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Cornell University Library
HD2741.C76 NI2 1908
Manual of corporate organization, contai
olin
3 1924 032 431 656
The original of this 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/details/cu31924032431656
Legal and Business Publications of
The Ronald Press Company
229 Broadway, New York.
CORPORATE ORGANIZATION.
By Thomas Conyngton, of the New York Bar.
Enlarged Edition. 400 pp. 6 x 9 in. 1908. Buckram
binding.
Prepaid Price, $3.00.
CORPORATE MANAGEMENT.
By Thomas Conyncton. Third Edition. 400 pp.
6x9 in. 1908. Buckram binding.
(In preparation.)
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CORPORATE FINANCE AND ACCOUNTING.
By H. C. Bentley, C. P. A. 500 pp. 6x9 in. 1908.
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THE MODERN CORPORATION.
" ">n. 290 pp. 5J4x8J£ ii
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lid
CORPORATION LAWS OF ALL THE STATES.
By M. U. Overland, of the New York Bar. 500 pp.
6x9 in. 1908-9. Buckram binding.
Prepaid price (including 1909 Supplement), $4.00.
MAINE CORPORATIONS.
By H. M. Heath, of the Maine Bar. 300 pp. 6 x 9
in. 1907. Buckram binding.
Prepaid price, $3.00.
NEW YORK CORPORATIONS.
By Richard Harrison, of the New York Bar. 431
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CONDITIONAL SALES.
By F. B. Haring, of the Buffalo Bar. 370 pp.
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PARTNERSHIP RELATIONS.
By Thomas Conyngton. 221 pp. 6 x 9 in. 1905.
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FINANCING AN ENTERPRISE.
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circulars on application.
A MANUAL
OF
Corporate Organization
CONTAINING
INFORMATION, DIRECTIONS AND SUGGESTIONS
RELATING TO THE INCORPORATION
OF ENTERPRISES
ENLARGED EDITION
BY
Thomas Conyngton of the New York Bar
Author of " A Manual of Corporate Management "
NEW YORK
THE RONALD PRESS
1908
COPYRIGHT 1904
The Ronald Press Company
copyright 1908
BY
The Ronald Press Company
PREFACE.
In this country the corporation has already become the
favorite form of business organization. Its use is constantly
extending. Every practicing lawyer is at times called upon
to incorporate the business enterprises of his clients or to
counsel them in regard thereto. The present work, treating
the general subject of incorporation from a practical stand-
point, is intended as a convenient manual of reference for
such occasions.
The work is also intended to point as clearly as may be
the advantages obtainable under the corporate form, and
to suggest the ways and means by which these may be most
effectually secured and conserved.
The value of the volume will probably be found to lie
largely in these suggestions. The innumerable conditions
that arise in the differing incorporations cannot all be spec-
ifically covered. The methods, instances and illustrations
given will, however, the author trusts, cover the field so
broadly that even though particular difficulties are not
directly met, their solutions may still be drawn from the
suggestions of the text.
The limits of space have prevented an exhaustive treat-
ment of many of the legal points discussed. In such cases
the law has been stated generally and with a view to the
avoidance of anything questionable or hazardous. Where
necessary, important points have been fortified by citation?
and quotations.
PREFACE.
The work has been prepared for use in any part of the
United States and without special reference to the laws of
any particular section, though the author's more extended
experience with the corporation laws of New York and New
Jersey has led to their more frequent use for purposes of
illustration. Wherever the book is used it will, of course,
be in connection with the local statutes applicable to the
subject.
The forms in Part VII are those most likely to be useful
and suggestive in the organization of corporations. In most
cases these forms are taken from instruments in actual use,
names and local details only being changed.
In conclusion the author would state that this volume
is intended to hold the same relation to the work of incor-
poration that his preceding volume " Corporate Manage-
ment " bears to the work of the organized company. He
can only hope that it may receive from his professional
brethren the same appreciation that has been so generously
accorded the former publication.
Thomas Conyngton.
New York City,
December i, 1904.
The author has taken advantage of the present reprint of
" Corporate Organization " to make such changes of the text
as were necessary to bring the volume up to date. He has
also added a number of forms, without which the volume is
incomplete but which were omitted at the time of its original
publication because of the limits of available space.
Thomas Conyngton.
New York City,
March 1, 1908.
TABLE OF CONTENTS.
PART I.— THE CORPORATE SYSTEM.
Chapter I. — Ends Sought by Incorporation.
§ i. Desirable Features of Corporate Form.
2. Limited Liability.
3. Legal Entity of Corporation.
4. Permanence.
5. Stock System.
6. Corporate Mechanism.
7. Attractiveness to Investors.
8. Conclusions.
Chapter II. — Subscription Lists and Contracts.
§ 9. General.
10. Nature of the Subscription Contract.
11. Form of Subscription Contract.
12. Underwriting Agreements.
Chapter III. — Contracts Prior to Incorporation.
13. Status of Corporation upon Organization.
14. Status of Contracting Parties.
15. Agreements between Incorporators.
16. Promoters' Contracts.
17. Option Contracts.
18. Trustees' Contracts.
19. Effect of Failure to Incorporate.
Chapter IV. — Where to Incorporate.
20. General.
21. Domestic Incorporation.
22. Foreign Incorporation.
23. Cheap Incorporation.
24. Reputation of Different States.
VI TABLE OF CONTENTS.
25. Corporate Laws of Different States.
26. Liabilities Imposed in Different States.
27. Protection of Minority in Different States.
28. General Rules for Selection of State.
Chapter V. — Cost of Incorporation.
§ 29. General.
30. Organization Fees and Annual Taxes.
31. Avoiding Fees and Taxation.
32. Counsel Fees.
33. Corporate Equipment.
PART II.— STOCK AND STOCKHOLDERS.
Chapter VI. — The Capitalization.
34. Basis of Capitalization.
35. Capitalization at Less than Real Values.
36. Capitalization at Real Values.
37. Capitalization on Earning Capacity.
38. Capitalization of Good-Will.
39. Form of Capitalization.
40. Bond Issues.
41. Financial Exigencies.
Chapter VII.— The Stock System.
42. Capital Stock.
43. Shares.
44. Certificates of Stock.
45. Unissued Stock.
46. Issued Stock.
47. Full-Paid Stock.
48. Common and Preferred Stock.
49. Other Classifications.
Chapter VIII.— Preferred Stock.
50. General.
51. Preference as to Dividends.
52. Preference as to Assets.
53. Cumulative Dividends.
54. Participation in General Dividends.
55. Redemption Right.
56. Voting Rights.
57. Convertible Stock.
58. Founders' Shares.
TABLE OF CONTENTS.
Chapter IX.— Full-Paid Stock.
§ 59. General.
60. Watered Stock.
61. Legal Status of Watered Stock.
62. Legal Status of Full-Paid Stock.
63. Certificates for Full-Paid Stock.
Chapter X. — Treasury Stock.
§ 64. Definition.
65. Origin.
66. Transfers to Corporation.
67. Transfers from Corporation.
68. Legal Status of Treasury Stock.
69. Stock of other Corporations held in Treasury.
Chapter XI. — Status of Stockholders.
§ 70. General.
71. Functions.
72. Rights.
73. Powers.
74. Liabilities.
75. Relations to Directors.
PART III.— THE CHARTER.
Chapter XII. — General Considerations.
§ 76. Nature of Charter,
77. Classification.
78. Business Corporations.
79. Public Utility Corporations.
80. Financial Corporations.
81. Charter Details.
82. Application for Charter.
Chapter XIII. — Incorporators.
§ 83. Who may Incorporate.
84. Number of Incorporators.
85. Functions of Incorporators.
86. Incorporators as Stockholders.
87. Dummy Incorporators.
Chapter XIV.— The Corporate Name.
§ 88. How Secured.
89. Selection of Name.
90. Right to Corporate Name.
91. Changing the Corporate Name.
V1U TABLE OF CONTENTS.
Chapter XV. — The Corporate Purposes.
§ 92. General.
93. Single Purpose.
94. Comprehensive Purposes.
95. Illegal Purposes.
96. Things " Ultra Vires."
Chapter XVI. — Stock Clauses.
§ 97. General.
98. Classifications.
99. Common Stock.
100. Preferred Stock.
Chapter XVII. — Location and Duration of Corporation.
§ 101. Domestic and Foreign Corporations.
102. Selection of State.
103. Principal Office.
104. Duration.
Chapter XVIII.— The Board of Directors.
§ 105. Qualifications.
106. Number.
107. Authority.
108. Power to Fass By-Laws.
109. Classification.
no. Standing Committees.
Chapter XIX. — Special Provisions.
§ in. General.
112. Usual Objects.
113. Cumulative Voting.
114. Classification of Stock.
115. Corporate Stockholding.
116. Limitations on Indebtedness.
117. Limitations on Salaries.
118. Sundry Provisions.
Chapter XX. — Execution and Filing of Charter.
§ 119. General.
120. Signing and Acknowledgment.
121. Filing.
122. Certified Copies.
Chapter XXI. — Amendment of Charter.
§ 123. General.
124. Subject Matter.
125. Procedure.
TABLE OF CONTENTS.
PART IV.— THE BY=LAWS.
Chapter XXII. — General Considerations.
§ 126. Function of By-Laws.
127. Subject Matter.
128. Power to Make.
129. Arrangement.
130. Preparation.
131. Adoption of First By-Laws.
Chapter XXIII.— Stock.
§ 132. Preliminary.
133. Certificates of Stock.
134. Transfers of Stock.
135. Transfer Agent and Registrar.
136. Stock and Transfer Books.
137. Preferred Stock.
138. Treasury Stock.
139. Lost Certificates.
Chapter XXIV.— Stockholders. .
§ 140. Annual Meetings.
141. Special Meetings.
142. Officers of Meetings.
143. Notice of Meetings.
144. Voting.
145. Certified List of Stockholders.
146. Election of Directors.
147. Quorum.
148. Proxies.
149. Order of Business.
Chapter XXV.— Directors.
