defined 51 § 21. Power of the state and federal govern- ments to grant charter 52 § 22. The charter a contract with the state . . 57 § 23. Power of the state to alter and amend charters 58 § 24. Form of the charter 59 § 25. Amendment of charter by the corpora- tion 60 CHAPTER V ORCANIZING AND MANAGINa THE CORPORATION § 26. Procedure to obtain charter 71 §27. Stating the objects 73 § 28. The corporate name 74 § 29. Mrst meetings 75 vi TABLE OF CONTENTS [references are to pages] §30. The by-laws 76 §31. Regular and other meetings of the stockholders and directors 77 § 32. The corporate books and records 79 § 33. Annual reports, etc 80 § 34. The corporate calendar 81 CHAPTER VI CORPORATIONS DE FACTO § 35. Corporation de facto defined 82 § 36. What essential to existence as corpora- tion de facto 83 § 37. Powers of de facto corporation 89 § 38. The plea nul tiel corporation 89 § 39. Estoppel to deny corporate existence . . 90 CHAPTER Vn PROMOTERS § 40. Promoter defined 93 § 41. The promoter in a position of trust. . 94 § 42. The promoter as agent of the corpora- tion 99 TABLE OF CONTENTS vil [BEFEEENGES ABE TO PAGES] PART III THE POWERS OF A CORPORATION CHAPTER Vin POWERS IN GENERAL § 43. The corporation a creature of limited powers 101 § 44. Express powers 102 § 45. Implied powers 104 § 46. Same subject. Illustrations 107 §47. Same subject. Further illustrations. . . 112 §48. Same subject. Further illustrations. . 115 §49. Same subject. General observations. . 119 CHAPTER IX PARTICULAR POWERS CONSIDERED § 50. Power of corporation to acquire and hold real estate 121 § 51. Power to lease and sell 123 § 52. Power of corporation to borrow money . 125 § 53. Power to execute evidences of indebted- ness 125 § 54. Power to mortgage 126 § 55. Power of corporation to loan money. . . 126 viii TABLE OF CONTENTS [references are to pages] § 56. Power to acqtiire shares in other cor- porations 128 § 57. Power to acquire its own shares . . 130 CHAPTER X THE DOCTRINE OF ULTRA VIRES §58. Introductory 131 § 59. Distinction between acts ultra vires and acts intra vires 132 § 60. Right of a stockholder to object to an ultra vires act 134 § 61. Ultra vires contract executory on both sides 134 § 62. Ultra vires contract executory 139 § 63. Ultra vires contract executed 143 PART IV STOCK AND STOCKHOLDERS CHAPTER XI DEFINITIONS § 64. Capital stock defined 147 § 65. Share of stock defined 148 TABLE OF CONTENTS ix [EEFEBENGES ABE TO FAGSS] § 66. Stoekiiolder defined 148 § 67. Common and preferred standridge, 12 Wheat 65 25 United States v. McAmdrews & Forbes Co., 149 Fed. 823 39 Upton V. Englehart, 3 Dill. 496 166 Upton V. Tribilcock, 91 U. S. 45 166, 176 V Veiser v. U. S. Board & Paper Co., 107 Fed. Rep. 340 95 Yenuer v. Chicago City Ry. Co., 246 HI. 173. . 188 W Wachsmuth v. Nat. Bank. 96 Mich. 426 30 Ware v. Hamilton, 92 Ala. 145 246 Wellton V. Missouri, 91 U. S. 275 245 Wentworth v. French, 176 Mass. 442 194 Wester, etc. Ass 'n v. Greenberg, 204 U. S. 359 . 15 Western Md. R. Co. v. Blue Ridge Hotel Co., 102 Md. 307 Ill TABLE OF CASES xxxv [references are to pages] Western Union Tel. Co. v. Pleasants, 46 Ala. 641 253 Wheelock v. Moulton, 15 Vt. 519 8 White V. Buss, 3 Cush. 448 136 Williams v. Montgomery, 148 N. Y. 519 195 Wilson V. WiUs Valley R. R. Co., 33 Ga. 466. . 64 Wood V. Danimer, 3 Mason 108 177 Wright V. Bundy, 11 Ind. 398 233 Y Yale Gas Stove Co. v. Wilcox, 64 Conn. 101 .. . 96 Z Zirkel v. Opera House, 70 HI. 334 174 THE LAW OF Private Corporations PART I THEORY OF CORPORATE EXISTENCE CHAPTER I CORPORATIONS DEFINED AND CLASSI- FIED §1. DEFINITION. A private corporation may be defined as an artificial person existing by virtue of the franchise of the state. In the policy of our law, it is considered desir- able for the encouragement of trade and for other purposes to permit the organization of intangible and imaginary personages which shall stand apart from the individuals for whose benefit they are brought into existence. Thus we may suppose, for illustration, that in any community we have, say, one hundred human beings. Now the law allows the creation in this community by these nat- ural persons, of intangible beings, having as much 1 2 PRIVATE CORPORATIONS separate and definite existence as the one hundred persons we have mentioned. In this community I go to buy goods; I buy a certain number from A, a business man, who is doing business individually; I buy other goods from B, an organization which has a charter from the state authorizing it to exist as an individual. I find that B is an organization in which C, D and E are financially interested, and yet the law does not permit me to hold 0, D and E, or any one of them, on the contract I have made, but I must look to B alone, just as in the other case I must look to A. Here my experience teaches me that the law gives to B as much indi- viduality for business purposes as A has; in other words, I find that B is a person. Now if I look about to find B, no one can point such a person out to me. I find persons who claim to be officers of B; I find other persons who claim to be working for B on salaries; I find other persons who have contributed money to bring B into existence, and whose profits they divide amongst themselves, calling themselves "stockholders." They seem to be all as sure of B's existence as they are of their own and they regard B as a person with whom they can contract, to whom they can sell, from whom they can buy, and whom they can sue. Fur- thermore, they seem to regard B as one who stands between them and me. It becomes apparent, then. DEFINED AND CLASSIFIED 3 that B is for all practical purposes an individual with an existence as clearly defined as their own. Now B gets this existence by the act of the state. We shall find that a charter is absolutely essential to the existence of a corporation. This charter is a franchise granted by the state, C, D and E can- not by their own agreement constitute a corpora- tion. It is essential that the corporation derive its life through the permission of the state in the shape of a charter. It is true that C, D and E may by mere agreement combine for business purposes, establishing a business organization to which they give a fanciful name, but such an organization is not a thing apart from them. It is simply a rela- tionship, rather than a new being and whoever trades or deals in any way with this organization is dealing with C, D and E under the name which they have given to their business. If it becomes necessary to sue, C, D and E must be sued and there is no entity for any purpose existing apart from C, D and E. What they have created is a partnership and not a corporation. A corporation was defined by Chief Justice Mar- shall as an "artificial being, intangible, invisible and existing only in contemplation of law. ' ' ^ This definition has been criticised and it is said that 1— Dartmouth College v. Woodward, 4 Wheat. (U. S.) 518, 636. 4 PEIVATB CORPOBATIONS after all, if we disregard fictions, a corporation is no more than a collection of individuals. The crit- icism, however, is not well taken, for the corporate existence as a thing separate and apart is a fact, not merely a fiction. It is true it exists only in con- templation of law, but its existence is as much a fact, not for fanciful but for practical purposes, as the existence of any natural person, for when we have a concern to which we may sell, from which we may buy, with which we may contract, which may hold property, which may be sued, and which may sue, and which in all these respects stands be- tween the stockholders and creditors or other per- sons concerned, so that they are not personally in- volved or liable, then, it would seem, we certainly have something which is more than a fiction. The corporation is, indeed, a separate, clearly defined member of the community and weU understood to be such, not only by theorists but practical busi- ness men. §2. THE CORPORATION AS DISTINCT PROM ITS STOCKHOLDERS— ILLUSTRA- TIONS. A corporation has a legal existence apart from the existence of its stockholders. It has rights and powers its stockholders do not have. It may sue or be sued by them. Its property is not their property. Its debts and liabilities are not DEFINED AND CLASSIFIED 5 their debts and liabilities. A few illustrations of these principles given. In the foregoing section we noticed the theory of coi*porate existence. The purpose of the pres- ent section is to further elucidate that theory by a few examples. Thus in a recent case,^ the right of a corporation to exercise the power of eminent domain was at- tacked because its chief stockholder appeared to be another corporation. The court said: "The fact that the Louisville Gas Co. owns a majority or even all, of the Calor Oil & Glas Co. does not vacate or destroy the charter or corporate rights of the latter corporation. The Calor Oil & Oas Company retains its separate corporate entity, and has all the powers and rights which it would otherwise have, if its stock were in the hands of a number of individual holders. ' ' According to this case, if the stock of a corporation having the right of eminent domain were all owned by a corporation having no right of eminent domain, the former corporation would not thereby be deprived of that power. 2— Calor Oil & Gas Co. v. Franzell, 128 Ky. 715, cit- ing on this point, Louisville Gas Co. v. Kaufman, S. & Co., 105 Ky. 158, 48 S. W. 434; Louisville v. Louisville Water Co., 26 Ky. Law Eep. 425, 1 L. R. A. (N. S.) 766, 81 S. W. 698 ; Bell v. Louisville, 32 Ky. Law Rep. 699, 106 S. W. 862 ; Parker v. Bethel Hotel Co., 96 Tenn. 252, 31 L. R. A. 706, 34 S. W. 209; McTighe v. Macon Con- struction Co., 94 Ga. 306, 32 L. R. A. 208, 47 Am. St. Ref. 153, 21 S. B. 701. 6 PRIVATE COEPORATIONS The corporation's ownership of its property is distinct from the rights of the shareholders. They own the stock (giving them on dissolution a right to share in the assets, it is true), but the corpora- tion owns the legal title to the corporate property. Thus it has been held that though the stock of a corporation is all owned by one stockholder, he cannot by his personal deed convey the legal title to the property of the corporation, and where the stock is owned by several, they cannot by joining in a deed convey the corporate property. To this end, it was said in one case: ® "Defendants insist that the alleged equitable estate of Lucius Frierson in the property of the Bethel Hotel Company did not depend alone upon the dissolution of the corporation, but resulted also from the fact that he was the sole owner of aU its capital stock. The proposition is that, if one per- son owns all of the shares of stock of a corporation which owes no debts, he, in virtue of such owner- ship, becomes the equitable owner of all its prop- erty, or at least may sell and dispose of it by deed, if he chooses to do so. This proposition is argued by counsel for defendants with force and ability, and is supported by some authority. It has found favor with the supreme court of Maryland, Swift 3— Parker v. Bethel Hotel Co., 96 Term., 252, 31 L. R. A, 706. DEFINED AND CLASSIFIED 7 & Sinitli, 65 Md. 428, 433, 57 Am. Rep. 336. But the decision of that learned court is opposed by the current of authority, and seems to us to overlook and ignore certain principles that are fundamen- tal. A corporation and its shareholders, are dis- tinct legal entities. In Keith v. Clarke, 4 Lea, 718, this court held that notwithstanding the state owned all of the stock in the Bank of Tennessee, "the bank and the state are entirely different legal entities;" and in Lillard v. Porter, 2 Head. 177, it was said: "Stockholders are totally distinct from the corporation." Important consequences result from this rule. The shareholders are neither re- sponsible for the debts, nor the torts of the cor- poration. In the absence of special circumstances, the shareholders cannot be parties, either plain- tiffs or defendants, in actions respecting corporate rights, nor have they any title or interest in the property of the corporation. "Shareholders," says Thompson, "are not joint tenants, or in any other sense co-owners of the corporate property, either before or after its dissolution. The title to it rests exclusively in the legal entity called the corporation. A share of the capital stock merely gives the right to partake according to the amount put into the fund, of the surplus profits of the cor- poration, and ultimately on the dissolution of it, of so much of the fund thus created as remains un- 8 PRIVATE CORPORATIONS impaired, and is not liable for debts of the corpora- tion." 1 Thomp. Corp. 1071. As tbe shareholders have no direct interest in the corporate property, they cannot convey the real estate of the corpora- tion, though all join in the deed. In Wheelock v. Moulton, 15 Vt. 519, Redfield, J. stated the reasons for the rule in his usual clear and accurate style. In that case Moulton and Hutchinson, sole propri- etors and owners of all the stock of a corporation, conveyed its real estate, in mortgage, to secure the repayment of money borrowed of the plaintiff, Wheelock. He brought suit to enforce his mort- gage. Judge Eefield said: "The fact that the sign- ers of this deed owned the whole of the shares will make no difference in regard to the necessity of a vote of the corporation, in order to convey the land. The title to the land was in the corporation, not in the individual shareholders. The deed of one, or of any number of the stockholders will not affect the title of the land. The share owners are not tenants in common of the land. They have no title whatever to any of the property of the cor- poration. It is true that one who owned all the shares might control the corporation, and so he could if he owned a majority of the shares; but he could in either case do it only by a vote of the cor- poration, at a meeting held in strict accordance with the statutes of the corporation." And in DEFINED AND CLASSIFIED 9 Humphreys v. McKissock, 140 II. S. 304, 35 L. ed. 473, Mr. Justice Field, discussing the same ques- tion, said: 'The property of a corporation is not subject to the control of individual members, whether acting separately or jointly. They can neither encumber nor transfer that property, or authorize others to do so. The corporation — ^the artificial being created — ^holds the property, and alone can mortgage or transfer it; and the corpora- tion acts through its officers, subject to the condi- tions prescribed by law.' A very instructive case on this questi<5n is Baldwin v. Canfield, 26 Minn. 43. The facts of that case were very similar to those of this case and the direct questions now un- der consideration were passed upon. The opinion of the court was in accord with the cases above quoted." The case of Russell v. Temple * decided in 1798, shows forcibly the difference between the owner- ship of property by the corporation and the owner- ship of shares in the corporation by the stock- holders. In that case, Thomas Russel died leaving his widow and several heirs. A widow, of course, takes dower in real estate, which is an estate for life in the real estate of the deceased. By the statutes of Massachusetts she was allowed abso- 4 — 3 Dane's Abridgment, 108, Warren's Cases on Cor- porations, 24. 10 PRIVATE COEPOEATIONS lutely one-tMrd of the personal property of the deceased, the other two-thirds going to the heirs. The contest was, whether the widow should take only a dower interest in the shares (considering them as real property because the corporation was the owner of real property), or should take one- third absolutely (considering them as personal property regardless of the nature of the property owned by the corporation) . The case reads in part as follows: "It was argued (for the widow) that these shares were personal estate for two rea- sons. * * * "Second. Because the share is personal estate, though the corporation hold real estate; for the individual member has no estate, but only a right to such dividends as the corporation, from time to time, assign to him. He is unknown on the grants made to it, and cannot grant any part of the estate; nor can he be taxed for it but by statute law; nor can any private member of a corporation be dis- trained for a public concern of it; his only remedy for his dividend is an action of assimipsit, or in ac- tion on the case for a wrongful refusal or neglect to pay or allow him his part of the profits. So lands may be real estate in one, yet the trees or corn growing on them may be the personal estate of an- other. * * * "For the heirs it was urged that these shares DEFINED AND CLASSIFIED 11 were real estate, because it was said that the estates were real ia the corporations; annexed to the soil; and that if these estates in the corpora- tion were real, the estates of the individual mem- bers in them followed their nature, and were real; and that the frequent declarations of the legisla- ture declaring such shares personal estate, at least shew a doubt: that when one has a right to receive rent, he has only a right to receive a sum of money; yet it does not follow that his estate is not real estate, out of which his rent issues. "The judgment of the court was, that these shares were personal estate, and distribution was ordered accordingly. The principal reason of the decision appears to be, because the court consid- ered that the individual member, or shareholder, had only a right of action for a sum of money, his part of the net profits or dividends. And so the law has been held to be since this decision was made."° This case very clearly shows how the share- holders' rights and titles are distinct from the rights and titles of the corporation. § 3. THE CORPORATE ENTITY IGNORED. Where a corporation is organized and used as a 5 — It is now elementary that shares of a corporation are personal property, although all the property of the corporation is real estate, for the title to such real estate Is in the corporation. 12 PRIVATE CORPORATIONS "cloak for fraud," the court will ignore the corpo- rate entity and fix liability on the real parties involved, but this doctrine must not be extended to mean that stockholders of a corporation are liable for its torts where they are not actual participants therein. We are by this time ready fully to understand how a corporation is distinct in a legal sense, from its members. Its acts are not their acts; its titles and powers, not their titles and powers. Not only are the stockholders not liable on the corporate contracts, but they are not liable for the torts com- mitted by the agents and servants of the company, especially if they have no part in them. This is readily apparent if we think of actual and ordi- nary cases. Thus, a corporation employing ser- vants is liable for torts committed by them, as where a street car driver negligently injures a pedestrian. In such a case, the corporation is lia- ble, but the stockholders are not. So it is with all torts. To be sure if the stockholders have a part in the commission of such torts they are liable, but that is not because we ignore the corporate fiction, but because all involved in a tort are liable there- for. There are cases, however, in which the corpor- ate fiction will be ignored, where it is apparent the DEiFINED AND CLASSIFIED 13 corporation was organized as a cloak to enable one to do things he could not otherwise do, as for in- stance where one having engaged not to go into business as a competitor, organizes a corporation to accomplish the same purpose,* or where stock- holders are accused of becoming parties to an illegal contract or enterprise and reply that the corporation is the party concerned. The Ohio Court had this contention raised in one case,'' in which it said: "The general proposition that a cor- poration is to be regarded as a legal entity, exist- ing separate and apart from the natural persons composing it, is not disputed; but that the state- ment is a mere fiction, existing only in idea, is weU understood and not controverted by anyone who pretends to accurate knowledge on the subject. It has been introduced for the convenience of the company in making contracts, in acquiring prop- erty for corporate purposes, in suing and being sued, and to preserve the limited liability of the stockholders by distinguishing between the cor- porate debts and property of the company, and that of the stockholders in their capacity as indi- viduals. All fictions of law have been introduced for the purpose of convenience, and to subserve the 6— Hagy v. McGuire, 147 Pa. St. 187. 7 — State ex rel. Watson v. Standard Oil Co., 48 Ohio St. 137. 14 PRIVATE CORPORATIONS ends of justice. It is in this ease that' the maxim in fictione juris subsistit aequitas is used, and the doetriae of fictions applied. But when they are urged to an intent and purpose not within the rea- son and policy of the fiction, they have always been disregarded by the courts." * §4. THE CORPORATION A "PERSON" WITHIN STATUTES EMPLOYING THAT WORD— NOT A "CITIZEN." A corporation is regarded as a "person" within statutes employing that word where the evident meaning is not to confine the statute to natural persons, but a corpo- ration is not included within the term "citizen" in statutes employing that word. Where the word "person" is used in a statute or ordinance, it will be construed to mean "cor- poration" as well as natural person unless it is clearly a|)plicable to natural persons alone; thus a statute giving "persons" a mechanic's Hen in certain cases, gives such lien to a corporation.® So a statute that any "person" employing a child under fourteen years of age shall be deemed guilty of a misdemeanor applies to corporations. ^° Wher- 8— See also Donovan v. Purtell, 216 111. 629; in re Rieger, 157 Fed. Rep. 609. 9— Chapman v. Brewer, 43 Nebr. 890. 10— Overland Co. v. People, 32 Colo. 263. DEFINED AND CLASSIFIED 15 ever, then, it is apparent that the word person is not used in the sense of a natural person, as where a statute might give a person the right to vote, the word will be held to include corporations. A corporation is a "person" within the meaning of the Fourteenth Amendment, " and therefore a cor- poration cannot be deprived of its property with- out due process of law though the amendment does not use the word "corporation," but merely says "no person." A corporation, however, is not a "citizen." Thus the constitutional provision which gives citizens of each state the rights and immunities of the citi- zens of the several states does not give a corpo- ration any rights in another state than that of its organization. " The constitution provides that the jurisdiction of Federal courts shall extend to controversies be- tween, citizens of different states. United States courts in order to take jurisdiction within this clause have held that the stockholders of a cor- poration will be conclusively presumed to be citi- zens of the state in which the corporation is organ- 11— San Mateo Co. v. So. Pac. E. E., 13 Fed. 722. 12_Wester, etc., Asso. v. Greenberg, 204 U. S. 359 ; in re Speed's Estate, 216 111. 23. So, also, where the term is used in the 14th Amendment, Aetna Ins. Co. v. Brigham, 120 Ga. 925; Paul v. Virginia, 8 Wall. (U. &) 168. 16 PRIVATE CORPORATIONS ized and that the citizenship of the corporation within this clause will be the state of its incorpo- ration. ^* § 5. ORIGIN OP THE THEORY OF CORPO- RATE EXISTENCE. The theory of corporate existence is thought to have originated among the Romans, but it was not until a very late day that corporations came to be very numerous. It is thought that corporations first originated among the Romans although it was not until the last century that they came to have very much im- portance in commercial life. Today corporations are being formed in vast numbers for business pur- poses, but we are perhaps indebted to the Romans for the idea, although, of course, had it not been there instituted, undoubtedly the theory would afterwards have been worked out. As to the his- tory of corporations, Blackstone says:^* "The honor of originally inventing these political con- stitutions entirely belongs to the Romans. They were introduced, as Plutarch says, by Numa; who finding, upon his accession, the city torn to pieces by the two rival factions of Sabines and Romans, 13— St. L., etc., Co. V. James, 161 U. S. 545 ; Bank of U. S. V. Deveau, 5 Cranch (U. S.) 61. 14 — Blackstone 's Commentaries, Cooley's Ed. Book I, page 468. DEFINED AND CLASSIFIED 17 thought it a prudent and politic measure to sub- divide these two into many smaller ones, by insti- tuting separate societies of every manual trade and profession. They were afterwards much con- sidered by the civil law,4n which they were called universitates as forming one whole out of many individuals; or collegia, from being gathered to- gether; they were adopted also by the canon law, for the maintenance of ecclesiastical discipline; and from them our spiritual corporations are de- rived. iBut our laws have considerably refined and improved upon the invention, according to the usual genius of the English nation; particularly with regard to sole corporations, consisting of one person only, of which the Roman lawyers had no notion; their maxim being that Hres faciunt collegium/ Though they held, that if a corpo- ration originally consisting of three persons, be reduced to one, 'si universitas ad unum redit,' it may still subsist as a corporation, 'et stet nomen universitatis/ " At the time Blackstone wrote corporations were not common and were only created for special pur- poses by special acts of Parliament. It has re- mained for the last century and this century to make use of this idea of corporation existence for general business purposes. V. C— 2 18 PRIVATE CORPORATIONS § 6. KINDS OF CORPORATIONS. We may classify corporations into public corporations and private corporations and private corporations may be further divided into stock and non-stock cor- porations. Blackstone made two classifications ^^ of corpo- rations. The first division was into aggregate and sole and the second into ecclesiastical and lay. He defined a corporation aggregate as one consist- ing of many persons imited together in one society kept up by a perpetual succession of members so as to continue forever. He defined a corporation sole as a corporation consisting of one person only and he gave the King, a bishop, a parson, a vicar, and others as examples of corporations sole. This is an idea which has become almost or quite obso- lete. Blackstone did not mean by a corporation sole a "one-man corporation," as we use that term today, meaning that the stock of a corporation is held by one man, but he meant a corporation which necessarily was composed of one person and which could not be constituted by two or more persons. Now a "one-man corporation" may be owned by one man today and a hundred men tomorrow. Of corporations sole Professor Cooley in his note to 15 — Blackstone 's Commentaries, Cooley 's Ed. Book I, page 469. DEFINED AND CLASSIFIED 19 the subject in Ms edition of Blackstone says:*' "The number of corporations sole in the United States must be very few indeed. It is possible that the statutes of some states vesting the property of the Eoman Catholic church in the Bishop and his successors may have the effect to make him a corporation sole ; and some public officers have cor- porate powers for the purposes of holding property and of suing and being sued." Ecclesiastical corporations were defined by Blackstone as those that exist where the members that compose them are entirely spiritual persons such as Bishops, etc. Under the division that we shall make, we shall see that in modem law a non- stock corporation may be created for religious pur- poses. Lay corporations, said Blackstone, are of two sorts, civil and eleemosynary. A civil corpo- rations being any corporation aggregate, not cre- ated for rehgious or charitable purposes and under which he included public corporations, as towns and trading companies, or companies for any pur- pose except religious and charitable purposes. He defined eleemosynary corporations as those which are constituted for the perpetual execution of the free alms or bounties of the founder of them to such persons as he has directed; that is, hospitals, colleges, and the like. 16— Id. 20 PRIVATE COE.POBATIONS We may make a division of corporations which wUl classify them according to the modern stand- point. They may be tabulated as f oUows : (1) Public corporations, or those which are founded by the government for public purposes. (A) Municipal corporations, as cities and towns. (B) Quasi-Municipal, as counties, boards of education, park boards, etc. (2) Private corporations, or those which are owned by private individuals, even though of a public nature. (A) Stock corporations, or those which are organized for pur- poses of financial profit. Here we place corporations of a strictly private nature as well as railroads, and the like." (B) Non-stock corporations, or those not organized for private profit. (1) Eeligious corporations. (2) Charitable corpora- tions. 17 — ^Any corporation is a "private corporation" when its stock is or may be owned by private persons, whether it is a corporation of a public nature or not. DEFINED AND CLASSIFIED 21 (3) Pleasure clubs. (4) Lodges. (5) All corporations for purposes of learning, mutual assistance, etc. We shall have nothing to do in this text with public corporations which is treated in another place, and shall devote our attention here strictly to the general principles pertaining to private corporations. CHAPTER II GENERALLY OF THE POWERS AND RIGHTS OF CORPORATIONS §7. EXPLANATORY OF THIS CHAPTER. The purpose of this chapter is to inquire gen- erally into the powersi of corporations and the rights of corporations for the purpose of arriving at a fuller understanding of the theory of corpo- rate existence. We shall take up particularly at a later point the charter powers of a corporation and the important subject of ultra vires, but it becomes necessary at this point for us to consider in a general way the powers and rights of corpo- rations as affected by the theory of corporate ex- istence. § 8. THE POWERS INHERENT IN CORPO- RATE EXISTENCE. A corporation has inher- ently the power to have a common name, a common seal, to make by-laws, to receive and grant, to sue and be sued, have a board of directors, etc. A corporation by reason of its very existence as 'such, that is to say, without respect to whether it is organized to manufacture automobiles or to 22 POWERS AND RIGHTS IN GENERAL 23 maintain a chureli has certain powers implied from and inherent in its corporate existence. In the first place it may contract. The extent to which it may contract is governed by its charter, but with- out respect to its charter we are justified in saying it has the power to contract. In the second place, it may receive and hold and grant property with- out respect to the particular object for which it is formed. In the third place it may sue and be sued irrespective of the object for which it is formed. In the fourth place it may make by-laws, elect directors and do all other acts necessary to effect its organization. It is usually said also that it may have a name and a seal, but while this is true, we do not now regard the seal as essential to its corporate existence. In addition to these regular powers which a cor- poration has, we may add that it has the power to commit torts, and crimes, as we will consider in the following section. The reader should bear in mind that at this point we are not attempting in any respect to in- quire into the powers of a corporation as depend- ent upon the peculiar provisions of its charter in any particular case. That is reserved for a later chapter." 18 — See chapters 8, 9 and 10. 24 PRIVATE COBPOKATIONS §9. GENERAL POWER OF A CORPORA- TION TO ENTER INTO CONTRACTS. Every corporation has the power to make contracts, but the extent to which it may contract is governed by the provisions of its charter. It may bind itself upon contracts express or implied and under or not under seal. While we must postpone to a further time the discussion of the extent of the power of a corpo- ration to enter into contracts we must notice at JMs point for our better understanding of the nature of a corporation its inherent power to bind itself or to hold others upon contracts. Every corporation has the power to enter into contracts inherent in its very existence for it could not ac- complish its purposes unless it had the power to contract. The power of the corporation to contract gives it the right to enter into all forms of contract, that is, contracts under seal or not under seal, and con- tracts express or implied. It seems to have been at one time thought that corporation could not bind itself upon a contract except by use of its seal. Blackstone stated this conception in the following language: "For a corporation being an invisible body, cannot manifest its intentions by any per- POWERS AND RIGHTS IN GENERAL 25 sonal act, or oral discourse j it therefore acts and speaks only by its common seal. Eor though the particiilar members msay express their private con- sents to any acts, by .words, or signing their names, yet this does not bind th^ corporation; it is the fixing of the seal, and that only, which unites the several assents of the individuals who compose the community, and makes one joint assent of the whole." ^« As late as 1827 we find Chief Justice Marshall in a dissenting opinion ^° maintaining that a corpo- ration cannot act except in writing. He does not contend that the seal is necessary, but he is gov- erned by the same thought that Blackstone had in mind in the above quotation. His reasoning was as follows: "I should now, as is my custom when I have the misfortune to differ from this court, acquiesce silently in its opinion, did I not believe that the judgment of the circuit court of Virginia gave general surprise to the profession, and was generally condemned. * * * The plaintiff is a corporation aggregate; a being created by law; it- self impersonal, though composed of many individ- uals. These individuals change at will; and even while members of the corporation, can, in virtue of 19— Blackstone 's Commentaries, Cooley's Ed. Book I, page 475. 20— United States Bank v. Dandridge, 12 Wheat. (U S.) 65. 26 PRIVATE CORPORATIONS such membership, perform no corporate acts, but are responsible in their natural capacities, both [while members of the corporation, and after they cease to be so, for everything they do, whether in the name of the corporation or otherwise. The cor- poration being one entire impersonal entity, dis- tinct from the individuals who compose it, must be endowed with a mode of action peculiar to itself, which will always distinguish its transactions from those of its members. This faculty must be exer- cised according to its own nature. Can such a being speak, or act, otherwise than in writing? Being destitute of the natura,l organs of man, being distinct from aU its members, can it Communicate its resolutions or declare its will, without the aid of some adequate substitute for those organs? If the answer to this question must be in the negative, what is that substitute? I can imagine no other than writing. The will to be announced is the aggregate will; the voice which utters it, must be the aggregate voice. Human organs belong only to individuals; the words they utter are the words of individuals. These individuals must speak col- lectively, to speak corporately, and must use a collective voice; they have no such voice, and must communicate this collective will in some other mode. That other mode, as it seems to me, must be by writing. A corporation will generally act by POWERS AND RIGHTS IN GENERAL 27 its agents; but those agent§ haYe no self -existing power. It must be created by; law, or communi- cated by; tbe body; itself. This can be done only by, iwriting. * * * It is stated in the old books (Bro. Corp. 49), that a corporation may have a plough- man, butler, cook, etc., without retaining them by deed; and in the same book (p. 50), Wood says, 'small things need not be in writing, as to light a candle, make a fire, and tiu-n cattle off the land.' Fairfax said, * A corporation cannot have a servant but by deed; small things are admissible, on ac- count of custom, and the trouble of a deed in such cases, not by strict law.' Some subsequent cases show that officers may be appointed without deed, but not that they may be appointed without writing. Every instrument under seal was desig- nated as a deed, and all writings not under seal were considered as acts by parol. Consequently, when the old books say a thing may be done without deed, or by parol, nothing more is intended than that it may be done without a sealed instrument. It may still require to be in writing. * * * Ac- cording to the decisions of the Courts of England, then, and of this Court, a corporation, unless it be in matters to which the maxim de minimis non curat lex applies, can act or speak, and of course, contract only by writing. * * * " It is surprising that so eminent a jurist as Chief 28 PRIVATE CORPORATIONS Justice Marshall should not have seen the wrong- ful premises upon which his conclusions were based, and Justice Story; in the same case said, "and it is now firmly established, both in England and Aim erica, that a corporation may be boimd by a promise express or implied, resulting from the act of its authorized agent, although such author- ity be only by virtue of a corporate vote xmaccom- panied with the corporate seal." An examination of the opinion by Justice Story in this case leads to the conclusion that while he was approaching the modern view, yet he had not come entirely to the viewpoint from which we now look upon corporate acts. If, as Chief Justice Marshall said, a corpo- ration cannot speak by human voice, then, by the same reasoning, it could not write by human hand. If it may employ a hand to write its deeds, it may employ a voice to speak its will. Hence, the ab- surdity of Marshall's view. It is now everywhere settled that a corporation is bound upon contracts made by it by properly authorized agents and that the authority of such agents need not be in any such a form unless called for on account of the peculiar nature of the tran- saction in question. A corporation uses a seal today upon important documents, its stock cer- tificates, etc., but that is only for the purpose of furnishing a further evidence of the validity of the POWERS AND RIGHTS IN GENERAL 29 act and it cannot be said that a seal is necessary in any case except where it would be necessary if the document were executed by an individual, assuming, of course, that the by-laws do not require the use of the seal, and neither must the contract be in writing, for a corporation may be bound upon an implied contract as readily as an individual may. § 10. POWER OF CORPORATION TO COM- MIT TORTS. A corporation may be liable for a tort in much the same way that a natural person may and the chief difficulty arises out of the fact that a corporation must always act through officers and agents so that it is necessary to determine according to the principles of agency what torts will be attributable to it as well as to the officer or agent or servant committing it. It is now everywhere admitted that a corpora- tion may be liable for a tort whether the tort be one of mere non-feasance or mis-feasanee or mal- feasance.^^ We are all familiar with the fact that 21— Stewart et al v. "Wright, 147 Fed. 321, citing, Rail- way Co. V. Harris, 122 U. S. 527, 7 Sup. Ct. 1286, 30 L. Ed. 1146 (assault and battery by railroad company) ; Railroad Co. v. Quigley, 21 How. 202, 16 L. Ed. 72 (libel by a railroad company) ; National Bank v. Graham, 100 U.S. 699, 702, 25 L. Ed. 750 (fraud and deceit, assault and battery, malicious prosecution, nuisance, and libel) ; Salt Lake City v. HoUister, 118 U. S. 256, 6 Sup. Ct. 30 PRIVATE CORPORATIONS in the large cities vast numbers of negligence cases are started in the courts because of the alleged negligence of the corporation acting through its agents or servants, l^^obody questions in this day the liability of the corporation for torts of this character, the only question being the one concern- ing the scope of the agency or the employment. In other words, the question is simply one of agency in such cases and a corporation is liable just the same as a natural person would be under the same circumstances; that is, where such nat- ural person was acting through agents or servants. It is now also recognized that a corporation may be liable for torts which involve malice, that is, wil- ful wrongdoing, but the question becomes involved on account of the element of agency. In pure neg- 1055, 30 L. Ed. 176 (fraudulent reports) ; Butler v. Watkins, 13 Wall. (U. S.) 457, 463, 20 L. Ed. 629 (fraud and deceit by a manufacturing company) ; Railroad Co. V. Baptist Church, 108 U. S. 317, 2 Sup. Ct. 719, 27 L. Ed. 739 (nuisance) ; Southern Exp. Co. v. Platten, 36 C. C. A. 46, 93 Fed. 936 (assault and battery by ex- press company) ; Copley v. Sewing Machine Co., 2 Woods 494, Fed. Cas. No. 3213 (malicious prosecution) ; Hartnett v. Plumbers' Supply Co., 169 Mass. 229, 47 N. E. 1002, 38 L. R. A. 194 (boycotting) ; Reed v. Home Savings Bank, 130 Mass. 443, 39 Am. Rep. 468 (mali- cious prosecution) ; Dorsey Machine Co. v. McCaffrey, 139 Ind. 545, 38 N. B. 208, 47 Am. St. Rep. 290 (false representations) ; Wachsmuth v. Nat. Bk., 96 Mich. 426, 56 N. W. 9, 21 L. R. A. 278 (false imprisonment) ; John- son Fife Hat Co. v. National Bank, 4 Okla. 17, 44 Pac. 192 (conspiracy to defraud). POWERS AND RIGHTS IN GENERAL 31 ligence cases we do not find it very difficult to determine whether a corporation is responsible for the acts of its agent or servant. If the agent or servant is about his principal's or master's busi- ness, and is negligent in the performance of his work, we hold the master liable, but the question is not so easy in a tort which involves malice, especially if it is a tort not authorized by the board of directors or by the stockholders as a whole, but is one committed without the consent of the corporation as a whole by some officer or agent while he is pursuing his duties. Obviously the corporation is not liable if the tort is not committed in the name of or as a part of the act or repre- sentation of the corporation and the difficulty is to determine when the act is the act of the corporation speaking through its agent, or the purely personal act of the representative. We may consider a few cases in which corpo- rations have been held liable for torts of a positive or malicious character. Thus in one case,^^ a rail- road corporation was sued in an action of trespass, because the ticket agent had struck the plaintiff and the court held that the action would lie. The court in its decision said: "iN'ow there are cases to be found— mostly in the Tear Books it is true — where courts have been misled by this sort of rea- 22— St. L. A. & C. R. Co. v. Dalby, 19 111. 352. 32 PRIVATE CORPORATIONS soning and held, that no corporation can be liable for any trespass. * * * The reason assigned by some why a corporation cannot be liable for assault and battery, is that it has no body to give or receive an injury. * * * " (The court here refers to a number of cases ^^ in which this ques- tion arose, and then continues.) ' ' Upon authority then, as well as principle, we find the law weU set- tled, that a corporation may as weU be liable for an assault and battery, as for any other tort which may be committed by its servants. The same au- thority, as well as the same reasons, which support the one, must maintain the other. If either is denied, both must be rejected. The idea that a corporation cannot be liable for beating because it has no body to be beaten, must be founded on the assumption that no party can inflict an injury which it is not capable of receiving. We confess to a want of respect when such whimsical notions are advanced by grave and learned Judges. "The question may be asked, what evidence shall be required to show that the act of the agent was done by the order of the company so as to make it responsible for such act? The answer is obvious 23 — Citing Eastern Counties R. Co. v. Broom, 6 Exch. R. 314 (assault and battery) ; Chilton v. London & C. R. Co., 16 M. & W. 212 (assault and battery) ; Moore v. Fitchburg R. Co., 4 Gray (Mass.) 465 (assault and false imprisonment) ; Crocker v. The New London R. Co., 24 Conn. 249 (assault and battery). POWERS AND RIGHTS IN GENERAL 33 and has been indicated by the quotation already made from Refield on Railways. The same evi- dence should be required of authority from the com- pany, in cases where it is sought to be made re- sponsible for a tort, as in cases where it is sought to be made responsible upon a contract. If a man occupies the position of general superintendent, conductor, station agent or attorney, for a com- pany, and is in the open and notorious exercise of the duties of such position, the presumption is that he has been appointed by the proper authorities of the company to such place, and has been autho- rized by the company to do any act properly per- taining to such position, and within the chartered powers of the company to do. Under an enlarged and liberal construction of such powers, and within such appropriate sphere, the company must be responsible for all his acts, as much as if an ex- press order of the board of directors or stock- holders were shown, ordering him to do the partic- ular act. The public cannot deal with the company in person, but only through its agents, and cannot be required to go and examine the written records of its proceedings, to see who have been appointed to particular places, and with what specific author- ity they have been clothed. It is enough, if the company suffers particular persons, openly and notoriously, to occupy particular places of respon- p.G— a 34 PRIVATE COEPORATIONS sibility in its service, without contradiction. Such acquiescence estops the company to deny the ap- pointment and appropriate authority incident thereto. Such is the universally adopted rule in relation to contracts, and it applies with equal propriety to torts. "Much was said upon the argument, of the hard- ship it would impose upon railroad companies should this action be sustained. It is supposed that it would authorize trespass against the company wherever it could be maintained against the serv- ant, and that the action on the case, which is now the usual remedy, would be superceded by tres- pass. This apprehension is not well founded. Hereafter, as heretofore, the usual remedy in torts must be case, and not trespass. Wherever the command was to do a lawful act, and the servant does it in an unlawful way, so as to injure another, there case would still be the proper remedy. * * * But where the act is unlawful in and of itself and not from the mode of doing it, trespass wWld lie. This case may serve to illustrate : Sup- pose the passenger had actually refused to pay his fare, then the act of removing him from the cars would have been lawful, and if the conductor had done this lawful act so carelessly as to produce an injury, the remedy would have been case against the company; but as he did not refuse to pay the POWERS AND RIGHTS IN GENERAL 35 fare which he was legally bound to pay, the act of attempting to remove him from the cars was itself unlawful, and trespass may be maintained. There may also be cases where, from the very nature of the injury, trespass would be the proper form of action, when, of course, it must be resorted to, if there be any liability." We notice that the corporation may be liable for a trespass as this case shows, but that ordinarily where an injury is suffered through the physical contact of the agent or servant, the safest remedy to bring would be case. In the same way it has been held that corporation may be liable for a libel or slander. Actions of libel against news- paper companies are not uncommon and no one contends that such a corporation cannot be gmlty of libels, but it is held that any other corporation may be held for the libels or even the slanders of its agents when it appears that such libel or slander is uttered as a part of the act of representation, and one court,^* in holding that one manufacturing cor- poration could be guilty of libeling a rival corpora- tion said: "A corporation is liable in damages for the publication of a libel, as it is for other torts. To establish its liability, the publication must be shown to have been ratified by it, or to have been 24 — ^Pennsylvania Iron Works v. Henry Voght Ma- chine Co., 29 Ky. L. Rep, 861. 