§ 150. General Considerations.
151. Number and Qualifications.
152. General Powers.
153. Classification.
154. Vacancies.
155. Meetings.
156. Notice of Meetings.
157. Quorum.
158. Election of Officers.
159. Removal of Officers.
160. Compensation of Directors.
161. Power to Pass By-Laws.
162. Order of Business
X TABLE Q,F CONTENTS.
Chapter XXVI.— Standing Committees. /
§ 163. Purpose. * .. /
164. Appointment. V
165. Composition
166. Powers.
167. Procedure.
Chapter XXVII.— Officers.
§ 168. Enumeration; Qualifications. /
169. Presiding Officers. ~
170. Secretary.
171. Treasurer.
172. Managing Officers.
173. Counsel; Auditor.
174. Assistant Officers.
175. Delegation of Official Powers.
176. Salaries.
177. Removals; Vacancies.
Chapter XXVIII. — Dividends and Finance.
178. General.
179. Dividends.
180. Reserve Funds.
181. Limitations of Debt.
182. Bank Deposits.
Chapter XXIX. — Sundry Provisions.
183. General.
184. Corporate Seal.
185. Penalties.
186. Amendments.
PART V.— ORGANIZATION OF CORPORATION.
Chapter XXX.— First Meeting of Stockholders.
187. General.
188. Preparation of Minutes.
189. Method of Conducting Meeting.
190. Opening the Meeting.
191. Reception of Charter.
192. Adoption of By-Laws.
TABLE OF CONTENTS.
193. Election of Directors.
194. Exchange of Stock* for Property.
195. Other Business.
Chapter XXXI.— First Meeting of Directors.
196. General.
197. Minutes.
198. Opening the Meeting.
199. Election of Officers.
200. Adoption of Stock Certificate.
201. Acceptance of Subscriptions.
202. Exchange of Stock for Property.
203. Financial Provisions.
204. Other Business.
Chapter XXXII. — Issuance of Stock for Property.
205. General.
206. Present Doctrine.
207. Cases in Point.
208. Resume of Doctrine.
209. Property that may be Received.
210. Usual Procedure.
2ii. Donation of Stock to Treasury.
Chapter XXXIII. — Concerning Promoters.
212. The Promoter's Function.
213. Promoter's Relation to Corporation.
214. Illegal Arrangements.
215. Legitimate Arrangements.
216. Incidental Liabilities.
217. Restrictions on Sale of Stock.
PART VI.— SUNDRY CONSIDERATIONS.
Chapter XXXIV.— Underwriting.
218. General.
219. Method.
220. Advantages.
TABLE OF CONTENTS.
Chapter XXXV.— Voting Trusts.
221. General.
222. Distinctions.
223. How Formed.
224. Legal Status.
225. Requisites.
226. Restriction of Stock Sales.
Chapter XXXVI.— Protection of Minority.
227. General.
228. Rights of Minority at Common Law.
229. Encroachment on Minority Rights.
230. Protective Measures.
231. Cumulative Voting.
232. Classification of Stock.
233. Voting Trusts.
234. Special Arrangements.
235. Annual Audits.
236. Charter Limitations.
Chapter XXXVII. — Protecting an Inventor.
i 237. General.
238. Stock Control.
239. Classification of Stock.
240. Voting Trust.
241. Cumulative Voting.
242. Specified Majorities.
243. Limitation of Expenditures.
244. Assignment of Patent to Trustee.
245. Reservation of Royalties.
Chapter XXXVIII. — Incorporating a Partnership.
246. General.
247. Name.
248. Capitalization.
249. Exchange of Property for Stock.
250. Stock Adjustments.
251. Board of Directors.
252. Maintenance of Agreed Management.
(a) By Voting Trust
(6) By Voting Requirements.
(c) By Classification of Stock.
253. Officers.
TABLE OF CONTENTS,
Chapter XXXIX. — Holding Corporations.
§ 254. General.
255. Statutory Enactments.
256. Present Status.
257. Limitations.
258. Parent Companies.
Chapter XL. — Industrial Combination.
§ 259. General.
260. Preliminaries.
261. Option Agreements.
262. Inspection and Appraisements.
263. Underwriting.
264. Organization.
PART VII.— FORMS AND PRECEDENTS.
Chapter XLI. — Charter Forms.
Form.
1. Connecticut Charter.
2. Delaware Charter.
3. Maine Charter.
4. South Dakota Charter.
Chapter XLII. — Special Charters.
Form.
5. New York Charter. (Midvale Realty.)
6. New Jersey Charter. (United States Steel.)
7. New Jersey Charter. (Chicago Subway.)
Chapter XLIIL— By=Law Forms.
Form.
8. Simple Form.
9. Extended Form.
10. Comprehensive Form.
Chapter XLIV. — Underwriting Agreements.
Form.
11. United States Shipbuilding Company.
12. Globe Telegraph Company.
Chapter XLV.— Voting Trust Agreements.
Form.
13. Glen Harbor Improvement Company.
14. Colorado Western Railroad Company.
:1V TABLE OF CONTENTS.
Chapter XLVI. — Subscription Lists and Contracts.
Form.
15. Subscription List.
16. Subscription Blank. Individual.
17. Subscription to Bank Stock. Individual.
18. Letter Accompanying Subscription Blank.
19. Subscription List. Trustee's.
20. Subscription List. Agreement with Promoters.
21. Subscription List. Preferred Stock with Bonus.
22. Subscription Agreement. Payable in Stock.
Chapter XLVII. — Receipts for Stock Subscriptions.
Form.
23. Trustee's Receipt.
24. Treasurer's Receipt for Instalment Payment.
25. Treasurer's Receipt for Stock Subscription.
26. Stock Scrip.
27. Endorsement Form for Stock Scrip.
28. Assignment of Subscription and Payments.
Chapter XLVIIL— Stock Certificates and Stock Books.
Form.
29. Stock Certificate. Common.
30. Stock Certificate. Preferred.
31. Voting Trustees' Certificate.
32. Assignment of Voting Trustees' Certificate.
33. Assignment of Stock Certificate.
34. Stock Transfer Book.
35. Stock Book or Stock Ledger.
Chapter XLIX.— First Meetings.
Form.
36. Minutes. Stockholders'.
37. Call and Waiver of Notice. Stockholders'.
38. Proxy.
39. Inspectors' Oath and Report.
40. Waiver of Notice of Assessment.
41. Minutes. Directors'.
42. Call and Waiver. Directors'.
43. Secretary's Oath of Office.
44. Proposal to Exchange Property for Stock.
45. Assignment of Subscriptions.
Chapter L. — Option Agreements.
Form.
46. Option on Capital Stock.
47. Option on Business and Property.
48. Option on Real Estate.
49. Option on Corporate Plant and Business.
50. Corporate Option. Payment in Stock.
Si. Assignment of Option.
CORPORATE ORGANIZATION.
PART U— THE CORPORATE SYSTEM.
CHAPTER I.
ENDS SOUGHT BY INCORPORATION.
§ i. Desirable Features of Corporate Form.
Practically there are but two forms of business combina-
tion available for the conduct of a business or enterprise —
partnership and the corporation. The one is easily entered
into, and as easily dissolved, the other is formal and permanent.
Men may drift into partnership; the law frequently im-
plies it for them, or it is made by a simple verbal agreement.
Incorporation, on the contrary, may be had only by deliberate
purpose, carried into effect through prescribed forms of law.
A partnership may, and frequently does, exist without the
knowledge of the partners ; an incorporation is impossible ex-
cept with the formally expressed concurrence and participation
of all the interested parties.
The general and steadily increasing preference for the cor-
poration over the partnership as a form of business organiza-
tion is due to the very material advantages offered by the
former, which may be summarized as follows :
(a) Its limitation of stockholders' liabilities to a
definite amount.
(b) Its distinct legal entity for all business pur-
poses.
w 15
16 THE CORPORATE SYSTEM.
(c) The stability and permanence of its organiza-
tion.
(d) The representation of the different interests in
the corporation and its property by transferable shares
of stock.
(e) The management of the business by an elected
board of directors, acting through officers and agents.
(/) The greater ease of securing capital because of
the safeguards and advantages of the corporation.
These characteristic features of the corporate form are
severally considered in the following sections of the present
chapter.
§ 2. Limited Liability.
The subscriber to stock, and the holder of stock not fully
paid for, are liable to the corporation, and, indirectly, to its
creditors, up to the par value of their stock. In most states
of the Union a subscription involves no further liability. So
soon as the face value of stock is paid, this liability ceases and
the stockholder is no longer, as a stockholder, responsible in
any way for the corporation and its doings. In Minnesota in
addition to the regular subscription liability, the stockholder is
liable in case the corporation becomes insolvent, for a further
amount equal to his original subscription — that is equal to the
par value of the stock he holds. This double liability existed
in several other states until recently, but is now found in Min-
nesota alone. The corporation cannot collect this additional
amount but in case of its insolvency any creditor of the cor-
poration may enforce payment. In California, each stock-
holder is liable for his unpaid subscriptions, and in case of in-
solvency is further liable for such proportionate' part of the
corporate indebtedness as his stock bears to the total capital-
ization of the corporation. Stockholders in national banks,
and generally stockholders in banks, trust companies and other
moneyed corporations, are, in addition to any subscription lia-
bility, held liable for an amount equal to the par value of their
ENDS SOUGHT BY INCORPORATION. 17
stock in case of the insolvency of their corporation. In some
few states stockholders may be held for any debt due a laborer,
servant or other employee of the corporation.
These statutory liabilities are, generally speaking, unfortu-
nate, because of their lack of uniformity and their uncertain
action. Not infrequently they work serious hardships where
stock is purchased in ignorance of their existence. They are
always productive of litigation and the states in which they
are found are to be avoided for purposes of incorporation.
(See§ 26.)
These statutory liabilities, however, exist in but a few
states, and the general rule prevails that a stockholder whose
stock has once been paid in full is neither liable to assessment
by the corporation, nor to action by its creditors. The prop-
erty of the corporation in which he is interested may be swept
away, but his liability is fixed and limited. His investment
will be lost but that is the worst that can happen. The unlim-
ited responsibility of the partnership does not exist.