36 PRIVATE COEPORATIONS made by one of its servants or agents in tlie scope of his employment and in tlie course of the business in which he was employed. And a corporation may sue for libel upon it, as distinct from the libel upon the individual members. * * * The evidence shows very clearly that Wilson was the duly authorized agent of appellant and in charge of the southern office at the time he wrote the letters. That they were written in the course of his busi- ness for appellant, and were within the scope of his employment, is made plaia by the fact that they were written for the purpose of obtaining for the appellant the contract to build the ice machine for the Northern Lake Ice Company, and to take this business away from the appellee. This being the sole purpose of the letters, and, Wilson being at the time the general agent of the appellant, it can- not be doubted that in writing it he was acting within the scope of his employment, and there- fore appellant is liable for his acts. It may be tS-ue that appellant did not authorize Wilson to insert in these letters the libelous statements they con- tained, and it may be conceded that they were written without its knowledge or consent, but this will not exonerate it from liability for the wrong perpetrated by him in an effort to obtain business for it. If the appellant is not responsible for this condi^ct of Wilson, it would be difficult to find a POWERS AND RIGHTS IN GENERAL 87 case in whicli a corporation could be held, liable for the acts of its agents in the publication of libelous matter. Corporations transact all their business through agents; and when the agent is acting in the course of his business and within the scope of his employment, the corporation wiU be held accountable for his acts and doings in the same degree as an individual will be held answerable for torts perpetrated by him in his individual capacity. Where an action will lie' against an individual for a tort, it wO lie against a corporation, if the tort was committed by its agent or servant in the scope of his employment." So it has been held,^^ that a corporation may be guilty of slander spoken by an agent in the scope of his duty. The court quotes from the case of Jordon v. Ala. G. S. R. Co.,^^ as follows : ' ' The idea that a corporation is not liable for a tort involving a malicious intent had origin in the day when it was denounced as soulless and was an application of the quaint syllogism ascribed by Lord Coke to Chief Baron Manwood that 'None can create souls but God; but a corporation is created by the King; therefore, a corporation can have no soul. ' " * ' The current of authority now is that corporations are responsible civilly the same as a natural person 25— Rivers v. T. & M. V. R. Co., 90 Miss. 196. 26—74 Ala. 85. 38 PRIVATE CORPORATIONS for wrongs committed by their officers, servants or agents while in the course of their employment, or which are authorized or subsequently ratified." And so a corporation may be held for the tort of deceit, malicious prosecution, conversion and the like.^^ By the cases that we have quoted from and the reasons given we may see to per- haps a sufficient extent the modem view of the liability of a corporation for torts committed by it and it wiU not be necessary for us to dwell further upon that subject. § 11. POWER OF CORPORATION TO COM- MIT CRIMES. It is now well established that a corporation may be held as a criminal but it is doubtful that a corporation has power to commit any crime which involves a specific intent. It seems to have been formerly thought that a corporation could not be guilty of any crime as the act would be beyond the purposes for which it was created. Thus Blackstone said:^® "A corpo- ration cannot commit treason or felonies, or other crimes ia its corporate capacity, though its mem- bers may in their distinct individual capacity, neither is it capable of suffering a traitor's or t 27 — See cases cited in note 21, supra. 28 — ^Blackstone 's Commentaries, Cooley's Ed. Book, I p. 476. POWERS AND RIGHTS IN GENERAL 39 felon's pmushment, for it is not liable to corporal penalties or to attainder, forfeiture or corruption of blood. ' ' It is, however, now well established and every where admitted that a corporation may be guilty of a crime. It is true it cannot be impris- oned, but it may be fined or have its charter taken from it. While it is admitted that the corporation may be guilty of a crime there is some conflict in the cases as to whether it can be guilty of crimes involving an evil motive, but it seems that the trend of authority is in favor of its responsibility ia such actions. It is admitted every where that a corporation may be guilty of crimes mala pro- hibita, as exceeding speed limits, giving illegal rebates, adulterating food, etc., but by the weight of authority it may also be guilty of crimes in- volving positive misconduct even of a malicious character. Thus one court ^® said, "It is notable that the older cases asserting the immunity here contended for are rarely decisions granting such immunity, but speak of it as something theoret- ically true, yet not applicable to the matter in hand. It seems to me as easily and logical to ascribe to a corporation an evil mind as it is to impute to it a sense of contractual obligation. There is an obvious physical difficulty in rendering a corpora- 29— United States v. McAndrews & Forbes Co., 149 Fed. 823. 40 PEIVATE CORPORATIONS tion amenable to corporal punishment, but there is no ntore intellectual difficulty in considering it capable of homicide or larceny, than in thinking of it as devising a plan to obtain usurious interest. The limitation of the power does not depend upon the difficulty of imputing evil intent, but upon the impossibility of visiting upon corporations the pun- ishments usually prescribed for greater crimes. The same law that creates the corporation may create the crime, and to assert that the legislature cannot punish its own creatures because it cannot make a creature capable of violating the law does not, in my opinion, bear discussion." Upon this theory corporations have been held liable for crim- inal libel and in a recent Canadian case ^^ a corpo- ration was held liable for involuntary manslaugh- ter. The court said: "From these authorities it is manifest that a corporation can render itself amen- able to the criminal law for acts resulting in dam- age to numbers of people, or which are invasions of the rights and privileges of the public at large, or detrimental to the general well being or inter- ests of the state. It appears to me perfectly clear that the offense set out in the declaration comes within this description. A public franchise was granted to the defendant to maintain and operate 29— Union Collier Co. v. Regina, 31 Can. S. 0. 81 ; 2 Brit. Rul-Cas. 222. POWERS AND RIGHTS IN GENERAL 41 a railway between two certain points. They were possibly under no obligation to accept the charter, but having once accepted and acted upon it, they were under an obligation to exercise proper care and diligence in the performance of their corpo- rate powers. Holding themselves out, as we are bound to assume they did, as public carriers, they were bound to carry their passengers safely. Even as carriers not of passengers, but of freight, carry- ing on their business by means of trains and loco- motive engines, they were, in my view, equally bound to see to the safety and protection of their employees. Whether the persons alleged in the in- dictment to have been kiUed were employees or passengers does not appear, but whether passen- gers or employees, the company defendants were under an equal obligation to both, and the offense committed was an offense not so much against indi- vidual right or against people in their private ca- pacities, but against the public at large, and there- fore, in the public interest indictable." In the present state of authorities, however, it must be said that the responsibility of corporations for crimes involving malice is not entirely settled, although the weight of authority is that it may be liable for crimes of this character. Such actions, however, are usually actions of criminal libel and the like and no case has ever gone so far as to hold 42 PRIVATE COBPORATIONS that a corporation could be guilty of murder or burglary and similar crimes. In these crimes we naturally think of individual responsibility as essential. Wherever a coi^oration is held guilty of a crime of any character, it is clear that the particular person by which it commits the crime is likewise guilty of the crime. §12. INJURIES TO CORPORATIONS. A corporation is capable of receiving injury from any form of tort and also inay be the victim of any sort of crime except those crimes an element in which is personal injury. We find no difficulty in our theory of a corpo- ration in attributing to it the power to receive injury and the power to be the Adctim of a crim- inal act ; thus it may bring suit in tort where it has been injured by another's negligence; it may be libelled or slandered; it may sue in trover for con- version of its personal property; it may sue in tres- pass; it may sue for malicious mischief, interfer- ence with its contractural relationships, etc. In the same way crimes may be committed against it. It may be the victim of burglaries, criminal libel, arson, malicious mischief and the like. CHAPTER III OBJECTS AND PUBFOSES OF INCOEPO- RATION §13. INTRODUCTORY. In this chapter we shall undertake to inquire the purposes for which a corporation miay be formed and the reasons why incorporation may he or may not be desirable. To that end we must distinguish between corporations and partnerships. § 14. DIFFERENCE BETWEEN CORPORA- TIONS AND PARTNERSHIPS. A corporation is an entity distinct from the members which com- pose it while a partnership is a relationship having no existence apart from the members which com- pose it though as a relationship it has certain well known characteristics in the law. The basic distinction between a corporation and a partnership is that the corporation is an entity existing for proper purposes as a being apart from the stockholders, while a partnership is simply an aggregation of individuals with no separate exist- ence as an entity for business purposes. The law 43 44 PRIVATE CORPORATIONS fully recognizes the partnership relation, but it recognizes it as a relation and not as an entity. What is done by the partnership is done by the partners. Its liability is their liability and each partner is answerable for the whole of the partner- ship debt so far as creditors are concerned. The partnership exists by mere agreement, hav- ing usually, but not necessarily, articles of part- nership drawn up between the parties not placed anywhere on record and entered into without any special permission on the part of the state. A cor- poration on the other hand, exists by virtue of the charter as we have seen and cannot exist by mere agreement. The liability of stockholders in a corporation is limited to the amount of their subscriptions, while the liability of partners is for the entire indebted- ness of the partnership. Sometimes a partnership is put in the form of a joint stock company but it is still, notwithstanding that fact, in all essential respects a partnership. See next section. §15. CORPORATIONS DISTINGUISHED PROM JOINT STOCK COMPANIES. A joint stock company is essentially a partnership with the form of a corporation. In some states special statutes have conferred upon joint stock companies OBJECTS OF INCORPORATION 45 a quasi-corporate character when such joint stock companies comply with the requirements of the law in that respect. Joint stock companies are in reality partner- ships '" which are organized somewhat after the manner of a corporation. The capital stock is divided into shares. These are made transferable, by-laws are drawn up and officers elected, yet as there ^is no charter from the state the concern is in aU essential respects a partnership composed of all of the shareholders. It has the form of a cor- poration, but lacks the advantages that arise out of incorporation. Statutes in a few states have been passed lim- iting the liability of shareholders in joint stock companies providing the concern publishes and records its articles of association, etc. It is not usual, however, to organize as a joint stock com- pany even where there are such statutes, because the same objects are much better obtained by in- corporation and associations are, therefore, usually conducted either as pure partnerships or as cor- porations. §16. REASONS FOR THE INCORPORA- TION OF COMPANIES. The principal reasons 30— People v. Rose, 219 111. 46. 46 PRIVATE COEPORATIONS governing incorporation are to limit the personal liability of the stockholders; to bring about a sys- tematic and permanent organization; to secure funds, etc. It will add to our comprehension of the idea or theory of corporate existence if we enumerate at this point some of the reasons which lead men to organize corporations. As so much of our present business activity is accomplished by means of cor- porations it is apparent that the theory of a cor- poration is favorably received today in business circles. It is true that in particular situations as we shall see in the next section it may not be desirable to incorporate, but generally where the business is of any importance it is carried on in the form of a corporation. We may set forth the reasons for incorporation as follows. (1) Purposes of organisation. The corporate form affords permanency to the organization and also encourages systematic organization. The death of a partner dissolves the partnership; so does his transfer of his interest. K corporation, however, is unaffected by the coming and going of its various members. (2) Purposes of limiting liability. Perhaps the chief reason why parties incorporate is to bring about the limitation of personal liability. OBJECTS OF INCORPOEATION 47 The law permits them to set their business apart from themselves, disassociating it from their per- sonal affairs, or from their other business affairs, so that parties who deal with the business must look to it and it alone for satisfaction of their claims. A stockholder is only liable upon his sub- scription, while a partner may be made to answer not only out of the partnership funds but cred- itors may go into his other business affairs and into his purely personal affairs. (3) Purpose of limiting liability for acts of associates. We know that partners are agents of each other, but stockholders are neither agents for each other nor for the corporation, hence in- corporation cuts off the apparent agency of one's associates, and while the corporation may appoint agents, even choosing the stockholders in that re- spect, yet such agency does not exist except upon such special appointment. (4) Purpose of obtaining funds. Very often it is possible to secure funds through incorpora- tion where they would not be otherwise obtainable. The reason for this is not only that bonds may be issued, but that parties may become interested as stockholders who would not be willing to assume the more onerous liability of a partner and es- pecially is this true where they are interested by the issuance of preferred shares. 48 PRIVATE CORPOEATIONS §17. DISADVANTAGES IN INCORPORA- TION. Incorporation permits transfer of shares which though usually desirable may not in par- ticular cases be deemed so. It also subjects the business to greater publicity, greater state con- trol, and may submit it to special taxation. Also in small businesses carried on personally by the owner, incorporation is often merely an additional expense. The facility with which shares in a corporation are transferred is usually given as an important reason why incorporation is desirable, but it may be readily seen that in a particular business a person may not be willing to have business rela- tionship with anyone to whom shares may be transferred. It is true that even where there is incorporation agreements may be drawn up re- stricting the right of transfer, but unless this is done and correctly done, third persons may by transfer take the place of the original incorporat- ors. It may therefore be urged as a disadvantage in particular cases that incorporation permits the transfer of interest where no such transfer is de- sired. Incorporation undoubtedly subjects the business to greater publicity and greater state control. The charter is a matter of record and also annual re- OBJECTS OF INCORPORATION 49 ports are required so that the affairs of the cor- poration are more or less on record. In addition to this any stockholder, though he own but one share and though he acquired that share for the mere purpose of learning the secrets of the com- pany, can demand inspection of all of the books and contracts of the company, so that this opens a door to the corporate affairs. Special taxes may apply to corporations which do not apply to imincorporated businesses, as for instance, the present federal corporation law. Where the business is small and is carried on by the owner individually, usually incorporation would accomplish no good purpose, but would sim- ply subject the incorporator to additional ex- penses. § 18. PURPOSES FOR WHICH A CORPO- RATION MAY BE FORMED. A corporation may be formed under the various state laws for almost any legitimate purpose and may be for profit or not for profit. It cannot be formed to carry on purely personal activities as to practice law and the like, also under the laws of any state it may be regarded as against public policy to permit a corporation for certain purposes, as, for instance, dealing in real estate. Today incorporation may be for almost any legitimate purpose. There may be incorporation as p. C— 4 50 PEIVATB CORPORATIONS we have seen for purposes of research, pleasure, mutual benefit or for almost any sort of business purposes. Corporations cannot be formed to do those things which the law entrusts solely to natural persons; thus it has been held recently in a New York case ^^ that a corporation cannot be formed for the purpose of practicing law. Of course a cor- poration cannot be formed for any illegal purpose and in this connection it is to be noted that the public policy of some states forbids incorporation for certain purposes where such incorporation is permitted in other states; for instance in the State of Illinois a corporation cannot be formed for the purpose of dealing in real estate,*^ nor can it be formed for the purpose of holding shares in other corporations,®^ yet in other states it may be formed for these purposes, although it may be noticed that many jurists and publicists deny the advi^- biUty of permitting any corporation to hold shares in the capacity of shareholder in other corpo- rations. Of course in any state a corporation may hold shares as a species of property where neces- sary for the protection of its interests. 31— Re Co-Operative Law Co., 198 N. Y. 479, citing People V. John H. "Woodbury Dermatological Inst., 192 N. Y. 454; Hannon v. Siegel Cooper Co., 167 N. Y. 244. 32— People ex rel Healy v. Shedd, 241 111. 155 ; Im- perial Building Co. v. Chicago Open Board of Trade, 238 111. 100. 33— People v. Pullman Car Co., 175 111. 125. PART II THE CREATION AND ORGANIZATION OF CORPORATIONS CHAPTER ly THE CORPORATE CHARTER § 19. IN GENERAL. In this chapter we will consider the nature of the corporate charter, the source from which it emanates and kindred topics leaving to a subse- quent part of this book the question of the powers of a corporation as determined by the peculiar provisions in its particular charter. § 20. CHARTER DEFINED. A charter may be. defined as the grant by the state whereby iti confers the privilege of existing as a corporation. We may look upon a charter as a form of letters patent whereby the state confers upon the incor- porators the privilege of forming an artificial body to be known as a corporation and to have the pow- ers set forth in that particular grant. We have 51 52 PRIVATE CORPORATIONS already noticed that the corporation can have no existence except by virtue of such charter and will notice more particularly hereafter that the powers of any corporation are to be governed by the terms of the charter granted by the state. § 21. POWER OF THE STATE AND FED- ERAL GOVERNMENTS TO GRANT CHAR- TERS. The federal government under the consti- tution has no power to grant charters except where it thereby is enabled to carry out other powers granted in the constitution. The general power in that respect being reserved by the state. We know that the United States is a govern- ment of delegated powers; that is, it has no powers except those granted to it in the constitution. The constitutional powers of the United States are, however, of two sorts; first, those powers ex- pressly set forth, as for instance, the power to regulate commerce between the several states and, second, those powers derived by implication from the express powers, viz., the powers which are reasonably necessary for carrying into effect the express powers.'* We may say that the United States government may exercise as ends in them- selves and for their own sake all the powers ex- 34 — See the subject of Constitutional Law in this series. THE CORPORATE CHARTER 53 pressly given but that its implied powers are those which are exercisable as means fairly and rea- sonably calculated to carry into effect its express powers. Now we do not find in the constitution of the United States any power expressly set forth to incorporate companies. It follows, there- fore, under well known rules of construction that the power does not exist to be exercised for its own sake, or as an end in itself, but that if it exists it only exists as a means to an end; to-wit, for the purpose of carrying into effect some of the express powers of the constitution. The states, on the other hand, have all powers which they have not in the federal constitution granted away. There- fore, a state has the power to incorporate companies whether anything is said in that respect in its own constitution or not. We may then assume that the general power of creating corporations has been re- served by the states, and that each state may pass general incorporation laws and that it may create corporations simply for the benefit and furtherance of social and business affairs. May it be said that the creation of a corporation by the federal government can possibly be regarded as a fair means of carrying into effect any of its express powers? This question was answered in the affirmative by Chief Justice Marshall in the 54 PRIVATE CORPORATIONS case of McCullocli v. Maryland/® in which the ques- tion came up whether the United States could incorporate a national bank, and the court held that this was a power to be fairly derived from the express fiscal powers of the government. The argument of counsel in that case, approved by the court, admirably sets out the law. " * * * The true view of the subject is, that if it be a fit instrument to an authorized pur- pose, it may be used, not being specially prohib- ited. Congress is authorized to pass aU laws 'necessary and proper' to carry into execution the powers conferred on it. These words, 'necessary and proper,' in such an instrmnent are probably to be considered as synonymous. Necessary pow- ers must here intend such powers as are suitable and fitted to the object; such as are best and most useful in relation to the end proposed. If this be not so, and if Congress could use no means but such as were absolutely indispensable to the ex- istence of a granted power, the government would hardly exist; at least, it would b6 wholly inade- quate to the purposes of its formation. A bank is a proper and suitable instrument to assist the op- eration of the government, in the collection and disbursement of the revenue; in the occasional an- ticipation of taxes and imposts; and in the regula- 35—4 Wheat. 316. THE CORPORATE CHARTER 55 tion of the actual currency, as being a part of the trade and exchange between the States. It is not for this Court to decide whether a bank, or such a bank as this, be the best possible means to aid these purposes of government. Such topics must be left to that discussion which belongs to them in the two Houses of Congress. Here, the only question is, whether a bank, in its known and ordinary operations, is capable of being so con- nected with the finances and revenues of the government, as to be fairly within the discretion of Congress, when selecting means and instru- ments to execute its powers and perform its duties. A bank is not less the proper subject for the choice of Congress, nor the less constitutional, because it requires to be executed by granting a charter of incorporation. It is not, of itself, un- constitutional in Congress to create a corporation. Corporations are but means. They are not ends and objects of government. No government exists for the purpose of creating corporations as one of the ends of its being. They are institutions estab- lished to effect certain beneficial purposes; and, as means, take their character generally from their end and object. They are civil or eleemosynary, public or private, according to the object intended by their creation. They are common means, such as all governments use. The State governments 56 PRIVATE CORPORATIONS created corporations to execute powers confided to their trust, without any specific authority in the State constitutions for that purpose. There is the same reason that Congress should exercise its discretion as to the means by which it must execute the powers conferred upon it. Congress has duties to perform and powers to execute. It has a right to the means by which these duties can be properly and most usefully performed, and these powers executed. Among other means, it has es- tablished a bank; and before the act establishing it can be pronounced unconstitutional and void, it must be shown, that a bank has no fair con- nection with the execution of any power or duty of the national government, and that its creation is consequently a manifest usurpation." It has been held also that Congress may incorpo- rate a railroad for the purpose of carryiag into effect its interstate commerce powers.'^ Just how far Congress might go in the creation of corpo- rations under the Interstate Commerce clause is an open question. Whether it could pass a general incorporation law for the incorporation of com- panies doing an interstate business is certainly questionable. 36— California v. P. R. R. Co., 127 U. S. 4. THE CORPORATE CHARTER 57 § 22. THE CHARTER A CONTRACT WITH THE STATE. A charter has been held to be a contract between the state and the incorporators and their successors and, therefore, cannot be taken away or altered by the state without the consenti of the incorporators or their successors, although prior to incorporation the state may as a part of the contract reserve the right to alter or repeal the charter. It was held in the case of Dartmouth College V. Woodward,^'' that the charter of a corporation constitutes a contract between the state and the parties concerned. The constitution of the United States provides that no state shall pass any law impairing the obligation of contracts, and if it is assumed or held that a charter is a contract, then it follows that the state in passing any law to alter or repeal the charter would be impairing the obli- gation of such contract. In the case referred to there was an attempt on the part of the state to make changes in the charter of Dartmouth Col- lege and this was resisted by the college. The court decided that the charter was a contract. It has been questioned whether this was a sound decision in its premise that the charter is 37 — ^Dartmouth College v. Woodward, 4 Wheat. (U, S.) 518, 58 PRIVATE CORPORATIONS a contract, but if we accept that premise as true, then it follows that the state cannot pass a law impairing the obligation. However, a criticism of the case would be merely academic for the de- cision has everywhere been accepted and fol- lowed. We will see in the next section that the force of this decision has been taken away by constitu- tional provisions or general laws passed in the various states as a result of this decision, that charters to be issued thereafter should be issued subject to the state's right to repeal or alter the charter. Such a statute cannot apply, of course, to existing corporations because it would be con- trary to the decision just quoted. §23. POWER OF THE STATE TO ALTER AND AMEND CHARTERS. The state has no power to alter and amend charters without the consent of the parties concerned except where prior to its incorporation it has reserved that right, but such right is now everywhere reserved. In the foregoing section we noticed that the charter is a contract and therefore unamendable by the state without the consent of the incorpo- rators or parties concerned, and we noticed that following the Dartmouth College decision laws were passed in the different states, sometimes THE CORPORATE CHARTER 59 taking the form of constitutional provisions that charters thereafter granted should be accepted subject to the state's right at any time to alter or repeal the charters at pleasure. Consequently we may say now that is it the law that the charters of the vast majority or corporations are amendable or repealable at the pleasure of the state, and as a fact we find a great bulk of corporation law being enacted every year which has the effect of altering existing charters. §24. FORM OF THE CHARTER. The char- ter may exist in the form- of a special statute or in the form of a certificate made in compliance with the general corporation law of the state. It is now the policy of the law not to grant special charters but to require incorporators to act under general laws applicable alike to all who are similarly sit- uated. In the early history of our country there was a great deal of special legislation; for instance, divorces might be granted by a special act of the legislature. Such a thing would be imknown at this day. In the same way corporations were cre- ated by special statutes passed at the instance of those who desired to have a corporation. This special statute would constitute the charter. It is now regarded as against the policy of our law 60 PRIVATE CORPORATIONS and foreign to tlie spirit of our institutions to grant special favors and accordingly in most of the states special legislation is forbidden, in all cases where a general law is possible. The states now have general corporation laws, under which incorporation must be obtained and special char- ters cannot be granted. These general laws pro- vide that a corporation may be formed by any one upon compliance with the terms of the act, which usually consists in making a certificate under the general law containing the matter required to be set forth by the law and making a proper record of such certificate. In such a case the charters con- sist in the certificate filed under the general law and all of the laws of the state which refer to cor- porations must be regarded as written into such charters, and as constituting a part thereof. Thus, if the laws of the state forbid a corporation to hold shares of other corporations this is a part of the charter of every corporation in the state, as much so as if it had been written therein by the incor- porators. §25. AMENDMENT OF CHARTER BY THE CORPORATION. Assuming that all the stock- holders consent the charter as originally drawn may be amended in any respect but if any stock- holders dissent then the charter cannot be amend- THE CORPORATE CHARTER 61 ed in a fundamental way but even with the dis- sent of a minority the charter may be amended in auxiliary matters. Charters as originally drawn may be afterwards amended upon application by the corporation and the general incorporation laws in all the states provide the manner in which this may be done. If any of the stockholders dissent difficult ques- tions arise. The dissent of these stockholders does not absolutely prevent amendment but it does prevent amendment in substantial and fundamen- tal ways. The difficulty is in determining what is a fundamental amendment and what is a mere auxiliary amendment. Suppose that a railroad is formed to run between two towns — ^may it be afterwards extended to another town against the dissent of a minority of stockholders'? The Illi- nois court in an early case ^® had occasion to dis- cuss this question and a part of the opinion is here quoted. In this case the amendment consisted in a change of the route of a railroad company, the termini remaining the same. The court said: "The true question, then, is not whether the de- fendant was deprived of any incidental benefit by the change in the location of the road, but whether the amendment of the charter worked such a 38— Banet v. V. N. & S. R. Co., 13 111. 504. 62 PRIVATE CORPORATIONS change in the company as releases the subscribers from their engagements, at least such of them as have not assented to the alteration. A reference to the authorities bearing on this subject will not be inappropriate. In the Middlesex Turnpike Corporation v. Lock, 8 Mass. 268, and the Same v. Sawn, 10 id. 384, it was decided that a subscription to build a turnpike in a specified direction could not be recovered to construct a road in a different direction, although the change was authorized by the legislature, and assented to by the directors of the corporation. In The Proprietors v. Towne, 1 New Hamp. 44, a subscriber was held to be ex- cused from the payment of his subscription on the ground that the corporation had obtaifled an amendment of the charter that materially changed the objects and character of the company. The Hartford New Haven Eailroad Company v. Cros- well, 5 Hill. 383, is a leading case on this subjjpct<- In that case, in 1833, the legislature of Connecticut incorporated a company to construct a railroad from Hartford to New Haven, and Croswell sub- scribed for ten shares of the capital stock. In 1839 the legislature authorized the company to procure and run a line of steamboats in connection with their road, and, for that purpose, to increase their capital stock to an amount not exceeding $200,000. The amendment was accepted by the board of di- THE CORPOEATB CHARTER 63 rectors, and ratified by a majority of the stock- holders. The corporation then brought an action against Croswell to recover the amount of his sub- scription. The court held that the subscription could not be recovered, on the ground that the amendment to the charter effected an essential change in the company — the addition of a new and different enterprise. In Clark v. The Mononga- hela Navigation Company, 10 Watts 364, and Gray v. The Same, 2 Watts & Serg. 156, it was held that an alteration in the charter of an incorpora- tion, by which additional privileges were granted to the company, was not such an invasion of the contracts of subscription as would relieve the sub- scribers from their liability to pay; although the additional privileges might extend the liabilities of the company, and thereby affect ' the stock- holders. In The Pennsylvania and Ohio Canal Company v. Webb, 9 Ohio 136, the court say: "It is not every minute change which wUl absolve a subscriber from his engagements. In works of this kind some power of regulation is retained by the legislature; some discretion is confided to the agents who execute the details. Where the sub- scription is general, unincumbered with condi- tions, perhaps the stockholder has no reason to complain of any line of transit which starts from the same point of business, accommodates the 64 PRIVATE CORPORATIONS same travel and transportation, and substantially subserves the same general interests. * * * "It foUows from these authorities, that an alter- ation in a charter may be so extensive as to work a dissolution of the contract of subscription. An amendment which essentially changes the nature or objects of a corporation will not be binding on the stockholders. A corporation formed for the purpose of constructing a railroad can not be con- verted into a company to construct an improve- ment of a different character without the consent of all the corporators. A road intended to secure the advantages of a particular line of travel and transportation can not be so changed as to defeat that general object. The corpor&,tion must remain substantially the same, and be designed to accom- plish the same general purposes, and subserve the same general interests." ^^ Subsequently in the same court the question arose again,*" and the court sustained an amendment of a very extensive character and in doing so used the following illus- trations: "Take for instance, the great New York Central Railroad. That was originally constructed and for many years operated by some seven or 39 — Accord on similar facts : Wilson v. Wills Valley R. R. Co., 33 Ga. 466 ; Chattanooga, etc., R. Co. v. War- then, 98 Ga. 599. 40— Sprague v. I. R. R. Co., 19 111. 173. THE CORPORATE CHARTER 65 eight separate and distinct corporations. Subse- quently:: an act of the legislature was passed, auth- orizing them aU to consolidate, so that all should constitute but one company, owning and operating as one road aU the different sections and branches formerly owned and operated by them separately; and this was done without the unanimous consent of all the stockholders of the original corporations; to have required that, would have rendered the consolidation an impossibility, no matter how manifestly the proposed measure might have been for the common good of all; so many stockholders would have been found opposing it, with the inten- tion of being bought up to give a consent which, in reality, their own interest demanded that they should give voluntarily, that nothing could ever have been done. It is a lamentable truth, that the history of human affairs shows that such is human nature, as exemplified by too many. The ever ready answer is, 'May I not do with my own as I wilir "Let us now see how this consolidation affected the individual stockholders of the separate orig- inal corporations. Take, for instance, one who subscribed stock for the construction of the road between Albany and Schenectady. When he made that subscription he only expressly consented to become a part owner of that small section of road, p. C— 6 66 PRIVATE COBPORATIONS some ^xteen miles long; and had lie been asked, instead of becoming a part owner in that small en- terprise, where his relative interest might be so considerable that his influence in its management might be sensibly felt, to become a part owner in that gigantic corporation as we now see it, he might very likely, and in all probability would, have refused to engage in it. And yet, having sub- scribed under these circumstances, all his subse- quent remonstrances could prove of no avaD, when the majority of his associates thought it for the interest of the whole to enter into the consolida- tion. Indeed the original stock, for which alone he subscribed, was taken from him, or rather de- stroyed, and he was compelled to take, in lieu thereof, stock in another company, to which he never subscribed or consented to be connected with. And this new company exhibits purposes and objects so much more extended than the old, that it is hardly proper even to call them of the same general character. Now here was certainly a great stretch of power, and no doubt considered by some a faithless trampling upon individual rights; but it has never been questioned, or if ques- tioned, it has been sustained by the courts of that State, for it is now standing unimpeached as an existing fact. There were brought into this great corporation, not only the main trunk of the road THE CORPORATE CHARTER 67 between Albany and Buffalo, but a great many lat- eral roads and branches, as well as cut-offs, so that it covers, upon the map, a very considerable por- tion of the State; and yet, he who only i^ubscribed to the insignificant affair of sixteen miles of road, has been compelled, against his will, though no doubt in promotion of Ms interest, to become a partner in this great enterprise. If he was com- pelled by law to submit to all this, then with the same propriety might he have been compelled to submit to an enlargement of the powers, and the necessary increase of the stock, of the little corpo- ration in which he originally became a shareholder, so as to have enabled that to build and control all that great system of roads, or to have purchased them after they were built." *^ It is difficult, it may be seen, to lay down any general rule by which it can be determined what constitutes a fimdamental change or what may be called an auxiliary change. The stockholder's right is of a contractual nature and the obligation il— Accord: Ross v. Chicago, etc., R. Co., 77 111. 127 ; Oldtown, etc., R. Co. v. Veazie, 39 Me. 571 ; 111. River R. R. Co. V. Zimmer, 20 111. 654; Cross v. Peach Bottom R. Co., 90 Pa. St. 372; Schenectady v. Thacher, 11 N. Y. 102 ; Fall River Iron Works v. Old Colony R. Co., 87 Mass. 221. Contra (though perhaps reconcilable on the particu- lar facts) : Middlesex Tump. Corp. v. Locke, 8 Mass. 268; Same v. Swan, 10 Mass. 384. 68 PRIVATE CORPORATIONS of his contract cannot be impaired without his con- sent. A part of that contract is that the company will pursue the objects for which it was formed and none other and yet we may also regard the contract as impliedly containing a reservation to alter its plans and purposes whenever the welfare of the company demands it so long as no funda- mental change is made. But fundamental changes cannot be made. As iUustrating what has been held to be a fundamental change we may cite the case that held that an amendment permitting a railroad to go into the business of transportation by water was a material and fundamental change.*^ "We may quote also from another Illi- nois case *' where the road as originally planned to extend across the state and the plan then changed to make it less important and extensive. The court held the change fundamental. It said: "This is the test to be applied to alteration of all charters. "When the vote of Fulton county was taken to subscribe stock, the charter provided for one continuous road across the State, from the Mississippi river, on the west, to the state line on the east, two himdred and thirty miles in length, and traversing by far the most beautiful and fer- 42— Hartford, etc., R. Co. v. Croswell, 5 Hill. 383. 43 — Supervisors v. Mississippi & Wabash R. "Co., 21 lU. 338. THE CORPORATE CHARTER 69 tile part of the State. An enterprise, it must be confessed, of great nlagnitude, and promising fa- cilities for a vast and extended commerce and intercommunication with distant markets, an ob- ject weU calculated to claim and receive the fav- orable regard of the people of a county lying on its track. This may be safely taken as one of the in- ducements to the vote for a subscription to its stock by the people of Fulton county. A great thoroughfare across the State, presided over by an iateUigent and competent directory, whose man- ageinent and counsel would be equally beneficial to all portions of it, and large dividends residtiag, were objects compared with which a coimty debt of seventy-five thousand dollars would be quite in- significant. It was for such a road, so to be gov- erned and controlled, the people voted, whose divi- dends, when completed, as the proofs show, would equal those of the best lines in the State. The pre- sumption always is that such investments are made with a view to the profits to be derived from the stock subscribed as an investment. The ex- pected dividends are to be considered as the mov- ing cause of subscription to the stock. u * * * -^g cannot but think, in this view, that the alteration of the original charter, by di- viding this great road, was fundamental, and the stockholders released from their subscriptions." 70 PRIVATE COEPORATIONS Under the statutes of the various states the right of a majority of the stockholders or a certain per- centage of them, to alter the charter is expressly given, but it is held that even in such a case a stockholder could not be required to become a member of an enterprise entirely foreign to its original purpose. In any case where a charter is amended a dis- senting stockholder would be obliged to diligently pursue his objections and could not be guilty of laches.