§ 3. Legal Entity of Corporation.
In the partnership every member must be made a party to
all actions either by or against the firm, and no partner may
sue or be sued by the partnership. He cannot contract with his
firm, nor enforce its obligations to him. The great inconven-
ience of this is manifest. On occasion it results in serious loss
and injustice. It is a material defect of the system.
The corporation, on the contrary, is a distinct legal entity,
entirely apart from its membership. It may sue and be sued
under the corporate name. It may contract freely with its
stockholders and even, under proper conditions, with its officers
and directors. It may bring suit to enforce these contracts,
and in its turn may be sued by stockholders, officers or di-
rectors. In short, for all purposes of ordinary business, the
corporation has a distinct, individual existence of its own.
18 THE CORPORATE SYSTEM.
§ 4. Permanence.
The partnership depends for its continued existence upon
the continued life, sanity, solvency and consent of each one of
its members. It is always readily, and often unavoidably, ter-
minated, and this easy and at times undesirable dissolution,
with its possible resulting loss of business, good-will and repu-
tation, is a serious defect of the system.
In the corporation, permanence and stability are character-
istic features. The organization endures until terminated ( 1 )
by voluntary dissolution, which must usually, though not in-
variably, be by unanimous consent of the stockholders, or, (2)
by the expiration of the period for which it was formed, or,
(3) by the insolvency of the corporation, or (4) by forfeiture
of charter by the state. These are the only legal methods by
which the corporation is terminated. The lives, the mental or
financial condition of its stockholders, the antagonism of an
individual or faction, need have no effect on its existence.
This permanence adds materially to the value and efficiency
of the corporation as a mechanism for the transaction of busi-
ness.
In some few states the maximum term for which charters
are granted is twenty years. In others it is fifty. In others
there is no limitation, and the duration of the corporation may
be fixed at any desired period, or may be made — at least in
name — perpetual.
§ 5. Stock System.
In a partnership there is no satisfactory or generally recog-
nized method of expressing and representing the individual in-
terests of the partners. Nor is there any way, save by consent
of all the parties interested, by which a partner may transfer his
interest in whole or in part to another person. Such a trans-
fer, unless by general agreement and adjustment, dissolves the
firm.
In stock corporations the exact reverse obtains. Under a
ENDS SOUGHT BY INCORPORATION. 19
fixed and well-ordered system, the various interests of the par-
ties in whom the ownership of the corporate property rests are
expressed as equal parts, or shares, of the whole. These shares
are represented by quasi-negotiable certificates which may be
transferred as desired, with but little formality and without
affecting the operations of the corporate business. The con-
venience and the obvious business advantages of this method
are most attractive features of the corporate system.
§ 6. Corporate Mechanism.
The stable, well-defined and orderly system of administra-
tion, characteristic of the corporation, is an admirable and im-
portant feature. The election of a board of directors by the
stockholders voting according to their stock interests, the elec-
tion of officers and the appointment of agents by this board for
the direct conduct of the business, the supervision and control
of these officers and agents by the board, the orderly action
of the board as a body at meetings called in accordance with by-
law or charter requirements, constitute the best working
mechanism for the conduct of a business enterprise that has yet
been devised.
The several functions of the stockholders, directors and of-
ficers, the well-defined laws and usages governing every fea-
ture of corporate operation, the records to be kept, the reports
to be made and the protection afforded its members, combine
to make a system compared with which the workings of the
partnership are crude and inadequate.
Like the federal system of government, the corporate or-
ganization is based on a division of powers and duties and the
operation of mutual checks and balances. If well arranged
and properly conducted its operation is effective and satisfac-
tory. It must be observed, however, that the ideal corporate
organization is not ordinarily attained. It is often lost through
ignorance, negligence or lack of experience. Safeguards and
checks may be omitted or purposely set aside by promoters
and exploiters. A charter and by-laws well adapted for one
20 THE CORPORATE SYSTEM.
corporation are often stupidly duplicated for another of
wholly different design and composition.
To avoid these errors and to secure an effective and
smoothly working corporate mechanism, requires skill and
intelligence in the organization of the corporation. To main-
tain its proper operation thereafter demands an honest, capable
administration or watchful care on the part of those interested.
It may be stated in passing that no system of conducting
business has been or can be devised that will protect the inter-
ests of those concerned, automatically and without effort on
their part. The-best laws are of no effect unless enforced, and
the most effectual and well-devised system of business organi-
zation may be wrested to evil ends unless the efforts in this
direction are opposed. All that can or should be done is to
afford the weak an opportunity to protect themselves if the
need arises. If they will not avail themselves of the opportu-
nity when the time comes, it is they that are at fault, not the
system.
§ 7. Attractiveness to Investors.
Speaking generally, any considerable combination of capi-
tal is impossible under the partnership system. No matter
what the merits of the enterprise, nor how great the induce-
ments offered, they are outweighed by the dangerous liabilities
and uncertain operation of the unincorporated form. For this
reason any appeal to the investing public on the basis of a
partnership, or of a joint stock association is foredoomed to
failure.
On the other hand, the corporate form has been found most
attractive to investors. It enables them to invest or partici-
pate to a definite extent without rendering themselves indefi-
nitely liable. It has a continued period of duration, usually
lasting until insolvency or voluntary liquidation. The busi-
ness interest obtained may be sold, transferred or transmitted
to posterity, with little formality and without material expense.
Its mechanism operates in well-defined grooves and the rights
ENDS SOUGHT BY INCORPORATION. 21
and liabilities of all concerned are well known. It has its own
personality, and stockholders are not involved by its actions or
responsible for its obligations.
For these reasons, if it is desired to raise capital for an en
terprise, or to increase the amount already invested, the obvi
ous method, and the one almost invariably pursued, is to incor-
porate the undertaking and sell the securities of the com-
pany so formed.
In this connection it may be observed that if the attractive-
ness of the corporation as a field for investment is to be pre
served, it is essential that those features shall be maintained
which serve to protect the interests of the investor. This has
not been the case in many recently floated incorporations. Ex-
orbitant and even fraudulent prices have been paid for proper-
ties. Undue power and emoluments have been given to the
original promoters. Rights of minority stockholders have
been denied, and the smaller investors have been debarred from
any knowledge of the inner corporate operations.
The immediate result of such practices has been to divert
much investment money to the better known bonds and par-
ticularly to the safe haven of the savings bank, where returns
are small, but where all the conditions are clearly defined, and
where both principal and profits are secure.
§ 8. Conclusions.
From the preceding considerations it seems that the char-
acteristic features of the corporate form which have led to its
extended use are : ( i ) Its efficiency which is curtailed only bj
ignorance or lack of skill in its organization; (2) its con-
venience which is inherent in the corporate system and requires
no special attention; (3) its safety which is the one point
above all others that requires attention, not only because it is
the one most apt to be overlooked, neglected or omitted by
intent, but because it is the most important feature of any
business enterprise in which a number of people are concerned.
The" corporation is, from its nature, a democratic institu-
22 THE CORPORATE SYSTEM.
tion, and the safety of the investors' interests should be a first
essential. The majority must rule, but the rights of the mi-
nority demand that this rule be fair, open and honest. Due
adjustment of all equities should be made so that all interests
are represented, none favored at the expense of others, the
general business facilitated and the profits fairly apportioned.
This is the true ideal of corporate organization, and, speaking
generally, that corporation is the most ably organized and con-
ducted which most nearly approaches this ideal.
CHAPTER II.
SUBSCRIPTION LISTS AND CONTRACTS.
§ 9. General.
In former days the subscription list was regarded as a
necessary preliminary to incorporation. It was circulated
either to determine whether sufficient support could be obtained
to justify the proposed incorporation, or, if this were already
known, to commit the subscribers definitely before the organi-
zation was actually undertaken.
In the present day the application of the corporate form
has been extended and somewhat modified, and the attendant
procedure has changed. Now the corporation is usually or-
ganized first, property of some kind is taken over, and stock
is then sold or subscriptions solicited to raise any needed capi-
tal. Under this plan the subscription list is of much less prom-
inence and importance than formerly.
There are, however, still cases of incorporation in which
the preliminary subscription is employed and is, at times,
essential. The farmers of a neighborhood may wish to estab-
lish a creamery, or a fruit-evaporating plant; in some growing
town the citizens may wish to combine their efforts for the
construction of an electric plant, the organization of a bank,
the opening of a library, or the establishment of some local
industry. In such event, the subscription list would be circu-
lated as the first step toward the formation of the contem-
plated corporation. (See Forms, Chapter XLVI.)
Also in other cases, memoranda or agreements are entered
into between the parties interested, which are the equivalent
of the subscription list and are the preliminary and definite
steps toward the intended corporate organization.
23
24 THE CORPORATE SYSTEM.
§ io. Nature of the Subscription Contract.
Prior to the organization of the corporation, the ordinary
subscription is merely a continuing proposition from the sub-
scriber to the proposed corporation for the purchase of a speci-
fied amount of its stock. At this stage the subscription is not
a complete and enforceable contract because the other party
thereto — the proposed corporation — has no legal existence,
and, until the corporation is formed, the death, insanity or vol-
untary withdrawal of the subscriber would cancel the proposi-
tion and thereby terminate the proposed contract. After the
corporation is organized and by either express or implied ac-
ceptance of the subscriptions to its stock, has completed the
contract, the subscription list becomes a binding agreement
between the parties thereto, and the corporation may, if neces-
sary, bring suit for specific enforcement.
To avoid this possibility of revocation, characteristic of
the ordinary subscription list before acceptance by the corpo-
ration, subscriptions are frequently made payable to trustees,
who act for the corporation in the matter, undertaking its or-
ganization, and, where desirable, the collection of the subscrip-
tions in whole or in part. Under such a contract, properly
drawn, the subscriptions, if unconditional, are binding as soon
as made; if conditional, as soon as the conditions are fulfilled.