** 44— Gifford v. New Jersey B. Co., 10 N. J. Equity, 271 ; Covington v. Covington, etc., Co., 10 Bush (Ky.) 69; Com, v. CuUen, 13 Pa. St. 13. CHAPTER V ORaANIZINa AND MANAGING THE COR- PORATION § 26. PROCEDURE TO OBTAIN CHARTER. In order to obtain a charter it is necessary to com- ply with the state law in that respect which usually requires a certificate to be made and filed which shall contain certain averments in respect to the organization and certain pther steps may be re- quired. It would not be possible to set out in this book the requirements of the various states in respect to organizing a corporation, yet we may here state in a general way the steps which must be taken to secure organization under the general incorpora- tion laws. As conditions precedent to existence in corporate form, the law may require that a cer- tain amount of stock be subscribed or paid in; that directors must be elected, etc. Everywhere it is provided that some form of certificate must be made out and filed for record. In some states the 71 72 PEIVATB CORPORATIONS procedure is simpler than in others and in some states the requirements are more onerous. If we take the procedure in one or two of the states, it will tend to enlighten us upon this point. Take for instance the statute of Illinois in this re- spect. That statute requires: (1) The fiUng of a statement with the Secretary of State signed by from three to seven commis- sioners, which shall state the name, capitalization, location of principal office, the objects of the cor- poration, the number of years for which it is cre- ated. (2) The issuance by the Secretary of State of a license to open books for subscriptions. (3) The securing of subscriptions to all of the capital stock, one-half of which must be paid in, in money or money's worth. (4) The convening of a meeting of the sub- scribers, ten days' notice being given to them (which may be waived by them) for the election of directors and other business. (5) A report by the commissioners to the Secre- tary of State of what has been done in these re- spects. (6) The issuance by the Secretary of State of a certificate of organization. This contains a copy of all the papers above referred to and is. regarded as the charter of the company. ORGANIZING AND MANAGING 73 (7) The filing of tMs in the office of the Recorder of the comity where the concern has its principal office. In some states the statute provides that the in- corporators shall make a certificate setting forth certain items and shall record the same and there- upon the incorporation shall be deemed complete. §27. STATING THE OBJECTS. It is impor- tant that great care should be observed in stating the objects of the corporation as a corporation has no powers except those expressly or impliedly given by the charter. Generally speaking only the main purposes need be stated, all necessary inci- dental powers being inferred. One of the important things in organizing a cor- poration is to carefully state the object for which it is formed. On the one hand the statement should be sufficiently full to indicate the purposes, but on the other hand it is not necessary or desir- able to set forth those powers which the corpora- tion would undoubtedly have by inference, such as the power to own real estate, enter into leases, employ clerks, etc. In the appendix in this book a number of forms are given which will illustrate this section. It is desirable that the objects be specifically stated because if the language is too general the purposes may be defeated. 74 PRIVATE COBPOEATIONS § 28. THE CORPORATE NAME. Subject to possible statutory provisions in that respect a cor- poration may adopt any name that it sees fit to use but statutes in some states make certain re- quirements in respect to names. It is a matter of considerable importance to adopt a name which a corporation is to use, for this name may have, or acquire, great value and very often the good will of the corporation is to a con- siderable extent involved in its name. A name once adopted and used will be protected by courts of equity against infringement by others. Almost any name may be employed including the name of an individual.*® The name may be an existing one which is taken over by the corpora- tion or, of course, it may be entirely new. What name a corporation should adopt is not so much a question of law as a question of business policy. Having once decided what name a corporation may adopt, it then becomes a matter of mere policy. Statutes in some states govern this matter to some extent.*' 45— People v. Eose, 219 111. 46. 46 — See, as construing statutes: Commonwealth v, American Snuff Company, 101 S. W. Rep. (Ky.) 364; Commonwealth v. Banks, 198 Pa. St. 397 ; State v. Colias, 43 So. Rep. (Ala.) 190; Standard Oil Co. v. Common- wealth, 110 Ky. 821., ORGANIZING AND MANAGING 75 §29. FIRST MEETINGS. Involved in the or- ganization of the company is the necessity of hold- ing meetings of the stockholders and the directors for the election of officers, the drafting and adop-. tion of by-laws, and the performance of other con- stituent business. It is necessary in forming a corporation to hold meetings of the stockholders or subscribers and of the directors when elected. The manner and the details in respect to holding these meetings is governed by the statute; thus in Illinois, for exam- ple, we have noticed that the commissioners must call a meeting of the subscribers, giving them ten days' notice, and this meeting must be held before incorporation is complete. At the stockholders' meeting directors are to be elected and also, in some states, by-laws are to be adopted, but in other states, the directors pass the by-laws at their meeting. The directors when elected convene to elect the President and the other administrative officers, and to perform other business properly coming before the meeting. At these first meetings, also, property is to be valued and other details arranged in respect to payment of stock, etc. These meetings may, of course, adjourn from time to time and in addition to such meetings as 76 PRIVATE CORPOEATIONS may be required by law, otber meetings may be held as the purposes of the case may call for. We wiU notice in subsequent chapters the sub- ject of meetings of stockholders and directors, the intention being at this point merely to call atten- tion to the necessity and purpose of first meetings. §30. THE BY-LAWS. The by-laws are rules enacted by the corporation for the purpose of in- ternal government. They are enacted in some states by the stockholders who, at common law, had this power. By statute, however, that power is sometimes given to the directors. The by-laws should provide for the holding of meetings, elec- tion of officers, powers of officers, and other mat- ters concerning the internal control of the corpo- ration. By-laws are amendable at pleasure and are not a matter of public record. In organizing a corporation it is necessary, or at least very valuable, to draw by-laws. At common law the power to enact by-laws rested in the stock- holders but it is thought advisable in some states to give the directors that power,*^ or the stock- holders may themselves confer the power upon the directors. 46 — ^Manufacturers' Exhibition Building Co. v. Lan- day, 219 111. 168. ORGANIZING AND MANAGING 77 A form of by-laws is set out in the appendix, and it will be seen from a consideration of that form what the usual provisions of the by-laws are. They customarily provide for the election of offic- ers, notice to be given in respect to meetings, the time and place of meetings, the powers and duties of officers, etc. The by-laws should not provide for matters of a merely temporary nature, for those matters should be expressed in resolutions contained in the minutes of meetings. The by-laws are not, like the charter, a matter of public record, and, therefore, are not usually of concern to third persons, except as such third per- sons have notice of them. These by-laws are amendable at pleasure by the body which enacts them and they also mjay be waived by the custom of the corporation in respect to them. Thus a by- law might restrict thei authority of a certain of- ficer, and yet he might be allowed by custom to have a greater authority. In that case the cor- poration would be estopped to set up the by-law. § 31. REGULAR AND OTHER MEETINGS OP THE STOCKHOLDERS AND DIRECTORS. The fundamental management of the corporation is brought about through the meetings of the stockholders and the directors which may be clas- sified into regular meetings and special meetings. 78 PRIVATE CORPORATIONS In subsequent parts of this book we will notice more at length the subject of the meetings of the directors " and the stockholders.*® It is sufficient to call attention here to the fact that all of the con- stituent and legislative business of the corporation is brought about through the holding of meetings of the stockholders or the directors. The stock- holders have usually an annual meeting at which they elect directors and perform other business, hearing reports and passing upon various meas- ures. The directors also have an annual meeting at which they elect administrative officers and per- form other business which comes before them. In addition to this annual meeting of the directors there may be other regular meetings held monthly or quarterly. We may classify these meetings into two general sorts, that is, the regular meet- ings and the special meetings; the regular meet- ings being such meetings as are provided for in the by-laws to be held at stated times; the special meetings being those meetings which may be called from time to time where emergency re- quires. These meetings are very important, as it is only through these that the stockholders and directors may act in concert and in a corporate ca- pacity. 47— See sec. 104. 48 — See sec. 86 and following. ORGANIZING AND MANAGING 79 § 32. THE CORPORATE BOOKS AND REG ORDS. The corporation should have two classes of books: first, the books which are required to record its corporate transactions as such; and, in the second place, books of account which are needed to record the business of the corporation as such. Any business concern whether incorporated or not must have ledgers and other books wherein to record its business transactions. In addition to these books a corporation should have certain other books to record its corporate activities. These books may be itemized as follows: (1) A stock certificate iook. This is a book con- sisting of blank stock certificates in the form which is authorized by the directors attached to stubs from which they may be readily separated, numbered consecutively. As these certificates are issued they are detached from the stubs, a record of the transaction being kept upon the stub. When the certificates are surrendered up to be cancelled by the holders thereof, they should be re- attached to the stub from which they were origin- ally taken. This may be accomplished by pasting the certificate to the underside of stub. (2) The stock ledger. A stock ledger is a book in which is kept the history of the stockholders' relationship to the company. It should show their 80 PRIVATE CORPORATIONS present standing at a glance. It should contain the name of each recorded stockholder with his address and the number of shares he owns, and also the source and date of his title. (3) The transfer book. This transfer book con- tains forms which may be filled out in cases of transfer. This is the book meant in the power of attorney on the back of a stock certificate where authority is given to make transfer on the books of the company. (4) Minute boohs. A corporation should have minute books in which it records consecutively both the minutes of the stockholders' meetings and the minutes of the directors' meetings, or it may have separate stockholders' minute books and sep- arate directors' minute books. Either way is proper. This minute book should set forth in full the minutes of the meetings. See the subject fur- ther discussed in later chapter. §33. ANNUAL REPORTS, ETC. Involved in the conduct of the corporation is the necessity of making annual reports to the state as required by law. The laws of the states in which the company is incorporated require annual reports to be made containing various items. It is very important that these reports be made because the penalty is ORGANIZING- AND MANAGING 81 usually forfeiture of the charter. The law under which tlie corporation is formed must be con- sulted in this respect. It is the custom for the sec- retary of state to send out iDlanks prior to the date on which these reports must be made for the pur- pose of making the matter as uniform and easy as possible. § 34. THE CORPORATE CALENDAR. The secretary of the company should prepare a calen- dar showing the things to be done In the manage- ment of the corporation for the ensuing year. It is customary for the secretary of a corpora- tion to prepare a corporate calendar which he shall keep before him so that he will not omit doing the things which the by-laws and the law of the state call for. It should show when he shall give notice of meetings, when meetings are held, when reports are to be made, when taxes are due, and aU other matters in reference to the conduct of the corpora- tion which should be done at certain times. p. C— 8 CHAPTER yi CORPORATIONS DE FACTO § 35. CORPORATION DE FACTO DEFINED. If a corporation is perfect in its legal organization it is known as a corporation de jure. If its organi- zation is not perfect it may still have existence as a corporation and it is then known as a corporation de facto. In order to be even a corporation de facto it must have a charter. It would lead to enaless confusion ana accom- plish no good result if the existence of the corpora- tion as such could be denied for every little defect in organization. The state may always complain for any non-compliance with its laws and in that sense every corporation must be completely organ- ized vmder the law, but a corporation may do busi- ness as a corporation as fully as though it were perfectly organized so far as its relations with any- one except the state is concerned. If a corpora- tion is perfect in its legal organization it is known as a corporation de jure. If it is not completely organized and yet has reached the stage of organi- 82 CORPORATIONS DE FACTO 83 zation which we will hereafter notice, it is known as a corporation de facto.*^ If it is a corporation de facto, then it may as far as individuals are con- cerned carry on its business as a corporation as fully and completely and with the same effect as though it were perfect in its organization; that is to says contracts entered into by it are the con- tracts of the corporation. Its organization is suffi- cient to prevent individual liability of its stock- holders or directors. It may and must sue and be sued as a corporation. If we once decide then that a corporation is a corporation de facto, then it is as fuUy and completely a corporation for all business purposes as though it is a de jure corporation and then only the state can attack it, which may com- pel compKance with the law or forfeiture of the charter. §36. WHAT ESSENTIAL TO EXISTENCE AS CORPORATION DE FACTO. In order to be a corporation de facto there must be (1) a law under which incorporation can be had; (2) a bona fide attempt to incorporate under that law; and (3) user. We have noticed at the outset of this book that a corporation exists by the grace of the state as 49 — See cases cited under following sections. 84 PRIVATE CORPORATIONS expressed in tlie charter and there cannot be a corporation without a charter. It must not be understood when we say a corporation can be such if it has a mere de facto existence that it can exist without securing a charter. There cannot even be a corporation de facto without a charter. It is or- dinarily said that to have a corporation de facto three things are necessary: (1) a general law un- der which incorporation can be had; (2) an attempt in good faith to organize as a corporation under that law; and (3) user of the corporate powers. First, there must be a law under which incor- poration might be had. This is illustrated in an Illinois case ^" in which there was an at- tempt to incorporate as a real estate company, where the policy of the law forbids such pur- pose. A certificate under the general incorpora- tion law was issued by the Secretary of State and the supposed corporation undertook to carry on business as such. It was argued in this case that the corporation was at least a corporation de facto and, therefore, in a suit brought by it that it could set up that it was a corporation. This case states the law upon this subject and gives a num- ber of authorities and, therefore, an extract of the opinion is here given: "It is next contended that if 50— Imperial Building Co. v. Board of Trade, 238 111. 100. COEPORATIONS DE FACTO 85 appellant's charter be held void it is not subject to be attacked collaterally and that appellee having entered into a contract with appellant for the leas- ing of the premises is now estopped to deny its cor- porate existence. The general rule is, that where there is an attempt in good faith to organize under a law authorizing the incorporation, and corporate functions are exercised, this makes the organiza^ tion a corporation de facto, and its legality cannot be questioned collaterally or by one who deals with it as a corporation. In such cases the introduction in evidence of the charter and proof of user, and that the party seeking to deny the legality of the corporation dealt with it as a corporation, suffici- ently proves it a corporation de facto, and whether there may have been some irregularities in per- fecting the incorporation will not be inquired into. The legality of such incorporation can only be at- tacked by the State in a direct proceeding. * * » 61 "The appellee concedes that this is the rule as to de facto corporations but contends that there can only be a de facto corporation where there is a law under which the corporation might legally be organized, but that if there is no law authorizing 51 — Citing Ramsey v. Peoria Marine & Fire Ins. Co., 55 lU. 311; Smith v. Mayfield, 163 Id, M7; MitcheU v. Deeds, 49 Id. 416. 86 PRIVATE COBPORATIONS :the organization of such corporation its non-exist- pnce or invalidity can be set up collaterally. Cook on Corporations (sec. 234) thus defines a corpora- tion de facto: 'The corporation is a de facto cor- poration where there is a law authorizing such a corporation and where the company has made an effort to organize under the law and is transacting business in a corporate name. ' In American Trust Co. V. Minnesota and Northwestern Eailroad Co., 157 Dl. 641, it was contended on behalf of certain corporations that had attempted a consolidation .without any law authorizing such consolidation, that the validity of the consolidation, when not questioned by the State, must be sustained as against third persons and wrongdoers. The court held the rule of law was not as broad as contended for, and said (p. 652) : 'Where there is a de facto corporation, its corporate existence, except in a few exceptional cases, cannot be questioned collat- erally, and can only be inquired into by the State and in a direct proceeding. ' (Hudson v. Green Hill Seminary, 113 HI. 618.) But in order that there should be a de facto corporation, two things are essential: First, there must be a law imder which the corporation might lawfully be created; and second, user. Where the law authorizes a corpora- tion, and there is an attempt, in good faith, to or- ganize, and corporate functions are thereupon ex- CORPORATIONS DE FACTO 87 ercised, there is a corporation de facto, the legal existence of which cannot ordinarily be questioned collaterally." ^^ The court, therefore, held that as there was no law in the state of Illinois under which this corporation could have been organized it was not even a corporation de facto. Jn the second place there must be an attempt to organize under the law. Thus in one case,"^ four parties were sued individually, they having asso- ciated themselves together under the name "The Coweata Gin Co.", and having incurred an indebt- edness of $4,700.00 to the plaintiffs shortly prior to the time when they made their first real attempt to incorporate. The court said: "Counsel for the defendants argue with much force and persuasive- ness that they escape liability because they be- came a corporation de facto, although they con- cede they never became a corporation de jure, and in support of this position they cite among other cases: (Here the court cites numerous authorities) 52 — ^The court cites: "Hudson v. Greenhill Seminary, 113 111. 618 ; Heaston v. Cincinnati, etc., R. Co., 16 Ind. 275 ; Eaton v. Walker, 76 Mich. 579 ; Swartwout v. Mich- igan Air Line Railroad Co., 24 Mich. 389; Detroit Schuetzen Bund v, Detroit Agitations Verein, 44 Id. 313; Evenson v. EUingson, 67 Wis. 634; City of St. Louis V. Shields, 62 Mo. 247 ; Pape v. Capital Bank, 20 Kan. 440 ; all to the same effect. 53— Harrill v. Davis, 168 Fed. 187. 88 PRIVATE CORPORATIONS * * * " But in every one of these authorities articles of incorporation had been filed under a general enabling act, or a charter had been issued, and there had been a user of the franchise of the supposed corporation which had been colorably created by the filing of the articles or the issue of the charter before the indebtedness in question was created, whUe nothing of this nature had been done before the debt for the $4,700, which we are now considering was incurred. The authorities which have been recited rest upon the proposition that where parties procure a charter or file articles of association under a general law, thereby secure the color of a legal incorporation, believe that they are a corporation, and use the supposed franchise of the corporation in good faith, and third parties deal with them as a corporation, they become a corporation de facto and exempt from individual liability to such third parties, although there are imknown defects in the proceedings for their in- corporation." We see from these observations and citations that unless the company has gone to that point in its organization under the corporation law as we have indicated that the acts done by it are not the acts of the corporation and its members are, there- fore, individually liable and the company cannot CORPORATIONS DE FACTO 89 sue as a corporation.** The corporation does not even have de facto existence and, therefore, has no existence at all as a corporation. § 37. POWERS OF DE FACTO CORPORA- TION. A corporation de facto has all the powers that a corporation de jure has. Having decided that the corporation is a cor- poration de facto we may say that subject to the right of the state to question its existence and to compel the comipliancq with the law or to forfeit its charter the corporation has all the powers that a de jure corporation has. §38. THE PLEA NUL TIEL CORPORA- TION. The question whether a plaintiff or de- fendant suing or sued as a corporation is such a corporation is raised by the plea of nul tiel corpo- ration. 54 — " * * * it is the law that a company, which is not a corporate body, is 'a partnership, composed not merely of the directors, but of all the subscribers to the articles of association who had not withdrawn.' " Lover- in V. McLaughlin, 161 111. 417, 435, citing Coleman v. Coleman, 78 Ind. 344; Bigelow v. Gregory, 73 111. 197; Hurt V. Salisbury, 55 Mo. 3103 ; also quoting Beach on Private Corporations, Vol. 1, sec. 16: "If a corporation be illegally formed, its members or stockholders are liable as partners for its acts or contracts; and directors, of- ficers, and agents, acting and contracting in its name render themselves personally liable." 90 PRIVATE CORPORATIONS If it is desired to raise the question whether a corporation suing or sued as such is really a cor- poration the plea of nul tiel corporation is the proper plea to raise this question. It may be availed of either by the alleged corporation or by one whom such alleged corporation sues. If a cor- poration is sued and pleads nul tiel corporation the plea is regarded as a plea in abatement because it gives the plaintiffs a better writ.^® If the corpora- tion sues and this plea is filed, the plea is regarded as a plea in bar because it defeats the action.** Where a corporation sues and the defendant pleads that there is no such corporation this plea is overcome by allegation and proof of existence as a corporation de facto.^'' To prove it a corporation de facto it is sufficient to show that there is a law under which it could incorporate; that it at- tempted to incorporate under that law and exer- cised functions as a corporation, according to the rules we noticed in the foregoing section. §39. ESTOPPEL TO DENY CORPORATE EXISTENCE. One who deals with a company in its capacity as a corporation is said to be estopped in any suit concerning such dealing to raise the 55— Keokuk & Hamilton Bridge Co. v. Wetzel, 228 111. 253, 56 Id. 56— Id. 57— Marshall v. Keaoh, 227 111. 35. CORPORATIONS DE FACTO 91 question of its corporate existence, but merely dealing with a concern in such a way as one might deal with it whether incorporated or not does not raise an estoppel of this character. If one deals with a company in its corporate character, he is said to be estopped to set up that it is not a corporation because by his conduct he has admitted its corporate character. It is some- times imderstood that this precludes one from denying that a concern is a corporation merely be- cause he has dealt with it while it was claiming to be a corporation, or styling itself as such, but the doctrine does not go to this extent. A true case of estoppel in this respect does not arise unless the dealings with the company were dealings entered into with it in its corporate character as where one received dividends, becomes a stock holder and the like.'* In such a case, a person by his dealings has necessarily admitted the corporate character, and, therefore, cannot afterwards for the purpose of defeating a suit in respect to such dealings set up that there is no such corporation."^ He is estopped, but if his dealings are merely by way of 58— Kanawha Dispatch v. Fish, 219 111. 236 ; Harrill V. Davis, 168 Fed. 187 ; Imperial Building Co. v. Board of Trade, 238 111. 100. 59— Jones v. Cincinnati Type Foundry Co., 14 Ind. 89; Imperial Building Co. v. Board of Trade, 238 111. 100. 92 PRIVATE CORPORATIONS buying and selling or entering into contracts that he might make with it whether incorporated or not, he is not estopped to deny its corporate ex- istence even though at the time of the transaction he may have believed it was a corporation. CHAPTER VII PROMOTERS §40. PROMOTER DEFINED. A promoter may be defined as a person who has undertaken to organize a corporation or to prepare the way for its organization, getting the necessary capital and subscriptions, making preliminary contracts, etc. It is not necessary in the organization of a cor- poration that there be any person whom we might call a promoter, yet in discussing the organization of corporations we may consider the character, the rights and duties of a person who undertakes to bring about the organization of the corporation taking upon himself the burden of securing neces- sary capital, making necessary contracts, etc. Such a person we caU a promoter. It cannot be said that the duties of a promoter are as a matter of law of any particular sort, because his duty in any particular thing depends upon what he has undertaken to do. In one case the capital might be already available when the services of the pro- moter were obtained and his contract would be to 93 94 PRIVATE CORPORATIONS secure sites, rights of way, etc., or in another case he might undertake to get capital, to that end ob- taining subscriptions. His duties, therefore, may be of various sorts. In any case, however, he is one who acts as an agent preliminary to or concur- rently with the organization of the corporation for the purpose of enabling it to become a corporation with the objects desired. The promoter might be one who originated the scheme and undertook to carry it out, or he might be one who was procured by others who have originated the scheme. The promoter may or may not be one who afterwards becomes a stockholder or otherwise financially in- terested in the corporation. § 41. THE PROMOTER IN A POSITION OF TRUST. The promoter is in a position of trust and must deal with the parties concerned in the highest good faith and cannot make secret profits in the enterprise. WMle it is undoubtedly true that in the organi- zation of corporations promoters have vastly en- riched themselves at the expense of stockholders it is certainly the law that a promoter is an agent who is in a position of trust and he must display the highest good faith. He must not put himself in a position of temptation and if he makes secret PROMOTERS 95 profits he will be answerable to those who have been injured thereby. The Court in one case,®" states the rule as follows: "In this country the courts have accepted the essential principle laid down in the English cases, and hold, with scarcely any variation to the doctrine, that the promoter of a company stands in the relation of a trustee to it, and those who become subscribers to its stock, so long as he retains the power of control over it. There is some difference of opinion, as there is in the English cases, in regard to the time when he be- comes such promoter, within the meaning and op- eration of the rule. Some courts are of opinion that he is chargeable with the duties of a trust when he enters into the execution of the scheme which is intended to result in the transfer of the property to a company to be organized and con- trolled by him. All, however, agree that he comes within the rule when he begins to organize the company, and that from that time he is bound to deal openly and fairly, and in such a way as that those having independent charge of the company, as well as those who are induced to become sub- scribers to its stock, may be fully advised of the relation he bears to the property which he pur- poses to sell, in like manner as one who assumes 60— Veiser v. United States Board & Paper Co,, 107 Fed. Rep. 340. 96 PRIVATE CORPORATIONS to act as the agent of another in the purchase of property. * * * 6i Ti^e particular subject does not seem to have been before the Supreme Court of the United States for consideration, but there have been at least two decisions at the circuit, and they are in harmony with the views we have ex- pressed. Chandler v. Bacon, 30 Fed. 538, per Colt, Ch. J.; Cortes Co. v. Thannhauser, 45 Fed. 730, per WaUace, Ch. J." In another case ®^ it appeared that the defend- ants had made secret profits as promoters and suit was brought to recover such profits. The court said: "As to defendants Freeman and Chne, the case, under the authorities, is, of course, a clear one so far as the $6,500 profit made by Freeman and shared by him in part with the others is con- cerned. They were essentially promoters of the corporation formed for the avowed piupose of pur- chasing this property from one other than them- selves, and they misrepresented to those whom they induced to join in the enterprise, and who be- 61 — Here the Court cites in support of its opinion: Brewster v. Hatch, 122 N. Y. 349, 25 N. E. 505 ; South Joplin Land Co. v. Case, 104 Mo. 572; 16 S. "W. 390; Hebgen v. KoefBer, 97 Wis. 313, 72 N. W. 745; Dens- more Oil Co. V. DensiAore, 64 Pa. 43 ; Haj^ward v. Lee- son, 176 Mass. 310, 49 L. R. A. 725, 57 N. E. 656 ; Bur- bank V. Dennis, 101 Cal. 90, 35 Pac. 444; Yale Gas Stove Co. V. Wilcox, 64 Conn. 101, 25 L. R. A. 90, 29 Atl. 303. 62— Lomita L. & W. Co. v. Robinson, 154 Cal. 36. PROMOTERS 97 came with them subscribers to the stock of the pro- posed corporation, the amomit the corporation would be required to pay iu order to obtain the property, for the purpose of making $6,500 secret profit from the subscribers in the transaction, and this secret profit was in fact made. The findings show that their plan from the beginning was to form a corporation to purchase this property, and that they practically procured its formation. As promoters of the corporation, they occupied a fidu- ciary relation to their co-subscribers, and were bound to truthfully declare to their associates any personal interest that they had in the matter of the purchase. Without such disclosure they could not legally profit at the expense of their associates. If they were guilty of any misrepresentation in the facts or suppression of truth in relation to their personal interest in the proposed purchase, the corporation is entitled to set aside the transaction, or recover compensation for any loss which it has suffered. See Ex-Mission Land & Water Co. V. Flash,®^ supra, and cases there cited. In Bur- bank V. Dennis, 101 Cal. 90, 102, 35 Pac. 444, this court quoted approvingly the following: 'The sub- stance of the law is that promoters are corporate fiduciaries. Transactions with their companies 63—97 Cal. 610. p. C— 7 98 PEIVATE CORPORATIONS wherein they deal honorably, with full disclosure, and without seeking to influence the action of the corporation, will be upheld; but transactions in which they suppress or misrepresent material facts, or otherwise deceive the company, or cor- ruptly control its action, are fraudulent, and the company may elect either wholly to set aside such transactions or to recover the promoter's secret profit.' " It is thus seen that where a promoter makes secret profits, or in any way uses his position to profit at the expense of the stockholders in mat- ters not contemplated by them the transaction is voidable or the secret profits may be recovered. It is, of course, true that a promoter may make large profits, may sell to the company or otherwise contract with it where he is dealing in an open- handed manner. It is well known that promoters of large corporations often make enormous com- pensation probably getting their reimbursement in the form of stock, which afterwards greatly in- creases in value, or may be paid a very large re- muneration for services rendered by them. In such cases, however, the profit of the promoter is by way of a contract fairly entered into with the subscribers or with the corporation. Where there is not a contract the promoter can only charge a reasonable compensation. PROMOTERS 99 § 42. THE PROMOTER AS AGENT OF THE CORPORATION. The promoter is usually in the situation of an independent contractor and is liable upon the contracts entered into by him. It is im- possible for him to be the agent of the corporation where he acts prior to its legal existence. It fol- lows that the corporation is not liable for his acts except in cases where his agency can be shown or where, not being in existence, the corporation adopts his acts upon coming into existence. Ordinarily the promoter is liable upon the con- tract he makes in launching the corporation on its career.®* He has no authority usually to repre- sent the corporation. Where he acts prior to the incorporation of the company it is a legal impossi- bility to consider him as the agent of the corpora- tion as there cannot be an agent of a non-existent principal. In such a case he could, of course, be the agent of the subscribers, and, as a matter of fact, that might be the case, yet it is probably true that he has no authority in such respect and enters into the contracts as his own principal. The corporation on coming into existence is not lia!)le for the acts of the promoter except where it can be shown that the corporation adopted his acts. It may adopt the acts of the promoter by 64;— Eoekford, etc., R. Co. v. Sage, 65 lU. 328; 100 PEIVATE CORPOEATIONS accepting the benefits of Ms acts under such cir- cumstances that it may be fairly assumed that it meant to pay for them or where equitably it ought to pay for them.®' 65 — Streator Independent Telephone Co. v. Conti- nental Tel. Constr, Co., 217 111. 577. PART III THE POWERS OF A CORPORATION CHAPTER VIII POWERS IN GENERAL §43. THE CORPORATION A CREATURE OF LIMITED POWERS. The corporation has only those powers inherent in its existence as such, those which are expressed in its charter, and those which are to be fairly implied as necessary or proper to carry out its other powers. We know that the corporation gets its right to exist from its charter. This charter not only cre- ates the corporation but limits its powers. When we are considering the power of a natural person to do a thing we admit that he has such a power so far as it is humanly possible unless the law for- bids the particular power involved, but we ap- proach the theory of corporate power from the op- posite direction. A corporation is a creature of limited powers and whatever power it has depends 101 102 PRIVATE CORPORATIONS upon the grant of the state in that respect. Inher- ently a corporation is a creature of limited powers. We have akeady; indicated at the beginning of this volume that the corporation may conveniently be said to have three general sorts of powers: first, those powers which may be said to be inherent in it as a corporation; which we enumerated at that time; second, the powers expressly given to it in its charter, that is, set out in haec verba, and; third, those powers which are to be implied as reason- ably necessary and proper to carry into effect the express or inherent powers of the corporation. §44. EXPRESS POWERS. A corporation may be given any express power except such as are by the law forbidden. Where the power is ambiguously stated the charter is construed strict- ly; that is, in favor of the state and against the corporation. The express powers of a corporation are those which are set forth in its charter in so many words. These express powers cannot be contrary to the law and are to be regarded as stated with refer- ence to the statutes and the general public policy of the state. As we have noticed before the law of the state is presumed to be set forth in the char- ter and to govern the express provisions thereof. POWERS IN GENERAL 103 Furthermore, whatever is expressed in the char- ter which is contrary to the laws or the public pol- icy of the state is void and is not to be regarded as constituting a part of the charter.^® While it is true that in these days the tendency is to construe the powers of a corporation liberally rather than strid'tly as we will see when we come to notice the implied powers of a corporation, yet it may be said that if in the statement of the express powers there is any ambiguity the usual rule of construction will apply that the language is to be construed strictly against the ones employing it; that is to say, the incorporators. In consonance with this rule if the powers are stated in general and indefinite terms the corporation can take no powers thereby, as where it is provided that the corporation shall have certain powers and that it is also organized "for other purposes." *'' The charter may provide expressly for the doing bf a number of kinds of businesses and the cor- poration wiU have the power thus given even though it has been its custom to carry on only one of the lines of business. In such a case, however, it is essential that there be nothing in the general law forbidding a combination of such businesses. 66— People v. Pullman's Car Co., 175 111. 125 ; Imperial Building Co. v. Board of Trade, 238 111. 100. 67— Re Journalists' Fund, 8 Phila. 272. 104 PEIVATE CORPORATIONS Thus it would be improper for a corporation organ- ized under a general banking act also to have pow- ers of a corporation organized under the general corporation law and it would be improper for a corporation organized for specific purposes under the general corporation law to have powers under the general banking law. §45. IMPLIED POWERS. The corporation will be deemed to have all implied powers which are reasonably necessary and proper for the pur- pose of carrying into effect the charter powers of the corporation. The courts incline to construe the charter liberally in this respect. Just as it has been decided that the United States government under the Federal constitution has not only those powers therein expressly granted but also all such powers as are not only necessary but in addition convenient and proper for carrying the express powers into execution, so the law in respect to the implied powers of cor- porations has developed along the same line. It is true that the courts differ in their application of the rule governing the powers of corporations, as we shall see, yet it is quite widely admitted in the abstract that corporations have the power to do all those things which are not only necessary but POWERS IN GENERAL 105 which are convenient and proper for carrying into effect the express purposes of the corporation. Thus the dissenting opinion in the case of The People V. PuUman Palace Car Co.,®® correctly states the general law (although it differs with the majority opinion in the application upon the par- ticular facts), and a part of the language there employed is as follows: " * * * that 'nec- essary' when used in defining the powers of cor- porations does not mean what is simply indis- pensable but also what is useful, convenient and proper to carry into effect the franchises granted. * * * 69 "In the case of Curtis v. Leavitt, 15 N. Y. 9, it was held that corporations, along with their spe- cific powers, take aU the reasonable means of exe- cution, — ^all that are convenient and adapted to the end in view; that the corporation has a liberty of choice amongst those means, and that if, ia the ex- ercise of such liberty, an intelligent good faith is 68— People v. Pullman Palace Car Co., 175 111. 125. 69 — Citing on this point: 1 Spelling on Corp., sees. 68, 73, 75; Green's Brice's Ultra Vires, pp. 66, 71, 73, 75, 87, 91 ; Curtiss v. Leavitt, 15 N. Y. 9 ; Union Bank V. Jacobs, 6 Hump. 525 ; Railroad Co. v. Berks Co., 6 Pa. St. 70 ; P. & S. R. R. Co. V. Lewis, 33 Id. 33 ; New Eng- land Fire & Marine Ins. Co. v. Robinson, 25 Md. 541; Brown v.Winnisimmet Co., 11 Allen, 326; Old Col. R. Co. V. Evans, 6 Gray, 25; McCuUough v. Maryland, 4 Wheat. 316 ; State v. Hancock, 35 N. J. L. 537 ; Crawford V. Longstreet, 43 Id. 328 ; EUerman v. R. Co., 49 N. J. Eq. 217 ; Cook on Stockholders, 3d Ed., sec. 681. 106 PRIVATE CORPORATIONS used, then the power to select the means adopted cannot be called in question. "In State v. Hancock, 35 N. J. L. 537, it was said by Chief Justice Beasley: 'Power necessary to a corporation does not mean simply power which is indispensable. Such phraseology has never been interpreted in so narrow a sense. There are few powers which are, in the strict sense, absolutely necessary to those artificial persons, and to con- cede to them powers only of such a character, while it might not entirely paralyze, would very greatly embarrass their operations. Such in simi- lar cases, has never been the legal acceptance of this term. A power which is obviously appropri- ate and convenient to carry into effect the fran- chise granted has always been deemed a necessary one.' And further said: 'the term comprises a grant of the right to use all the means suitable and proper to accomplish the end which the legis- ture had in view at the time of the enactment of the charter.' " This may be taken to be the law everywhere, that a corporation has implied powers reasonably convenient to carry into effect its express powers. In the illustrations to follow throughout this chap- ter and in the consideration of the particular pow- ers that we will notice this principle will be exem- plified. POWERS IN GENERAL 107 §46. SAME SUBJECT. ILLUSTRATIONS. Whether a railroad company has the power to operate hotels, lunch rooms, maintain parks, etc., discussed. In the case of Louisville etc. Co. v. The Com- monwealth of Kentucky ''° a suit was brought by the State under a clause in the constitution which provided that in case a railroad company owned property for more than five years not de- voted to railroad purposes the same should escheat to the state. It appeared that the defendant rail- road company was operating a hotel, and that it was using certain lands for park purposes. It Was therefore essential in order to avoid escheat that the railroad prove that these purposes were railroad purposes; that is to say, were purposes for which the railroad could hold and devote its property. It appeared that at the place where the hotel was situated as many as eighty trains passed in and out each day; that about three himdred em- ployes were compelled to eat at that point daily, and that many passengers were also daily fed there. With reference to this the court said: "The proof in this case shows that the hotel property cost the company more than $30,000, and that it spent annually in taxes and repairs upon the hotel 70—146 Ky. 827. 108 PRIVATE CORPORATIONS building the larger part of the rental derived therefrom, and that it cannot be said that it is run- ning it for profit. On the contrary, the evidence fully justifies the allegation that it is held and maintained solely for the benefit of the public trav- eling on its trains and such of the employes of ap- pellant as are, from the nature of their duties, re- quired to take their meals and sleep there at Guth- rie. Nor is this all. It appears that under the con- tract of lease the toilets and waiting rooms of the hotel are for the special use of the lady passengers stopping at Guthrie; and a tem;porary hospital is provided for in one of the rooms of the hotel. The building being under control of the company, it is in a position to see that the wants of the passen- gers and employes are properly supplied; and while there is some evidence that the prices charged are high, they are not out of proportion to the accommodations furnished. Considering the needs of the place and the character of the use to which this hotel property is put, we are satisfied that the court did not err in holding that these tracts were not subject to escheat. "The right of the railroad to hold tract 4 as a park presents a new question. We are furnished no authority by counsel for either side, nor have we been able to find any bearing upon this subject. And yet we know that it is a custom of railroads POWERS IN GBNEEAL 109 generally, and particularly the great transconti- nental roads, to convert the small, unoccupied tracts of land lying adjacent to and near their de- pots into miniature parks, and beautify them by planting shade trees, flowers, and shrubbery, and laying walks through them, and frequently, as in the present case, building pools and putting foun- tains therein. The very fact that this custom has so universally obtained is suggested that it has not been regarded as violative of the rights of the company so to do. Unquestionably, in this way the company adds to the pleasure of its passen- gers, and frequently to the comfort, both of its passengers and employes; for these parks are not only pleasing to the eye, but they add materially to the comfort of passengers and employes waiting for the arrival and departure of trains, by afford- ing them a place for recreation and rest. The stat- utes require that the company shall provide suit- able and convenient waiting rooms at all depots for the accommodation of passengers. The object in view is the comfort of the traveling public; and the more perfectly the wants, needs, and interests of the traveling public are provided for, the more popular the road becomes as a common carrier. The maintenance of the park is in no wise profit- able to the company. On the contrary, it is a source of constant expense. It can serve no pos- 110 PEIVATE COEPORATIONS sible purpose, except to add to tlie attractiveness of the depot and its surroundings, and to the com- fort of the employes and passengers of the com- pany who are required to be and remain at the depot. * * * "Coextensive with the custom of raiboads to build and maintain parks at and near their depots is that of bmlding and keeping Y. M. C. A. rooms at points along the line of their road where their employes are required to congregate in numbers. These buildings are erected solely for the benefit of the employes of the company. * * * In or- der to justify the raUroad to hold land for park purposes, two things must concur: First, the land so held must lie at or near the depot, so as to be of easy access to its passengers and employes; and, second, it must be reasonable in size, taking into consideration the extent of travel to and from such depot and the number of employes whose duties require them to be there. In other words, the park must be in keeping with the size of the place and other accommodations and conveniences fur- nished by the railroad at that point. If these two necessary prerequisites are complied with, neither the letter nor the spirit of the Constitution or stat- ute will be violated." In the case, also, of Abraham v. O. & C. E. Co.,^^ 71— Abraham v. 0. & C. E. Co., 37 Ore. 495. POWERS IN GENERAL 111 the question of the right of a railroad to operate a hotel was raised and the court stated the rule as follows: "And in eases where hotels or eating houses appear to be reasonably necessary for the convenience of its employes and passengers, their maintenance is a legitimate railroad purpose. But an eating house or hotel kept for the accommoda- tion of the general public, and not as an incident to the operation and management of the railway, can- not be so considered. As to whether a given hotel or eating house is maintaiaed for railroad pur- poses is therefore largely a mixed question of law and fact, to be determined from the circumstances of each particular case. The question as to when and imder what circumstances a hotel is a neces- sity or legitimate raUroad use or purpose is quite fully considered in Milwaukee & St. P. E. Co., v. Crawford County, 29 Wis. 116."" In the case of Western Maryland R. Co. v. Blue Ridge Hotel Co.,'^ it appeared that the railroad company had guaranteed the interest and divi- dends on the stock and bonds necessary for the Construction of a summer hotel, and the court held 72 — Accord: Milwaukee & St. P. R. Co. v. Milwaukee, 34 Wis. 271; Chicago, M. & St. P. R. Co. v, Crawford County, 48 Wis. 666 ; Gudger v. Richmond & D. R. Co., 101 N. C. 481; I. C. R. Co. V. Wathen, 17 111. Ap. 582. 73_Westem Md. R. Co. v. Blue Ridge Hotel Co., 102 Md. 307. 112 PRIVATE CORPOEATIONS that this was an improper railroad purpose even though the hotel might operate to increase the business of the railroad company. It may be no- ticed here that the fact that an act may increase revenue of a corporation is never decisive of the question whether it is properly a corporate act. §47. SAME SUBJECT. FURTHER ILLUS- TRATIONS. Whether a mercantile company can become guarantor or surety, as illustrating the general rule, discussed. As illustrating this general rule that a corpora- tion has the implied powers which are not only necessary but reasonably proper to carry into ef- fect its other powers we may notice an Illinois case'* in which a lumber corporation became surety upon a building bond executed by a building contractor for the purpose of securing the sale of the lumber in the building to such contractor. The court held that this was a proper exercise of the corporate functions, inasmuch as it was merely in- cidental to carrying out its general lumber busi- ness. The court said: "If the bond was executed on the part of the corporation for the purpose of securing a sale of lumber to Rafferty, the con- tractor, the making of the bond was within its 74r— Central Lumber Co. v. Eelter, 201 111. 502. POWERS IN GENERAL 113 implied powers." In another case ^® the court up- held as an exercise of the corporate powers the act of a brewery corppration in lending money to a saloon keeper for the purpose of enabling Viitti to start in business to sell its beer. The court said: "Appellee is a corporation organized under the laws of this state, the object of its organization being 'the brewing and selling of beer,' and it is clear that it had no power to engage generally in the business of loaning money. The only question open to discussion is whether the nature of this transaction was within such prohibition. From a careful consideration of the evidence we are of the opinion it was not. A corporation may for the purpose of advancing the objects and purposes for which it was created do many acts which except for their bearing upon the express powers of the corporation would be ultra vires." Here is a case then in which the act done, if done for its own sake, would not be within the charter power of the cor- poration, but inasmuch as it was done in the merely incidental way to carry forward the char- ter purposes of the corporation the court held that it was proper. In the case of the Best Brewing Co. v. Klassen,^" a brewing company became surety upon an appeal 75— Kraft v. West Side Brewery Co., 219 111. 205. 76— Best Brewing Co. v. Klassen, 185 111. 37. p. C— 8 114 PRIVATE CORPORATIONS bond and the court held that this was not a proper exercise of corporate authority. The court said: "We think the primary question here is not whether appellant has reaped a benefit from the act of becoming surety for Rounds upon the Bond, but whether the act of signing it was within the scope of its corporate authority. The purpose of the corporation, as expressed in its charter, is to manufacture and sell ale, beer and porter and carry on a general brewing business. It would seem no acts could be more unlike than the doing of those authorized by the charter of the company, and the signing of the appeal bonds as surety. The instrument was executed in a suit not by or against the corporation, but by a third person against another to recover possession of the house. Prima facie the signing of the company of an ap- peal bond in such a suit was an act beyond the pur- pose for which it was organized, and consequently illegal. If it had been shown that it was executed clearly for the purpose of promoting or protecting its own business of brewing or selling beer, etc, — that is to say, if the act had been reasonably neces- sary to accomplish the end for which the corpora- tion was formed — ^it would have been within the scope of the corporate power. But it cannot be held that every act in furtherance of the interests of a corporation is inter vires. Many acts can be POWERS IN GENERAL 115 suggested wMch tlioiigli beneficial to tlie business of a corporation, are too remote from its general purposes to be deemed reasonably within its im- plied powers. What is and what is not too remote must be determiaed according to the facts of each case. The rule has been stated to be : In exercising powers conferred by its charter, a corporation may adopt any proper and convenient means tending directly to their accomplishment, and not amoimt- ing to the transaction of a separate, unauthorized business." §48. SAME SUBJECT. FURTHER ILLUS- TRATIONS. The case of People against Pull- man Palace Car Co., 175 111. 125, discussed. The case of the People v. Pullman Palace Car Co.''^ which arose in the Supreme Court of the State of Illinois is an interesting case on the sub- ject of the implied powers of a corporation and may be used by us to illustrate this text. The at- torney general filed an information in the nature of a quo warranto against the Pulhnan Palace Car Co., a corporation organized under the laws of the state of Illinois by a private act passed in 1867.''® That act gave the corporation "power to manufac- ture, construct, and purchase railway cars with all 77— People v. Pullman Palace Car Co., 175 111. 125. 78—2 Priv. Laws of 111. 1867, p. 337. 116 PRIVATE CORPORATIONS convenient appendages and supplies for persons traveling therein, and the same may sell or use, or permit to be used in such manner and upon such terms, as the said company may think fit and proper. " * * * to borrow money and secure the pajrment of the same by deed of trust, mortgage or other security. " * * * to purchase, acquire and hold such real estate as may be deemed necessary for the suc- cessful prosecution of their business and may have power to sell and convey the same." At the time the present suit was brought it appeared that the corporation had erected and was operating a large ten story business block in the business center of Chicago, three-fourths of which it rented to parties having no interest in its busi- ness ; that it owned fifty acres of ground in the city of Pullman covered with small dwelling houses constituting homes for twelve thousand people to whom it rented the same; that it owned fifty acres of ground in the town of PuUman, using it for the purpose of streets and alleys; that it owned fifteen acres upon which it had a business block, a hotel and school houses; that it owned two churches, which it rented to congregations; that it owned a number of school houses, a theatre, a market hall, and that it owned and operated a large gas plant, POWERS IN GENERAL 117 a system of water mains for the supply of th6 town of Pullman; and that it owned a plant for generat- ing steam which it supplied to the residences of its tenants; that it owned and operated a large brick plant, selling the brick from the same upon the market; that it operated a sewerage system, and that it owned about two hundred and fifty acres of vacant ground; aU of these activities being addi- tional to its operation of a large car plant covering about a hundred and ten acres. The court found it necessary to pass upon the right of the company to engage in these various activities, some of which were upheld and some of which it held to be ultra vires. A few quotations from the case are here given that the reader may note the reasoning of the court in reference to these activities. The court held that the company had the right to erect and maintain the Chicago office building upon the averment in its pl"pa admitted by demurrer "that it became impossible to rent general offices there (Chicago) and even insufficient and undesirable offices could only be obtained at high and exorbi- tant rates; that the business of the company was large and rapidly increasing * * * and that more office room would be needed in the future to accommodate the growing business of the com- pany * * * ; that if the business of the cor- poration continued to Increase as it has in the past 118 PRIVATE CORPORATIONS the entire building will soon be devoted to the uses of the company." The court said: "The right of the appellee to construct an ofi&ce building is indis- putable, as so also, is the right to select the most eligible and desirable site. It would be but a nar- row and wholly unjustifiable view of this power to insist that in planning and constructing the build- ing the corporation should leave out of considera- tion its probable prospective requirements and should erect a building containing only as many rooms and offices as its present business might de- mand. The corporation had the right, as we think, to look to and prepare for the future." The court held that the company had no right to operate and maintain dwellings and tenement houses or the streets, the school houses, the churches, the hotel, the Arcade business building, the waterworks and sewers and the gas plant. The court said with ref- erence to these matters: "It seems perfectly clear that the charter of the corporation did not clothe it with express power to purchase the real estate upon which the town or city of Pullman is built, or to construct the buildings in said town or city, or to engage in the business of renting dwellings, storerooms, market places, etc. With reference to the manufacture and sale of steam the plea averred and the demurrer admitted that the pres- ent boiler system was larger than the company POWERS IN GENERAL 119 needed because it had anticipated the future in reference to its needs in that respect withiu the probable growth of the company, and that pend- ing that time it had the right to dispose of the steam for heating purposes which would otherwise go to waste. There was a dissenting opinion in this case filed by three of the judges out of seven. In the dis- senting opinion it was said: "We are not prepared to condemn as usurpation of power the furnishing by appellee to its employes of comfortable and at- tractive homes with the surroundings of parks, churches and public library, not for motives of in- vestment or gain, but as alleged and admitted with the object of appealing to the better and more skiUful workmen and securing and retaining them in its employment." §49. SAME SUBJECT. GENERAL OB- SERVATIONS. It appears from the cases we have discussed and cited that while it may be in cases difficult to apply the principle to the facts involved that the principle is now fairly well ad- mitted that a corporation has all those implied powers which are not only necessary but reason- ably proper and convenient for the exercise of its express charter |)owers. 120 PRIVATE CORPORATIONS From the cases and the observations made in the foregoing section we are now prepared to appre- ciate the force of the principle that a corporation may do all of those things which are not only nec- essary but fairly and reasonably incidental to its proper purposes, and that it may employ as means to an end many measures that it could not enter into as ends in themselves. We may add that whether or not an activity is profitable to a cor- poration, other considerations must determine whether such activity is a proper one; that which is most profitable to it may be the most improper act for it to do. In the next chapter we will inquire concerning certain particular powers to be exercised by a cor- poration. CHAPTER IX PARTICULAR POWERS CONSIDERED §50. POWER OF CORPORATION TO AC- QUIRE AND HOLD REAL ESTATE. Except the charter or the general law permit, a corpora- tion has no right to hold real estate not necessary for carrying on its business and in some states it is against the policy of the law to permit this by express charter power, but where a corporation has any power to hold real estate it may take, hold and grant a good title as far as anyone is concerned except the state. We may start out with the general proposition that unless there is a special prohibition in that re- spect, which would seldom be the case, a corpora- tion, no matter what its purpose is, would have the power to receive, hold and grant real estate. In fact we mentioned this as one of the powers inher- ent in corporate existence. As it has a right to ex- ist, it has a right to provide a home for itself and this it can do by taking property in fee, even though its own life is limited to a brief period of 121 122 PRIVATE CORPORATIONS years. As it has the power to take property, its title to property cannot be questioned in any case except by the state where it abuses its power in that respect.''^ In other words, there can be no cloud thrown upon the title to a piece of real estate for the mere reason that it has passed through a corporate ownership where there might be some doubt as to the corporation's right to hold it. It requires a direct inquiry by the state to question the corporation's right in this respect, for in holding real estate, as we haye seen, a cor- poration may anticipate its present needs. In many states a corporation may be organized to carry on a real estate business, but this is against the public policy of some of the other states.^" In every state, however, a corporation may own what- ever real estate it has reasonable need for and also in every state a good title can be acquired and given by a corporation in respect to any real estate as far as the grantor or grantee is concerned whether in strictness it had a right to own the real estate in question. 79— Cooney v. BootH, etc., Co,, 169 111. 370; Natoma Water, etc., Co. v. Clarkin, 14 Cal. 544 ; Rector v. Hart- ford Deposit Co., 190 III. 380; Hayden v. Hayden, 241 111. 186. 80— People v. Pullman's Car Co., 175 111. 125; Im- perial Building Co. v. Board of Trade, 238 HI. 100. POWERS CONSIDERED 123 §51. POWER TO LEASE AND SELL. A corporation has the power to sell all of its property or to lease the same but cannot sell its franchise to be a corporation. In case of a public service company such a corporation has no power to lease or seU its property with the effect of transferring its facilities and conduct as a public service com- pany to another company unless its charter or the general law permits. Not undertaking at the present time to discuss the rights of shareholders to prevent the sale or lease of the corporate property we may say that a corporation has the power to sell all of its prop- erty or to lease the same but that it cannot sell or lease its franchise to be a corporation. In the case of a public service company different questions arise. It is held in the leading case of Central Transportation Co. v. Pullman Palace Car Co.," that unless there is something in the char- ter or the general law permitting the sale or lease, the corporation of a public character such as a railroad company has no right to transfer by sale or lease all of its corporate property to another company. In this case the Central Transporta- tion Co. attempted to lease and transfer to the 81 — Central Transp. Co. v. Pullman Palace Car Co., 139 U. S. 24. 124 PRIVATE CORPORATIONS Pullman Car Co., another corporation, all its cars, railroad contracts, patent rights and other per- sonal property,' moneys, credits, and rights of action for the term of ninety-nine years and cov- enanted not to engage in the business of manufac- turing, using or hiring sleeping cars for that period. The court said: "The corporation can- not without the assent of the legislature transfer its franchise to another corporation and abnegate the performance of the duties to the public im- posed upon it by its charter as a consideration for the grant of its franchise. Neither the grant of a franchise to transport passengers nor a gen- eral authority to sell and dispose of property em- powers the grantee while it continues to exist as a corporation to sell or lease the entire property and franchise to another corporation." In so far as this case relates to public service companies it states the law correctly, but it is un- doubtedly the right of a purely private concern to seU or lease its entire equipment, or any part thereof, because no duty to the public is thereby violated. Of course a public service company even could sell or lease its property where there was no at- tempt to transfer its entire or a considerable por- tion of its equipment; thus there would be no POWERS CONSIDERED 125 question but what a railroad company could seU a few of its cars to another railroad company. Very often legislative sanction is given to rail- road companies and the like to mortgage, lease or transfer their property. When we come to consider the rights of stock- holders we will consider what right a minority stockholder has to object to the sale of the entire property of a corporation by the directors or the majority stockholders. § 52. POWER OF CORPORATION TO BOR- ROW MONEY. A corporation has the power to borrow money incidental to its other powers for the purposes of a corporate nature. A corporation undoubtedly has the power to borrow money for the purpose of carrying on its business though no express power in that respect is mentioned in the charter or the general law. It cannot borrow money for purposes which it has no right to engage in, but it may be said that its power to borrow money is a very general power and it may exercise it without much restriction.** §53. POWER TO EXECUTE EVIDENCES OF INDEBTEDNESS. A corporation has the 82— Eastman v. Parkinson, 133 Wis. 375. 126 PRIVATE CORPORATIONS power to execute promissory notes, to issue bonds or any evidence of indebtedness as necessary and proper in the exercise of its power to borrow. A corporation as we have seen has the power to borrow. As it has this power it has the power to issue the evidences of its debts. Accordingly a corporation has the power to make promissory notes, to issue bonds, to accept bills of exchange or in any manner to evidence the debts properly entered into by it, although there is no reference to such power in the charter.*^ § 54. POWER TO MORTGAGE. A corpora- tion has the power to mortgage its property to secure the debts properly entered into by it. A corporation as it has the power to enter into debt has the power to do all those things by which it may effectuate or make possible such power. As, therefore, it is necessary to secure its debts, it has the power to mortgage its property. § 55. POWER OP CORPORATION TO LOAN MONEY. Generally speaking a corporation has no power to loan its money unless it is in a bank- ing business although in particular circumstances 83 — Eastman v. Parkinson, supra. POWERS CONSIDERED 127 it may make short time loans where the object is merely to invest its funds pending their disposi- tion in increasing its equipment or performing other proper corporate functions. If a corporation has no power to carry on a banking business, it has no right, as a general rule, to loan its money, because it must make use of its money to carry on its business, to pay divi- dends and the like. Yet it if it has a surplus which it is holding for some purpose as to make further expenditures in increasing its plant and the like, it has no doubt the power to make short time and well secured loans of such money. Thus in one case,®* the Court said: "While it is true as a general proposition, that a corporation authorized by its articles only to carry on a mer- cantile or manufacturing business has no author- ity to engage in the business of loaning money, it does not follow that it has not the power in the management of its funds to loan them out tempo- rarily at interest when not needed in the prose- cution of its business. The loaning of money not being expressly prohibited to the corporation it may as we think without any question make such temporary disposition of the funds which it has on hand from time to time as to secure a profit, 84 — Canning Co. v. Stanley, 133 Iowa, 57. 128 PRIVATE CORPORATIONS the very object of its organization being to earn money for its Stockholders in the prosecution of its business. Such a temporary and incidental loaning of money is not the engaging in the busi- ness of making loans which is outside the scope of the authority of manufacturing corporations." §56. POWER TO ACQUIRE SHARES IN OTHER CORPORATIONS. A corporation has no inherent or implied power to purchase shares and become a shareholder in another corporation, but the charter or the general law may give such a right although in some states the general law forbids. It has been held that a corporation has no in- herent or implied power to purchase stock in an- other corporation for the purpose of controlluig or exercising the rights of a stockholder in such other corporation.*^ The charter or general law may, however, give this power, but it is also true that the general law in some states is opposed to the right of a corporation holding stock in other cor- porations for the purpose of controlling them or exercising the rights of a stockholder. Thus in People V. Pullman Palace Car Co.,*' the State of Illinois is said to be opposed to the policy of per- 85 — De La Verne v. German Institute, 175 U. S. 40. 86—175 111. 125. POWERS CONSIDERED 129 mitting corporations to be shareholders in other corporations; the same principle was announced in the Chicago Gas Trust case. In both of these cases the certificate of incorporation attempted to give this power to the corporation, but the court said that the general policy of the law would render nugatory any provisions in the certificate of incorporation to that effect; and so in the case of Dunbar v. American Telephone Co.,®'' the court held that a purchase of stock by a corporation for the purpose of obtaining a controlling interest in a competing company and stifling competition is void, and so it may be noticed that under the recent act of New Jersey, corporations have been de- prived of the power to hold stock in other corpo- rations, some exceptions being made. It is to be noticed, however, that in the majority of states a corporation has the right to hold stock in other corporations but it is believed by many publicists that this is conducive to many of the corporate abuses that have existed. It is undoubtedly true that everywhere a corpo- ration may acquire shares of other corporations not for the purpose of becoming a shareholder but in the protection of its interests, finding it neces- sary to take such stock in payment of its debts, etc. In such a case it ought to dispose of the 87— Dunbar v. American Telephone Co., 238 111. 456. P, C— 9 130 PRIVATE CORPORATIONS stock as soon as it can consistently with its best interests. §57. POWER TO ACQUIRE ITS OWN SHARES. A corporation may acquire its own shares for the purpose of holding the same as treas- ury stock where no injury to creditors and no fraudulent purpose is thereby attempted. It is undoubtedly the right of a corporation to acquire its own shares ®® where it does not thereby attempt to defraud creditors ®* or perpetrate any other wrong, such stock being known as treasury stock. It differs from unissued stock in the sense that it has once been issued and then re-acquired. 88— First National Bank v. Peoria Watch Co., 191 111. 128; Republic Life Ins. Co. v. Swigert, 135 111. 150; Clapp & Peterson, 104 111. 26. 89— Olmstead v. Vance & Jones, 196 111. 236. OHAPTEBX THE DOCTRINE OF ULTRA VIRES §58. INTRODUCTORY. When a corpora- tion performs any act which is beyond its inherent, its express or its implied powers, the act is said to be ultra vires. It being decided or assumed that any act is ultra vires the question arises whether any, and, if so, what rights can arise out of such unauthorized act. In the previous two chapters we have been con- sidering the powers of a corporation under the general theory that a corporation is a creature of limited powers, and have not concerned our- selves with the questions that must at once be suggested where the corporation undertakes to do those things which under its charter it has, strictly- speaking, no power to do. "We have said that a corporation chartered for railroad purposes has no right to lease its entire equipment and in another connection that such corporation has no right to operate hotels. Assuming now that a railroad company has made such a lease or has operated 131 132 PRIVATE CORPORATIONS such a hotel, or has made contracts of any sort in reference to these things what rights, if any, can arise out of its actions in that respect? Sup- pose it sues for rent upon the lease; suppose it has parted with its property; has it any right to recover? These are the questions that we must concern ourselves with in this chapter. The task is not an easy one because the authorities are in hopeless conflict on this question; some holding what may be termed a liberal view, con- fining the right to question the act to the state, especially if the contract is executed; others hold- ing what may be called a strict and rigid view, holding that no rights can arise out of an act ultra vires. We must notice the authorities in this re- spect and attempt to gather from them a general view of the present condition of the law upon this subject in the United States today. § 59. DISTINCTION BETWEEN ACTS UL- TRA VIRES AND ACTS INTRA VIRES. An act is not ultra vires unless it is absolutely beyond the power of the corporation to do it, assuming that there is no question as to the authority of the par- ties by whom the act is done. If the act is within the corporate power, then it may be described as an act intra vires and in that case the question may DOCTRINE OF ULTRA VIRES 133 arise as to whether it is also within the power or authority of the agent by whom it was done. Ultra vires means "beyond the power of" the corporation, not merely beyond the power of some agent or of&cer; that is, by this term we mean to indicate that the act in question is absolutely be- yond the power of the corporation to do, though every director and every stockholder assent to the act done. By intra vires we may describe any act done which it is within the power of the cor- poration to do, although it may be another ques- tion whether or not the party who purported to represent the corporation had an agency which extended to the act done.®" Thus to issue a promis- 90 — The term "ultra vires," however, has been loosely used to describe an act within the power of the corpora- tion, but beyond the power of the agent. In National Home Building Association, 181 111. 35, at page 43, it is said: "It [the term 'ultxa vires'] has been applied! indiscriminately to different states of fact in such a way as to cause considerable confusion. * * * For exam- ple, the term has been applied to acts of directors or of- ficers which are outside and beyond the scope of their authority, and therefore are invasions of the rights of stockholders, but which are within the powers of the cor- poration. * * * Again, it has been applied to cases where an act was within the authority of the corpora- tion for some purposes or under some circumstances, and where one dealing in good faith with the corpora- tion had a right to assume t^e pxistence of the conditions which would authorize the ast. * * * In the more proper and legitimate use of the -term it applies only to acts which are beyond the purposes of the corporation, which could not be sanctioned by the stockholders." 134 N PRIVATE CORPOKATIONS sory note is not ultra vires. At the same time the corporation might not he liable upon the note made in its name, not because the act was ultra vires, but because the note was made by one who had neither actual nor implied authority.®^ § 60. RIGHT OF A STOCKHOLDER TO OB- JECT TO AN ULTRA VIRES ACT. A stock- holder of a corporation may by bill in equity enjoin or set aside an act which is done beyond the pow- ers of the corporation. We shall have occasion to again refer to this subject when we come to the question of the rights of stockholders, but it may be mentioned here in connection with this subject now under discus- sion that a stockholder of a corporation has the right to object to a corporate act and if other means fail him may go into a court of equity to enjoin the officers of the company in their attempt to divert the activities of the company into authorized channels.®^ §61. ULTRA VIRES CONTRACT EXECU- TORY ON BOTH SIDES. If the contract is ultra 91 — An innocent purchase^ for value of a negotiable instrument signed by the corporation by its proper of- ficers can bold the corporation whether the note was given for proper co^8rate purposes or not. See Grom- mes et al. v. SuUivin, 81 Fed. Rep. 418. 92— Hardin© v. American Glucose Co., 182 111. 551. DOCTRINE OP ULTRA VIRES 135 vires and is executory on both sides, the weight of authority is that either party can refuse to per- form on the ground of ultra vires. If a corporation has entered into a contract which is undoubtedly ultra vires and such contract is executory on both sides at the time the question is raised, that is, no benefits and no detriments have been sustained on either side, the bet- ter rule is that either party to the contract can refuse to perform on the groimd that it is beyond the power of the corporation. Thus in one case ®* the court said, "the contract between the plain- tiff and Jones was wholly executory, and nothing has occurred thereunder, preventing ^The bank from setting up its own want of authority to make such a contract, as a defense to any action brought thereon by Jones. "While executed contracts, made by corpora- tions in excess of their legal powers, have, in some cases, been upheld by the courts, and parties have been precluded from setting up, as a defense to actions brought by corporations, their want of power to enter into such contracts * * * this doctrine has never been applied to a mere execu- tory contract which is sought to be made the foun- dation of an action, either by or against such cor- 93 — ^Nassau Bank v. Jones et al., 95 N. Y. 115. 136 PRIVATE CORPORATIONS porations. It was said by Judge Selden, in Tracy V. Talmage (14 N. Y. 179), 'That a contract by a corporation, wMcli it bas no legal capacity to make, is void and cannot be enforced, it would seem difficult to deny.' In Wbite v. Buss (3 Cusb- ing, 448), Chief Justice Sbaw lays down the rule as follows: *It is weU settled by the authorities that any promise, contract or undertaking, the performance of which would tend to promote, ad- vance or carry into effect an object or purpose which is unlawful, is in itself void and will not maintain ah action.' " Although this seems to be the weight of author- ity, there are Courts which will not aUow the plea of ultra vires even in purely executory contracts. The Kansas Supreme Court inclines to this view, stating the law, in part as follows : ®* "Although the decisions relating to the doctrine of ultra vires are characterized by some conf usign, as well as by much conflict, they admit of classifi- cation into fairly well-defined groups, and exhibit a development in the direction of restricting the scope of its operations. These courts which ac- cord it the most favorable treatment — allow it the largest field of action — ^propeed upon the con- ception that a corporation being the creature of the state, possesses no power whatever beyond 94— Harris v. Independence Gas Co., 76 Kan. 750. DOCTRINE OF ULTRA VIRES 137 that granted in its charter and cannot directly or indirectly acquire rights, or incur liabilities, un- der any contract not thereby authorized. They refuse under any circumstances, to enforce or give effect to an unauthorized contract as such, but, where it has been acted upon, will protect the par- ties against hardship and injustice, by allowing whatever relief may be suited to the facts of the case, — ^for instance, by permitting either party to recover money or property which has been parted with in the transaction, or to have compensation therefor. The cases illustrating this treatment of the matter are collected in 29 Am. & Eng. Enc. Law, p. 54, Note 2. The theory is consistent and logical, but its practical effect is so to circumscribe the power of the court as to make the relief fur- nished at times inadequate to the occasion. In a larger number of jurisdictions, although the same conception of corporate authority is adopted, its effect is greatly changed by the application of an- other principle. Here the courts concede that a corporation has no power to make a contract ex- cept such as is conferred by its charter, expressly or by necessary implication. But they hold that, as it must have some discretion in the manner of carrying out the purposes of its creation, some freedom of action, it is amenable to the same rules of conduct as a natural person, and may estop it- 138 PRIVATE CORPOEATIONS self to question tlie validity of an agreement it has assumed to make, or may acquire the right to invoke a similar estoppel in its own behalf. Where this theory is accepted, recovery may be had upon a contract which is in fact void, simply because its validity cannot be put in issue. The cases in point are gathered in 29 Am. & Eng. Enc. Law, p. 57, note i. * * * li * * * It is generally held to be inap- plicable to purely executory contracts, one reason stated being that 'Where neither party has acted upon the contract, the only injustice caused by a refusal to enforce it is the loss to the parties of prospective profits, and this is too slight a con- sideration to weigh against the reasons of public policy for declaring it void and not enforce- able.' * * * << * * * rpjjg court is convinced of the soundness of the view, that in the absence of special circumstances affecting the matter, neither party to even an executory contract should be allowed to defeat its enforcement by the plea of ultra vires. The doctrine is logical in theory, simple in application, and just in result. It, of course, does not apply to contracts which are im- moral, or which are illegal (as distinguished from merely unauthorized), or to those made by pubKe DOCTEINE OF ULTRA VIRES 139 corporations. Nor does it forbid interference by a stockholder to protect his rights as such." This seems to be opposed, however, to the gen- eral rule, which is that of the contract is entirely executory on both sides, ultra vires may be made a defense. §62. ULTRA VIRES CONTRACT EXE- CUTED. THE STRICT VIEW. Even though the contract is executed in whole or part there are some courts that hold that no right can arise out of it and the ultra vires may be set up by either side in a suit on the contract. In such courts, however, it is admitted that for benefit actually received and retained reimbursement may be had as on an im- plied contract. Some courts hold to the view that even though the contract ultra vires is not entirely executory, that no performance by either side can give it validity, or estop the other party to set up the plea of ultra vires. This was announced in the federal courts in the case of Central Transportation Co. V. Pullman Car Co., as follows:®^ "The clear re- sult of these decisions may be summed up thus: 95 — Central Transp. Co. v. Pullman Car Co., 139 United States 24. Accord: McCormick v. Market Bank, 165 U. S. 538; Louisville, etc., R. Co. v. Louisville Trust Co., 174 U. S, 552. 140 PRIVATE CORPORATIONS The charter of a corporation, read in the light of any general laws which are applicable, is the measure of its powers, and the enumeration of those powers implies the exclusion of aU others not fairly incidental. All contracts made by a corporation beyond the scope of those powers are unlawful and void, and no action can be main- tained upon them in the courts, and this upon three distinct grounds: the obligation of every one con- tracting with a corporation, to take notice of the legal limits of its powers; the interest of the stock- holders, not to be subjected to risks which they have never undertaken; and, above aU, the inter- ests of the pubhc, that the corporation shall not transcend the powers conferred upon it by law. * * * A contract of a corporation, which is ultra vires, in the proper sense, that is to say, out- side the object of its creation as defined in the law of its organization, and therefore beyond the powers conferred upon it by the legislature, is not voidable only, but wholly void, and of no legal effect. The objection to the contract is, not merely that the corporation ought not to have made it, but that it could not make it. The contract can- not be ratified by either party, because it could not have been authorized by either. No perform- ance on either side can give the unlawful contract DOCTEINE OF ULTEA VIRES 141 any validity, or be the foundation of any right of action upon it." The Illinois court holds the same view. Thus it has said:®^ "It is also argued that the building and loan association was estopped to raise the question whether the contract was ultra vires be- cause it had received the benefits of the contract by the conveyance of property to it. * * * The powers delegated by the state to the corporation are matters of public law of jv^hich no one can plead ignorance. "A party dealing with a corporation having lim- ited and delegated powers conferred by law is chargeable with notice of them and their limita- tions and cannot plead ignorance in avoidance of the defense. * * * "In this case the transaction was beyond the corporate powers and ultra vires * * * but could not be ratified or become valid by acquies- cense since there was no power to make it * * * no action can be maintained upon the unlawful contract, and in such cases if the courts can afford any remedy it cannot be done by affirming or en- forcing the contract, but in some other manner." In another and later Illinois case'^ the court said: "A contract of a corporation which is ultra 96_National Home Bldg. Ass'n v. Bank, 181 111. 35. 97_Steele v. Fraternal Tribunes, 215 111, 190. 142 PRIVATE CORPORATIONS vires in the proper sense of that term, that is to say outside of the object of its creation, as de- fined by the laws of its organization and, there- fore, beyond the powers conferred upon it by the legislature is not only voidable but wholly void and of no legal effect. * * * No performance by the parties could give the unlawful contract validity or become the foundation of any right of action upon it." In these cases which hold this strict view that there cannot be any estoppel to set up the defense of ultra vires, it is generally admitted that those benefits must be accounted for as upon an implied contract in an appropriate action to that effect. The United States court in the Central Transpor- tation Company case above quoted from, indicated that there might be a right of action upon a quantum meruit, although it refrained from ex- pressing any opinion upon that subject, and it will be noticed that in the quotation from the case in 181 HI., the court said: "and in such cases if the court can afford any remedy, it cannot be done by affirming or enforcing the contract, hut in some other manner." And it is undoubtedly the law that a corporation, or the other contracting party could not take and keep property even under an ultra vires contract without accounting for the reasonable value thereof. This would give no re- DOCTRINE OF ULTRA VIRES 143 lief in many cases, of course, even thougli the contract were executed, as, for instance, where a corporation is sued upon an appeal bond as surety which it had no power to make and upon which, therefore, it can plead ultra vires. Here no form of action whatever would give any relief iu re- spect to such appeal bond, and the obligee thereof would be without remedy. But if property is re- ceived and retained or services rendered some compensation will usually be allowed therefor as on an implied contract. §63. ULTRA VIRES CONTRACT EXE- CUTED. THE LIBERAL VIEW. Many states hold that if the contract, though ultra vires, is exe- cuted in whole or in part that there will be an estoppel to set up the defense of ultra vires. The doctrine as announced in the last section is what might be termed the minority rule and the cases in the majority of states are to the effect that if the contract is not entirely executory, but partly executed, there will be an estoppel to set up the defense of ultra vires. In one case " it is said: "Private corporations are creatures of statute, and derive their powers solely therefrom. Upon weighty considerations of public policy, and 98— Denver Fire Ins. Co. v. McClellan, 9 Colo. 11. 144 PRIVATE CORPORATIONS of private equity as well, the principle lias been universally recognized that the charters or general laws through which these corporations derive their existence absolutely control their action; that a contract made or an act done by them which is not in any manner authorized by some express provision of the charter or law of incorporation, or which may not be clearly implied therefrom is ultra vires; and that such usiupation of power may be relied upon as a complete defense to a suit growing out of the unauthorized act or con- tract. "But for the purpose of avoiding the infliction of manifest injustice in given cases, many courts of the highest respectability have seen fit to recognize an exception to the foregoing doctrine. This exception when admitted, is always based upon principles largely analogous to those sup- porting equitable estoppels. The decisions reeog- nizing it hold that where a corporation receives and retains the full benefit of a contract, and a failure to perform on its side would result in pal- pable injustice to the other contracting party, it is estopped from escaping liability thereunder through a plea of ultra vires. "We are inclined to the opinion that cases some- times arise wherein this exception, properly un- derstood and limited, should be held applicable. DOCTRINE OF ULTRA VIRES 145 If a private corporation lias accepted and retained the full benefits of a contract which it had no power to make, the same having been performed by; the other party thereto; and if the transaction is of such a nature that the party thus perf ormiag will suffer manifest injustice and hardship unless permitted to maintain his action directly upon the contract, no other adequate relief being at his com- mand, we think the defense of ultra vires may be disallowed. This, however, does not do away with the objectionable character of the unauthorized contract. It admits the legal wrong committed by the usurpation of power, but denies the equit- able right of the corporation to profit through such wrong at the expense of parties contracting with it; the corporation having received and re- tained the benefit of the contract, is denied the privilege of invoking the illegality of its act, and thus avoiding consequences naturally flowing therefrom. "The circumstances attending and surrounding the transaction now before us, in our judgment, render this an appropriate case for the application of the foregoing equitable doctrine. For this rea- son we concur in the conclusion arrived at by Mr. Justice Stone, who writes the principal opinion." This was an early case decided in 1885 and many P.O.