The acceptance of a subscription by the corporation not
only renders the contract a binding one, but also, of itself, con-
stitutes the subscriber a stockholder of the corporation. If
his subscription is made to a trustee for the corporation, he
becomes a stockholder so soon thereafter as the corporation is
organized and his subscription turned in by the trustee. In
either case nothing further is necessary to legally establish
him in this position, nor in the enjoyment of his rights as a
stockholder. The delivery of the stock certificates, while a
formal recognition of this status, confers nothing beyond a
convenient evidence of his stock interest that he did not have
before. Even though the subscriber never paid his subscrip-
SUBSCRIPTION LISTS AND CONTRACTS. 25
tion, he is a stockholder from the time of the acceptance of his
subscription until such time as by proper procedure his sub-
scription is canceled or forfeited for non-compliance with its
condition's. (Wheeler vs. Millar, 90 N. Y., 353, 1882.)
It is to be noted that the corporation when organized is
under no compulsion to accept or recognize subscriptions to
its stock. The subscriber is not bound ; neither is the corpora-
tion until the contract is completed by the acceptance of the
subscription by this latter. If the subscription is made to a
trustee for the corporation and is accepted by him, this would
make a binding contract between the subscriber and the trus-
tee, but would not bind the corporation until acceptance, ex-
press or implied, by this latter. If the corporation accepted
the benefit of the trustee's acts it would thereby also accept
the trustee's contracts, from which such benefits accrued. The
very fact of the organization of the corporation by the trustee,
or trustees, might be held to be an acceptance of the subscrip-
tion contracts which rendered such incorporation possible.
Usually, however, the acceptance of subscriptions by the
corporation does not enter into consideration, such acceptance
following its organization as a matter of course. Litigation
may be necessary to compel payment of subscriptions, but
hardly to compel their acceptance by the corporation.
Subscriptions made as a part of a prescribed statutory form
of incorporation are irrevocable as soon as made. (Phoenix,
etc., Co. vs. Badger, 67 N. Y., 294, 1876.)
After the completion of any subscription agreement by the
recognition of both parties thereto, it becomes a simple con-
tract and subject to the usual laws of contracts.
The subscription to stock must be distinguished from an
agreement to purchase stock. In the first instance the sub-
scriber becomes a stockholder immediately upon the acceptance
of his subscription by the corporation. In the latter case he
does not become a stockholder until the consummation of his
agreement and the delivery to him of his certificates of stock.
A subscription list might be so worded as to be merely an
26 THE CORPORATE SYSTEM.
agreement to purchase stock, in which case, the subscribers
would not be stockholders until they received their certificates
of stock. (See § n.)
§ n. Form of Subscription Contract.
Generally, the form of the subscription list is of small im-
portance if the intent of the parties is clearly expressed. Ex-
cept for the difficulty of proof, a verbal subscription, if within
the provisions of the statute of frauds, would be binding and
entirely sufficient.
As a matter of ordinary precaution, however, the subscrip-
tion list should be prepared with due regard to form and with
a clear presentation of all important details. The name of
the proposed corporation, its general purpose, its capitalization,
the par value of shares, the state in which it is to be incorpo-
rated, and the conditions under which the subscription is made,
all should be set forth with precision. Enough should be in-
cluded to prevent any question as to the nature of the sub-
scription and the conditions under which it was made.
(Woods Motor Vehicle Co. vs. Brady, 181 N. Y., 1905.)
Where it is inconvenient to go into full details in the sub-
scription list proper, a general statement, or prospectus, is fre-
quently prepared and accompanies the list. Where this is
done the statements of this prospectus become a part of the
representations upon which the subscriptions are secured, and
must be lived up to in all essential details if the subscription is
to be held.
Any material variation from the statements of the subscrip-
tion list, such as a change of capital, or purposes, or location,
would release the subscribers. For this reason, only those
details should be stated explicitly in the subscription list that
have been fully decided upon; any undecided points being
either omitted, or stated as undecided, or otherwise so covered
that no matter how finally settled the subscriptions previously
secured will not be affected. For instance, if the name of the
proposed corporation has not been finally determined, the list
SUBSCRIPTION LISTS AND CONTRACTS. 3?
might be headed with any suggested name, as " The Smith
Separator Company," but the body of the document state that
the subscriptions were made to the stock " of a corporation to
be organized under the name of ' The Smith Separator Com-
pany,' or such other name as may be later determined." Sub-
scribers to such a list could not plead any voidance of their
subscriptions no matter what name was eventually selected.
Or if the capitalization were not definitely settled, the subscrip-
tion list might fix sufficiently elastic limits by the use of such
phrases as " not less " or " not to exceed " according to the
conditions.
At times individual subscription blanks are sent out instead
of a single list. At other times several similar lists are circu-
lated as a matter of convenience. If properly worded to show
their common purpose, these separate lists will for all legal
purposes be held as a single list.
The subscription list should be clearly and unmistakably a
subscription and not an agreement to subscribe in the future or
to purchase stock later. As a general rule the courts construe
subscription agreements very liberally in accordance with what
appears to be the intent of the parties, but a direct statement
that " We, the undersigned, hereby agree to subscribe, etc.,"
instead of the proper form, "We, the undersigned, hereby sub-
scribe, etc.," might have a very different legal effect from that
intended. (General Electric Co. vs. Wightman, 3 App. Div.,
N. Y., 118 (1896) ; Yonkers Gazette Co. vs. Taylor, 30 App.
Div., N. Y., 334 (1898) ; Lake Ontario Shore R. R. Co. vs.
Curtiss, 80 N. Y, 219, 1880.)
It is to be noted that under the common law, unless other-
wise specified in the agreement of subscription, the entire capi-
tal stock of the proposed corporation must be subscribed before
any of the subscriptions are binding and enforceable. In some
of the states this has been modified by statute, but otherwise
prevails, and where it is desirable that subscriptions for a less
amount than the entire capital stock should hold, the subscrip-
tion list should so specify. It is competent for the subscrip-
28 THE CORPORATE SYSTEM.
tion list to fix this amount at any desired figure and the sub-
scriptions will be binding provided the other requisite condi-
tions are fulfilled, so soon as the specified amount is
secured.
Any person competent to contract may make a binding sub-
scription for stock. A subscriber for stock need not necessa-
rily be an incorporator of the company, though usually an
incorporator must be a subscriber to the company's stock. One
corporation cannot usually subscribe for the stock of another
corporation, though it might be permissible in the case of a
corporation authorized to hold the stock of other corpora-
tions.
§ 12. Underwriting Agreements.
In the organization of the larger corporations, and more
especially those designed to effect industrial combinations, it
is usually very important and at times absolutely essential
either that funds be raised in advance of the time when the
corporate securities can be offered for sale, or that there be
some positive assurance that the necessary funds will be de-
rived from the sale of these securities when they are ready to
be offered. Under such conditions the use of the ordinary
subscription agreement would, at the best, be ineffective and in
most cases absolutely impracticable. Under such circumstances
recourse is had to the modified form of subscription agree-
ment known as the underwriting agreement. (See Chap.
XXXIV, Underwriting.)
CHAPTER III.
CONTRACTS PRIOR TO INCORPORATION.
§ 13. Status of Corporation upon Organization.
When a corporation comes into existence, it is usually with-
out debts, contracts or obligations of any kind, save those ex-
pressed in its charter and in the statute law of the state of
domicile. It is not bound by anything done or said before
its incorporation unless embodied in its charter, or in its by-
laws or involved in the procedure of its organization. A cor-
poration cannot be bound before it exists as no one could then
act with authority as its agent or representative.
After its organization, the corporation may recognize or
accept any contracts it sees fit, and this applies to contracts
made on its account before its incorporation. Such accept-
ance may be express or implied. If the corporation takes the
benefit of such a contract it is liable thereon without any ex-
press recognition or formal acceptance. For example, if
offices had been leased for the corporation before its incorpora-
tion, and the corporation, when organized, occupied the offices
it would be liable on the contract without further acceptance.
If the corporation did not occupy the offices but by a proper
resolution recognized the contract and assumed the rent, it
would be liable. If it neither occupied the office nor assumed
the lease, there would be no acceptance either express or im-
plied and the corporation could not be held. The whole mat-
ter would rest in the discretion of the corporation.
§ 14. Status of Contracting Parties.
Contracts are continually entered into by incorporators,
promoters or trustees for and on account of unorganized cor-
29
30 THE CORPORATE SYSTEM.
porations. These contracts are entered into on behalf of the
corporation and in its interests, but the party who enters into
any such contract is himself liable in the absence of an express
agreement to the contrary until the assumption of the contract
by the corporation. Then, if it was understood that he was
acting in the interests of the corporation, the party directly con-
tracting is relieved of liability, the corporation taking over the
liability in his stead. If, however, there were no such under-
standing, the party who originally made the contract would
be responsible, unless the other party agreed to his release, even
after the contract was taken over by the corporation.
For example, take the case of offices leased for the use of a
corporation. If leased with the clear understanding that the
party making the lease was acting for the unorganized corpo-
ation, such party would be personally liable, and if the cor-
poration failed to assume the lease, could be held for the full
amount, but so soon as the contract was assumed by the cor-
poration would be released. If, however, the lease were taken
without a clear understanding that the party was acting for
the corporation, he would not be relieved when the corporation
took over the lease — unless by consent of the lessor — but
would still be liable, and, should the corporation fail to pay its
rent, might be called upon to make good the deficiency.
For this reason, in making contracts for the benefit of an
unorganized corporation, the fact that they are being made for
such proposed corporation should be clearly recognized and
expressed. The parties making such contract should also
recognize their own liability in the matter, and, if there is any
uncertainty as to the ultimate organization of the corporation
or its acceptance of the contracts, should make such contracts
dependent upon acceptance by the corporation or else be pre-
pared to assume the responsibility themselves.
§ 15. Agreements between Incorporators.
There is another class of agreements relating to the unor-
ganized corporation, of a very different nature. These are the
CONTRACTS PRIOR TO INCORPORATION. 31
understandings or agreements between the incorporators, or
other interested parties, defining the nature of the proposed
corporation, its purposes and often the details of its organiza-
tion and management. Between the parties these agreements
are perfectly proper and legitimate, but affect the corporation
only so far as they may be incorporated in its charter or
by-laws.
It is to be borne in mind that provisions may be incor-
porated in the charter, or made part of the by-laws, in pur-
suance of a contract, or as a consideration for a contract, in
such wise that their subsequent alteration or repeal can be
effected only by consent of the interested parties. One
partner may agree to the incorporation of the partnership busi-
ness on condition that certain provisions be embodied in the
by-laws, the maintenance and observance of such provisions
constituting part of the consideration for the transfer of the
partnership property. Such by-law provisions, properly in-
corporated and duly adopted, would be extremely difficult if
not impossible of revocation without the consent of all parties
concerned. (Kent vs. Quicksilver M. Co., 78 N. Y., 159;
Lowenthal vs. Rubber etc., Co., 52 N. J. Eq., 440.)
Formal agreements between promoters as to the subject
matter of a charter can rarely be specifically enforced, and the
only recourse of the aggrieved party is a refusal to participate
in the subsequent organization of the corporation, or, if
damages can be shown, a suit against the offending parties for
their breach of contract.
Often agreements in regard to incorporation are mere
verbal understandings. Usually, if not carried out, these only
result in the refusal of the aggrieved party to move further in
the matter, such agreements not ordinarily furnishing suf-
ficient basis for litigation.
§ 16. Promoters' Contracts.
The general doctrine that no one is authorized to contract
for a corporation before it is formed applies to all contracts
82 THE CORPORATE SYSTEM.
with and by promoters. The promoter is himself liable on
these precorporate contracts, unless otherwise expressly pro-
vided, but the corporation is not.
For example, as is frequently the case, the promoters of an
enterprise may agree with an attorney for its incorporation,
authorizing him to attend to the whole matter, including dis-
bursements, preparation of seal, printing, etc., the amount of his
professional fee being agreed upon in advance. On the
organization of the corporation, its directors might disclaim
the whole matter and the attorney would have neither re-
course nor claim against the corporation on account of his
contract with the promoters. The corporation having utilized
his legal services in its incorporation would probably be held
for a fair fee, though this is not certain, and for the necessary
disbursements, such as the state fee, notarial charges, filing
fees, etc. Such claims would, however, have to be based on
their own merits, not on the terms of the agreement made with
the promoters. That agreement would have no standing as
against the corporation, and should this latter reject the seal,
printing, etc., the attorney would have no ground to proceed
against the corporation therefor, but must look to the pro-
moters. (Re Empress Engineering Co., L. R. 16, Ch. D., 125,
1 881.)
The most difficult questions arising under contracts with
promoters relate to the sale of property to the corporation.
It is a matter of almost daily occurrence for promoters to dis-
pose of property to corporations organized by them for the
express purpose of taking over such property. For discus-
sion of this somewhat complicated subject see Chapter
XXXII, Issuance of Stock for Property, and Chapter
XXXIII, Concerning Promoters.
§ 17. Option Contracts.
In the formation of corporations, and, especially, in the
formation of combinations, it is frequently necessary that
options be secured in advance of the actual incorporation. As
CONTRACTS PRIOR TO INCORPORATION. 33
these options may be — and often are — absolutely essential to
the enterprise, they must be secured before the corporation is
formed, and frequently involve very considerable expenditures
of money. (See Forms, Chapter XL.)
Nothwithstanding the importance of these contracts and
their peculiar nature, they fall under the general rules gov-
erning precorporate contracts. If accepted they become the
contract of the corporation; if rejected the corporation cannot
be held. If the corporation refused to take over any such
option contracts, the party obtaining or holding same would
have no claim for compensation or for damages on account of
any payments made by him thereon or in connection therewith.
He might have some claim against his associates, if they made
any promises to him in regard to the options, or authorized
him to procure them, but the corporation would not be in-
volved, except by its voluntary consent.
§ 18. Trustees' Contracts.
When the organization of a corporation is contemplated,
not infrequently a trustee, or trustees, will be selected to act
for the inchoate corporation. Some arrangement of the kind
is necessary where subscriptions to the stock of the corporation
are to be made binding before its organization. Also, usually,
it is advisable to have definite parties in charge of the matter,
who have power to act for the subscribers and who will attend
to the details of the incorporation.
Such trustees frequently collect payments on subscriptions,
make disbursements in the interest of the new enterprise, and,
in some cases, actually carry on the undertaking until such
time as the corporation may be advantageously organized and
put in control of the going concern.
No matter how far such trustees may have carried the cor-
porate affairs, nor to what extent they may have contracted
in the interests of the corporation, they have the same in-
dividual liability on these contracts and the same inability to
force them on the corporation, as in the case of any other pre-
corporate contracts.
34 THE CORPORATE SYSTEM.
The coign of vantage occupied by the trustees is found
in the fact that they are in control of the organization, and,
where contracts of any importance have been entered into by
them on behalf of the corporation, or disbursements made, or
obligations entered into, they will see that these are properly
assumed by the corporation before its control passes from their
hands. Then, if these contracts have been entered into in
proper form, so that the assumption by the corporation re-
leases the trustees, these latter, barring fraud, are thereafter
absolutely free from any liability on account of their pre-
corporate undertakings.
§ 19. Effect of Failure to Incorporate.
When contracts are entered into in expectation of the
formation of a corporation and on its behalf, their status if
the corporation fails of incorporation depends upon the
nature and condition of the contract. A subscription to its
stock, no matter how irrevocable, would be terminated, and,
if payments had been made thereon to a trustee, any unex-
pended amount might be reclaimed, and, if the trustee were
to blame for the failure to incorporate, he might be responsible
for the portion expended as well. Most other contracts, if
clearly made on behalf of the proposed corporation, would be
terminated. If not clearly so made, the parties acting for the
corporation might be held to specific performance, or for
damages for non-performance. If the contracts were made
with the distinct understanding that they were for the benefit
of the proposed corporation, the parties acting for the corpora-
tion could not insist on performance for their own benefit,
unless with the consent of the contracting parties.
CHAPTER IV.
WHERE TO INCORPORATE.
§ 20. General.
If the corporation laws and imposts were uniform in every
state of the Union, or if the whole matter were regulated by
general Federal laws, the best location for any particular
corporation would be easily determined. It would then, as
a matter of course, be organized in that state in which the
principal operations were to be carried on, or in which
its headquarters might most conveniently be located.
There is, however, great variation in the cost of incor-
poration in different states, also in the rates and methods of
taxation after incorporation. The general requirements and
regulations imposed on corporate operations also differ
widely.
Owing to the material differences in the costs, regulations
and requirements of the several state laws, taken in con-
nection with the fact that a corporation organized in one
state may, under more or less restriction, or lack of restric-
tion, do business in any other state, the selection of the place
for incorporation frequently becomes a balancing of the
comparative advantages and disadvantages of the available
states. The low taxes of one state will be weighed against
the more liberal corporation laws of another; the liabilities
of a convenient state with the freedom therefrom of another
less available; the benefit of incorporation under desirable
laws in an " outside " state, with the addition of the burdens
imposed on foreign corporations in the " operating " state,
as against direct incorporation in this latter; or the priv-
ileges allowed by one state as against the immunities en-
joyed under the laws of another.
36 THE CORPORATE SYSTEM.
§ 21. Domestic Incorporation.
Within the boundaries of the state by which it was char-
tered, a corporation is a domestic corporation — outside these
boundaries it is a foreign corporation. Within its own
state, a corporation has certain recognized powers and
privileges as a matter of right. Outside it has only such
powers and rights as may be accorded foreign corporations
by the laws or customs of the particular state. These vary
greatly in the different states. In some, foreign corporations
are discriminated against, while in others upon compliance
with the prescribed formalities the foreign corporation has
the same status as the domestic corporation.
As a rule a corporation should be organized in that
state in which its principal operations are to be carried on,
and this rule should not be departed from unless to gain
some distinct advantage. At times, however, there will
be weighty reasons that justify the selection of an outside
state for incorporation. Also it often happens that the
business of a corporation must of necessity be conducted
in a number of different states. In any such case it is domi-
ciled in one of these states and thereafter transacts its business
in the others as a foreign corporation. The selection of the
home state then becomes purely a question of expediency and
advantage. (See § 101.)
§ 22. Foreign Incorporation.
A corporation is not a citizen of the United States and
has no claims to the privileges and immunities of citizen-
ship under the Constitution. It is an artificial creation of
the state in which it is incorporated, and in that state is
endowed by common and statute law with certain rights,
powers and immunities. It is also usually allowed to
carry on its operations in other states with all the powers
and privileges it enjoys in its home state. These other
states may, however, if they so desire, ignore the fictitious
WHERE TO INCORPORATE. 37
personality of the foreign corporation, refuse it recognition,
debar it from initiating litigation in the state courts, con-
sider it a partnership if litigation be brought against it, or
even entirely prohibit its corporate operations within the
state, except in so far as they may be permitted by the con-
stitutional provisions regulating interstate commerce.
Generally, however, no such discrimination is exer-
cised against the foreign corporation. In most if not all
the states, laws will be found providing for certain fees and
requirements as a pre-requisite to the exercise of the cor-
porate rights by foreign corporations within the state, but
upon compliance with these demands they are admitted
freely and are usually accorded all the rights of domestic
corporations.
Some states have gone even further than this, as in New
York, where for many years domestic corporations were
subjected to high fees, burdensome reports and possible
liabilities, which were not imposed upon foreign corpora-
tions doing business within the state. As a consequence
the citizens of New York when desirous of incorporating
a local business or enterprise would resort to other states
for the purpose. Thereafter the corporation so organized
did business in New York as a foreign corporation and this
though all the parties interested resided in the state and all
the corporate business was transacted there.