— 10 146 PRIVATE CORPOEATIONS later cases have taken the doctrine much further and placed it upon additional grounds. It is now undoubtedly the law in many states that the contract need not be wholly executed pro- vided benefits have been received under it. It is often said that "the plea of ultra vires should not as a general rule prevail whether interposed for or against the corporation when it would not advance justice but on the contrary would accom- plish a legal wrong." ^® 99 — Carson City Bank v. Carson City Elevator Co., 90 Mich. 550. Accord: Leslie v. Lorillard, 110 N. Y. 519; Bath Gas Light Co. v. Claffy, 151 N. Y. 24; Sey- mour V. Spring Forest Seminary Co., 144 N. Y. 333, 157 N. Y. 697. (The Court says: "That kind of plunder which holds on to the property, but pleads the doctrine of ultra vires against the obligation to pay for it, has no recognition or support in the law of this state.") PART IV STOCK AND STOCKHOLDERS CHAPTER XI DEFINITIONS § 64. CAPITAL STOCK DEFINED. Capital ?tock of a corporation is the amount of money which it has received or is entitled by law to re- ceive from stockholders for the purpose of carry- ing on its corporate business. We say that a corporation is capitalized at a certain amomit. This does not mean that it actu- ally has that amomit of money or property. It indicates that its charter gives it the right to re- ceive that amount of money from the subscribers or their assigns for the purpose of carrying on its business. The capital of a corporation then is that fund which it has received or may receive in order to carry on its business. The capital of a corporation differs from the property of a cor- poration, which may vary from day to day and 147 148 PRIVATE CORPORATIONS be either of less or greater value than the par value of the stock. The amount of the capital stock of a corpo- ration may be increased or diminished by ap- propriate amendment of the charter. § 65. SHARE OF STOCK DEFINED. A share of stock is the unit of financial interest held by the stockholder and determines the liability of the stockholder to contribute to the capital stock of the company. The capital stock of the company is represented by units known as shares of stock, the aggregates of which in their face value are equivalent to the amount of capital stock of the corporation. A stockholder necessarily holds a certain number of shares and this determines the amount for which he is liable as his share of the corporate enter- prise. Each share of stock has a par value, that is a face value which may differ in the market from its real value, that being the amount for which it will seU when transferred by one stockholder to his successor. Such value is known as the market value. § 66. STOCKHOLDER DEFINED. A stock- holder is one who owns or in his own name pos- DEFINITIONS 149 sesses shares of stock. He may be an original sub- scriber or an assignee. He may also be said to be a stockholder upon the books of the company where he is recorded in the books as a stockholder but this is not necessary to make him a stock- holder, although it is necessary in order to give him all the rights of a stockholder. A stockholder is one who has either subscribed or by purchase or otherwise has come into pos- session and ownership of some of the shares of the company. He is really one of the co-owners of the corporation and has an interest similar to that of a partner in a partnership, although he essentially differs from such partner in his rights and powers. He may be a stockholder where he has purchased stock although he is not recorded in the books of the company as a stockholder, but in order to fully protect himself he must have himself entered in the books as a stockholder. It is of course also true that one may appear upon the books to be a stockholder when he is not really such because he has not been superceded by an action taken by his assignee. § 67. COMMON AND PREFERRED STOCK. The stock of a corporation may be either common or preferred in the sense that one class of stock 150 PRIVATE CORPORATIONS wUl be entitled to dividends up to a certain extent before the other class can share in the profits of the company. In some corporations especially the larger ones stock is divided into two sorts, that which is called preferred and that which is called common stock. Preferred stock is stock upon which dividends are payable up to a certain per cent, before the com- mon stock is entitled to share in any of the earn- ing of the company. The purpose of issuing pre- ferred stock is to secure capital by way of issuing stock therefor instead of bonds, the preferred stockholders being guaranteed a certain dividend. A preferred stockholder is, however, only a stock- holder and cannot compete with the creditors of the company. Preferred stock may be simply preferred as to dividends or both as to dividends and assets, mean- ing that in a distribution of the assets among the stockholders the preferred stockholders will be entitled to the assets in full return of the amount of preferred stock held by them before the com- Tcion shareholders will have any right to share therein. The question arises whether preferred stock which is to bear a certain per cent, per year is cumulative or non-cumulative. Of course, in any DEFINITIONS 151 well-organized corporation tliat ought to be ex- plicitly set out, and usually is set out so that there is very little authority one way or another on the question, but if it has been neglected the ques- tion is whether the preferred shareholders are entitled to this per cent, for every year, whether the year has earned any dividend or not; that is, must future years make up the deficiency of past years. There is very little law upon this subject, but the law seems to be that preferred stock is cumulative. The preferred stock guarantees a return of a certain amount as, say, 6 per cent. If the com- pany is very prosperous the common stock may earn larger dividends than the preferred stock and, therefore, have a higher market value, es- pecially at various periods. Thus if the corpora- tion is earning, say 20 per cent., the common stock would earn 14 per cent., while the preferred stock would earn only six per cent. In the case of either preferred or common stock there is nothing owing to the stockholder until a dividend is declared by the directors, although as we wiU see hereafter the stockholder has a certain limited right of enforcement of a declar- ation of dividends. 152 PRIVATE CORPORATIONS § 68. UNISSUED AND TREASURY STOCK. Unissued stock is stock which has never been is- sued by the corporation. Treasury stock is stock that has once been issued but has been reacquired by the corporation. If stock has not been as yet issued it is known as unissued stock. If it has been issued and bought back again it is known as treasury stock. In such a case it may be re-issued, but the original certificates ought to be retired and new certifi- cates issued. §69. THE STOCK CERTIFICATE. The stock certificate is an instrument issued by the cor- poration to the stockholder as evidence of his own- ership of stock. It recites how much stock it represents and usually bears a serial number. The stockholder is entitled to a certificate from the corporation stating his standing as a stock- holder and enabling him to transfer his stock. The corporation for this purpose issues what is known as a certificate of stock in which the stock- holders ownership of stock is admitted and stated, the certificate reciting the number of shares repre- sented by it and usually giving the name of the stockholder, although it may be issued to bearer. DEFINITIONS 153 It also bears a serial number corresponding with a stub in the stock certificate book bearing the same number. A stockholder is entitled to have his stock divided into a number of certificates where he makes reasonable demands in that re- spect so that he may transfer a part of his stock with less trouble. The stock certificate usually has upon the back thereof a blank power of attorney and form of assignment to enable the holder to make trans- fer. The subject of transfer of stock we will, however, notice at a later time. CHAPTER XII STOCK SUBSCRIPTIONS §70. NATURE OF SUBSCRIPTIONS TO STOCK. Subscriptions to stock of a corporation are contractual in nature. They may be by way of offer or acceptance and may be to take stock of an existing or projected corporation. A subscription to the stock of a corporation is a proinise by the subscriber to take a certain amount of stock. If the corporation is an existing corporation, then the subscription may either be by way of an offer or of an acceptance according as to whether the first proposition came from the corporation or the subscriber. A subscription, however made, must amoimt to a contract between the corporation and the subscriber before it be- comes binding. If the subscriber is the offeror, then he is not a stockholder until his subscription has been accepted, but if he is an offeree, the con- tract is complete upon his subscription, and this is the reason why it might be important to de- termine whether the subscriber was offeror or of- 154 STOCK SUBSCRIPTIONS 155 feree. If the corporation is not yet formed, then the preliminary subscription is only an offer and must be accepted by the corporation after it comes into existence before the subscription can amount to a contract so far as such corporation is con- cerned, although, of course, by a properly drawn agreement such a subscription could be made to have a contractual character as between the sub- scriber and the other subscribers, or the pro- moters. The acceptance by the corporation may be ex- press or may be shown from the facts. As a mat- ter of practice acceptance is more often simply imderstood and evidenced by the act of the corpo- ration in treating the subscriber as a stock- holder."" § 71. SUBSCRIPTIONS UPON CONDITION. If a subscription is made upon a lawful condition it is not enforcible until the condition has been performed but an unlawful condition is invalid and the subscription is enforcible as though the condition had never been made. Secret and parol conditions are not enforcible. Conditions to stock subscriptions have caused considerable difficulty in the law; the reason is 100— Thrasher v. Pike Co. E. R., 25 111. 393; Stowe v. Flagg, 72 III. 397; Pittsburg R. R. Co. v. Gazzam, 32 Pa. St. 340. 156 PRIVATE CORPORATIONS that conditions are often unlawful or against pub- lic policy, or are entered into secretly, or perhaps orally under a written subscription. If a sub- scription is not secret in nature and is not unlaw- ful it is enforcible and the subscription cannot be enforced imtil the corporation has complied with the condition.^"^ Thus if one subscribes to the stock of a corporation yet to be formed, upon a common condition entered into with every sub- scriber, his subscription could not be enforced ex- cept upon the performance of the condition. Conditions are often unlawful or against public policy as they amount to an attempt by the sub- scriber to control the destinies of the corporation and take the management of it out of the hands of its directors. This is especially true in public service corporations such as railroads, where one subscribes upon condition that a station wiU be built at a certain place and so on. It would be against public policy to enforce any such condi- tion.*"'' Where the condition is unlawful the subscription 101— AsHtabula R. Co. v. SmitH, 15 Ohio St. 328; Bait., etc., R. Co. v. Pumphrey, 74 Me. 86. 103— Mobile & Ohio R. Co. v. People, 182 111. 559 ; But- ternuts, etc., Turnpike Co. v. North, 1 Hill, 518 ; Ft. Ed- ward Co. V. Payne, 15 N. Y. 583. But such conditions have been upheld by some courts : Des Moines Valley R. Co. V. Graff, 27 la. 99; North Mo. R. Co. v. "Winkler, 29 Mo. 318 ; Racine County Bank v. Ayres, 12 Wis. 512. STOCK SUBSCEIPTIONS 157 is deemed to be separable from the unlawful con- dition and the condition wiU f aU and the subscrip- tion stand. If the condition is secret in nature it will not be enforced because this would amount to a fraud upon the other subscribers and upon the public in general who have a right to believe that sub- scriptions to stock are unconditional."^ In the case cited the Court said: "The object of subscription for capital stock in a corporation, is to create a fund with which to do business, and fair dealing between the several stockholders of the corporation, and with creditors, prohibits any secret agreements that would tend to defeat the terms of the subscription for capital stock; that capital stock can only be issued reg- ularly by the corporation to the persons who have paid the par value thereon and good faith among the several stockholders with each other is re- quired by law. Any agreement by a person sub- scribing and taking capital stock in a corporation, with a corporation, whereby the corporation is to repay the amount so paid or the capital stock, is repugnant to the principles of corporation law, and fair dealing among the several stockholders; that if such claim could be enforced the corpora- 103— Matter of Owen Pub. Co., 20 Amer. Bankr. Eep. 643. 158 PRIVATE CORPORATIONS tion would be liable to have its capital stock de- pleted at any time at the will of the stockholders. Such withdrawing of capital stock would be a fraud upon the creditors of such corporation and it appears such agreement as to this particular claim was void at the time it was made and it cannot be enforced against the bankrupt or the assets of the corporation and diverted from the creditors of the corporation. "It does not appear that the other stockholders of the company or the creditors of the company had any knowledge or ever consented to such agreement. "The principles herein involved are elementary and are sustained by all the authorities: "See Cook on Law of Stocks and Stockholders, sec. 191. " 'A secret agreement of a corporation with cer- tain subscribers to stock whereby they are to be released from payment, or to have some other ad- vantage not common to all the stockholders, is no defense for a subscriber who is not promised the same advantage. All such agreements are void and the subscribers receiving them are liable on their subscription, absolutely, as though no special advantage had been promised.' "See also to the same effect, Thompson on Lia- bilities of Stock Holders, sec. 124. STOCK SUBSCRIPTIONS 159 "The following authorities sustain the forego- ing principles, Armstrong v. Danahy, 75 Hun 450. "In that case an action was brought by the re- ceiver of a corporation to recover an amount on an unpaid subscription. The defendant sought to avoid payment by saying that he was promised paid up capital stock for less than its face value, held, that it did not constitute a defense to plain- tiff to recover the balance on capital stock. "In the case of Myer v. Blair, 109 K Y. 600, the promoters of the Blair Iron & Steel Co. promised the plaintiff in writing that they would repurchase the stock of him at the end of one year. He paid for the stock. He brought an action to recover on the agreement. It will be noted that that action was not against the Blair Iron & Steel Co., but against the promoters and individuals who signed the agreement with Myer. It was held, that they were personally liable and that an action could be maintained. The court there discusses the sub- ject of secret agreement between subscribers and the corporation and distinguished that case by showing that it was not the company that made the contract, but individuals. "On page 605, the court said: 'Cases of stock subscriptions to stock of corporations, accom- panied by a secret agreement between the com- pany and subscriber, that the latter should not be 160 PRIVATE CORPORATIONS bound bx bis subscription or changing in some other respect its ostensible terms, the cases of composition between a creditor and debtor, where the creditor joiniag in the composition with a creditor, seciures an advantage over other credi- tors in violation. of the understanding implied in aU cases of composition, that the settlement with the creditors joining in the petition proceeds ex- clusively upon the terms of the common agree- ment.' " 'In both classes of cases mentioned the col- lateral agreement is held to be void. In the first, the court holds the subscriber to the ostensible contract and permits it to be enforced in an action by the company as the only means of preventing the consummation of a fraudulent scheme to pro- tect the other subscribers.' " If the condition is made orally while the sub- scription is in writing, there is the further objec- tion that the condition cannot be proved on ac- count of the parol evidence rule, as well as the ob- jection that it would amount to a fraud upon the other stockholders and creditors. In one case ^°* the defendant was sued on a sub- scription and set up that he had signed upon a secret condition. The court said: "Under the 104 — ^Minneapolis Threshing Machine v. Davis, 40 Minn. 110. STOCK SUBSCRIPTIONS 161 elementary rule of evidence that a written agree- ment cannot be varied or added to by parol, it is not competent for a subscriber to stock to allege that be is but a conditional subscriber. The con- dition must be inserted in the writing to be effec- tual. This rule applies with special force to a case like the present where, to allow the defend- ant now to set up a secret parol arrangement by which he may be released, while his fellow sub- scribers continue to be bound, would be a fraud not only upon them but upon the corporation, which has been organized on the faith of these subscriptions, and upon its creditors. * * * ii * * * rpjjjg subscription agreement was not intended to be the sole contract of defendant. It was designed to be also signed by other parties, and from its very nature defendant must have known this. Each succeeding subscriber executed it more or less upon the faith of the subscriptions of others preceding his. The paper purports on its face to be a completed contract containing all the terms and all the conditions which the sub- scribers intended it should. When this agreement was presented to others for subscription, defend- ant had not only signed it in this form but he had also done what, under the facts, constituted to all outward appearances at least, a complete and valid delivery. He had placed it in the proper channel p. C-IJ 162 PRIVATE CORPORATIONS according to the ordinary and usual course of pro- cedure for passing it over to the corporation when organized, and clothed Janney with aU the indicia of authority to hold and use it for that purpose without any other or further act on his part, un- trarmneled by any condition other than those ex- pressed in the writing. In reliance upon this, others have not only subscribed to the stock but have since paid in a large share of it. The corpo- ration has been organized and engaged in business, expending large sums of money and contracting large liabilities, all upon the strength of these subscriptions to its stock and in entire ignorance of this secret oral condition which defendant now claims to have attached to the delivery. "To permit defendant to relieve himself from liability on any such ground, under this state of facts, would be a fraud on others who have sub- scribed, and paid for stock, upon the corporation which has been organized and incurred liabilities in reliance upon the subscriptions, and on creditors who have trusted it. The familiar principle of equitable estopped by conduct applies, viz: where a person by his words or conduct wilfully causes another to believe in the existence of a certain state of facts and induces him to act on that belief so as to alter his own previous condition, he is STOCK SUBSCRIPTIONS 163 estopped from denying the truth of such facts to the prejudice of the other.""® §72. FRAUD IN SUBSCRIPTION. If a sub- scription is fraudulently obtained by one who has authority to represent the corporation in securing the subscription, subscription is voidable by the subscriber until he ratifies the fraud except where according to most of the authorities the corpora- tion has become insolvent before the subscriber has avoided the contract. If an agent has authority to represent the cor- poration in securing subscriptions, fraud commit- ted by him is the fraud of the corporation even though the corporation did not authorize the fraud. The corporation, therefore, is answerable to the subscriber and the subscription may be set aside by the subscriber if he proceeds in apt time and if the rights of creditors do not intervene. Fraud and deceit to entitle a subscriber to avoid must consist in a statement of fact made to be relied on and relied on by the subscriber to his damage. There is no distinction between fraud in this case and fraud in any case and the same 105— Accord: Kelsey v. No. Light Oil Co., 45 N. Y. 505 ; Miller v. "Wild Cat, etc., Co, 52 Ind. 51 ; Noble v. Callender, 20 Ohio St. 199 ; Melvin v. Lamar Ins. Co., 80 111. 446 ; La Grange v. Mays, 29 Mo. 64} Low v. Stude- baker, 110 Ind. 57. 164 PEIVATE CORPORATIONS rules as to what constitutes fraud apply here as in any other department of law; that is to say mere opinions and predictions do not amount to fraud and there must be a statement of fact made which was relied upon by the subscriber, and refer- ence to the general law of torts and the general law of sales is made in this connection to that end. The subscriber's contract is merely avoidable on account of the fraud and not void and, there- fore, the subscriber can ratify the same in any way that one may ratify any voidable contract; that is, by his words, his acts or his laches. In the case of Burwash v. Ballon,^"® the court stated the rule as follows: "The rule is that a party who desires to rescind the sale for fraud must act promptly; that he cannot be permitted to stand passively by and speculate as to the result of an investment, es- pecially an investment in mSning stock which usually fluctuates in value, and after the future has disclosed the investment was a mistake re- scind the contract of purchase for fraud and re- cover back the consideration paid for the stock." "^ Prom this case we see that a stockholder must 106— Burwash v. Ballou, 230 111. 34. 107— Citing Greenwood v. Penn, 136 111. 146 ; FoUett V. Brown, 188 Id. 244; Coolidge v. Rhodes, 199 Id. 24; Grymes v. Saunders, 93 U, S. 55. STOCK SUBSCRIPTIONS 165 proceed diligently after he discovers the fraud be- cause rights of others are involved. As a matter of fact some courts hold that if the rights of cred- itors have intervened, that is to say, where the corporation has become insolvent, he cannot avoid because the rights of such creditors are superior to his. Thus in the case of Grress v. Knight,"® the court after reviewing numerous authorities says: "Where a person becomes a stockholder of a cor- poration, he becomes a part of it. Its agents are, in a sense his agents. They go out and deal with the public. If through their dealings debts are incurred, assuming both the stockholder and the creditor to be innocent and that one must suffer, the former, who put it in the power of the agents to do the wrong, should suffer rather than third persons who dealt with such agents. * * * As to grantors whose claims arose after the stock- holders became such, their rights are superior to any right of rescission. The status of a stock- holder relative to creditors who became such after he took the stock is not in all respects identical with that relative to antecedent creditors. As to creditors whose debts were created before he took the stock, questions of laches, acts inconsistent with rescission, estoppel, etc., might arise. The new stockholder may have permitted the increase 108— Gress v. Knight, 135 Ga. 60. 166 PRIVATE CORPORATIONS of indebtedness and the lessening of tlie assets with which to pay. * * * << * * * -^YTien the facts are shown, it can be made to appear whether a fraud was really per- petrated on each of the interveners; whether there was any lack of diligence in discovering such fraud, or unreasonable delay in seeking relief after its discovery, whether there was any active partici- pation by the interveners in the management of the corporation, or whether debts had been in- curred after the intervener became a stockholder, which either gave corporate creditors superior equitable rights or estopped the intervener from denying that he was a stockholder, and generally whether his conduct was such as to prevent re- Hef."^"" 109 — The Court reviews the following authorities: Cakes v. Turquand, L. R. 2 H. L. 325 ; Stone v. City & County Bank, L. R. 3 C. P. Div. 282 (giving the English rule that "after the commencement of winding up pro- ceedings against corporation, and application to be relieved of liability as a shareholder on the ground of fraud practiced upon him by agents of the company in procuring the subscription, comes too late") ; Chubb v. Upton, 95 U, S. 665 (defense cannot be set up after in- solvency, "especially when the subscriber has not been vigilant") ; Upton v. Tribilcock, 91 U. S. 45; Upton v. Englehart, 3 Dill. 496, Fed. Cas. No. 16,800; Farrar v. Walker, 3 Dill. 506, Fed. Cas. No. 4,679 ; Newton Na- tional Bank v. Newbegin, 33 L. R. A. 727 and note (20 C, C. A. 339, 40 U. S. Ap. 1, 74 Fed. 135) ; Parker v. Thomas, 19 Ind, 213 ; Granger Ins. Co. v. Turner, 61 Qa. STOCK SUBSCRIPTIONS 167 There are cases to the effect that the rights of the stockholders are not cut off by the inter- vening rights of creditors where the stockholder is not guilty of laches in proceeding against the corporation but the prevailing American doctrine is in any case that he will have no right against creditors if he was guilty of laches. 561 ; Hamilton v. Granger's Life & Health Ins. Co., 67 Ga. 145 ; Stewart v. Rutherford, 74 Ga. 435 ; Howard v. Glenn, 85 Ga. 238. CHAPTER XIII LIABILITY UPON SUBSCRIPTION §73. IN GENERAL. The liability of the sub- scriber to the corporation is to pay for the stock according to the terms of his subscription. Credit- ors have an interest in his contract of subscrip- tion and in case of insolvency of the corporation can compel the payment of his subscription and are not always bound by the contract which is made with the corporation where he received the stock at less than par or for property of a less valuation than the par value of the stock. In considering this subject of payment for stock we will have to consider it from the standpoint of the corporation and of the creditors of the corpo- ration. Grenerally speaking the stockholder is liable to the corporation strictly upon the terms of his subscription but he may be liable to creditors according to the par value of the stock subscribed for by him irrespective of his contract with the. corporation. In the same way, where he pays for his stock in property usually whatever bargain ,_ 168 LIABILITY UPON SUBSCRIPTION 169 the corporation has made will stand as between him and the corporation, but it will not always stand as far as creditors are concerned. It is con- ceivable also that a contract of subscription made by a stockholder might be set aside or disregarded by other stockholders where such contract is clearly in fraud of their rights. We shall, however, be chiefly concerned in this chapter with the liabil- ities of the stockholder in respect to the corpora- tion and in respect to creditors of the corporation. §74. LIABILITY UPON UNQUALIFIED SUBSCRIPTION. The liability of a subscriber is to pay the par value of the stock subscribed for by him unless otherwise agreed. Where the subscription is imqualified then it is elementary law that the liability of a stock- holder is to pay the par value thereof to the cor- poration. After this amount has been paid no further liability exists, no matter in what straits the corporation may find itself. As we saw at the beginning of this volume, one great purpose of incorporation is to secure limitation of liability for the debts contracted in the business. By statute in one or two of the states certain assessments are allowed, but this is not the general rule. It is also true that under banking laws a multiple 170 PRIVATE COEPORATIONS liability may be provided for in case of insolvency, but even in such a case the subscriber knows that his liability is hmited to a certain amount and that he is not personally liable for corporate debts. If a subscriber is offered stock below par then he cannot be compelled to pay any more than he has agreed so far as the corporation is concerned. Thus sometimes mining stock, having a par value of one dollar, is issued for a few cents. In such a case the subscriber could never be called upon to pay the rest of the par value. It is to be remembered throughout this chapter that we are considering stock subscriptions and not stock purchased upon the market which has already been issued, for in that case even creditors could not call upon the purchaser to pay anything upon the stock owned by him, assviming that the stock was once fully paid or that the purchaser did not know that it was not paid. §75. MEDIUM OF PAYMENT. Payment of stock may be in money or in any other medium as agreed upon. Before entering into a consideration of the rights of creditors with respect to stock payments we may say that it is an elementary principle in the law of corporations, true everywhere, that a LIABILITY UPON SUBSCRIPTION 171 subscriber may pay for his stock either in money or money's worth."" Thus assume that a large dry goods business is to be incorporated. It is un- necessary that the corporation formed and taking over the existing business should require the stock- holders to pay in money. It is simply necessary that the business be valued and then be trans- ferred to the corporation by the owners thereof in return for stock issued to them. To require the stockholder to pay in money would be requir- ing a useless thing, as it would mean that where the corporation desires certain property which is in the hands of a stockholder that he would have to sell the property to the corporation, receiving cash therefor, and then would immeditately turn back the cash to the corporation for the stock received by him. In other words the result would be the same as though the property had been trans- ferred by him to the corporation for its value in corporate shares. §76. WATERED STOCK. The term "wa- tered stock" is somewhat variously used, but it is usually taken to indicate that stock of a corpora- tion has been issued for less than par or as a gra- 110— Farwel v. Great "West. Tel. Co., 161 111. 522; Keichwald v. Commercial Hotel Co., 106 lU. 439; CoflSn V. Eansdell, 110 Ind. 417. 172 PRIVATE CORPORATIONS tuity with the understanding and for the purpose of enabling it to be floated upon the market by the stockholders as fully paid up stock. It is stock which does not represent real value, but which seems to represent such value. The term "watered stock" is used to describe stock which does not represent in whole or part real value, but so far as the public is concerned has nothing on its face to show that it was not issued for real value. Sometimes it is issued at a heavy cash discount for the purpose of enabling the stockholder to profit heavily by a re-sale on the market. Sometimes it is issued for property grossly overvalued for the same purpose. Watered stock, however the term is used, indicates that there is an apparent value which the stock repre- sents which does not in fact exist. Thus if a cor- poration organized for say one hundred thousand dollars, issues that amount of stock for property valued at twenty-five thousand dollars, seventy- five thousand dollars is watered. In such a case there must be an actual issue of stock when no value has been received therefor. Thus a corpora- tion organized at one hundred thousand dollars might have assets worth only twenty-five thousand dollars, yet if seventy-five thousand dollars was still unissued, there would be no water in the stock. LIABILITY UPON SUBSCRIPTION 173 It is usually understood from this phrase that there has been a purposeful or fraudulent over- yaluation to enable the parties concerned to profit by a re-sale, or to enable the corporation to ac- quire money for division among the originators at the expense of purchasers or subscribers. It would be useless to attempt to enter here into all the various devious ways and schemes by which stock has been watered. It is enough for the pur- poses of the law to say that whatever the device, watered stock is stock that purports to represent value that does not exist. §77. RIGHTS OF CREDITORS AGAINST STOCK SUBSCRIBERS. Where creditors of a corporation through its insolvency or otherwise acquire a right to collect its outstanding assets, they may treat the subscribers' liability as an asset, and usually can compel the payment of the par value whatever agreement may have been made by the stockholder with the corporation. Fraudulent overvaluation of stock can be ignored or set aside. Where creditors through bankruptcy or other insolvency proceedings or in garnishment pro- ceedings acquire rights to call in for their benefit the assets of a corporation the liability of stock- 174 PRIVATE CORPORATIONS holders to pay for their shares will be regarded as an asset. In other words such stockholders are debtors of the corporation and, therefore, may- be compelled by the creditors in a proper pro- ceeding to pay their subscriptions to the extent necessary to satisfy the corporate creditors. In no case can the creditor of a corporation proceed directly against the stockholder, even though such stockholder owes money to the corporation, but a trustee in bankruptcy, or a receiver or assignee in a state insolvency proceeding can as representa- tive of the creditors and the corporation proceed against the debtors to compel them to pay to the corporation for the benefit of creditors. To this end the court will ignore all agreements between the corporation and the stockholders whereby it has been stipulated that the stock need not be paid for"^ and will set aside or ignore fraudulent devices between the stockholders and the corporation whereby it has been attempted to make it appear that the stock was in fact paid for. Any stockholder who has not honestly in money or property paid up his stock can be com- pelled by the court to pay in as much as is neces- sary up to the par value of his stock to satisfy creditors even though there may be other stock- ill— Zirkel V. Opera House Co., 70 111. 334; Potts v. Wallace, 146 U. S. 689 ; Sawyer v. Hoag, 17 WaU. 610. LIABILITY UPON SUBSCRIPTION 175 holders who are not forced to pay. If the creditor finds a debt owing to the corporation he may en- force that debt without regard to whether other debts are paid or not. In the case of Edwards v. SchiUinger/" an action was brought by a trus- tee in bankruptcy against certain stockholders of a corporation to set aside a fraudulent dividend which had been declared in an effort thereby to make it appe9.r that the dividend was applied to the payment of stock subscriptions. The court said: "It was not necessary that there should be any call made by the corporation or the bank- ruptcy court. The creditor of a corporation can proceed in equity without a caU, and without tak- ing any account of other indebtedness or making aU stockholders defendant. The liability of a stockholder for unpaid subscriptions is several and not joint, and the creditor is not bound to set- tle up the affairs of the corporation in order to obtain his dues. * * * A creditor of the cor- poration seeking satisfaction of his debt need look no further than to find a solvent stockholder who is liable for it, and he sustains no relation to the corporation which requires him to adjust equities between stockholders or between the corporation and others."' * * * 112— Edwards v. Sehillinger, 245 lU. 231. 113— Citing Ogilvie v. Knox Ins. Co., 22 HoW; (U. S.) 380; 16 L. Ed. 349. 176 PRIVATE CORPORATIONS u * * * ^ contract of a corporation limit- ing the liability of its stockholders to a portion of the par value of their stock is void both as to cred- itors and the assignee in bankruptcy/" and the scheme in this case is admitted by the demurrer to have been a fraud. The relation of a stockholder who has not paid for his stock, to the corporation, is the ordinary one of debt." ^'® In the next section we will consider a doctrine called the "trust fund" doctrine which is appro- priate in considering the liability of stockholders as far as creditors are concerned. § 78. THE TRUST FUND DOCTRINE. The trust fund doctrine in corporation law is the doc- trine that in an insolvency proceeding the assets of the corporation will be regarded as held by it for the benefit of creditors. The trust fund doctrine in the law of corpora- tions has been variously stated and has been held to have several meanings. It has been applied as between directors and stockholders, holding that the directors are substantially trustees for the stockholders in respect to the stockholders of the H4r— Citing Uptoii v. Tribilcock, 91 U. S. 45, 23 L. Ed. 203. 115— Citing Parmallee v Price, 208 111. 544, 70 N. B. 725. LIABILITY UPON SUBSCRIPTION 177 corporation although the doctrine is hardly neces- sary in such a case because the directors are un- doubtedly in position of trust and, therefore, the rights of the stockholders can be worked out with- out the assistance of any particular doctrine of this sort. The trust fund doctrine is usually ap- plied as between the corporation and its creditors and is in effect that in an insolvency proceeding the court will regard the assets of the corporation as held in trust for the benefit of creditors. This doctrine was first announced by Mr. Justice Story in the case of Wood v. Dummer,"® and the phrase has become a well known phrase in American law. By virtue of this doctrine it is held that so far as creditors are concerned, a corporation cannot re- lease the liability of its stockholders or accept part payment for full payment, and that undervalua- tions of property wiU be regarded as fraudulent. It is by virtue of this doctrine, then, that many courts work out the rights of creditors against the stockholders where so far as the corporation is concerned it would by its own agreement itself have no right against the stockholders.^" §79. BIGHTS OF CREDITORS WHERE PROPERTY IS OVERVALUED IN PAYMENT 116— Wood V. Dummer, 3 Mason, 108. 117— See HoUins v. Brierfield, etc., Co., 150 U. S. 371, limiting and explaining the doctrine, p. a— 12 178 PRIVATE CORPORATIONS OP STOCK. Stock must be paid for so far as creditors are concerned either in money or money's worth and if property is fraudulently overvalued when taken in payment for stock the transaction will be set aside at the suit of creditors in an insol- vency proceeding. It is everywhere conceded that if property is fraudulently valued in order to evade liability to creditors in case the corporation becomes insol- vent, that the transaction will not avail to make the stock fuU paid stock where the corporation be- comes insolvent and the creditors are seeking to reach its assets. The stock so fraudulently paid for will be regarded as watered stock and the transaction wiU be set aside or ignored and the stockholders compelled to pay up their stock."® But some courts hold that even though there is no actual fraud a valuation will be set aside where it is an overvaluation to any appreciable extent not- withstanding the directors may have used good faith in making the valuation. That is to say, not- withstanding the directors did not have in mind an intent to accomplish anything fraudulent, accord- ing to these cases the directors must either receive the money or they must receive property which on 118— Douglass V. Ireland, 73 N. Y. 100; National Tube Works v. GilfiUen^ 124 N, Y. 302 ; Libby v. Tobey, 82 Me. 397; Camden v. Stuart, 144 U. S. 104. LIABILITY UPON SUBSCRIPTION 179 the market would bring substantially tbat amount of money. Of course, no court would allow an hon- est transaction to be opened up because there may have been some overvaluation, but where this doctrine prevails of money or money's worth, good faith is no defense. Thus in the case of Gillett v. Chicago Title & Trust Co.,"® the court says: " * * * the natural and reasonable method to be pursued in determining that question would have been to have applied to men not interested in the promotion of MacKaye's scheme who were of wide experience in the production of great spec- tacular plays for their views in reference to the worth of the rights which MacKaye proposed to transfer. No such investigation was made. No other steps were taken to ascertain the value of the right MacKaye proposed to transfer such as would have been taken by directors seeking to deal hon- estly and fairly with the assets of the corporation. It was the duty of these directors to ascertain the value of these rights precisely as they would have done had they intended to invest money in such rights themselves and that they did not do. It is no doubt true that if directors in the fair, honest and intelligent exercise of their judgment make a mistake and accept property at a price greater 119— Gillett V. Chicago Title & Trust Co., 230 111. 373. 180 PRIVATE CORPORATIONS than its real value such cannot be regarded as a fraudulent overvaluation of the property, but that rule only applies where the transaction constitutes a valid contract of bargain and sale made in good faith on the part of the directors and in the intelli- gent exercise of fair and honest judgment on their part." In some states the corporation law provides that where stock is paid for in property, that the valu- ation of the directors if made in good faith shall be final and conclusive, but in these states the re- sult reached is about the same as that reached else- where where there is no such provision, because the directors under such a statute must honestly exercise their judgment and act as reasonable men, so that if there is an undervaluation consti- tuting a material departure from the true valua- tion, a court would be compelled to say that such a valuation was not honestly made. It is imdoubt- edly true, however, that some courts allow the di- rectors a larger leeway in this respect than other courts and there is perhaps a basis for making a distinction between what may be called the good faith rule and the true value rule."" 120 — Some courts incline to the view that a purchaser of stock in a corporation ought to look and customarily does look to the actual financial condition prevailing in the corporation involved, rather than to the nominal LIABILITY UPON SUBSCRIPTION 181 §80. EFFECT OF CREDITOR'S KNOWL- EDGE THAT STOCKHOLDER HAS BEEN RELEASED OF HIS LIABILITY, OR THAT HE HAS AGREED TO FAY LESS VALUE THAN PAR. In most states if the creditor knows before he contracts his debt that the stockholder has acquired his stock at less than par value this wiU estop the creditor to enforce the stockholder's liability, but in one or two other states such knowl- edge is immaterial. In some of the decisions it is said that the stock- holder's liability is affected by the knowledge which the creditor has that the stockholder was not by his contract obliged to pay the par value,^^^ but it has been said that the liability can be en- forced irrespective of the creditor's knowledge.^^'* capitalization: Merchants' Bank v. Belington, etc., Co., 51 W. Va. 60, quoting Cook on Corporations, sec. 46. 121 — Baston Nat. Bank v. American, etc., Co., 69 N. J. Eq. 326; Miller v. Higginbotham's Adm'r, 93 S. W. Rep. (Ky.) 655. This is the prevailing view. 122— Gillett V. C. T. & T. Co., 230 111. 373. This seems to be the only state that holds such view. CHAPTER XIV RIGHTS OF STOCKHOLDERS §81. STOCKHOLDERS' RIGHT TO DIVI- DENDS. A stockholder's right to dividends de- pends upon a declaration thereof by the directors but in clear cases a court of equity will compel the declaration of the dividend. The ultimate purpose of a corporation is to make profits for the stockholders and these profits come to the stockholder by way of dividend; therefore, we may say, that in a general way a stockholder has a right to dividends when the corporation has made and has on hand accumulated profits, yet it is true that the directors are the managers of the corporation and have a right to say when divi- dends are payable. They have a large discretion in this respect which will. not be interfered with by the courts if there is any other relief to be had by the stockholder, or tmless there is a clear abuse of discretion. There are very few cases in the books in which the court has seen fit to interfere to compel the directors to pay dividends. Ordinarily 182 EIGHTS OP STOCKHOLDERS 183 then we may say that a stockholder's right to divi- dends depends upon the action of the directors de- claring dividends. In one case the Court says: ^*^'' "Counsel for appellees say that appellant has no standing in a court of equity because he has a complete remedy at law by an action for any divi- dends that may be due him, but as no dividends have been declared an action at law would not lie to collect them. When dividends have been regu- larly declared they become the absolute property of the stockholders, and the debt may be collected by an action at law. A proceeding to compel di- rectors to declare and pay a dividend is of an equit- able nature, and a court of equity is the proper tribunal in which to institute the action. Gener- ally the question of declaring a dividend is en- trusted to the sound discretion of the directors; and as to common stock, such discretion will not be interfered with by a court of equity in the ab- sence of bad faith or arbitrary or unjustifiable con- duct. But different rules apply with respect to the right of the holders of preferred stock to in- voke the aid of a court to order the declaration and payment of dividends on their stock. (9 Am. & Eng. Ency. of Law, supra.) " 122a— Cratty v. Peoria Law Library Ass'n, 219 El. 522. 184 PEIVATE CORPORATIONS §82. RIGHT OF STOCKHOLDERS TO PRE- VENT ULTRA VIRES ACTS AND TO PRE- VENT A SALE OF THE CORPORATE ASSETS. The stockholder has a. right to prevent ultra vires acts where he is diligent in that respect and has not been a party to the act or ratiiied it. ' A stockholder may be said to be in a contractual relation to the corporation upon a contract that it will not depart from its proper charter activities and, therefore, a corporation can be enjoined when it is about to enter into an ultra vires contract pro- vided the stockholder has no other means of re- lief.^'^^ So, the stockholder has a right, though he is hopelessly in the minority, in fact, may even be a single dissentient stockholder, to prevent the sale of aU the assets of a solvent going concern, made for the purpose of discontinuing business. §83. RIGHT OF STOCKHOLDER TO SUE OR DEFEND IN BEHALF OF A CORPORA- TION. A stockholder has the right to bring suit in behalf of the corporation to preserve its assets or other rights only in case he has no other relief and has availed himself of all means whereby with- out suit he might obtain relief. 123— Harding v. American, etc., Co., 182 111. 551, and lee next section. RIGHTS OF STOCKHOLDERS 185 A stockholder has, of course, a right to sue the corporation to enforce his contractual rights against it, just as he may sue any person, but now we take up the question whether he may sue in behalf of the corporation to enforce or preserve rights that ordinarily would be for the directors or at least for the stockholders in a body. Of course it would be very unusual for a stock- holder to start suit in behalf of a corporation be- cause he has no right to interfere with the man- agement of the corporation except through stock- holders' meetings, yet there are cases where a stockholder can sue the corporation, or sue or de- fend in its behalf to protect his interests where the directors are refusing to do their duty in that re- spect, in such a case it is said that a stockholder must exhaust every possible remedy which he has before coming into a court of equity to sue in be- half of the corporation. He must show that he has no relief by action through a corporate meeting; that is to say, that he has appealed to the stock- holders, or that such appeal would be unavailing and that he has appealed to the directors or that such appeal would be unavailing and, therefore, he must come into a court of equity to start suit in behalf of the corporation. If he shows that these are the facts he may bring suit in behalf of the cor- poration or of the other stockholders to preserve 186 PRIVATE CORPORATIONS the assets of the corporation, to prevent ultra vires acts, to prevent forfeiture of franchise, etc. Thus the United States Court has said: ^^* "We understand that doctrine to be that to en- able a stockholder in a corporation to sustain ia a court of equity in his own name, a suit founded on a right of action existing in the corporation itself, and in which the corporation is the appropriate plaintiff, there must exist as the foundation of the suit — some action, or threatened action of the managing board of directors, or trustees of the cor- poration which is beyond the authority conferred on them by their charter or other source of organi- zation; or such fraudulent transaction completed or contemplated by the acting managers, in con- nection with some other party or among them- selves, or with other shareholders as will result in serious injury to the corporation; or to the inter- ests of other shareholders; or where the board of directors, or a majority of them, are acting for their own interests, in a manner destructive of the corporation itself, or of the rights of the other shareholders; or where the majority of sharehold- ers themselves are oppressively and illegally pur- suing a course in the name of the corporation, which is in violation of the rights of the other shareholders, and which can only be restrained by 124— Hawes v. Oakland, 104 U. S. 450. RIGHTS OF STOCKHOLDERS 187 the aid of a court of equity. Possibly other eases may arise in which, to prevent irremediable in- jury, or a total failure of justice, the court would be justified in exercising its tpowers, but the fore- going may be regarded as an outline of the princi- ples which govern this class of cases * * * He must make an earnest, not a simulated effort, with the managing body of the corporation, to in- duce remedial action on their part, and this must be made apparent to the court." §84. RIGHT OF STOCKHOLDER TO IN- SPECT CORPORATE BOOKS AND RECORDS. A stockholder has the right to inspect the corpo- rate books and records. At common law he had to show good faith but under some of the statutes this right has been declared to be absolute. A stockholder has the right to see the books and all the contracts and other papers of the corporation because he is regarded as really being the owner of the corporation and the directors are simply trus- tees for him in keeping the books and papers of the corporation. At common law it was said that a stockholder had the right to inspect the books and papers of the corporation, but this depended upon his show- ing that he wanted to see the books in good faith. 188 PRIVATE CORPORATIONS Statutes, however, have been enacted in some states giving a stockholder the right to see the books and it has been decided that the motives of the stockholder are immaterial. AU he must show is that he is a stockholder and that he applied at reasonable times and in a reasonable way to see the books of the company and that he was refused. Such a showing being made he is entitled to a writ of mandamus compelling the officers of the com- pany to allow him to see the books. A case ^^* stat- ing the rule, both at common law and under stat- ute, reads as follows: ** There is a well recognized distinction between the right of a stockholder to inspect the books and papers of a corporation under the common law and an unlimited right given by statute. Under the former the examination can only be compelled where the stockholder asks it in good faith and for reasons connected with his rights as stockholder. * * * 128 "\\r|iere the right is conferred by stat- ute in absolute terms, the purpose or motive of the stockholder in making the demand for an inspec- tion is not material and he cannot be required to state his reasons therefor. (Thompson on Cor- 125— Venner v. Chicago City Ry. Co., 246 111. 173. 126 — Citing Heminway v. Heminway, 58 Conn. 443; Sage V. Lake Shore R. Co., 70 N. T. 220 ; Phoenix Iron Co. V. Commonwealth, 113 Pa. St. 563 : Stone v. Kelloffg 165 111. 192. RIGHTS OF STOCKHOLDERS 189 porations, — 2d ed. — sec. 4516.) The weight of American authority is to the effect that where the right is statutory the stockholder need not aver or show the object of his inspection, and it is no de- fense under a statute granting the absolute right to inspection to allege improper purposes or that the petitioner desires the information for the pur- pose of injuring the business of the corporation. A clear legal right given by a statute cannot be de- feated by showing an improper motive. If this were so, the stockholder would be driven from a certain definite right given him by the statute to the reahn of uncertainty and speculation." ^^^ § 85. RIGHT OF THE STOCKHOLDER TO CONTRACT AND DEAL WITH THE COR- PORATION. A stockholder has the same right to contract and deal with the corporation as a stran- ger has. A stockholder may contract with the corpora- tion, buying from and selling to it, becoming its agent or otherwise working for it and njay sue or be sued by it as any other stranger may. Being, as we have seen, distinct from the corporation, as an individual he may sue it as any other individual against, whom he has rights. 127 — Citing Johnson v. Langdon, 135 Cal. 624. CHAPTER XV STOCKHOLDERS' MEETINGS §86. MEETINGS REGULAR AND SPE- CIAL. The meetings of the stockholders are di- vided into two sorts: regular or stated meetings, and special meetings. There is ordinarily a regu- lar meeting. The stockholders must act in meeting assem- bled.^^^ A stockholder, as we know, is not an agent of the corporation and he has no right to interfere in the management of the corporation except as he acts in a stockholders' meeting. Stockholders' meetings are of two sorts: regular meeting^ and special meetings. The by-laws should provide how special meetings may be called and in some cases the statute makes a provision that special meet- ings may be called by a certain percentage of the stockholders at any time, a certain notice being given. 128 — A stockholders' meeting must be Held in the state in which the corporation was incorporated. Craig Sil- ver Co., 163 Mass. 262 ; Harding v. American, etc., Co., 182 111. 551. 190 STOCKHOLDERS' MEETINGS 191 TKe most important stockholders' meeting is the meeting at which the directors are elected. This is usually the annual meeting. At this meet- ing important business is usually gone over and it is proper to take up at such a meeting any business of whatever nature which the stockholders may properly go into. In a special meeting it is not proper to transact any business except such business as was noted in the call and notice as to be transacted,"^ although, of course, if all the stockholders are present at any special meeting and do not dissent it would be proper to take up any business whether mentioned in the call and notice or not. §87. CALLS AND NOTICES. A special meeting must be called in the proper way as deter- mined by the by-laws or general law and notice thereof must be given to all the stockholders upon the books. Some cases hold that no notice is neces- sary of a regular meeting unless the by-laws or the statutes so provide. A special meeting is authorized by mteans of a caU. This call is usually made by the direct- ors and the directors may certainly call special meetings of the stockholders. The by-laws should 129— Tuttle V. Michigan Air Line, 35 Mich. 247. 192 PRIVATE CORPQBATIONS be explicit in this respect. The statute gives the stockholders in some cases the right to call special meetings. Special meetings must be preceded by notice properly given of the time and the place of the meeting and its object, except that aU the stock- holders by agreement may, of course, meet at any time and place and perform any business to which they all assent. As a general rule, however, no business without the consent of all the stockhold- ers can be done at any special meeting unless men- tioned in the notice. If the by-laws or the general law provides for notice of a regular mjeeting, then such notice must be given. If there is no such provision, there is authority to the effect that no notice need be given,"" as the stockholders know from their knowledge of the by-laws the time and place of such meeting. It is undoubtedly true that at a regular meeting any business may come up that the stockholders may properly transact. Thus at a regular annual meeting the question of increas- ing the capital stock changing the name, etc., may be brought up and acted upon, though no mention has been made in the notice of the meeting. 130— Morrill v. Little Falls Mfg. Co., 53 Minn. 371. Matter of N. Y., etc., Union, 122 N. Y. Ap. Div. 764. STOCKHOLDERS' MEETINGS 193 §88. ATTENDANCE AND VOTE. Any stockholder who is such upon the books of the com- pany is entitled to attend and vote at stockholders' meetings. The attendance may be in person or by proxy. A trustee, administrator and the like has a right to vote. Any stockholder who appears to be such upon the books of the company has a right to attend and vote at the meetings. Such attendance may be in person or by proxy. It is competent for the cor- poration to have a rule whereby the books are closed a certain reasonable time before any stock- holders' meeting, thus requiring that one claim- ing the right to vote should have been enrolled upon the books prior to that time. Such closing of the books cannot be more than for a reasonable period prior to the calling of the meeting, say twenty-four or forty-eight hours, or such a time as may be required to enable the secretary to prepare the list of those entitled to vote. If one holds stock as administrator, executor or trustee he has the right to vote such stock. He is a stockholder and the person whom he represents is not a stockholder. In respect to pledgees differ- ent considerations arise. A pledgee has acquired the stock for mere purposes of security and not for the purpose of becoming a stockholder and, there- P. C— 13 194 PRIVATE CORPORATIONS fore, it may be doubted wbetber lie has the right to vote.**^ Ordinarily it is not understood that he will have himself enrolled upon the books as the owner of the stock and statutes ia some states have explicitly set out that pledgees shall not have the right to vote the stock, which they hold as se- curity. §89. VOTING TRUSTS. The stockholders may enter into a voting trust constituting someone a trustee to become the stockholder on the books of the company and to have the right to vote the stock at a corporate meeting. Such trusts are usually regarded as legal so long as they are con- fined to one company. We will notice hereafter that a "trust" as that term is used in corporate law to denote a combina- tion is illegal, but it seems that the stockholders of any single corporation may for legitimate and hon- est purposes form a voting trust for a period of years whereby a certain trustee shall appear for them as the stockholder upon the books and vote at corporate meetings. Such trusts are usually re- garded as legal.^^ 132 131— J. H. Wentworth Co. v. French, 176 Mass. 442. 132— Brightman v. Bates, 175 Mass. 105, citing Fauld V. Yates, 57 111. 416 ; Smith v. Francisco & No. Pac. Ry., 115 Cal. 584; Havemeyer v. Havemeyer, 11 Jones & Spencer, 506, 512, 513 ; Brown v. Pacific Mail Steamship STOCKHOLDERS' MEETINGS 195 §90. QUORUM AT STOCKHOLDERS' MEETING. What shall constitute a quorum at a stockholders' meeting should be stated in the by- laws. In the absence of any such provision it isi usually held that whatever stockholders attend constitute a quorum. The by-laws should explicitly set forth how many stockholders must be present to constitute a quorum. In the absence of any such provision a quorum consists in the number who actually at- tend, no matter how few.^*^ A quorum in a stock- holders' meeting is reckoned from the amount of stock present and not the number of stockholders as units. In other words, a share of stock is the unit and u shareholder may vote for every share of stock that he holds. If no quorum is present, all that the meeting can do is to adjourn, though it may adjourn to a particular place at a particular time and so on from time to time until a quorum is present. §91. THE MINUTES OP THE MEETING. The minutes of the meeting become the legal evi- Co., 5 Blateh. 525, 527 ; Greene v. Nash, 85 Me. 148 ; Wil- liams V. Montgomery, 148 N. Y. 519, 525. Contra: Shepaug Voting Trust Cases, 60 Conn. 553. 133— Morrill v. Little Falls Mfg. Co., 53 Minn. 371; Craig V. First Church, 88 Pa. St. 42, 196 PRIVATE CORPORATIONS dence of what transpired at the meeting and are conclusive in that respect in the absence of a show- ing of fraud, mistake, etc. The transactions of the meeting should be put down in the minntes. Whatever vote is taken or business done should appear in such minutes, but argmnents and speeches and preliminary matters of that nature are not supposed to be in the min- utes as the minutes are simply a record of the busi- ness that was transacted. These minutes are the legal evidence of what the corporation did at any meeting and cannot be varied by parol testimony except in the absence of fraud, mistake and the like. CHAPTER XVI TRANSFER OF STOCK §92. TRANSFERABILITY OF CORPOR- ATE STOCK, Stock is transferable but not nego- tiable. We may note at the outset of this chapter that stock is freely transferable with the effect of sub- stituting the transferee as the stockholder in the corporation or for limited purposes of pledge. It cannot be said that stock is negotiable because a negotiable instrument is one that is ultimately re- ducible to money although this does have a sort of a quasi-negotiability. It is more proper, however, in the present state of the law to regard it as merely assignable. §93. HOW TRANSFER ACCOMPLISHED. Transfer of stock is accomplished by the transfer of the certificate properly indorsed and a transfer upon the books of the company accompanied with a surrender of the transfer certificate and the issu- ance of a new one to the transferee. 197 198 PRIVATE CORPORATIONS It is, of course, legally possible that stock may be transferred without the transfer of the certificate of stock, but practically speaking, stock is almost universally transferred by a transfer of the certifi- cate properly indorsed. When that is done the transaction is complete so far as the transferror and transferee are concerned but something else remains to be done to give the transferee the full rights of a stockholder. He must see that the transfer is entered upon the books of the company. To this end he must present the certificate of stock which he has acquired and secure a new certificate, at which time he is enrolled upon the books of the company as a stockholder. It is not untU he has done this that he is entitled to be regarded as a stockholder because a corporation looks only to the books in determining who the stockholders are; that is, who shall receive notices, have the right to vote at meetings and receive dividends. It is, of course, true that any stockholder who is in fact such but who is not registered on the books would have the right to the dividends as far as the transferror was concerned who could not claim them except by virtue of the fact that he was stUl enrolled upon the books. §94. BY-LAWS AND AGREEMENTS RE- STRICTING TRANSFER. A by-law or regula- TRANSFER OP STOCK 199 tion to which all the stockholders assent restrict- ing transfer is valid but the corporation has no right to restrict transfer except upon the consent of the stockholder. A regulation or by-law restricting the transfer of shares providing, for instance, that the share- holder shaU not dispose of his property until he first offers it to the corporation or to the other stockholders is valid and effectual,^** but there cannot be any restriction upon the power to trans- fer stock except upon the assent thereto of the stockholders, for such a restriction will be opposed to public policy, one object of a corporation being to permit transfer of shares.^^® It is also true that no third person would be bound by any such re- striction unless he had knowledge thereof. Where such a restriction is attempted it is usually put in the form of a by-law and then the by-law is copied upon the certificate so that anyone purchasing it would have notice. §95. STOCK SOLD WITHOUT AUTHOR- ITY. If corporate stock is sold without authority the purchaser thereof gets no right against the 134-^ones v. Brown, 171 Mass. 318. 135— Morgan v. Struthers, 131 U. S. 246 ; Re Klaus, 67 Wis. 401 ; Brinkerhoff-Farris, etc., Co. v. Home Lum- ber Co., 118 Mo. 447. 200 PRIVATE CORPORATIONS stockholder or the corporation, but of course could hold the agent upon his warranty of authority. If a corporation recognizes a forged indorsement and issues a new certificate to the forger it is liable to anyone who buys such certificate from the forger. We will presume that A. is a stockholder in the X corporation. He places Ms stock in the hands of B., his agent, for the purpose of safekeeping. If this stock is indorsed, in blank so that B. is thereby enabled to represent himself as the owner thereof or as having authority to sell it, B. can give a good title to an innocent purchaser for value. Presume, however, that the stock is not so indorsed and B. in order to transfer it must forge Ai.'s signature. He does so and sells to C, an innocent purchaser for value. Here C. gets no right against A., or against the corporation, for neither one has done anything estopping hitn to set up his title."® Sup- pose, however, that C. takes the certificate he has acquired from B., the forger to the office of the cor- poration and has himself enrolled upon the books and obtains a new certificate which recites that B. is the owner. StiU C. has no right against the cor- poration for he has not done anything upon the faith of what the corporation has done or repre- 136— Fay v. Slaughter, 194 111. 157 : Chicago Edison Co. V. Fay, 164 111. 323. TRANSFER OF STOCK 201 sented and the corporation can deny his title as stockholder notwithstanding it has issued such cer- tificate to hitn.^^^ Suppose, however, C. takes this hew certificate which recites that he is the stock- holder owning so many shares and sells to D. Here for the first time we have a person acting upon a written representation by a corporation and ac- cordingly he can hold the corporation, and can compel it to recognize him as a stockholder pro- vided such corporation has or can obtain stock to be represented by his certificate/^^ In case it has no stock to issue to him it is liable to him in dam- ages. §96. LIABILITY OF TRANSFEREE TO CORPORATION. The transferee of unpaid stock which he knows to be unpaid is liable to the cor- poration for future calls, but if the certificate states the stock is paid up the corporation is estopped to call for further payments upon such stock. 137— Hambleton v. Central Ohio R. R. Co., 44 Md. 551. 138 — Chicago Edison Co. v. Fay, supra. There is, however, a diversity of opinion as to whether the trans- ferree can hold the stock against the former original owner. On principle, it would seem, he could not as the original owner, it would seem, could no more be deprived of his stock by forgery, than a thief can deprive one of his property, no matter through how many hands it passes. But see Machinists' National Bank v. Field, 126 Mass; 345. 202 PRIVATE CORPORATIONS Where stock is unpaid a transferee thereof takes it subject to future calls provided he knows that the stock is unpaid, but if he does not have this knowledge and is entitled to presume that the stock is paid the corporation cannot afterwards make a call binding upon him. §97. LIABILITY OF TRANSFEREE TO THE CREDITORS. A transferee of stock which he knows to be unpaid is by statute usually liable to creditors or for their benefit in the same sense that stockholders in any case are liable to credit- ors, but a transferee who does not know that stock is unpaid is not liable to creditors. If a person purchases stock which he presumes to be paid and has nothing to put him on notice that it is not paid, he has no liability to the cor- poration for the benefit of creditors,"' but in most states if he knows that the stock is unpaid; or if he has reasonable cause to believe that it is unpaid, then the court will hold him to the stockholder's liability which we discuss elsewhere. In the case of Garden City Sand Co. v. Crematory Co.,"" a proceeding was brought to enforce the statutory liability of the defendants as stockhold- 139— Coleman v. Howe, 154 111. 458. 140— Garden City Sand Co. v. Crematory Co., 205 111. 42. TRANSFER OP STOCK 203 ers of unpaid stock. It appeared tliat the stock had been issued for worthless patents and pur- ported to be fully paid up and that it came into the hands of the defendant by assignment. The court said: "The stock was issued as fully paid and non-assessable, but that fact furnishes to ap- pellees no exemption from liability. Judge Thompson characterizes that statement in stock certificates as the most shallow and ineffective, al- though perhaps the most common, of the many de- vices resorted to by stockholders to escape the liability assumed by their contract of subscription. [(Thompson on Liability of Stockholders, sec. 129.) The practice of issuing stock in that way upon the payment of a small percentage of its par value is now so common that it is questionable whether it ought to raise any presumption of full payment. The report of the master and the decree were based entirely on the evidence introduced by the appellant, none being offered by any of the appel- lees, and there is no claim that appellees bought their stock in any open market where stocks were dealt in so that none of the presumptions arising in such a case can be indulged in. They bought their stock from Rutan, and if the circumstances were such that a person of average intelligence would know the facts in relation to it, they must be held chargeable with such knowledge. 204 PRIVATE CORPORATIONS "Undoubtedly, stock may be issued in payment of the purchase price of property sold to the cor- poration if the property is such as the corporati^on may lawfully purchase. Where a corporation de- sires property for corporate uses and the owner of the property desires to purchase stock, an ex- change is equivalent to paying money for the prop- erty and the vendor paying it back for shares of stock. In such a case the corporation may agree with the stockholder as to the value of the prop- erty to be taken in payment for the stock, but the transaction must constitute a valid contract bar- gain and sale in good faith, in the exercise of fairs and honest judgment. (Sprague v. National Bank of American, 172 Dl. 149.) It is also true that where there is nothing to apprise an innocent pur- chaser that the property was worth less than the face value of the stock, and that there was a fraudulent overvaluation, he will be protected. (Thompson on Liability of Stockholders, sec. 135.) He is not to be charged with liability to the cred- itors of the corporation where he acts in good faith and there are no circumstances to put him upon in- quiry. It is, of course, unnecessary, as well as impracticable, for a creditor to prove that each purchaser of stock was told that there had been a fraudulent overvaluation of a patent taken in ex- change for it, but if he establishes such facts as TRANSFER OF STOCK 205 properly lead to the inference of knowledge it will be sufficient. In this case the corporation had a capital stock of $1,000,000, all of which except two shares, was issued to Rutan and purported to have been fully paid. It there had appeared to have a paid up capital of $1,000,000 in money or property, and was possessed of nothing but the interest in the patent. It is not conceivable that a person of ordinary intelligence and prudence, buying shares of stock in such a corporation, would not become advised as to what property the corporation had." Where one buys stock upon the market or imder any circumstances which do not put him upon no- tice he is not liable to creditors for unpaid stock and such creditors must have their recourse against the original transferror. §98. LIABILITY OF TRANSFERROR TO TRANSFEREE. The transferror of stock im- pliedly warrants that the stock is genuine, that he has title or authority to sell but there are no fur-* ther warranties unless they are expressed. The transferee of stock may hold the transferror upon his warranty of title and his implied war- ranty that the stock is genuine and what it pur- ports to be, but it has been held that there are no further warranties of an implied sort and that a 206 PRIVATE CORPORATIONS purchaser must protect himself by express war- ranties if he wishes any further liability on the part of the transferror. The court said in an Illi- nois case: "^ *'The International Copper and Gold Company was a de facto corporation, and the ap- pellant having purchased its stock of the appel- lees, in a proceeding like this, no warranty having been made by the appellees that the corporation issuing such stock was a de jure corporation, the appellant cannot escape the payment of the con- sideration agreed to be paid by him for such stock, by showing that the International Copper and iG-old Company, which issued said stock, was not legally organized, or that its increase of stock of which that purchased by appellant formed a part, was illegally issued. ( Marshall v. Keach, 227 HI. 35.) In Higgins v. Illinois Trust & Savings Bank, 193 111. 394, it was held that the vendor of stock in a corporation impliedly warrants that the stock is genuine and that he is the owner thereof and auth- orized to transfer title, and that if the assignee de- sires further protection he must exact a special warranty. See also First Nat. Bank of Sterling V.Drew, 191111. 186." 141— Burwash v. Ballou, 230 111. 34. CHAPTER XVII DIVIDENDS § 99. KINDS OF DIVIDENDS. Dividends are divisions made by the directors by a formal vote of the profits of the company. They are known as money dividends, script dividends and stock divi- dends. The profits of a corporation come to the stock- holders by the way of dividends. Dividends may be defined as divisions made by the directors of the accumulated profits of the company. No dividends are properly payable except out of the profits of the company, although when a corporation is dis- solved and its assets divided among its stockhold- ers we sometimes speak of the share which each gets as a "capital dividend." In this chapter, however, we are simply concerned with dividends which are supposed to represent the profits of the company. The profits of the company are not di- visible except by way of dividends formally de- clared by the directors assembled in meeting. A shareholder cannot sue the corporation for a di- 207 208 PRIVATE CORPORATIONS vision of the profits until the dividend has been declared. Upon the declaration of a dividend the stockholder becomes a creditor of the company and may sue it upon showing that the time of pay- ment has arrived. Dividends may be divided into several kinds, al- though the usual dividend is a money dividend; that is a dividend payable in money. However, it is not unusual to declare stock dividends where the corporation has unissued stock, for of course no such a dividend could be declared if the stock were all outstanding. A stock dividend is simply a divi- dend to be paid in stock, the profits of the company being applied to the payment of such stock. If such dividends are declared as paid up stock, if they are not in reality paid up, the court win not consider them as paid up stock. A script dividend is a dividend of certificates which are usually issued to anticipate a conversion of property now rjepre- senting profits into cash at an early date. §100. DECLARATION OF DIVIDENDS. The dividends are declared by the directors in meeting assembled. They have a very full discre- tion in the matter of declaring dividends and the court will not interfere with that discretion except upon a plain case of abuse. DIVIDENDS 209 The right of the stockholders to the profits of the company accrues by virtue of a declaration of dividend. This declaration is made by the direct- ors acting as a board in a regular or special meet- ing. The directors have almost unimpeachable discretion in the matter of declaring dividends, that being one of their inherent powers and a court of equity will not interfere with that discretion ex- cept in cases of plain fraud, or clear abuse of the fundamental rights of the stockholder. Where the directors abuse their discretion in reference to a declaration of dividends the court of equity is the proper tribunal in which to insti- tute an action for reUef."'' In such a case if the court finds that the stockholder is entitled to re- lief it does not declare a dividend but enters a de- cree ordering the directors to declare a dividend. It is very seldom that a court of equity will inter- fere with the discretion of the directors in this re- spect and it will interfere with greater readiness at the instance of preferred stockholders than of common stockholders. §101. WHO IS ENTITLED TO DIVIDENDS? Unless something appears to the contrary the rule is that dividends are payable to the owner of the 142— Cratty v. Peoria Law Library, 219 111. 516. P.O.— 14 210 PRIVATE CORPORATIONS stock at the time of the declaration irrespective of the time of payment. When a dividend is declared the time and place of its payment is stated. It may not be payable until some future time and in the meantime the stockholder may have disposed of his stock. This raises the question who is entitled to dividends as between the transferrer owning the stock at the time of the declaration and the transferee owning the stock at the time of the payment. The rule is in such a case that the party who owned the stock when it was declared is entitled to it, no matter when it is payable, and no matter what has become of the stock in the meantime. PARTV DIRECTORS AND ADMINISTRATIVE OFFICERS CHAPTER XVIII DIRECTORS § 102. NATURE OF THE OFFICE OF A DI- RECTOR. The director is a trustee having the power with his associates in meeting assembled to legislate for and represent the corporation in de- termining its policies, making its contracts, elect- ing its officers and pursuing generally the manage- ment of the corporation. The management of the corporation rests in the board of directors who are sometimes called the board of managers. These directors have been lik- ened to a city council, the stockholders resembling the city. The directors have thfe power in meeting assembled to do practically everything that the corporation could do. They determine the policies of the corporation and elect the administrative of- 211 212 PRIVATE CORPORATIONS ficers. All questions of a fundamental sort must be passed upon by tbem. As we know, the stock- holders have no power to represent the corporation and even in stockholders' meetings there is little power to bind the corporation except with the acquiescence and approval of the board of direct- ors. The board of directors are the managers and they have all the powers of managing. §103. ELECTION AND QUALIFICATION OF DIRECTORS. The directors are elected by the stockholders at a stockholders' meeting. The statute or by-laws may provide various qualifica- tions. A director is usually elected for a certain term and until his successor has been elected and has qualified. The directors of a corporation are elected by the stockholders, usually at the annual meetigig. Sometimes the board of directors is made up of di- rectors whose terms expire at different times like the terms of the United States senators, so that the directorate is never completely renewed at any one time. By statute or by-law, there may be a right to accumulate votes for a director, that is, for in- stance, if three directors are to be elected, a stock- holder can cast one vote for every share he holds DIRECTORS 213 for each director or he can cast three votes for one director. In this way the minority stockhold- ers by acting together can secure representation upon the board. This right does not exist unless it is specially given. A stockholder is entitled to a vote for directors for every share of stock that he holds."^ Directors are elected usually not only for a cer- tain term, but until their successors have been chosen and qualified so that if for any reason the election of a successor is neglected or omitted the office does not become vacant. The statute may provide certain qualifications for a director as that he must be a resident, or that he must be a stockholder; so the by-laws may make similar provisions. Sometimes the by-laws provide that a director must be a stockholder and that if he ceases to be a stockholder his office shall ipso facto become vacant. §104. MEETINGS OF DIRECTOBS. The di- rectors must act as a board at which a quorum is present, although the cases hold that where a quo- rum is not present and action is nevertheless taken, that the absent directors can ratify what has been done. 143 — See Cook on Corporations, Sixth Edition, aec. 609. 214 PRIVATE CORPORATIONS In the absence of a provision to tlie contrary a majority in number constitutes a quorum. The directors have no powers by virtue of their office alone to represent the corporation as agents except as they act at a properly called directors' meeting, at which a quorum must be present. A quorum consists in a majority in number where there is no other provision."* The director's own- ership of stock has no effect upon his voting power, each director having one vote. It has been held, however, that a quorimi was not present, the court will not disturb action that was taken thereat where the other directors by their acts or words afterwards ratified what had been done. The meeting of the directors must be properly called as in the case of a stockholders' meeting, al- though the directors may meet at any time when all consent. Directors' meetings, like stockhold- ers' meetings, are regular and special. Action at directors' meetings usually takes the form of a resolution which is preserved in the min- utes. The minutes of the meeting are the legal evi- 144 — ^Where a quorum is present, a majority of those present may carry a vote, though they are not a majority of the directors. Grain v. Bangor, 12 Me. 354; Sargent y. Webster, 54 Mass. 497. DIEECTORS 215 dence of what transpires thereat in the absence of fraud or mistake."^ §105. REMOVAL OF DIRECTORS. A di- rector may be removed for cause during his term, a charge being regularly preferred and a trial had. The right of the stockholder to remove a director for cause before his term has expired is known as the right of amotion. A director who offends either against the law of the land or the duties of his ofi&ce can be removed by the stockholders notwithstanding Ms term of office has not expired. If he is charged with a crime against the law which does not immediately con- cern his office he cannot be removed unless he has been found guilty in a court of law. If, however, he is charged with a breach of his official duties; that is, neglect or malfeasance in office, he is en- titled to a trial by the corporation, a charge being preferred against him specifically setting up the nature of his offense and he has a right to a fair, impartial trial and to have counsel in his de- fense.^" § 106. TITLE TO OFFICE. DIRECTORS DE JURE AND DE FACTO. CONTEST. The di- 145— Central, etc., Co. v. Sprague, 120 Fed. 925. 146— Evans v. Philadelphia Club, 50 Pa. St. 107 ; Rex y, Richardson, 1 Burr. 517. ^ 216 PRIVATE COEPOEATIONS rector's title to his office may be questioned in an action of quo warranto brought by a party inter- ested. A director may have the powers of his of- fice though in some respects his title is formally de- fective, in which case he is known as a director de facto, but a usurper without color of office would not be a director de facto. If a director is de facto his title can only be directly and not collaterally attacked. SVhere it is questioned that the director's title is good an action may be brought to contest the title, a remedy not otherwise being available. The proper action in which to bring a contest is that of quo warranto. If merely the validity of the of- fice is in question an action in equity will not lie, because the remedy by quo warranto is adequate. If, however, other questions are involved, as for instance where the credit of the corporation is im- paired by reason of the contest, its orderly admin- istration in peril, etc., a court of equity will take jurisdiction and having taken jurisdiction will re- tain it for all purposes, deciding the title to the ofiace."^ As far as collateral attacks upon the office are concerned, the director will be regarded as such notwithstanding there may be some formal defect 147— Chicago Macaroni Co. v. Boggiani, 202 111. 312. DIRECTOES 217 in his election or qualification; that is to say if the director is in possession of the office, exercising his functions the acts done by him cannot be ques- tioned because of a formal defect. He will be re- garded as a director de facto, but one who is a mere usurper in the office of director could have no authority to act for the corporation and conse- quently collateral attack can be made on the action of such a person for it would have no validity for any purpose. §107. THE RESPONSIBILITY OF A DI- RECTOR. The director is responsible to the cor- poration for purposeful injury or fraudulent con- duct, for neglect of office and for ultra vires acts whereby the corporation is damaged, but a director has the right to exercise a considerable discretion and if he exercises good judgment he cannot be held in damages to the corporation. If a director uses his office to defraud the cor- poration, or if he commits ultra vires acts the corporation may hold him responsible for damages accruing to it by reason of its conduct in that re- spect. Suppose the director acting honestly never- theless uses bad judgment and thereby brings about damage to the corporation, what is his re- sponsibility? We may premise our conclusion by 218 PRIVATE CORPORATIONS the observation that a director in the exercise of his of&ce has a very wide discretion which courts will not interfere with and so long as he exercises that discretion he will not be held. It is seldom, therefore, that for mere inaction a director can be held, particularly if he attends meetings and looks after the interests of the corporation. At the same time, however, a director is in a position of trust and there are positive duties upon him of an oner- ous nature and he must display diligence and good judgment or he will be held liable notwithstanding he meant no injury to the corporation. What his duty is in this respect depends considerably upon the nature of the corporate enterprise. A director in a bank would be held to a greater degree of re- sponsibility than a director in a corporation organ- ized for purposes of speculation. A bank director should keep in touch with the affairs of the bank, examining reports, making inquiries concerning the character of the employes and officers and us- ing a wide discretion in the expenditure of funds. In the case of Hun v. Gary,"* bank directors were held liable where when the bank was in a failing condition they used the funds of the bank to put up a large office building. It appears, therefore, that a director must be prepared to use good judgment 148— Hun V. Cary, 82 N. T. 65. DIEBCTOES 219 as well as good faith and may be held liable for a mistake of judgment. In other words one should not become a director imless he is in a position to know the customs and duties expected of one in that position and unless he has good business judg- ment. §108. BIGHT OF DIRECTOR TO DEAL WITH THE CORPORATION, PROFIT BY HIS POSITION, ETC. A director is in the position of a trustee and cannot use his office for his private advantage or put himself in a position of tempta- tion to profit by his relationship. He may contract with the corporation if his vote is not necessary or if all the stockholders assent, his position being an open one. The director as we have said before is in a posi- tion of trust. He cannot use his office for purposes of profit at the expense of the corporation. It is true that a director may receive a salary or may contract with the corporation, buying from it or seUiug to it, or performing work on a salary, but it must appear in such a case that his vote was not necessary, otherwise a single non-assenting stock- holder can have the transaction set aside as fraud- ulent, no matter even though it is perfectly fair upon the facts. In such a case the general rule of agency applies, that an agent cannot deal with 220 PRIVATE CORPORATIONS lumself, thereby opposing Ms interests to the in- terests of his principal, even though as a matter of fact the contract actually made is perfectly fair/" III a United States case the Court said: ^'» "That a director of a joint-stock corporation oc- cupies one of those fiduciary relations where his dealings with the subject-matter of his trust or agency, and with the beneficiary or party whose interest is confided to his care, is viewed with jeal- ousy by the courts, and may be set aside on slight grounds, is a doctrine founded on the soundest morality, and which has received the clearest rec- ognition in this court and in others. * * * ^®^ The general doctrine, however, in regard to con- tracts of this class is not that they are absolutely void, but that they are voidable at the election of the party whose interest has been so represented by the party claiming under it. We say, this is the general rule; for there may be cases wheye such contracts would be void ab initio; as when an agent 149— GUman, C. & S. R. Co. v. KeUy, 77 lU. 426; Marsh v. Whitemore, 21 Wall. 178; Higgins v. Lan- singh, 154 lU. 301. 150— Twin Liek Oil Co. v. Marbmy, 91 U. S. 588, 589, 23 L. Ed. 328. 151 — Citing Koehler v. Black River Falls Iron Co., 2 Black, 715, 17 L. Ed. 339;.Drury v. Milwaukee & Supe- rior R. Co., 7 Wall. 299, 19 L. Ed. 40; Luxemburg R. R. Co. V. Paquay, 25 Beav. 586; Cumberland Co. v. Sher- man, 30 Barb. (N. Y.) 553; Hoffman Steam Coal Co. v. Cumberland Coal & Iron Co., 16 Md 456, 77 Am. Dec. 311. DIRBCTOES 221 to sell buys of himself, and by Ms power of attor- ney conveys to himself that which he was author- ized to sell. * * * It is very true that as a stockholder, in making a contract of any kind with the corporation of which he is a member, is in some sense dealing with a creature of which he is a part, and holds a common interest with the other stock- holders, who, with Mm, constitute the whole of that artificial entity, he is properly held to a larger measure of candor and good faith than if he were not a stockModer. So, when the lender is a di- rector, charged, with others, with the control and management of the affairs of the corporation, rep- resenting in tMs regard the aggregated interest of all the stockholders, his obligation, if he becomes a party to a contract with the company, to candor and fair dealing, is increased in the precise degree that Ms representative character has given him power and control derived from the confidence re- posed in him by the stockholders who appointed him their agent. If he should be a sole director, or one of a smaller number vested with certain pow- ers, tMs obligation would be still stronger, and Ms acts subject to more severe scrutiny, and their va- lidity determined by more rigid principles of mor- ality, and freedom from motives of selfishness." "" 152 — Cited and approved in Canton Roll & Machine Co. V. Rolling Mill Co., 168 Fed. 475. 222 PRIVATE COKPOEATIONS If, however, the corporation by a majority of the directors ratifies the act, or authorizes it, then the director can deal with the corporation or receive a salary or other advantage from his ofBce provided, however, he acts fairly and makes full disclosure of all material facts. He is not entitled to take the position of an ordinary vendor but must disclose every thing material to the transaction notwith- standing his own vote is not necessary to the con- tract. A transaction entered into by a director with his corporation is not validated by the fact that he secures its approval by the other directors if those directors are dummy directors controlled by him.^^^ Neither will it avaU the director to secure a majority of the stockholders' votes in his favor if he himself controls the votes unless the contract is a fair one. Thus the court in an Illinois case,*®* said: "It is not to be tolerated that the directors of a corporation owning and controlling a majority of the stock shall be permitted to cause their un- lawful acts to be ratified by calling a stockholders' meeting which they control as effectually as they do the board of directors and causing a majority of the stock to be voted in favor of the ratification. 153— Adams v. Burke, 201 111. 395. 154 — Klem v. Independent Brewing Ass'n, 231 lU. 594. DIRECTORS 223 If the acts complained of were unaffected by any unlawful and fraudulent motive and conduct and it were a question simply whether the directors had exercised good judgment for the best interests of the corporation, a different rule would perhaps 8^PPly; foJ^ tJie directors and a majority of stock- holders have the right to control, direct and man- age the corporation. In this case, however, the directors purchased from themselves property for an amount much in excess of its value and this was a fraud upon the stockholders which could not be ratified nor condoned by a stockholders' meeting at which a majority of the votes cast in favor of the ratification were passed by or under the control of the directors who were guilty of the wrong doing. If the reverse were true then the minority stock- holders would be at the mercy of the majority who would be able to elect the directors and be able to control stockholders' meetings and thereby ratify the acts of the directors however wrongful and in- jurious they might be to the corporation." It thus appears that the courts require of di- rectors that they act as trustees for the benefit of the corporation and discourage the theory that the office of a director is one created for the benefit of the director. CHAPTER XEX THE ADMINISTRATIVE OFFICERS § 109. IN GENERAL. The usual administra- tive officers are the president, secretary and treas- urer with such other officers as any corporation may desire. These officers are elected by the di- rectors and have the corporation or some depart- ment thereof under their administration with such duties as may be prescribed in each case. The detail of the management of a corporation is brought about under the control and direction of certain elected officers who take their title from the Board of Directors. These officers differ from clerks, agents and employes who are appointed and do not act in an administrative capacity. The usual officers are the President, Secretary and Treasurer. In the case of a bank a Cashier is to be added. In any particular corporation there may be other officers as Vice-President, a General Counsel, Chairman of the Board, Managing Di- rector, and so on. Accountants, transfer clerks, bookkeepers, salesmen and the like are not admin- 224 ADMINISTRATIVE OFFICERS 225 istrative officers and are usually hired by the ad- ministrative officers or the directors. We refer in this chapter simply to the administrative officers, that is, the officers elected by the Board of Direct- ors and not to those in appointed positions. We will consider very briefly the nature of the duties inherent in the office. It must be remembered, however, that the authority and power of an officer in any particular case depends under the rules of agency upon the particular facts in the case, thus a Vice-President in one corporation may be, in fact, its manager, while in another corporation he may, in fact, have only an honorary position. §110. THE PRESIDENT. The president of a corporation has the duty of presiding at directors' meetings and in some states but not in others he is presumed to be, in the absence of evidence to the contrary, a general manager. The president of the directors must usually be a director and a stockholder cl'othed with the duty of presiding over its meetings, overseeing in a gen- eral way the affairs of the corporation, making re- ports as provided by the by-laws, and so on. He may also be, and very often is, a sort of a general manager; in fact in some states the presumption is that he is a general manager until the contrary is p. C— 15 226 PRIVATE CORPORATIONS shown, and that as such general manager he has considerable apparent authority to control the cor- poration."