This practice gave rise to litigation to determine the
right of citizens to incorporate elsewhere when the cor-
porate business was to be conducted in the state, but the
decisions were uniformly and unreservedly in favor of such
right. (Merrick vs. Santvord, 34 N. Y., 206 (1866);
Demarest vs. Flack, 128 N. Y., 205, 1891.) In other states
the same question has arisen and has been so uniformly decided
in the same way that the principle may be regarded as firmly
established.
In some states conditions exist of so onerous a nature as
to render foreign incorporations most desirable, as, for
THE CORPORATE SYSTEM.
instance, the double liability of Minnesota, imposed upon the
stockholders of certain corporations when organized under the
laws of the state. Under ordinary conditions the stockholders
of a foreign corporation doing business in the state escape
this double liability altogether, being subject only to such
liabilities as were imposed by the corporation laws of the
state of organization.
In this connection it is to be noted that the State of
California, in which a special liability is imposed upon
stockholders of domestic corporations, sought to extend
this same liability by statute provision to the stockholders
of foreign corporations doing business within the state.
This liability was sustained by a decision of the Supreme
Court of the United States as against the California stock-
holders of a Colorado corporation doing business in Cali-
fornia. (Pinney vs. Nelson, 183 U. S., 144, 1901.) In this
case, however, the corporation was organized in Colorado,
mainly by citizens of California, for the express purpose
of doing business in this latter state, and this purpose, with
unusual and perhaps unnecessary frankness, was specifically
set forth in the charter. Without such charter statement, or
in the case of an ordinary foreign corporation doing business
in California, it is doubtful if the statute liability would be
sustained even against California stockholders though the
matter has not yet been adjudicated.
It may be stated as a general rule that if corporate busi-
ness of any importance is to be carried on in a foreign
state all the requirements of that state in regard to foreign
corporations should be complied with as a matter of business
policy and expediency. If they are not so complied with,
the usual penalty is the refusal of corporate recognition by
the foreign state. The corporation may then still carry on
business within such foreign state, its property is safe from
confiscation and it cannot be prevented from bringing suit
in all proper cases in the United States' courts in that state.
Beyond this, however, it has no status. It cannot enforce a
WHERE TO INCORPORATE. 39
contract or collect a debt in the state courts. If sued, it
will be treated as a partnership and its stockholders con-
sidered as partners.
§ 23. Cheap Incorporation.
Resort to outside corporation on account of its cheap-
ness is legitimate but not always wise. The cheap states
have their advantages, but the excellence of their corporate
regulations does not figure among these. Nor is the status
of their incorporations as a class so far removed from
reproach as to render the association entirely desirable for
reputable organizations.
Occasions will occur when temporary or experimental
incorporations are desirable, or where the conditions are
such that the cheapest incorporation must be made to serve,
or where the laxity of corporate regulation is regarded as
advantageous. Then the cheap localities will be sought.
Speaking generally, however, the ease and cheapness
with which incorporation may be secured in these localities
draws to them most of the unsubstantial enterprises, illusive
undertakings and fraudulent schemes that adopt the cor-
porate guise for their dubious careers. These give char-
acter to the incorporations of these localities, and the very
fact that a corporation is organized in a cheap state is in
itself a circumstance requiring explanation and tending to
discourage the experienced investor. In other words the
corporation is in bad company and is likely to suffer the
usual results of such association.
An even more material objection to the states of cheap
incorporation is found in the fact that their corporation
laws are crude, incomplete, and, for the most part, unad-
judicated. Nor is there any reasonable assurance of the
permanency of the existing laws. Obviously they have been
compiled hastily, and without requisite care and considera-
tion, and they are liable to be amended or altered at any
time with equal haste and lack of judgment. The pos-
40 THE CORPORATE SYSTEM.
sibilities in this direction are illustrated by the corporate
career of West Virginia. Up to 1901, West Virginia had
a virtual monopoly of the cheap incorporation business,
and derived therefrom a large and very profitable revenue.
In the year mentioned, without previous warning, and with-
out obvious reason beyond an ill-judged avarice, the state
legislature raised the corporate fees and taxes materially,
making them complicated and burdensome. The result
was the practical destruction of the incorporating business
in West Virginia. Most of the outside corporations already
in the state re-incorporated elsewhere, new incorporations
ceased to come, and West Virginia is no longer considered
an available resort for incorporators from other states.
§ 24. Reputation of Different States.
Each of the incorporating states has a general reputation
in corporate matters, primarily arising from the character and
operation of its corporate legislation and from the security
afforded thereby to corporate investors and creditors, but
actually derived from the character of the corporations organ-
ized under its laws.
This reputation is of much importance to corporations in-
tending to offer their securities to intelligent investors. In the
cheaper localities, on account of this cheapness and the accom-
panying laxity of the corporate laws, such reputation is dis-
tinctly bad. The mere fact that a corporation is organized in
Arizona or South Dakota is sufficient to put experienced in-
vestors on their guard and renders the sale of corporate
securities difficult.
Prior to the amendments of February 4, 1905, the laws of
the District of Columbia regulating incorporations were cul-
pably slack. Fees were nominal; restrictions were practically
nil, and as a result the incorporations of the District became a
national scandal. Attention was called by President Roosevelt
to the abuses that had grown up under these laws and Con-
gress was asked to abate the evil. This was accomplished by
WHERE TO INCORPORATE. 41
a few drastic changes, and the corporate code of the District is
now at least indifferently good. Its laws are, however, avail-
able only for local incorporations and it is to be regretted that
while a revision was under way it was not carried further.
A model code in the District of Columbia with the fees, taxes,
records and reports of an ideal system would not only have
served for local incorporations but could have been made
available and advantageous as well for corporations conduct-
ing an interstate business or carrying on operations in different
states. It would also have served as a model for the country
at large, and, if its operations were satisfactory, would un-
doubtedly have furthered materially a much to be desired uni-
formity of corporate laws in the various states of the Union.
Among the more moderate-priced incorporating states
Maine stands well and is resorted to by many Eastern corpo-
rations. Delaware has a fair reputation and, having recently
(1907) made very considerable reductions in both organization
fees and annual taxes, should become one of the most popular
states for outside incorporation. Connecticut's reputation
where known is good.
New Jersey is the most popular state of the Union for out-
side incorporations of large capitalization, and its reputation
is excellent. Massachusetts stands high, on account of the
conservatism of her laws, while Pennsylvania, Illinois and
other important states lying between also stand well. New
York, under its present law, ranks as high as any state in the
Union.
§ 25. Corporate Laws of Different States.
Where important business interests and valuable prop-
erty rights are involved it is of great advantage that the system
of corporate laws should be full, comprehensive and judicially
determined.
Of all the states of the Union, New Jersey has probably
the advantage in this respect. She was the first to enact an
effective and liberal system of corporate law. Incorporators
42 THE CORPORATE SYSTEM.
from all over the country were attracted by the excellence of
these laws. In the course of time the important points of
doubtful status came up in litigation and were finally settled.
From time to time, as defects were discovered, her corporation
laws were amended, until to-day, save as to a few points, she
has probably the most generally satisfactory system of cor-
poration laws to be found in this country.
The New York laws have always ranked well, but until
recently imposed unnecessarily onerous liabilities on directors
and stockholders. The fees were also excessive. These fea-
tures have been removed and at present the New York incorpo-
ration laws are satisfactory and the system of taxation though
unnecessarily complicated is exceptionally fair.
In permanency, another most important feature of cor-
porate laws, New Jersey again stands exceptionally high, and
the cheaper localities correspondingly low. In New Jersey the
corporate system has been gradually shaped into a nearly per-
manent form requiring but little change, and, save for some
few occasional laws passed, apparently, for the accommodation
of particular corporate interests, her Legislature has shown a
commendable reluctance to interfere with these laws, unless
for their obvious betterment. In most of the other states of
the Union more or less modification of the existing corpora-
tion laws is to be expected before a permanent form is reached.
In states such as New York, Pennsylvania, Massachusetts,
Illinois, California, these changes are not likely to be radical,
as the property interests involved are too extensive to permit
of any material modifications of the laws by which these
interests are held and administered.
§ 26. Liabilities Imposed in Different States.
When the selection of a state for incorporation is under
consideration the special liabilities attaching to directors and
stockholders of a corporation are matters for careful investi-
gation. The unusual stock liabilities found in Minnesota and
California are very serious, if not insuperable, objections to
WHERE TO INCORPORATE. 43
incorporation in these states. In the cheap localities the usual
liability on unpaid stock exists, but there are no special liabili-
ties of either directors or stockholders.
In the more important incorporating states stockholders
generally have no liabilities save on unpaid stock, though in
Massachusetts, New York and a few other states there is a
stockholders' liability to laborers employed by the corporation.
Also in Idaho, Minnesota and some other states failure to
observe certain requirements as to corporate organization and
procedure may involve stockholders in liability, and in a num-
ber of states the legislatures have re-enacted the common law
liability of stockholders — which exists in all states — for divi-
dends or other disbursements to the stockholders which im-
pair the capital stock.
Directors are in most of the states only held liable for
negligence or direct fraud.
§ 27. Protection of Minority in Different States.
This feature is at times of very great importance. It could
hardly be satisfactorily secured in either Arizona or the Dis-
trict of Columbia, special charter provisions not being per-
mitted in those localities. In South Dakota, while special
charter provisions are not allowed, the right to cumulative
voting is effectually secured by the constitution of the state,
and the minority is to that extent protected.
In New Jersey and New York protection may be secured
by charter provisions. In Maine it may only be had by by-
law enactment, which, as the by-laws are subject to repeal by
the majority, is practically no protection. (See Chap.
XXXVI, Protection of Minority.)
§ 28. General Rules for Selection of State.
Uusually the selection of the place of incorporation will be
determined by the particular conditions. The more important
of the few general rules that can be given are as follows :
( 1 ) A corporation having but one plant or place of busi-
44 THE CORPORATE SYSTEM.
ness, in which all or the greater part of its capital is involved,
should be incorporated in the state where that plant or place
of business is located.