® The president usually signs the notes of a corporation, the certificates of stock and the other important contracts. If the president is in fact allowed by the directors to exercise a general supervision over its affairs, his authority is very broad. That authority extends to those actions which are for the benefit of the corporation. The president would have no power to represent the corporation against its interests as where he signs accommodation paper in its name, loans its funds for personal purposes, etc. Anyone dealing with the president in such cases would be bound to know that he was not acting withia the scope of his authority. * §111. THE VICE-PRESIDENT. The vice- president is an officer whose powers as such are very ill defined and usually reference must be made to the particular facts in the case. He may 155— Lloyd & Co. v. Matthews, 223 111. 447, But in most states, it seems, his authority to represent the cor- poration will not be presumed. De La Vergne, etc., Co. V. German Inst., 175 U. S. 40; especially where of an exceptional character. See generally, Nat. State Bank V Vigo, etc., Bank, 114 Ind. 352 ; England v. Dearborn 141 Mass. 550; Columbia Bk. v. Gospel Tabernacle, 127 N. Y. 361. ADMINISTRATIVE OFFICERS 227 as a matter of fact have very extensive powers, or his office may be purely honorary. To determine the powers of a vice-president we must inquire into particular facts. His office is often purely honorary, whose sole duty is to pre- side at directors' meetings if the president is ab- sent. He does not succeed to the president in case of the president's death, disqualification or re- moval. In some corporations he has very exten- sive duties; in fact there may be a number of vice- presidents each one of whom has a department or branch of work under his control. Where a vice- president occupies a position of authority, then he wiU be deemed to have under the rules of agency aU the authority which one in that position would naturally be considered as having. §112. THE TREASURER. The treasurer has the charge of the books relating to his office, and the funds of the corporation. His duty is to re- ceive the funds and pay them out upon proper vouchers or directions. He has very little implied power to bind the corporation except in making checks, etc. While a treasurer holds an important office and has charge of the fiscal affairs of the corporation, 228 PRIVATE CORPORATIONS he has very little power to represent it upon con- tracts. His duty is to keep the funds of the cor- poration and pay them out in due course. He often signs or countersigns the negotiable paper of the company. He is entitled to receive moneys payable to the corporation and what he does ia this respect binds the corporation. He has, how- ever, very little implied power to contract in be- half of the corporation. § 113. THE SECRETARY. The secretary of the corporation has charge of its books and its seal and his duty is to keep the usual secretarial books, attend to the ordinary details of management, send out notices of meetings, attend stockholders' and directors' meetings and act as secretary of those meetings. The secretary of a corporation has a consider- able volume of affairs to attend to. He has general charge of all of the books of the corporation and has the duty imposed upon him to attend to all current activities affecting the corporation as such. He has charge of the seal and usually at- tests important documents of the corporation. He should keep a corporate calendar and see that no- tices are duly sent of meetings, etc. It is also his duty to attend the meetings of the corporation and ADMINISTRATIVE OFFICERS 229 to act as secretary thereat, althougli Ms right to act as secretary at a meeting depends upon the [will of the membership. It is customary, however, to have the secretary act as secretary of the meet- ing as he is in position to know more about the in- ternal affairs of the corporation than anyone else. As a matter of fact he is sometimes given author- ity to represent the corporation in various ways but purely as secretary he has very little power to contract on behalf of the corporation. § 114. OTHER ADMINISTRATIVE OFFIC- ERS. Besides the officers named any corporation may have certain other administrative officers whose powers and duties depend in each case upon the particular facts involved. There may be ia any corporation certain offices besides those above mentioned as the office of Gen- eral Counsel, Chairman of the Board, Managing Director, etc. If we were developing the subject of banking law we would be called upon to notice the office of the Cashier who has quite wide powers in reference to the business of the bank, but it is hardly appropriate in this book to develop that subject at any length. PART VI FOREIGN CORPORATIONS CHAPTER XX THE STATUS OF A FOREIGN CORPORA- TION § 115. FOREIGN CORPORATION DEFINED. A foreign corporation may be defined as any cor- poration organized under the laws of any other state or country than the one in which its rights are being considered. We use the term, foreign corporation to describe any corporation which is organized under the laws of any other state or country besides the state in which its rights or powers are being considered. Thus an Indiana corporation is a foreign corpora- tion under the laws of lUinois. We speak of cor- porations organized under the laws of our own state as domestic corporations. In this and the following chapter we will undertake to consider the rights which a corporation has outside of the legislative jurisdiction which created it. 230 FOREIGN CORPORATIONS 231 A corporation is to be regarded as a foreign cor- poration whenever it is organized under the laws of another state, no matter where the stockholders reside. Thus, if ten parties residing in Illinois take out incorporation papers under the laws of Maine, the corporation is a foreign corporation and so to be deemed for all purposes, though it does no business whatever except in the state of Illinois. § 116. RIGHT OF CORPORATION OUTSIDE OF THE JURISDICTION WHICH CREATED IT. A corporation strictly speaking has no right whatever outside of the legislative jurisdiction which created it, except by comity and except in the United States by virtue of its rights under the United States constitution. We shaU find that under the constitution of the United States a corporation organized in any state has the right to enter any other state to do inter- state business therein, but subject to this qualifica- tion, we may say that a corporation cannot of right demand entrance into any other state and that it goes into such other state purely upon the princi- ples of comity; that is to say, a corporation organ- ized in the state of Maine has no right in the State of Illinois except by the permission of the State of 232 PRIVATE CORPORATIONS Illinois. It is, of course, true that the practice is to permit corporations of one state to enter any other state to transact their business therein, but this is by virtue of the comity of the state in which the corporation comes. Every state of the union has foreign corporation laws which set forth and prescribe the conditions under which a foreign cor- poration can enter the state. This foreign cor- poration law must be regarded merely as an ex- pression of grace or comity by which one state re- cognizes the institutions of another state. This comity will be extended so as to permit a corpora- tion to enter the state so long as the policy or laws of the state entered are not avoided. This has been announced in many decisions and one com*t states the rule of comity as follows: ^^* "Again, it may be said in this connection that 'it is a fundamental principle that the laws of a State can have no bind- ing force, proprio vigore, outside of the territorial limits and jurisdiction of the State enacting them.' * * * 'Hence it follows that a State caniiot grant to any person the right to exercise a fran- chise in a foreign State or country; for a franchise is the result of a law authorizing particular indi- viduals to do acts or enjoy immunities which are 156— Empire Mills v. Alston Grocery Co., 12 L. R. A. (Tex. Ap.) 366. FOREIGN CORPORATIONS 233 not allowed to the community at large.' Mora- wetz, Priv. Corp. 1st ed. 500, 535. "A grant of corporate existence is a grant of special privileges to the corporators, enabling them to act for certain designated purposes as a single individual, and exempting them (unless otherwise provided) from individual liability. The corporation, being the mere creation of local law, can have no legal existence beyond the limits of the sovereignty where created. It must dwell in the place of its creation, and cannot migrate to an- other sovereignty. The recognition of its exist- ence even by other states and the enforcement of its contracts made therein depend purely upon the comity of those states.' Morawetz Priv. Corp. 1st ed. Sec. 500. * * * ^" "The rule of comity is entirely in subjection to the sovereign will of the State, and can only exist by permission of the State in which it is sought to employ it. A corporation has no implied authority to do any act in a foreign State which is not per- 157— Court cites Bank v. Earle, 38 U. S. 588; Run- yan v. Coster, 39 U. S. 14 ; Landgrant, etc., Co. v. County Commiss., 6 Kan. 352; Thompson v. Waters, 25 Mich. 221 ; B. & O. R. Co. V. Glenn, 28 Md. 287 ; Franco-Texan Land Co. v. Laigle, 59 Tex. 339 ; "Wright v. Bundy, 11 Ind. 398 ; Miller v. Ewer, 27 Me. 509 ; Merrick v. Van Santboard, 34 N. Y. 208 ; McCall v. Byram Mfg. Co., 6 Conn. 428; Paul v. Virginia, 75 U. S. 181; Smith v. Alboard, 63 Barb. 423. 234 PRIVATE CORPORATIONS mitted by the laws of the latter to individuals gen- erally. Speaking of the limit of the rule of com- ity, Morawetz says: *By the common law, the right of acting in a corporate capacity is not accorded freely and without conditions to everyone,, but must be derived from an Act of the Legislature. It is evident that there are reasons of public policy underlying this restriction, and it cannot be as- sumed that its effect may be nullified by the com- ity extended towards foreign States. To obtain a charter for the purpose of evading the laws of a foreign State, under cover of the rule of comity, would be a fraud upon the State granting such charter, and to attempt to act imder such charter in the foreign State would be a fraud upon the lat- ter.' " The leading case upon the right of a corporation in other states is the case of Paul v. Virginia,^''® in which the court said: "Now a grant of corporate existence is a grant of special privileges to the corporators, enabling them to act for certain des- ignated purposes as a single individual, and ex- empting them (unless otherwise specially pro- vided) from individual liability. The corporation, being the mere creation of local law, can have no legal existence beyond the limits of the sover- 158— Paul V. Virginia, 8 "Wall. 181. FOREIGN CORPORATIONS 235 eignty where created. As said by; tMs court ia Bank of Augusta v. Eafle, 13 Pet. 519, 10 L. Ed. 274: 'It must dwell in the place of its creation, and cannot migrate to another sovereignty.' The re- cognition of its existence even by other states, and the enforcement of its contracts made therein, de- pend purely upon the comity of those states — a, comity which is never extended where the exist- ence of the corporation or the exercise of its pow- ers is prejudicial to their interests or repugnant to their policy. Having no absolute right of recogni- tion in other states, but depending for such recog- nition and the enforcement of its contracts upon their assent, it follows, as a matter of course, that such assent may be granted upon such terms and conditions as those states may think proper to im- pose. They may exclude the foreign corporation entirely, they may restrict its business to particu- lar localities, or they may exact such security for the performance of its contracts with their citi- zens as in their judgment will best promote the public interest. The whole matter rests in their discretion." We shall see in the next section that by virtue of the constitution of the United States a corporation has the right for certain purposes to enter a state. §117. RIGHTS OP FOREIGN CORPORA- TION UNDER THE FEDERAL CONSTITU- PRIVATE CORPORATIONS 236 TION. A corporation of any state may enter any other state subject to no restrictions for the pur- pose of transacting interstate commerce in that state and for the purpose of acting as agent or to carry on the business of the federal government. 5Ve know that the United States Constitution gives to the United States government the right to regulate commerce between the various states and for this reason a corporation which is engaged in interstate commerce has the right to enter other states for the purpose of carrying on interstate commerce and undue restrictions cannot be placed upon it in that respect. One court in which this question arose stated the law as follows:*®® "The review of the decisions of the Supreme Court re- lating to the power of a state to trammel or de- stroy the right of a corporation of another state to do business within its borders in which we have indulged may have been tedious; but it may be profitable, if it serve to correct the erroneous view that such a corporation has no such right, and that all its powers and privileges without the limits of the state of its creation are at the mercy of any state in which it attempts to do business. It is not now, and it never has been, the law that no cor- 159— Butler Bros. Shoe Co. v. U. S. Rubber Co., 156 Fed. 1. FOEEIGN COBPORATIONS 237 poration of one state has any absolute right of recognition in other states, or that other states may exclude aU the corporations of any state from doing any business within them, or that they may condition their transaction of such business by such terms as they may think proper to impose. "The Constitution of the United States and the acts of Congress in pursuance thereof are the su- preme law of the land. Under that Constitution and those laws a corporation of one state has at least three absolute rights which it may freely ex- ercise in every other state in the Union, without let or hindrance from its legislation, or action: "(1) Every corporation empowered to engage in interstate commerce by the state in which it is created, may carry on interstate commerce in every state in the Union, free of every prohibition and condition imposed by the latter. * * * "° 160 — Citing on this point Pensacola Telegraph Com- pany V. "Western Union Telegraph Company, 96 U. S. 1, 8, 24 L. Ed. 708; Cooper Manufacturing Company v. Ferguson, 113 U. S. 727, 736, 737, 5 Sup. Ct. 739, 28 L. Ed. 1137 ; Pembina Silver Mining Company v. Pennsyl- vania, 125 U. S. 181, 190, 8 Sup. Ct. 737, 31 L. Ed. 650; Lyng V. Michigan, 135 U. S. 161, 166, 10 Sup. Ct. 725, 34 L. Ed. 150; Norfolk, etc.. By. Co. v. Penn^lvania, 136 U. S. 114, 115, 118, 120, 10 Sup. Ct. 958, 34 L. Ed. 394; Crutcher v. Kentucky, 141 TJ. S. 47, 57, 59, 11 Sup. Ct. 851, 35 L. Ed. 649 ; Horn Silver Mining Company v. New York, 143 U. S. 305, 315, 12 Sup. Ct. 403, 36 L. Ed. 164; Osborne v. Florida, 164 U. S. 650, 655, 656, 17 Sup. Ct. 214, 41 L. Ed. 586; Missouri, K. & T. Trust Co. V. Krumseig, 172 U. S. 351, 19 Sup. Ct. 179, 43 L. Ed. 238 PRIVATE CORPORATIONS "Every corporation of any state in the employ pf the United States has the right to exercise the necessary corporate powers and to transact the business requisite to discharge the duties of that employment in every other state in the Union without permission granted, or conditions im- posed by the latter. * * * ^®^ "Every corporation of each state has the abso- lute right to institute and maintain in the federal courts, and to remove to those courts for trial and decision, its suits in every other state, in the cases and on the terms prescribed by the acts of Con- gress. * * * ^'* "Every law of a state which attempts to destroy these rights or to burden their exercise is viola- tive of the Constitution of the United States and void." We may say in a general way that interstate commerce consists in the carriage of goods from state to state, the carriage of passengers from state to state, or the intercourse by mail, telegraph or telephone of the citizens in one state with the citizens of another state, but it would hardly be ad- 474; Caldwell v. North Carolina, 187 U, S. 622, 623, 23 Sup. Ct. 229, 47 L. Ed. 336. 161— Citing on this point: Pembina Mining Co. v. Penna., 125 U. S, 181 ; Horn Silver Mining Co. v. N. T. 143 U. S, 305. 162-^Citing on this point: Insurance Co. v. Morse, 87 U. S. 445; Barron v. Bumside, 121 U. S. 186. FOREIGN CORPORATIONS 239 visable at this point to enter into a lengthy dis- cussion of that subject for it falls more properly in another volume of this series."^ However, ia a subsequent section when we consider what consti- tutes doing business by one corporation in another state we shall find it necessary to discuss this sub- ject to some extent because that is usually held not to be the transaction or business within a state under the foreign corporation law which con- sists in interstate commerce. 163 — See the volume in this series on Constitutional Law. CHM>TER XXI THE FOREIGN CORPORATION LAW AND RIGHTS AND PENALTIES THEREUNDER § 118. USUAL PROVISIONS OF FOREIGN CORPORATION LAWS. The foreign corpora- tion laws of the various states usually provide that no foreign corporation shall transact business within the state until it has filed a copy of its char- ter, paid certain fees, etc., under a penalty of losing its right to sue in the state and also under the pen- alty of a fine. No foreign corporation comes with- in such a law unless it transacts business within the state. We may notice in this section the usual* provis- ions of the foreign corporation laws and the effect of not complying with them. Such laws do not apply to a corporation until it has entered the state for the purpose of transacting business therein. Assuming for the moment that the cor- poration has so entered the state, we may inquire as to the laws to which it is subject. • The foreign corporation law differs, of course, 240 FOREIGN CORPORATION LAW 241 in the various states, but we may say that there are certain provisions which we are likely to find in any foreign corporation law and which we may notice here. Such law usually provides that a copy of the charter must be filed with some officer of the state in which the corporation seeks to do business; that certain fees must be paid; that cer- tain information must be given and placed on file in reference to the amount of capital stock actually paid in; the amount of capital stock to be repre- sented in the state; the officers of the company; the principal place of business in the state, and an agent upon whom service of process may be made; under penalty that if such things are not done the foreign corporation shall be subject to a fine and shall also be deprived of its right to bring suit upon contracts entered into or rights accruing while it was engaged in business in the state before it had complied with the foreign cor- poration law. §119. HOW FOREIGN CORPORATION MAY ENTER AINOTHER STATE. A foreign corporation may enter another state by transact- ing business there or by going there for some cor- porate purpose or by having property in the state. It does not enter another state where it merely has p. a— 16 242 PEIVATB CORPORATIONS Stockholders, officers, or agents therein unless they are there for the corporate business. Before considering what constitutes a transac- tion of business under the foreign corporation laws we may notice in what ways a foreign corporation can go into another state "* and there are three sorts of ways: First it may enter another state for the purpose of transacting its business therein within the meaning of the foreign corporation law which we will notice particularly in the next sec- tion; in the next place, it may enter the state for corporate purposes as to bring suit and engage in isolated transactions and in these respects, al- though it must be considered as coming into the state, it does not subject itself to the foreign cor- poration law, and in the third place it may be con- sidered within the state for the purposfe of getting jurisdiction upon it when it has property Fithin the state. It is only when it goes into the state for the purpose of transacting business therein, and in that case only when such business is not in- terstate commerce business that the corporation law applies to it, in the sense that it must comply therewith. 164— Edwards v. Schillinger, 245 111. 231. The court in this case says: "It is the just and reasonable theory that a business corporation is constructively present out- side of the state of its origin whenever it has property and carries on its operation by means of agents." FOREIGN CORPORATION LAW 243 A corporation is not to be regarded as in an- other state simply because persons interested in it may be in such state unless such persons are there in order to transact business in its behalf. Thus if the President or any other officer of a corpora- tion go into another state this is not an entering that state by the corporation where the president is not there for purposes of transacting its busi- ness therein.^®^ §120. WHAT CONSTITUTES TRANSACT- ING BUSINESS UNDER FOREIGN CORPOR- ATION LAWS. In order to come within the term of the foreign corporation laws, the corporation must enter the state to transact business therein. Doing business under such laws consists in estab- lishing itself there to carry on its business. Bring- ing suit, holding stockholders' meetings, selling stock, performing isolated transactions, engaging in interstate commerce are not transactions of business under the foreign corporation law, and therefore the penalty in such law does not apply for non-compliance. It is difficult to state in general language what constitutes doing business under the foreign cor- 165 — ^Bttflfalo Sandstone Brick Co. v. American Sand- stone Brick & MacMnery Co., 141 Fed. 211 ; Kandall v. American Automatic Loom Co., 198 U. S. 477; Central Grain & Stock Bxch. v. Board of Trade, 125 Fed. 463 ; Goldey v. Morning News, 156 U, S. 518. 244 PRIVATE CORPORATIONS poration laws and undoubtedly tliere has been some conflict of authority upon this point. In the first place we may say that inasmuch as the state cannot regulate interstate commerce we may con- strue the statute of the state not to mean inter- state commerce when it uses the term doing or transacting business within the state. It is fur- thermore held that single transactions are not do- ing business within the state. We may quote here from a case ^®® which sums up the law in this re- spect and gives the authorities: "It has further been held that sales of goods by a foreign corpora- tion to a resident of a state, although made by a salesman or agent sent into the state, to be shipped to him in the state from another state, belong ta the operations of the interstate commerce and are not subject to these restrictive laws of the states."^ Also even though the business is done by the foreign corporation through an agent or firm resident in the state, and notes are given in settlement in the state payable in the state."® 166 — Kirven v. Virginia, Carolina Co., 143 Fed. 293, 167— Citing Caldwell v. North Carolina, 187 U. S. 622, 23 Sup. Ct. 229, 47 L. Ed. 336; Brennan v. Titus- ville, 153 U. S. 289, 14 Sup. Ct. 829, 38 L. Ed. 719; Stoutenburg v. Hennick, 129 U. S. 141, 9 Sup. Ct. 256, 32 L. Ed. 637; Robbing v. Shelby County, 120 U. S. 489, 7 Sup. Ct. 592, 30 L. Ed. 694 ; Cooper Mfg. Co. v. Ferguson, 113 U. S. 727, 5 Sup. Ct. 739, 28 L. Ed. 1137. 168— Citing Kessler v. Pereilloux, 127 Fed. 1011; FOREIGN CORPORATION LAW: 245 It has, however, been held that this interstate com- merce clause does not apply to foreign corpora- tions maiataining continuously an agency in a state from which orders are solicited and the goods are delivered to purchasers,^®® "In construing the effect of these statutes in given cases, it has become frequently necessary for the courts to define what constitutes a 'doing, transacting or carrying on a business,' and, while there is some conflict, the greater weight of au- thority is to the effect that isolated transactions, especially commercial, between foreign corpora- tions and a citizen of the state, do not constitute a 'doing, transacting or carrying on a business,' within the meaning of such statutes using these terms. It has so been held by the courts of Ala- bama, Arkansas, Colorado, Illinois, Iowa, Kansas, Missouri, New Jersey, New York, Oregon, Penn- sylvania, Tennessee, Texas, Washington, Wis- consin, and by the federal courts in such cases as * * * "" Among such instances of single transactions not constituting a 'doing of business within the meaning of the statutes' are the making Wellton V. Missouri, 91 U. S. 275 ; Davis, etc., Mfg. Co. V. Dix, 64 Fted. 406. 169— Citing Diamond Glue Co. v. U. S. Glue Co., 187 U. S. 611. 170— Cooper Mfg. Co. v. Ferguson, 113 U. S. 727; Frawley v. Penna. Casualty Co., 124 Fed. 259 ; Oakland Sugar Co, v. Wolf, 118 Fed. 239. 246 PRIVATE CORPORATIONS of a single sale or contract of goods to a citizen and, the taking of a mortgage in the state to secure payment therefor. * * * "^ And the taking o^ notes in the state for goods sold or a debt con- tracted in another state, and the suing thereon in the state, does not constitute such 'doing of business.' * * *"^ And these statutes can- not affect contracts made by a citizen outside of his state with a foreign corporation, as for in- stance, where an order is sent by the citizen for goods to the foreign corporation, or where such or- der is taken by a local agent, subject to the approval of the corporation, and is approved by the corpo- ration outside the state, and the goods are shipped from outside the state by it to the purchaser in the state. * * * " "s Holding stockholders' meetings, selling stock, 171— Citing Ware v. Hamilton, 92 Ala. 145, 9 South, 136 ; Florsheim v. Lester, 60 Ark. 120, 29 S. Y- 34, 27 L. R. A. 505, 46 Am. St. Rep. 165 ; Col. Iron Works v. S. G. Mining Co., 15 Colo. 499, 25 Pac. 325, 22 Am. St. Rep. 433 ; Dela. Canal Co. v. Mahlenbrock, 63 N. J. Law, 281, 43 Atl. 978, 45 L. R. A. 538 ; Penn. Collieries Co. v. McKeever (Sup.), 87 N. T. Supp. 869; Cooper Mfg. Co. V. Ferguson, 113 U. S. 727, 5 Sup. Ct. 739, 28 L. Ed. 1137; Ammons v. Brunswick (Ind. T.), 82 S. W. 937. 172— Citing Cretan v. Foot, 57 N. Y. S. 1103 ; Lumber Co. V. Holbert, 39 N. Y. S. 432 ; FtiUer Mfg. Co. v. Fos- ter, 4 Dak. 379. 173— Citing Lumber Co. v. Chappell, 184 111. 539; Cordage Co. v. Mosher, 114 Mich. 64; Plow Co. v. Peter- son, 93 Minn. 356 ; Pierce Co. v. Sigel Gas Fixture Co., 60 Mo. App. 148. FOREIGN CORPORATION LAW 247 and such acts do not constitute transactions within the law of the state. If a corporation opens up an office in the state or has an agency there at which contracts are closed, this is doing business within the state, not- withstanding to fulfill the contract it is necessary to ship goods from the home office because the contract is entirely made within the state.^^* §121. PENALTY FOR NOT COMPLYING WITH FOREIGN CORPORATION LAW. If a foreign corporation is engaged in transacting busi- ness within the state without complying with the laws of that state it is subject to a fine and some courts hold also that it has no right to sue with ref- erence to such transaction while other courts do not regard the contract as void as preventing suit. If the corporation is doing business within the state according to the rules that we have discussed, then it is subject to the fine imposed by law. It is also in many states deprived of the right to bring suit with reference to the transaction even though it complies with the law subsequently and before suit is brought. There are two views as to the effect of such laws. Thus one court says: "" 174r-Intem. Text Book Co. v. Peck, 217 U. S. 91. 175 — ^Priim-Coliion Contracting Co. v. Chattetson, 146 Ky. 540. 248 PRIVATE CORPORATIONS "She set up that the appellant had failed to com- ply with this statute and hence could not recover against her on the contract made with the board of public works for the street improvement. In a reply, appellant admitted that when the contract was awarded and the work completed it had not complied with the statute, but averred that it did so afterwards, and in November, 1909. Chancellor Miller, now a judge of this court, ruled that, un- der the facts admitted in the pleadings, the plain- tiff could not recover and entered a judgment dis- missing the petition. On this appeal, the only question presented is, Did the failure of the appel- lant to comply with the statute before making the contract and completing the work under it deny it the right to recover the cost of the improve- ment? * * * "With the question of estoppel out of the way, the exact matter for decision is. Will a foreign corporation be assisted by the courts of this state to enforce a contract that was entered into and completed at a time when it was unlawful for the corporation to carry on in this state the business it was engaged in, and out of which the contract arose? The statute does not provide that con- tracts entered into before it has been complied with shall be void or nonenforceable, nor does it use any language in reference to the contract; FOREIGN CORPORATION LAW 249 but, when a statute makes it unlawful to do busi- ness under certain conditions, it seems to neces- sarily and logically follow that the doing of the business under the prohibited conditions is in it- self unlawful. When the doing of the act is made imlawf ul, there is no reason why the statute should also declare that contracts made in violation of it should also be unlawful. When the law pro- hibits a thing, it is unlawfid to do it, and the courts should not lend their aid to the enforcement of prohibited contracts. Courts are established to afford remedies to litigants who seek relief growing out of lawful transactions, and not to aid those who would invoke their assistance to enforce contracts made in violation of law. Their chief purpose is to secure the observation of laws en- acted for the safety and protection of life and property and the general well-being of the peo- ple, and it would be a startling departure from this purpose if they should also give relief to par- ties who were seeking to enforce contracts made in violation of law. Such a course of procedure would be a perversion of justice, and convert the courts into instruments to aid lawbreakers, in place of punishing them. It is also argued that it would be a hardship on this corporation to lose the value of its work, but this furnishes no excuse why it should obtain relief, as there is scarcely a 250 PRIVATE CORPORATIONS penal statute the enforcement of wMch does not impose severe burdens; and if the severity of the punishment should be treated as a reason for dis- regarding the statute, many beneficial laws would be unenforced. "Our attention has been called by counsel for appellant to authorities from other states, hold- ing that the courts will not deny relief in cases of this character, but will leave the offending corpo- rations to be punished imder that penalty feature of the statute. That there is much diversity of opuiion on the subject under consideration to be found in the decisions of the courts of other states cannot be doubted by any person who has exam- ined the cases, but we think the weight of author- ity supports the principle that when a statute ex- pressly declares that it shall be unlawful to do business untU its requirements shall have been complied with, a contract made in contravention of the statute will not be enforced by the courts. * « * 176 Another view is stated as follows: "'' "There is a very great conflict ia the decisions 176 — Citing: Buckley v. Humason, 50 Minn. 195 McConnell v. Kitchens, 20 S. C. 430 ; Johnson v. Hulingsi 103 Pa. 498 ; Henni v. Fidelity, etc., Co., 61 Nebr. 744 Tri-State Amusement Co. v. P. P. H. Amusement Co. 192 Mo. 404; Randall & Tuell, 89 Me. 443; Cincinnati Ass. Co. V. Rosenthal, 55 111. 85. 177— Kirven v. VirginiarCarolina Co., 145 Fed. 293, FOREIGN CORPORATION LAW 251 0f the state courts construing the effect of the failure of foreign corporations to comply with these laws. Numerous cases in the states of Alabama, Colorado, Illinois, Indiana, Kentucky, Massachu- setts, Michigan, Mronesota, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New lYork, North Caroliaa, Oregon, Pennsylvania, Tennessee, Texas, Utah, Vermont, and Wisconsin hold that such failure to comply renders the con- tracts of foreign corporations absolutely void and unenforceable, and especially so where no crim- inal penalty attaches by the terms of that statute. This harsh doctrine naturally shocks the con- science. It virtually encourages the individual citizen to be dishonest and repudiate his obliga- tions, and that, too, where he has reaped the full fruits and benefits of the contract. Very naturally, and rightly, the courts have sought to avoid the consequences of such vicious legislation and the moral turpitude its strict enforcement involves. "We therefore find many other cases in the states of Arkansas, Colorado, Idaho, Indiana, Kansas, Kentucky, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, North Dakota, Ohio, Ehode Island, South Dakota, Washington, and West Virginia, holding that such contracts are not void or unenforceable, but that foreign corpo- rations which have failed to comply are neverthe- 252 PRIVATE CORPOBATIONS less permitted to sue upon them. Some of these decisions are based upon the superior claim of the law of comity, others upon the assumption that the criminal penalty provided by the statutes is exclusive of aU civil forfeiture of the contract. Other cases in Kentucky, North Dakota, Pennsyl- vania, South Dakota, and Washington hold that, ,where a party has entered into a contract with a foreign corporation and has received the benefit thereof, he is estopped from setting up the failure to comply with these statutes by the corporation, for the purpose of avoiding his liability on the contract. Still other cases hold that the failure to comply with these statutes does not render its contracts wholly void, but only operates to sus- pend the right of the defaulting corporation to sue until it does comply. See 19 Cyc. pp. 1289- 1300, and notes; and 12 Cent. Dig. tit. 'Corpora- tions,' 2536-2543, where these different classes of decisions are collected. "It seems to us that the position last above re- ferred to, holding the contract good, but suspend- ing the remedy, is the reasonable and honest one to take." § 122. SERVICE ON FOREIGN CORPORA- TION. Service cannot be obtained upon the for- eign corporation except where it has property and transacts business. FOEEIGN COEPORATION LAW 253 As we liave seen before the corporation is not necessarily witMn a state simply because it may have offices there. To get service upon a foreign corporation the plaintiff must go to a place where it has property and there secure service by way of attachment, or he must go to a place to which it is carrying on its business. Thus if it is doing any of the things in the state which we have found would not constitute business, valid service can- not be obtained upon it in that state. If it is within the state, then service may be obtained upon it by attaching its property or by serving its president, or if the president cannot be fotmd then upon some superior officer. As the Illinois court "^ says: "A business corporation is constructively present in any state where it has property and carries on its operation by means of agents, al- though the domicile of the corporation is in another state. (Edwards v. SchUlinger, 245 111. 231.) If a foreign corporation does business in the state through agents, it may be sued there by obtaining service on the agent (Burrows Steamship Co. v. Kane, 170 TJ. S. 100; Western Union Telegraph Co. V. Pleasants, 46 Ala. 641.) If it avails itself of the privilege of doing business in a state whose laws authorize it to be sued there by service of process 178— Booz V. T. & p. R. Co., 250 lU. 376. 254 PRIVATE CORPORATIONS Upon an agent, its assent to sueli service will be implied * * * but the foreign corporation must have entered the domestic State for the pur- pose of carrying on its business there. * * * In Mineral Point Railroad Co. v. Keep, 22 HI. 9, a Wisconsin corporation had built and operated a railroad from the line between Wisconsin and this State to Warren, in Jo Daviess county, and it was held the foreign corporation having prop- erty in this State and doing business here could be served with process by delivering a copy to its con- ductor, the president not being within the state." It seems to have been formerly held that a cor- poration could not be served outside of its own state."^ But this theory no longer obtains. In an Illinois case,^*° "The theory that a corporation can only have its existence in the state of its cre- ation has long since been dispelled by the migra- tory corporations which has transacted the busi- ness of the country and there have always been courts which held that they could be sued where- ever they could be served." Where a corporation is required to keep an agent in the state upon whom process can be served, service may be had upon him or upon any 179— Peckham v. Haverhill No. Parish, 16 Pick. (Mass.) 274; McQueen v. The Mfg. Co., 16 Johns. 5; Middlebrook v. Ins. Co., 14 Conn. 301. 180— Edwards v. Schillinger, 245 111, 231. FOREIGN CORPORATION LAW 255 other proper representative of the corporation, and, of course, the refusal to name such an agent in accordance with the law would not deprive the plaintiff of a right to sue the corporation if he could find an agent within the state. §123. JURISDICTION OF COURT OVER CONTROVERSY IN REFERENCE TO THE INTERNAL MANAGEMENT OF FOREIGN CORPORATION. Courts will not take jurisdic- tion of a controversy relating to the affairs of a foreign corporation where the wrongs complained of are such as to require the exercise of visitorial powers of the sovereign but will take jurisdiction in other cases where it can do justice especially if the stockholders are its own citizens. In the case of Babcock v. Farwell,^^^ the court had occasion to discuss the law in respect to the right of the court to take jurisdiction to pass upon and settle internal controversies of foreign cor- porations. The court said: "The general rule has been declared by the decisions of many courts and has been stated by text writers to be, that the courts of one State will not exercise the power of deciding controversies relating merely to the in- ternal management of the affairs of a corporation 181— Babcock v. Farwell, 245 lU. 14. 256 PRIVATE CORPORATIONS organized under the laws of another State or of determining rights dependent upon such manage- ment. * * * "As stated in Thompson on Corporations, supra, this doctrine obviously has its limitations. Ex- cept in cases involving the exercise of visitorial powers, the question is not strictly one of juris- diction but rather of discretion in the exercise of jurisdiction. The reasons which influence courts of chancery to refuse to interfere in the manage- ment of the internal affairs of a foreign corpora- tion are, that the rights arising between a cor- poration and its members out of such manage- ment depend upon the laws under which the cor- poration is organized; that the courts of that State afford the most appropriate forum for adjudication upon the relation between the stockholders and the corporation, and that frequently such courts alone possess power adequate to the enforcement of all decrees that justice may require. It is the inability of the court to do complete justice by its decree, and not its incompetency to decide the question involved, that determines the exercise of its power. The general statement that courts will not interfere with the management of the in- ternal affairs of foreign corporations must be con- strued in connection with the particular facts. The rule rests more on grounds of policy and ex- FOREIGN CORPORATION LAW 257 pedieney than on jurisdictional grounds; more on want of power to enforce a decree than on juris- diction to make it. Where the wrongs complained of are merely against the sovereignty by which the corporation was created or the law of its ex- istence, or are such as require for their redress the exercise of the visitorial powers of the sov- ereign, or where full jurisdiction of the corpora- tion and of its stockholders is necessary to such redress, the courts wiU decline jurisdiction. Ex- amples of such cases are suits to dissolve a corpo- ration; to appoint a receiver; to determine the validity of its organization or which of two rival organizations is legal; to restrain it from declar- ing a dividend or compel it to make one; to re- strain an issue of stock or of bonds; to compel a division of its assets; to restore a stockholder to his right to vote at stockholders' meetings from which he has been excluded, or to compel the recog- nition of one claiming to have been elected a director. * * * "Where, however, the relief sought is within the general jurisdiction of a court of chancery, where all the parties necessary to the full and proper adjustment of the rights involved are before the court and where the relief sought does not require the exercise of the visitorial power of the govern- ment, we think the court should exercise the power r. 0.-17 . 258 PRIVATE CORPORATIONS of determining controversies brought before it in- stead of remitting suitors to a foreign juris- diction." As noted in this decision foreign corporations can only be wound up under the laws of the State which incorporated them and so all other suits of a visitorial nature must be brought in that jurisdiction. Notice what sort of suits those are which require visitorial powers. The decision just quoted from, states them. PABTVII CONSOLIDATION, TRUSTS AND MONOPOLIES CHAPTER XXII CONSOLIDATION §124. RIGHT TO CONSOLIDATE. Corpora- tions have the right to consolidate except where the consolidation is contrary to some statute or to public policy. Two or more corporations have the right to con- solidate forming a new corporation in which the old corporations become merged, their separate identity passing out of existence. This new cor- poration succeeds to the rights and title of the companies which are merged into it. We shall see in the following chapter that consolidation in particular cases may be against the law, but this does not affect the general rule that consolidation is permissible. As a matter of fact the various 259 260 PBIVATB CORPORATIONS state statutes authorize consolidation by their ex- press provisions. §125. HOW CONSOLIDATION ACCOM- PLISHED. The consolidation is accomplished by following the directions of the statute in that re- spect or by dissolution of the old companies and the organization of the new one. Consolidations of corporations may ^e accom- plished in two ways: first by dissolution of the old company imder the law, and then the organi- zation of a new corporation, and, second, which is to be perhaps regarded as a true case of consoli- dation, by following the provisions of the statute in respect to consolidation. There cannot be a merger of corporations to constitute a new one ex- cept by virtue of the corporation law permitting such merger. If there is no such law, then con- solidation would have to be accomplished by the dissolution of the old companies and the incor- poration of a new one. Thus, the A. company and the B. company could not organize themselves into the C. company by mere contract, but only by dis- solution of the A. and B. companies and the in- corporation of the C. company, or by following the provisions of the statute, in respect to con- solidation, there being such provisions in most of the states. CONSOLIDATION 261 §126. EFFECT OF CONSOLIDATION. Where the corporation law provides for consolida- tion, consolidation thereunder has the effect of constituting a new corporation which takes the rights and title, and succeeds to the liabilities of the old corporation. It is impossible in this book to enter into a dis- cussion of the various statutes in respect to the consolidation of companies, but we may notice generally that a consolidated corporation has the effect of transferring to the new company the rights and titles and also the liabilities of the old companies, although in the act of consolidation new powers may be given. CHAPTER XXIII TRUSTS AND MONOPOLIES § 127. A TRUST DEFINED. The term "trust" as peculiarly used in corporation law signifies the creation of a trustee or board of trustees for the purpose of holding the stock of various corpora- tions in trust to vote the same, the various stock- holders holding trustees' certificates vrhich entitle them to dividends. Of course we know that the term "trust" used in its general sense signifies that the legal owner- ship of property is in one person and the beneficial ownership in another, and in this sense the term may be used in corporation law to describe a transaction which is perfectly valid and which is distinguishable from the sense in which we will use this term throughout this chapter. Thus, A. owning stock in a corporation might transfer his estate, including such stock, to B. in trust to hold the same for C. and there would be no distinction between this case and the case in which he trans- ferred land to B. in trust for C, but the term trust 262 TRUSTS AND MONOPOLIES 263 in corporation law has come to have a special and popular significance. A true trust in this sense exists where the stockholders of several corpora- tions, usually competing ones, join in a scheme whereby they all transfer their stock for a period of years to a central trustee or board of trustees for the purpose of enabling such trustees to vote the stock and thereby control the directorate and govern the policy of the corporation. The stock- holder in the meantime to hold certificates in re- turn for their stock certificates upon which they are entitled to draw dividends as declared. In popular meaning a trust, not only signifies this arrangement, but any monopolistic combination or consolidation, and that popular meaning comes about because such combinations were originally effected by this trust arrangement. § 128. LEGALITY OF TRUSTS. A trust as defined in the section above is illegal. It did not take the courts long to declare that such an arrangement as we have described was illegal for many reasons. First, it was said to put the power of the control of the corporation out of the hands in which it reaUy belonged; second it was apparent that the trust was a combination in undue restraint of trade, and; third, it fostered 264 PEIVATE CORPORATIONS monopoly and came within the provisions of special statutes. In an Illinois case,"^ there was an arrangement of the sort we have mentioned in the section above, and the court said: "There can be no doubt, we think, that the Distillers' and Cattle Feeders' Trust, which preceded the incor- poration of the defendant, was an organization which contravened well-established principles of public policy, and that it was therefore illegal. No one who intelligently considers the scheme of this trust, as detailed in the information, can for a moment doubt that it was designed to be, and was in fact, a combination in restraint of trade, and that it was organized for the purpose of get- ting control of the manufacture and sale of all distillery products, so as to stifle competition, and to be able to dictate the amount to be manufac- tured and the prices at which the same should be sold, and thus to create, or tend to create, a virtual monopoly in the manufacture and sale of products of that character. No other business principles can be suggested upon which tha development of such an elaborate and far-reaching scheme can be accounted for. No rational purpose for such or- ganization can be shown consistent with an in- tention to allow business to run in its normal chan- 182— The Distilling & Cattle Feeding Co. v. People, 156 111. M8. TRUSTS AND MONOPOLIES 265 nels, to give competition its legitimate operation, and to allow both production and prices to be con- trolled by the natural influence of supply and de- mand, and the results, as shown by the informa- tion were such as might be anticipated. The trust obtained possession of nearly aU the dis- tilleries and of nearly the entire distillery pro- duct of the United States, thus enabling it to dic- tate prices and the amount of production, and to thus draw to itself the substantial control of the distillery business of the country. "Combinations of this character have been fre- quently made the subject of judicial investigation within the last few years, and while the proceed- ing has most generally been against some one of the corporations entering into the trust, the courts, so far as they have had occasion to speak on the subject at aU, have held such trusts to be il- legal." >«^ § 129. MONOPOLIES. A monopoly is an or- ganization for the purpose of controlling output and regulating prices. It is illegal, but mere great- ness of size is not illegal. 