(2) Any large corporation, or industrial combination,
formed to transact business or operate plants in a number of
states will, for the reasons already given, find incorporation
in New Jersey advantageous. Its tax rate is higher than in
some of the other incorporating states, but is not excessive.
Of late years Maine is coming into favor for incorporations of
the kind.
(3) Temporary incorporations, some few close corpora-
tions, purely speculative corporations, incorporations of doubt-
ful stability, and all other corporations desiring the maximum
of capitalization with the minimum of expense and restriction,
will naturally gravitate to the bargain-counter localities, where
the cost of incorporation is nominal.
CHAPTER V.
COST OF INCORPORATION.
§ 29. General.
The direct expenses of incorporation are the initial taxes
paid the state authorities, counsel fees, the incidental fees
for filing and acknowledgments, and the cost of the cor-
porate equipment. Thereafter the expenses are presumably
the same as for an unincorporated concern, save for the
annual franchise tax and possibly an increased property
taxation that may result from the greater difficulty of
evasion under the corporate form.
The incidental expenditures are usually trifling. The
initial state fees and the subsequent annual taxation are
more serious. As, however, these differ greatly in the vari-
ous states, only a general consideration of the subject can
be undertaken here.
§ 30. Organization Fees and Annual Taxes.
In deciding upon a locality for incorporation the matter
of fees and taxes is often given undue importance. Unless
the saving is considerable, it is rarely expedient to incor-
porate in a foreign state on that account alone. In many
cases really important advantages are sacrificed for the
sake of immaterial savings in fees. The following tables
give the fees for incorporation and annual taxes in a few
of the states most utilized for general incorporation pur-
poses.
45
46
THE CORPORATE SYSTEM.
COMPARATIVE TABLE OF ORGANIZATION EXPENSES.
Including all Filing and Incidental Fees.
CAPITAL STOCK
SOUTH
OF COMPANY.
NEW JERSEY.
NEW YORK.
DELAWARE.
MAINE.
DAKOTA.
$1,000
$35 °°
$l6 OO
$25 OO
$27 OO
$13 OO
5,000
35 00
17 5°
25 00
27 CO
13 OO
10,000
35 °°
20 OO
25 OO
27 00
13 00
25,000
35 00
27 50
25 OO
67 OO
13 00
50,000
35 °°
40 OO
25 OO
67 OO
18 00
100,000
35 °°
65 OO
25 OO
67 00
18 00
500,000
no 00
265 OO
65 OO
67 OO
23 00
1,000,000
210 00
515 OO
115 OO
117 OO
28 00
5,000,000
1,010 00
2,515 OO
365 OO
517 OO
43 00
10,000,000
2,010 00
5,015 OO
615 00
1,017 00
43 °°
COMPARATIVE TABLE OF ANNUAL FRANCHISE TAXES.
$1,000
$1 OO
$1 50
$5 00
$5 °°
None.
5,000
5 °°
7 5°
5 00
5 00
(C
10,000
10 00
15 00
5 00
5 00
(C
25,000
25 00
37 5°
5 00
5 00
a
50,000
50 00
75 00
10 00
5 00
100,000
100 00
150 00
10 00
10 00
a
500,000
500 00
750 00
25 00
50 00
a
1,000,000
1,000 00
1,500 00
50 00
75 00
5,000,000
4,000 00
7,500 00
150 00
275 00
a
10,000,000
4,250 00
15,000 00
275 00
525 00
It is to be noted that all such tables of comparative ex-
penses are misleading without some explanation. For instance,
the annual taxes of the preceding table are based on the sup-
position that in each case the entire stock of the corporation
is issued and outstanding. Also the annual taxes as given are
exclusive of the usual tax imposed on any real or personal
property held in the state, which is taxed in all respects as
if owned by an individual. In New York the annual tax
varies with the conditions, and, as given in the table, is based
on the supposition that (1) all of the capital is issued and
(2) is employed in the state, and (3) is paying six per cent,
dividends.
In the table as given the usual incidental expenses of
each state have been included as part of the organization
tax. These incidental fees vary. In New York they amount
COST OF INCORPORATION 47
to $15; in New Jersey $10; in Delaware $15; in Maine $17;
in South Dakota $3 ; in Arizona $20 to $30.
The comparative cost of incorporation only comes up
for consideration when foreign incorporation is contem-
plated. In all such cases the cost of keeping up a state office
and agent in the selected state is to be added to the usual
expenses. This would vary from $25 to $50 annually for
corporations of moderate capitalization, and usually includes
assistance in holding annual meetings in the state and such
attention to state reports as is demanded by the local law.
It is to be noted that the annual franchise tax in New
Jersey amounts to a very considerable sum. In New York,
a corporation doing all its business outside of the state,
and merely maintaining an office in the state for its books
and meetings, pays no annual franchise tax. The annual
franchise tax in Maine is moderate. In the District of
Columbia, Connecticut, South Dakota, Arizona, and some
other of the western states there is no annual franchise
taxation. In considering the question of cost, it is to be
remembered that foreign corporations are usually required
to pay license fees and taxes in the states in which they do
business, and often foreign incorporation merely adds the
cost of the outside incorporation to the taxes that cannot
be avoided in the state in which the corporation conducts its
operations. In some cases, however, a foreign incorporation
may save onerous local taxation as in the case of People, etc.,
vs. Feitner, 54 N. Y. App. Div., 217 (1906). Here foreign
incorporation would have saved the corporation over $30,000
per annum.
§ 31. Avoiding Fees and Taxation.
As stated elsewhere, it is usually advisable for an incor-
poration to be taken out in that state where the principal
business is to be conducted. At times, however, the incor-
porating fees are so excessive that the corporation is forced
48 THE CORPORATE SYSTEM.
to resort to another state where the fees are less onerous,
doing business in its own state thereafter as a foreign cor-
poration. For instance, had the Steel Trust incorporated in
Pennsylvania, which would naturally have been its home
state, its initial fees would have amounted to over $3,500,000.
In the state selected — New Jersey — these fees amounted
to but $220,000.
Such incorporation in a less expensive state is the most
obvious method of avoiding or reducing excessive state fees,
but it is not always practicable. Conditions may exist which
fix the state of incorporation despite the question of fees, and
it then becomes a matter of importance to reduce these fees
and the annual taxation thereafter to the lowest possible figure.
Where a corporation is organized to take over a business or
property it is often possible and frequently distinctly advan-
tageous to issue bonds in part payment for the property taken
over. The necessary capitalization of the company is thereby
reduced by just the amount of this bond issue, and the state
fees and the state taxation thereafter are also proportionately
less. Also, in many states, the corporation, in rendering its
statement of taxable property, is allowed to deduct any out-
standing indebtedness. The bond issue is an entirely legit-
imate indebtedness and as such in these states is deducted from
the taxable property of the corporation in ascertaining the
basis of taxation. This law was sustained by the decision in
People, etc., vs. Barker, 139 N. Y., 63 (1894), an extreme
case, where the corporation under consideration had an out-
standing bond issue of $2,250,000, an amount far in excess
of its total capital stock, and at least twice the amount of its
actual assets. In this decision the Court said :
" This indebtedness must in the nature of things be
taken into consideration in arriving at the value of the
capital of the relator. And when it is seen that the in-
debtedness of a corporation is double the amount of all
its assets, it follows, upon the system adopted by the
State for the assessment of corporations that the actual
value of the capital of such a corporation is zero."
COST OF INCORPORATION. 49
In some states a corporation is taxed in the place where its
principal place of business is located, and this principal place
of business is named in and fixed by its charter. This obtains in
New York. Accordingly, the Union Steamboat Company of
that state, operating principally in Buffalo, where it employed
twenty steam propellers and conducted a profitable business,
selected by charter designation an obscure little hamlet in the
southern part of the state as its principal place of business.
Here taxation was low and assessors lenient and the com-
pany made good the statement of its charter by renting a room,
putting up its sign thereon and holding its annual meeting
therein.
This went on without objection for some six years, when
the Buffalo assessors woke to the fact that the city was not
receiving its apparent dues, and thereupon promptly assessed
the corporation on some $600,000 of personal property. The
company paid the tax under protest and then brought suit to
recover the amount so paid. Judgment was in favor of the
corporation and on appeal to the highest court was sustained.
The court in its decision (Union Steamboat Company vs. City
of Buffalo, 82 N. Y., 351, '1880) stated that if the scheme
was a device to avoid taxation the evil must be corrected by
other authorities, not by the courts.
It was to be supposed that the legislature would, in accord-
ance with the suggestion of the court, have promptly remedied
this defect in the corporation laws, but, although it is now
more than twenty years since this case was decided, nothing
has been done, and many New York corporations have since
availed themselves of this legal method of evading taxation.
• A more intricate method of avoiding taxation sometimes
followed is the organization of a company with the desired
name, purposes and capitalization in some state, as Maine,
South Dakota or Arizona, where taxation is nominal, stock
being issued for property in apportionment of interests and
for other purposes as necessary. This is the actual corpora-
tion. A small operating company is then incorporated in the
50 THE CORPORATE SYSTEM.
state in which the business is to be really conducted, with the
same name and purposes, but with a nominal capitalization,,
possibly only one per cent, of that of the larger corporation.
The smaller corporation then acts as the local agent of the
larger corporation, under such arrangement as the particular
conditions indicate, the larger corporation not appearing
actively in the conduct of the business.
The small corporation is either managed so as to make no
profits, all these being diverted to the larger corporation, or
its stock is held either by the larger corporation or by the
stockholders of the larger corporation in due proportion. The
officers of the smaller corporation would usually be the same
as for the larger corporation, and this latter might guarantee
accounts, or otherwise assist the small corporation with its
credit.
It is obvious that organization fees and taxes would by this
method be largely avoided, and that both state and local taxa-
tion thereafter might be materially lessened if not almost
entirely evaded. The general plan is, however, difficult and
complicated and requires the assistance of able counsel for its
successful execution.
In some states taxes are arranged upon a sliding scale,
depending upon the rate of dividends paid. Where this is true,
close corporations may advantageously reduce their dividends
by the disposal of profits as salaries, instead of allowing them
to accumulate and be distributed as dividends.