183 — Citing as in accord : State v. Nebraska Distilling Co., 29 Neb. 700; State v. Standard Oil Co., 49 O. St. 137; People v. No. River Sugar Refining Co., 121 N. Y. 528; Richardson v. Buhl, 77 Mich. 632. 266 PRIVATE CORPORATIONS Following the decisions that declared a trust is illegal, there was a general movement among large corporations to form themselves into one larger corporation so that the illegal feature of the trust would be obviated. The mere fact that several corporations form themselves into a greater one results in nothing illegal. This is the day of giant corporations and an attack cannot be made on a corporation because it is simply of great size. However, monopolization is frowned upon by the law. A monopolistic organization is one whose purpose is to obtain control of the output for the purpose of regulating the same and controlling prices. There is no monopoly merely because there may, as a matter of fact, be virtual control of output because of superiority of methods, but true monopoly is an attempt to stifle competition by simply buying up or crushing out all competi- tors and such monopolization is illegal, not only by the principles of the common law, but by the various federal and state enactments aimed at such organizations. PART yiii CORPOBlATE INDEBTEDNESS DISSOLUTION OF CORPORATIONS CHAPTER XXIV CORPORATE INDEBTEDNESS § 130. CORPORATE BONDS. A corporation has the power to issue bonds securing the same by trust deed or mortgage upon the property of the corporation. The bondholder is simply a secured creditor. The corporate indebtedness is often in the form of a bond issue. We have seen that a corporation has the power to issue bonds. A bond issue is really an issue of a series of notes which altogether form a part of one act and are secured by one common mortgage or trust deed upon the prop- erty of the corporation. A bond issue is in reality simply a mortgaging of the property of the cor- poration with the evidences of the indebtedness 267 268 PRIVATE CORPORATIONS divided into a series of notes wMch altogetlier constitute the entire evidence of the indebtedness and which therefore are without priority over each other and which are meant to circulate among various holders each being ref errable to the others and to act as a whole. We will see in the next sec- tion that there are different forms of bonds. §131. FORM OF THE BOND. Bonds are usually knovm as registered bonds and coupon bonds. A registered bond is a bond which is transfer- able merely by transfer on the books of the com- pany, each successive holder becoming registered. Such bonds are not negotiable although transfer- able. A coupon bond is a bond to which are at- tached interest coupons detachable as they are desired for circulation or for collection. Such bonds are usually regarded as negotiable because they are really promissory notes. Eegistered bonds are son^etimes convertible by their terms into negotiable bonds. §132. REMEDIES OF BONDHOLDERS. Bondholders have the right of foreclosure, the ap- pointment of a receiver, etc. They are usually represented by a common trustee, the bond of in- debtedness being in the form of a trust deed. CORPORATE INDEBTEDNESS 269 The bondholders are represented by a trustee named in the bond issue who is supposed to pro- tect their rights. The bond issue may be fore- closed at maturity and a receiver may be ap- pointed under the provisions of the issue to take charge during foreclosure. The bondholders are, of course, secured creditors and thus have a lien upon the assets of the corporation which comes in ahead of the claims of general creditors, and is, of course, superior to the rights of the stock- holders, common and preferred. §133. OTHER FORMS OF INDEBTED- NESS. A corporation like a natural person may enter into any form of indebtedness as upon notes, open accounts, etc., and may to that end mortgage or pledge its property just as a natural person may. Of course a corporation may be bound upon a note, bill of exchange, an open account, or any form of indebtedness and when so bound the cred- itor shaU have the same remedies they would have in the case of natural persons; that is to say, the right to sue, have judgment, levy execution, at- tach, foreclose, etc. CHAPTER XXV; INSOLVENT CORPORATIONS §134. DEFINITION. An insolvent corpora- tion is any corporation whose financial condition is such that its assets are not equal in volume to its liabilities or which has stopped payments on its debts. An insolvent corporation is one which is in the same financial condition that would make a natural person insolvent. By insolvency we do not indicate, of course, bankruptcy, although bankruptcy may follow and be predicated upon insolvency. Insolvency is a condition, while bank- ruptcy signifies judicial action under a bankruptcy statute. Insolvency has been variously defined. It has been defined as a financial condition ex- isting when the debtor is compelled to stop pay- ment in the ordinary course of business, but un- der the bankruptcy law of 1898, it is defined as a condition existing when the assets taken at a fair valuation are insufficient to meet liabilities. An insolvent corporation may be made bankrupt or 270 INSOLVENT CORPORATIONS 271 may be wound up under state statutes on action taken by the creditors. §135. BIGHT OF INSOLVENT CORPORA- TION TO PREFER CREDITORS. An insolvent corporation may prefer creditors by the principles of the common law, but this is an act of bank- ruptcy under the national bankruptcy act. Every debtor whether insolvent or not by the principles of the common law may prefer one cred- itor over another, even though such creditor is a stockholder, but under the bankruptcy law this has been made an act of bankruptcy where the debtor intended a preference and has also been made voidable by the trustee in bankruptcy where it occurred within four months prior to the filing of the petition in bankruptcy and where the cred- itor knew or had a reasonable cause to know that the preference was intended. § 136. STOCKHOLDERS' UNPAID LIABIL- ITY AS AN ASSET. The unpaid liability of a stockholder upon his subscription is an asset upon the insolvency of the corporation and collectible as such. We have already noticed the liability of stock- holders of the corporation for the benefit of credi- 272 PRIVATE CORPORATIONS tors. We may repeat tliat if the corporation be- comes insolvent the stockholder's liability as an asset and as such it is collectible by the trustee in bankruptcy or the receiver or other appropriate officer for the benefit of the creditor. § 137. REMEDIES OF CREDITORS OF AN INSOLVENT CORPORATION. The creditors of an insolvent corporation may bring bankruptcy proceedings or if they are secured or lien creditors, may enforce their securities or liens according to the law of debtor and creditor. The corporation under the bankruptcy law of 1898 can be made a bankrupt when it has commit- ted an act of bankruptcy, and this now days would be the usual remedy of creditors of an insolvent corporation. The hen or secured creditors could proceed to enforce their liens or securities_^ accord- ing to law. Under state statutes there is a right to have receivers appointed and the corporation wound up, but such a law is for most purposes to be regarded as suspended by the National Bank- ruptcy Act. A court of Equity, without the aid of statute, has no power to wind up an insolvent corporation. CHAPTER XXVI DISSOLUTION AND WINDING UP OF CORPORATIONS j §138. HOW DISSOLUTION ACCOM- PLISHED. Dissolution may be brought about by the attorney general for abuse of franchise, and for non-user, by creditors under state statutes, and by the stockholders themselves under the provi- sions of the statute. Dissolution may be regarded as either volun- tary or involuntary. Voluntary dissolution fol- lows "where the stockholders acting in unison pro- ceed under the pi^ovisions of the state statute to wind up the corpoiration. Involuntary dissolu- tion is accomplished either by the creditors bring- ing a suit for that purpose or by the State for abuse of or non-use of the corporate powers. To these ways of dissolution we must also add that dissolution of course follows where the coi^ora- tion has lived out the term for which it was created. 273 P.O.— 18 274 PRIVATE CORPORATIONS §139. VOLUNTARY DISSOLUTION. The statute provides that when the stockholders desire they may by paying the debts of the corporation and properly distributing its assets take certain proceedings to be publicly recorded by which the life of the corporation shall come to an end. The provisions of the various state statutes must be sought in this respect. Generally speak- ing the stockholders may obtain the dissolution of the corporation by taking certain statutory steps, filing a certificate to that end showing that all the stockholders or a certain percentage thereof have voted for dissolution, that the debts of the prop- erty are paid, and that the assets are properly dis- tributed among the stockholders. §140. DISSOLUTION BY CREDITORS. The state statutes provide that the creditors may ob- tain dissolution and distribution of all assets of the corporation among them upon its insolvency. Bankruptcy of a corporation does not dissolve it. The statutes of the state sometimes provide that if a corporation is insolvent the creditors may pro- ceed to bring receivership proceedings and have the assets of the corporation distributed and the corporation dissolved. DISSOLUTION OF CORPORATIONS 275 If a corporation is put into bankruptcy, the bankruptcy does not operate to dissolve it. § 141. DISSOLUTION BY THE STATE. The state by a proceeding brought by the attorney gen- eral may dissolve a corporation for misuse or non- use of its franchise. The State by a proceeding iu quo warranto may inquire into the right of a corporation to exist because it is abusing its franchises or because it is not using them. In such a suit the court may simply find that the corporation does not have the right to exercise certain power and, therefore, must discontinue it, or if the abuse is flagrant or of an Ulegal character, to dissolve and wind up the corporation. All acts of an ultra vires char- acter are grounds for quo warranto proceedings in which the court may wind up the corporation. For mere non-use of charter the state may force dissolution, but usually it must extend over a long period of time, and the period is sometimes pre- scribed in the statute. Where a corporation has several powers and does not use one of them, this is no ground for dissolution. § 142. DISTRIBUTION OP ASSETS UPON DISSOLUTION. Upon dissolution of a corpora- 276 PEIVATE CORPORATIONS tion the assets are to be distributed among the creditors according to their priority and then if any be left among the stockholders, some of whom may be preferred as to such assets. Where the corporation is wound up, then, of course, the question arises what is to become of its assets. First, of course, creditors are to be satisfied. Those who have secured debts can en- force their security and then general creditors share ratably. If any assets are left after cred- itors are paid, the stockholders are entitled to the assets in the proportion of their ownership of stock. Where there are preferred stockholders they may as we have seen be preferred not only as to dividends but as to assets. In such a case they are to be first satisfied before the common stockholders can take any share. FORMS 1. The Statement of a Proposal to Form a Stock Coepo- KATioN Under Ilunois Laws. STATE OF ILLINOIS, 1 County, J^^ To , Secretary of State : We, the undersigned, propose to form a corporation under an act of the General Assembly of the State of Illinois entitled "An Act Concern- ing Corporations," approved April 18, 1872, and all acts amendatory thereof: and that for the purposes of such organization we hereby state as follows, to-wit : 1. The name of such corporation is 2. The object for which it is formed is 3. The capital stock shall be 4. The amount of each share is 5. The number of shares 6. The location of the principal office is in , in the County of , State of Illinois. 7. The duration of the Corporation shall be years. (Note. — This must be acknowledged and sworn to before a notary public and a form for that purpose is printed on 277 278 FORMS the back thereof. The parties signing this statement are called "Commissioners." There must be at least three and not more than seven in Illinois.) 2. Illustrative Object Provisions in Chakter. (1) To own and conduct a restaurant. "The object of this corporation shall be to own, operate and conduct restaurants, lunch rooms, cafeterias and eating houses and places of refreshment. To own and operate bak- eries and kitchens for the preparation of bakery goods and foodstuffs of every sort for use in its own restaurants, lunch rooms and other places and for sale at wholesale or retail to others or upon hire for others. To carry on a general cater- ing business, and in general to do all and every thing that may properly appertain to the business of conducting restau- rants and lunch rooms of all classes and descriptions and the business of preparing food for consumption at wholesale or retail, and a general catering business." (2) To own and operate a laundry. "The object of this corporation shall be to own, operate and conduct the business of a laundry for the washing, clean- ing, ironing, pressing, renovating of wearing apparel, house- hold linen and clothes of every kind and description; to dye and dry clean all sorts of fabrics ; and to buy, sell and deal in all kinds of machinery necessary or useful in the laundry, cleaning and dyeing business." 3. Form of By-Laws. (Note. — These by-laws are intended to be merely suggest- ive; in any case the by-laws adopted should be framed ac- cording to the actual needs and circumstances of the par- ticular corporation.) ARTICLE I. STOCK. Sec. 1. Certificates of stock shall be in such form as the iPresident shall decide. All certificates must be signed by the President and the corporate seal shall be affixed and attested by the Secretary. Sec. 2. Shares of capital stock may be transferred by FORMS 279 endorsement on the certificate in the usual form and the sur- render of such certificate to the Secretary for cancellation, who shall take up and cancel the same attaching it to the original stub and who shall thereupon issue a new certificate to the transferee. See. 3. The stock books of the company shall be closed to transfers forty-eight hours before the annual meeting. ARTICLE II. STOCKHOLDERS, Sec. 1. The annual meeting shall be held on the first Friday after the first Monday of January of each year at the hour of 3 o'clock P. M., at the general offices of the com- pany, for the election of directors or the transaction of such other business as may come before the meeting. Sec. 2. Special meetings may be held at any time upon call by the President whenever he shall deem a special meeting advisable or whenever he is so directed by a resolu- tion of the Board of Directors, or whenever the stockholders representing one-third of the capital stock shall request him in writing so to do, specifying in such writing the time andl object. Such meeting shall be held at the same place and at the same hour of the day as is provided for holding the annual meeting. Sec. 3. The Secretary shall mail to every registered stockholder at his known place of residence a written or printed notice of the time and place of holding every annual or special meeting, and in case of special meeting shall state the object of the meeting. Such notice must be mailed at least five days prior to the time of holding the meeting. Provided that stockholders may come together in special meeting at any time without notice provided all stock is represented in per- son or by proxy, and notice may in every case be waived. Sec. 4. A majority of stock must be present at any meeting to constitute a quorum. But a smaller number may adjourn the meeting to some other time without further notice. Sec. 5. No business shall be transacted at any special meeting or any adjournment thereof except such as shall be mentioned in the notice ; unless all stock is present or repre- sented and other business is introduced by unanimous consent. Sec. 6. The President and Secretary of this corporation shall act as President and Secretary of the meeting, imless 280 FORMS the meeting shall elect a Chairman and Secretary pro tem to act in their stead. Sec. 7. The stockholders shall elect at every annual stockholders' meeting from among their number a board of five directors to serve for one year or until their successors are elected and duly qualified. Sec. 8. Voting for directors shall be by ballot, and all other votes shall be by ballot when the majority of those present so demand. Sec. 9. The order of business at the annual meeting shall be as follows : 1. Reading and disposal of minutes of last meeting and all other undisposed of minutes. 2. Annual Reports. 3. Reports of Committees. 4. Unfinished Business, 5. New Business. ARTICLE III. DIRECTORS. Sec. 1. The affairs of this corporation shall be managed by a Board of Directors who shall be elected by the stock- holders at their regular annual meeting and who shall hold ofl&ce for one year or until their successors are elected and qualified. Any vacancy occurring in the board may be filled by the other members thereof for the unexpired period. Sec. 2. No person shall be eligible to the offlce of director who is not a stockholder. A transfer by a director of all his stock shall operate as a resignation by him. Sec. 3. No director shall receive any salary or compensa- tion for his services as director. Sec. 4. The directors shall meet in regular session once a year immediately after the annual stockholders' meeting and at the same place and also shall meet once every month on the third Monday thereof at 3 o'clock P M., at the general office of the company. A reminder of these monthly meet- ings shall be mailed by the Secretary twenty-four hours be- fore the time of the meeting. Sec. 5. Special meetings may be called at any time by the President or any three directors. The other directors shall be entitled to three days' notice of such meetings, but the directors may meet in special session at any time without notice if all attend or waive notice. FORMS 281 Sec. 6. A quorum skall consist in a majority of the directors. ARTICLE IV. OFFICERS. Sec. 1, The officers of this corporation shall consist in a President, a Vice President^ a Treasurer and a Secretary. They shall be elected by the directors at their annual meeting and hold office for one year or until their successors are elected and qualified. Sec. 2. No officer except the Secretary shall be other than a stockholder. A sale of all his stock by any such officer shall operate as a resignation by him of his office. Sec. 3. AU officers may be required by the directors to give bonds in such sums and with such sureties as the di- rectors shall determine. Such bonds shall be conditioned for the faithful performance of the duties of their office. Sec. 4. The directors may at any time demand the resignation of any officer, and upon refusal, may dismiss said officer and elect his successor. Sec. 5. The President shall have general charge of the affairs of the company. He shall have supervision over and direction of all officers and employees of the company, and shall see that their duties are properly performed. He shall sign all bonds, obligations or other contracts in the name of the company. He shall preside at the meetings of the Board of Directors. He shall present a report of the year's busi- ness to the directors just before the annual stockholders' meeting and the same shall be read at such annual meeting. The President shall have power from time to time to em- ploy clerks and agents and fix their salaries. But this ^ower shall be at all times under the immediate control of the Board of Directors. Sec. 6. The Vice President shall preside at the meetings of the Board of Directors in the absence or disability of the President and shall perform such other duties as the directors may by resolution prescribe. Sec. 7. The Treasurer shall receive and disburse all funds of the company. He shall keep the funds in some Chicago Bank and shall deposit all money received in the bank account of this company to its credit. The Treasurer of the company shall sign all checks drawn on the bank account of this com- pany. He shall file and preserve all vouchers. He shall ren- 282 FORMS der an account at the annual meeting and at such other times as the directors may by resolution require. Sec. 8. The Secretary shall attend all regular and special meetings of the directors and stockholders and shall keep in a book prepared for that purpose a true record of all proceed- ings, and shall have charge of the books, documents and papers of the company. He shall have charge of the seal and attach it to all documents requiring sealing, but in his absence or refusal to act the President may attach such seal. The Secretary shall serve all notices required. He shall keep a calendar of things required to be done by the corporation or by him at certain dates and faithfully observe said calendar. And in general he shall do all such things as appertain to the office of Secretary and as shall be from time imposed upon him by the Board of Directors. ARTICLE V. MISCELLANEOUS. 1. The fiscal year of this company shall begin January 1st and end December 31st of each year. 2. These by-laws may be altered, amended or repealed at any regular meeting of the Board of Directors by a vote of the majority of the same, or at any special meeting of the directors when all are present. 4. Subscription Contract. We, the undersigned, hereby severally subscribe for the number of shares set opposite our respective names, to the Capital Stock of General Laundry Company, and we sever- ally agree to pay the said company, for each share, the sum of One Hundred Dollars. Chicago, Illinois, Nov. 15, 1911; Name Address Shares Amount FORMS 283 5. Certipicate op Stock. No. Shares Incorporated Under the Laws of the State of Ilunois. GENBBAL LAUNDRY COMPANY. Capital Stock $10,000. Shares, $100 each. Chicago, Illinois. This is to Certify, that is the owner of Shares of the Capital Stock of GENERAL LAUNDRY COMPANY. Fully paid and non-assessable, transferable only on the Books of the Company, in person or by Attorney, on the surrender of this Certificate properly endorsed. In Witness Whereof, the Seal of the Company and the signatures of the President and Secretary are hereto affixed at this day of , A. D. 19.... President. Secretary. 6. Power op Attorney on the Back op Certificate. For Value Received, the undersigned hereby assign. . and transfer. . unto , i Shares of the Capital Stock within mentioned, and do. . hereby constitute and appoint to be , true and Lawful Attorney, irrevocable for and in name and behalf to make the necessary trans- fer on the books of the company. Witness hand at this the day of : , A. D. 19. . . . [Witness : 7. Stub prom Which Certificate is Detached. certificate. No For Shares Issued to 284 FORMS Dated , A. D. 19. . . . Transferred from Dated ,...., 19.... No. Original No. Original No. of Shares Certificate. Shares. Transferred. Received this Certificate 8. Notice of Annual Meeting. 25 N. Blank Street, Chicago, Illinois, Dec. 24, 1911. To the Stockholders of General Manufacturing Company. The annual meeting of the stockholders of the General Manufacturing Co. will be held at the general offices of the company at 25 North Blank Street, Chicago, Illinois, on the 10th day of January, 1912, at 3 o'clock P. M. for the purpose of electing directors for the ensuing year and transacting such other business as may come before the meeting. Enclosed find a proxy which you may sign and return. In the event that you are present in person you may withdraw the same. Secretary. 9. Proxy for Annual Meeting of Stockholders. KNOW ALL MEN BY THESE PRESENTS, That the undersigned stockholder of the General Manufacturing Company, hereby constitutes and appoints, James Monroe and Harry Smith, or either of them, the attorney and proxy of the undersigned, to attend and represent the undersigned at the Annual Meeting of the stockholders of the General Manufacturing Company to be held on the 10th day of Jan- uary, A. D. 1912, and all adjournments thereof, and for and on behalf of the undersigned, to vote according to the num- FORMS 285 ber of shares of the stock of said company, which the under- signed would be entitled to vote if there personally present, hereby ratifying and confirming all that said attorneys and proxies, or either of them, shall do in the premises, giving and granting unto said attorneys and proxies full power of substitution and revocation. Dated at Chicago, Illinois, January 5, 1911, [Seal] In presence of 10. Minutes op an Annual Meeting of Stookholdees. minutes of the annual meeting of the stockhoiidebs of the general manufacturing company. The annual meeting of the stockholders of the General Man- ufacturing Company was held at the office of the company at No. 25 North Blank Street in Chicago, Illinois, on the 10th day of January, 1912, at 3 o'clock P. M, The meeting was called to order by the President of the corporation who was unanimously chosen Chairman of the meeting, and who served as such throughout the meeting. Mr. James Brown, the Secretary of the company being pres- ent, was appointed and acted as Secretary of the meeting. There were present the following stockholders in person who responded to the roll call. (Here follow names of stockholders, with number of shares set opposite their respective names.) The following stocldiolders were present by proxy : (Here follow the names of the stockholders, with the names of their proxies and number of shares set opposite their respective names.) There being a quorum of the stock present the company proceeded to the transaction of business. The proxies presented were ordered filed for record with the Secretary. The Secretary presented, read and appended in a conve- nient place for perusal the roll of all stockholders entitled to vote, and it remained so disclosed throughout the entire meeting. The Secretary then presented and read a copy of the, no- tice of the meeting together with the proof of mailing the same to each registered stockholder at his address as it ap- 286 FORMS pears on the books of the company at least ten days prior to the date of holding the same. The Minutes of the last annual meeting of the stockholders, held on Jan. 10, 1911, were read and approved. Upon motion duly made and seconded, the meeting pro- ceeded to the election of 5 directors by ballot according to the by-laws and the polls were opened at 3 :20 o 'clock P. M. On motion duly made and seconded Messrs. Henry Smith and "Walter Goodwin were appointed inspectors of election and the stockholders delivered to them their votes. The annual report of the President was then presented and read and upon motion of Charles P. Johnson, duly seconded, it was Resolved, That said report be received and adopted and ordered filed with the Secretary. (Here insert other business, including communications re- ceived, unfinished and. new business.) The polls, having remained open thirty minutes and every stockholder having voted, were closed and the inspectors pre- sented their report in writing showing that the following gen- tlemen, all stockholders, had received the highest number of votes : (Here place names.) The Chairman thereupon declared the said gentlemen duly elected directors of the company to hold office for one year and until their successors are elected and qualified. The Secretary was directed to insert in the minute book a copy of the following papers: 1. Notice of meeting and proof of mailing thereof. 2. Form of proxy. 3. President's report. There being no further business, the meeting adjourned. Secretary. 11. FoEM OP Minutes of Directors' FIrst Meeting. Minutes of the meeting of the Board of Directors of Gen- eral Manufacturing Company, held in Chicago, Illinois, at 25 North Blank Street, January 10, 1911, at the hour of 4 o'clock P. M. by the unanimous consent and appointment of all of the directors of said corporation. The meeting was called to order by Charles Henderson, who was elected temporary chairman. Henry Anderson was elected as temporary secretary. FORMS 287 The following directors were present in person: James Smith, Harold Wright, Henry Anderson, Abel Jones, Axel Johnson, being all of the directors of said corporation. On motion duly made and seconded, it was Eesolved, That the meeting go into the election of perma- nent officers. (Note : If this meeting was in a state in which the directors make the by-laws, those could be adopted at this point, or a committee could be appointed to prepare them. If the by- laws were not adopted at this meeting, the directors by reso- lution could establish the permanent offices or could simply proceed to the election of the usual officers, and make the by-laws, subsequently adopted, conform to this state of facts.) On motion duly made and seconded, Harold Wright was elected to the office of President of the Company, for the term of one year and until his successor is chosen and qualified; and being present in person, Mr. Wright signified his accept- ance of said office, and thereupon took the chair and presided during the remainder of the meeting. (Here elect other officers. If more than one candidate for an office, the election may be by ballot.) Thereupon the following communication was read to the-^ Board of Directors by the President. To the President and Board of Directors of the General Manu- facturing Company: Gentlemen : I am the sole owner of the following described property lo- cated at Number 302 Dearborn Street, Chicago, Illinois, viz. : A manufacturing plant consisting in, etc., valued at $10,425.00 Merchandise, valued at 1,874.00 Accounts receivable 1,247.00 Cash on hand 672.00 Total $14,218.00 This property is owned in connection with a business which has been conducted by me in my name for ten years. I re- gard the good will thereof to be worth at a fair conservative value, at least $7,500. I propose to sell said property and good will to your com- pany, provided you will assume the outstanding accounts, 288 FORMS amounting to $3,718.00, and the outstanding bills payable amounting to $1,000, for the price of Seventeen Thousand Dol- lars and I will receive in payment of said purchase price of said property One Hundred and Seventy shares of the capital stock of your company, being the number of shares I have heretofore subscribed for in my original subscription, the said One Hundred and Seventy shares to be issued to me as fully paid and non-assessable, the certificates to be issued and de- livered to me as soon as I have delivered and conveyed and assigned said property to your company. Respectfully, James Smith. Dated, Chicago, Illinois, November 20, 1911. Mr. James Smith then retired from the room and remained out during the following discussion and resolution. After some discussion the following resolution was adopted, all di- rectors except Mr. James Smith voting in its favor. Whereas, James Smith has offered by the written proposi- tion above spread upon the minutes, to sell, assign and con- vey to this corporation certain property for $17,000, and. Whereas, Said property is deemed by the Board of Direct- ors to be worth the sum of $17,000 to this corporation, and it is deemed to the best interests of this corporation to accept said proposition, therefore, it is Resolved, That this company accepts the above proposition of Mr. James Smith, and hereby purchases said property mentioned in said proposition and assumes the outstanding accounts and bills payable as therein stated, and shall pay said Seventeen Thousand Dollars for said property by issuing and delivering to said James Smith One Hundred and Seventy shares of this company of the par value of $100, as fully paid and non-assessable, being the original subscription of said James Smith, upon the execution of the proper instruments of transfer and bills of sale. Be it Further Resolved, That the Secretary be and he is hereby authorized to accept said property on behalf of this company and deliver certificates for One Hundred and Sev- enty shares, as aforesaid. There being no further business, the meeting adjourned to convene again at 2 o'clock P. M. on January 12, 1911, at the same place. (Note: In the minutes of the stockholders held prior to the above meeting, it should appear that they received the above communication [which need not be set out at length FORMS 289 in such minutes] and that they referred it to the directors and advised its acceptance.) (Note : In a subsequent meeting the bill of sale and other instruments of transfer, if any, executed and received pur- suant to the resolution above, should be copied in the minutes and approved.) 12. Ceetipicatb of Copy of Resolution fob Bank upon FnjNG Account. "Resolved, That the Treasurer be hereby authorized to open a bank account in the name and on behalf of this company with the 16th National Bank of Chicago, Illinois, and that he deposit the funds of this company therein; and that the checks of this company against such deposit be signed by its Treasurer and countersigned by its President, and said 16th National Bank of Chicago is hereby authorized to honor said checks and make the payments according to the tenor thereof, until notice to the contrary." I, William Smith, Secretary of the General Manufacturing Company do hereby certify that the above and foregoing is a true, complete and correct copy of a resolution of the Board of Directors of said company, passed at a duly convened meet- ing thereof, held on the 27th day of November, 1911, as taken from and compared with the original resolution in the minute book of said company. In Witness Whereof, I have hereunto affixed my signature and the seal of the company at Chicago, this 28th day of No- vember, 1911. (Corporate Seal) William Smith, Secretary. 13. Resolution Declaring Dividend. Resolved, That a dividend of five per cent on the capital stock of this corporation be and the same is hereby declared out of the surplus earnings of the corporation, payable to the stockholders of the corporation as they appear of record on the books of the company at the close of business on the 24th da,y of December, 1911, said dividend to be due and payable December 31, 1911. or 1 -x 1 Resolved, That a dividend of five per cent on the capital stock of this corporation be and the same is hereby declared out of the surplus earnings of the corporation, payable to the P.C.— 19 290 FORMS stockholders in proportion to their respective holdings aaid payable on January 31, 1911. 14. Notice op Spkcial Meeting (to Increase Stock). 25 N. Blank Street, Chicago, 111., Nov. 20, 1911. To James Smith. You are hereby notified that a special meeting of the stock- holders of the General Manufacturing Company will be held at its general offices at 25 North Blank Street, Chicago, Illi- nois, on the 20th day of December, 1911, at 2 o'clock P. M., for the purpose of considering the question of increasing the capital stock of said corporation, at which time you are re- quested to appear. Directors. 15. Form of Resignation fob Officer. November 20, 1911. To the President and Board of Directors of the General Manu- facturing Company. Gentlemen: I herewith tender my resignation as a Treas- urer of the General Manufacturing Company to take effect immediately. Andrew Johnson. INDEX [reeeeenoes are to sections] A ACCOUNT BOOKS OP CORPORATION, 32. ADMINISTRATrVE OPPICERS— who are, 109, 114. election of, 29, 30, 104, 109. AGGREGATE CORPORATION&- defined, 6. AMENDMENT OP CHARTER— See "Charter." AMOTION— right of, defined, 105. ARTIPICIAL PERSON— corporation defined as, 1. B BANKING CORPORATION— congress may charter, 21. 291 292 INDEX [eefekenoes are to sections] BONDS— power to issue, 130. form of, 131. remedies under, 132. BOOKS OF COEPORATION— account books, 32. stock certificate books, 32. stock ledger, 32. transfer books, 32. minute books, 32. right of stockholder to inspect, 84. BORROW MONEY— corporation may, 52. BY-LAWS— necessity of, 30. adoption of, 31. contents of, 31. enactment of, 31. CALENDAR, CORPORATE- what is, 34. should contain what, 34. INDEX 293 [REraaiENCES ABE TO SECTIONS] CALLS AND NOTICES— of stockholders' meetings, 87. of directors' meetings, 104. CAPITAL— see, also, "Stock." defined, 64. CAPITAL STOCK— See "Stock." CERTIFICATE OF INCORPORATION— procedure to obtain, 26. recording, 26. CERTIFICATE OF STOCK— book of, 32. defined, 69. transfer of, 93. CHARTER OF CORPORATION— see, also "Powers of Corporation." defined, 20. power of state to grant, 21. power of Federal government to grant, 21, a contract with the state, 22. reservation of right of state to amend, 22, 23. 294 INDEX [BEFERENCES AEE to SECTIONSJI form of charter, 24. under general law, 24. amendment of, by state without consent, 22, 23. by corporation, 25. procedure to obtain, 26. powers under, 43-60. construction of, 45. "CITIZEN"— corporation not, 4. may sue as, in U. S. Courts, 4. CLASSIFICATION OP CORPORATIONS, 6. COMMERCIAL PAPER— power to issue, 53. bona fide holder of, 61. CONDITIONAL SUBSCRIPTIONS— rights upon, 71. when unlawful, 71. when condition not provable, 71. CONSOLIDATION OP CORPORATION— right of, 124. how accomplished, 125. effect of, 126. INDEX 295 [befkbences are to sections] CONSTRUCTION OF CHARTER, 45. CORPORATION— defined, 1. an artificial person, 1. charter necessary to, 1. Chief Justice Marshall's definition, 1. as distinct from its stockholders, 2. entity ignored when, 3. when a "person," 4. not a "citizen," 4. origin of theory of, 5. kinds of, 6. aggregate, 6. sole, 6. ecclesiastic, 6. lay, 6. public, 6. private, 6. religious, charitable, pleasure, etc., 6. powers of, see also "Powers of Corporations." inherent in, 8. general contractual, 9. to commit torts, 10. to commit crimes, 11. differs from partnership, 14, 15. reasons for creating, 16. 296 INDEX [references are to sections] disadvantages in, 17. purposes for which formed, 18. CEEDITORS— rights in respect to conditional subscriptions, 71. rights in respect to subscriptions procured by fraud, 72. rights in respect to fraudulent subscriptions, 77. rights of under "trust fund" doctrine, 78. rights of in respect to overvaluation, 79. rights of as effected by knowledge of condi- tions, 80. rights against transferee, 97. where corporation insolvent, 134-137. CRIMES— power of corporation to commit, 11. D DE FAiCTO CORPORATIONS— defined, 35. what essential to constitute, 36. powers of, 37. DE FACTO DIRECTORS, 106. INDEX 297 [eetekenoes aee to sections] DE JUEE CORPORATION— defined, 35. DIRECTORS— nature of office, 102. election and qualification of, 103. meetings of, 104. removal of, 105. title to office, 106. responsibility of, 107. duty of, 108. right of, to deal with corporation, 108. DISSOLUTION OF CORPORATION— how accomplished, 138. voluntary, 139. by creditors, 140, by state, 141. DIVIDENDS— defined, 99. kinds, 99. money, 99. stock, 99. script, 99. right to, 81. ?.98 INDEX [references are to sections] declaration of, 100. who entitled to, 101. E ELECTION— see, also, "Meetings." of directors, 103. of officers, 29, 31. ESTOPPEL OP CREDITOR- to enforce stockholders' liability, 80. ESTOPPEL TO DENY CORPORATE EXIST- ENCE— when arises, 39. ESTOPPEL TO PLEAD ULTRA VIRES— whether when contract executory, 61. whether when contract executed, 62. F FEDERAL GOVERNMENT— power to incorporate, right of corporations under, 117. INDEX 299 [references are to sections] FOEEIGN CORPORATIONS— defined, 115. rights of, 116. under rules of comity, 116. under Federal constitution, 117. laws relating to, provisions of, 118. penalty under, 121. how may enter another state, 119. transaction of business by, 120. service upon, 122. suits of visitorial nature, 123. wound up under what laws, 124. FRANCHISE— corporation exists under, 1. FRAUD— conditional subscription is, 71. in subscription, 72. makes subscription voidable, 72. may be ratified, 72. rule where rights of creditors intervene, 72. in valuing property paid for stock, 76, 77. I INCORPORATION— by special charter, 24. under general laws, 24. 300 INDEX [eefeeences aee to sections] INJURIES— by corporations, see "Torts"; "Crimes." to corporations. INSOLVENT CORPORATIONS— defined, 134. rights of, 135. assets of, 136. remedies against, 137. INTERSTATE COMMERCE— clause of constitution, 21. what constitutes. INTRA VIRES ACTS— defined, 59. JOINT STOCK COMPANY- defined, 15. JURISDICTION— of Federal Courts, 4. K KINDS OF COMPANIES, 6. INDEX 301 [befeeences are to sections] L LACHES— prevents assertion of fraud, 72. LAND— power of corporation to hold, 50, 48. LEASE— power of corporation to make, 51. LIABILITY OF SUBSCRIBER, 73. subscription unqualified, 74. payment to extinguish, 75. upon conditional subscriptions, 71. upon subscriptions fraudulently obtained, 72. under trust fund doctrine, 78. where property overvalued, 75, 79. as effected by creditor's knowledge, 80. LIABILITY OF TRANSFEREE— to corporation, 96. to creditors, 97. LICENSE TO OPEN BOOKS, 26. M MANAGEMENT OF CORPORATIONS— See Chapter 5. 302 INDEX [beferenoes aee to sections] MAEKET VALUE OF STOCK, 65. MEETINGS OF DIRECTOES— quorum at, 104. how called, 104. regular and special, 104. MEETINGS OP STOCKHOLDERS— first meetings, 26, 29. regular and special, 86. calls and notices of, 87. attendance and vote, 88, 89. quorum at, 90. minutes of, 91. MINUTE BOOK, 32. MINUTES— of stockholders' meetings, 91. of directors' meetings. MONOPOLIES— defined, 129. are illegal, 129. MORTGAGE— power to, 54. INDEX 303 [BEFBKENCES ABE TO SECTIONS] N NAME— what corporation may take, 27. protection of, 27. NOTICE OF MEETINGS, 87. NUL TIEL CORPOEATION— plea of, 38. nature of plea of, 38. how met, 38. OBJECTS— what corporation may have, 18. statement of, 19. OEIGIN OF CORPOEATE THEORY, 5. OVEEVALUATION OF PROPEETY— in payment of stock, 76. \ right of creditors in respect to, 79. P PAROL EVIDENCE— forbids proof of conditions in subscriptions, 71. 304 INDEX [eefekenges are to sections] PARTNERSHIP— how differs from corporation, 14, PAR VALUE— defined, 65. PAYMENT OF STOCK— how may be made, 75. PERSON— corporation is, 1, 2, 4. PLEA OF NUL TIEL CORPORATION— nature of, 38. how met, 38. PLEDGEE- right to vote, 88. POWER OF EMINENT DOMAIN— not effected by ownership of stock, 2. POWERS OF CORPORATION, SEE, ALSO, "ULTRA VIRES"— inherent, 8, 43. general power to contract, 9. to commit torts, 10. INDEX 305 [kEFEBE])^ GES ABE TO SECTIOKS} to commit crimes, 11. three sorts of powers, 43. express powers, M. implied powers, 45. in general, 45, 49. of railroad companies, 46. to become surety, etc., 47. various illustrations, 48. to hold real estate, 50. to lease and sell, 51. to borrow moii6y, 52. to make notes, etc., 53. to mortgage, 54. to loan money, 55. to acquire shares, 56, 57. PRESIDENT 0¥ CORPORATION— how elected, 109. powers of, 110. duties of, 110. PROCEDURE TO OBTAIN CHARTER, 26. PROMOTER— defined, 40. in position of trust, 41. as agent of corporation, 42. p. c.—ao 306 INDEX [REFEKBNCES ABE TO SECTIONS] PROPERTY OP CORPORATION— does uot belong to stockholders, 2. may be in payment of stock, 75. midervaluation of, 76-78. power of corporation to sell, QUORUM— at stockholders' meeting, 90. at directors' meeting, 104. B RAILROAD CORPORATIONS— change of route, etc., against dissent, 25, power to maintain hotels, etc., 46. power to maintain parks, etc., 46. power to sell property, 51. REAL ESTATE— power of corporation to hold, 48, 50. REASONS FOR INCORPORATION— enumerated, 16. RELIGIOUS CORPORATIONS— defined, 6. INDEX 307 [BEFBHENCES ABE TO SECTIONS] EEMOVAL OF DIRECTOES, 105. ebpeMj of CHAETEE— power pf state to, 22, 23. EESCISSION FOE FEAUD, 72. S SALE OF PEOPEETY— power of, 51. by railroad company, 51. right of stockholder to prevent, 82. SEAL— corporation may have, 8. not essential, 8. SECEETAEY— of&ce of, 113. SHAEEHOLDERS, SEE "STOCKHOLDEES" SHAEES, SEE "STOCK" SOLE COEPOEATIONS— defined, 6. 308 INDEX SPECIAL CHABTDE, U. STOCK— defined, 64. share of, defined, 67. common, defi