In many states manufacturing corporations are either en-
tirely released from the payment of state franchise taxes or
are granted a more liberal basis or rate. Such exemption
would naturally be claimed as far as possible.
The whole system of taxation is unsatisfactory and in-
equitable. Many corporations make false returns, shift cash
accounts, manufacture fictitious indebtedness and resort to
other expedients of doubtful legality or morality, in order to
relieve the burden of taxation. The methods heretofore
outlined and such others along the same lines as the statutes
COST OF INCORPORATION. 51
of the various states may allow, while legal, are not free
from criticism. They are to a certain extent evasions of
the spirit of the law. If, however, the legislature in its
wisdom has decreed that a corporation organized with both
stock and bonds shall have these latter deducted from
the former in order to establish its taxable status, or that
an obscure village where taxes are light may be selected
by a wealthy city corporation as its principal office for
taxation, there would seem no valid business reason why
corporations should not take advantage of the situation
while it lasts and avoid all such taxation as may be without
fraud and subornation of perjury. The same is to be said
of the practice of incorporating in an outside state where
taxation is less and doing business at home as a foreign
corporation. It is not a manifestation of the highest spirit
of civic patriotism, but it is not so repugnant to this spirit
as are the perjury and falsification which too often pre-
vail in the matter of tax returns.
§ 32. Counsel Fees.
The corporation is a creature of the law and in its formation
every requirement of the law must be carefully observed. It is
not sufficient that the corporation- be merely brought into exist-
ence. With the aid of a printed charter form, and a ready-
made set of by-laws, even the inexperienced may do this. It
must be incorporated under the proper forms and with ap-
proved arrangements and with such knowledge of the condi-
tions and possibilities that it secures every legitimate advantage
allowed or permissible under the laws which authorize its crea-
tion. For this reason lawyers, and the inevitable concomitant,
lawyers' fees, are important features of any incorporation in
which actual values are involved.
Where cheap incorporations are imperative, or where the
character of the incorporation does not justify the employment
of an attorney, the incorporating agencies are usually employed
52 THE CORPORATE SYSTEM.
and charge from $25 to $50 for their services in conducting
the incorporation. This incorporation is then secured in one
of the cheaper incorporating states and is not usually worth
more than the amount paid.
For the better class of incorporations where a really sound
and effective organization is desired the fees of any qualified
attorney would hardly be less than $50, and from this would
range far upward according to the complexity of the arrange-
ments, the standing and experience of the counsel and the
increase of responsibility as property values increase.
It is to be noted that an incorporation differs from the con-
duct of litigation in the fact that the amount of work and re-
sponsibility involved may be estimated in advance with reason-
able accuracy. For this reason the prospective counsel fees
may be determined with precision and are usually agreed upon
before incorporation is undertaken.
The reputation of the counsel employed may not only have
a direct bearing on the charter and value of an incorporation,
but may, and frequently does, assist materially in the subse-
quent sale of corporate securities and in the general welfare
of the corporation. If the incorporation counsel rank high,
his name in connection with the corporation is not only a
guarantee of its technical correctness, but of the propriety of
its purposes, the solidity of its undertaking, and, generally, of
the status and character of the whole enterprise. For this rea-
son the fees of counsel eminent in this line rank far above any
justifiable compensation for the work actually involved in the
incorporation.
§ 33- Corporate Equipment.
The cost of the stock books, certificates, seal, etc., necessary
or usually employed in connection with a corporation varies
widely according to the nature of the outfit. The ordinary
corporation of moderate capitalization and pretensions, desi-
rous of restricting its expenditures may secure everything nec-
essary, and in neat and attractive shape, for the modest sum of
COST OF INCORPORATION. 53
$10. This includes stock certificates, printed on lithographed
blanks, the corporate seal, minute book, stock book and trans-
fer book.
If a handsomer outfit is required, with special lithographed
designs for certificates, and more impressive bindings on the
books, the price of the outfit will easily run up to $40 or $50
and more. If specially engraved certificates are requisite or
desired, this price will be increased to anywhere from $100 to
$500, according to designs, character, etc.
The corporate books of account need be no different either
in kind or cost from those used by the unincorporated concern.
PART II.-STOCK AND STOCKHOLDERS.
CHAPTER VI.
THE CAPITALIZATION.
§ 34. Basis of Capitalization.
In the earlier history of the business corporation, its capi-
tal stock was usually determined by the amount deemed neces-
sary for the particular enterprise, or by the amount of cash
subscriptions which could be secured for its exploitation. In
either case the capitalization was intended to represent the
actual cash or property values originally invested in the enter-
prise.
At the present time, the theory of capitalization has been
somewhat modified and extended, and even in conservative op-
erations, at least a portion of the earning value is included
in the original capitalization.
The general theory is simple. Any enterprise may be con-
sidered as worth the amount upon which, with due regard to
sinking fund and maintenance requirements, it can pay fair
dividends and may justly be capitalized at that figure. In
other words, the earning capacity of the enterprise rather than
the cash value of the property involved forms the modern basis
of capitalization.
As stated by a writer of eminence in financial matters in a
recent discussion of this method :
" It is not good financing to capitalize a company at
only the value of its tangible assets — as if any sum over
that value was ' water.' A manufacturer who does not
on the average earn considerably more than the usual
54
THE CAPITALIZATION. 55
rate of interest upon the actual cost of his plant might
better go out of business and invest his money in bond
and mortgage. Business men consider themselves enti-
tled to at least I2j4 per cent, upon their actual capital.
If, then, assuming high earnings when forming a com-
bination, a banking house should issue preferred and
common stock in amounts each equal to the value of the
plant, it would not be stock watering. The difference
between cost of plant and earning capacity, whether we
call it value of patents and trade-marks or good-will, is
just as legitimate an asset of a company as is its mer-
chandise, though harder to appraise properly." (Thomas
L. Greene, in New York Times.)
If fairly done and kept within reasonable bounds, this gen-
eral basis of capitalization is hardly open to serious objection.
On the contrary, in many cases there are substantial business
reasons for its adoption. If the enterprise be capitalized on the
basis of its immediate cash or cost value, it may, and should,
if meritorious, pay dividends far above the regular rates of
interest or the usual returns on invested funds. The fact of
the stock paying unusual dividends inevitably attracts attention,
provokes opposition and invites competition.
Also stock in a dividend-paying concern may usually be
sold at a better price on a large capitalization, if this latter be
justified by the dividend paid, than it possibly could on a more
conservative valuation.
For instance if an enterprise were capitalized at such
a figure, say $200,000, that it could earn and pay a regular
annual dividend of 6 per cent., its stock should sell readily
at par, or 100. If its capitalization were reduced one-half
namely $100,000, so that its regular annual dividend became
12 per cent, the stock having twice the earning power, and
representing the same corporate property, should, theo-
retically, sell at twice par, or 200. As a matter of fact it
would do nothing of the kind, ordinarily bringing from
175 to 180 according to circumstances and showing the
" cashing " value of the smaller capitalization to be from
56 STOCK AND STOCKHOLDERS.
10 to 12% per cent, less than that of the larger. That is,
the smaller capitalization would involve a loss on the sale
of the entire capital stock of from $20,000 to $25,000. As
long as this is true, enterprises will be capitalized on their
earning capacity rather than on their actual immediate value.
Also if capital is to be raised for the newly organized
corporation, the larger capitalization, if within reasonable
limits, gives much the better basis for the sale of stock.
Greater inducements — at least in appearance — may be
offered the buyer, and from the standpoint of future trans-
actions the position of the buyer himself is better.
For these and other reasons the general practice at
the present time, even in conservative circles, is to capital-
ize at that amount upon which the enterprise or under-
taking may be reasonably expected to pay fair dividends —
that is, the earning capacity is made the basis of capitaliza-
tion. The practice is often deprecated and may easily be
carried to a point at which it becomes alike dangerous, and
at times dishonest. Kept within reasonable bounds, how-
ever, it would not seem to be objectionable either from the
standpoint of morals or sound finance and it does give cer-
tain legitimate advantages. (See Chapter XXXII, Issuance
of Stock for Property.)
§ 35. Capitalization at Less than Real Values.
In many cases the owners of small businesses in which
but a few people are interested and to which others are not
to be admitted, find it advantageous to incorporate at a
capitalization much below the real value of the concern.
Other conditions also arise in which the corporation with
capitalization below its real value is a convenient business
mechanism. The arrangement is frequently advisable where
sales of stock are not contemplated and in all those cases
where merely an apportionment of interest is desired under
the corporate form. The fees and taxes are thereby kept
at the minimum, the attention of competitors is not
THE CAPITALIZATION. 57
attracted, the organization itself may be made very simple
and every purpose of the incorporation is effectively ful-
filled.
In states where a tax is levied on the capital stock, such
tax may be largely and legitimately avoided by a small
capitalization. If it is essential that the full values be repre-
sented in some way, the small capitalization may still be
retained if desired, and the excess be covered by the issue
of bonds or debentures.
In those small and close corporations where profits
threaten to become excessive as compared with the capital-
ization, the dividend rate is sometimes kept down by the
distribution of surplus profits under the guise of salaries.
It need hardly be said that the plan can only be adopted
with justice and safety when all the stockholders participate
in due proportion in these liberal emoluments. If fairly
carried out the practice is legitimate. The reduction of
profits is sometimes effected by less defensible methods.
§ 36. Capitalization at Real Values.
In banks and other financial institutions this is the
invariable rule. Beyond this, in those states where a double
liability attaches to the stock of financial institutions, the
more solid of these put the subscription price at double
the par value of their stock in order to cover this liability
in advance. At the same time they thereby establish a
reserve equal in amount to their capitalization.
In most mercantile businesses it is usual to approximate
the real value of the enterprise in the capitalization. Such
valuation may, it is true, include good-will, trade names and
the other more or less intangible assets of the business that
differentiate the going concern from a dead stock of goods.
In any established business, however, these values are quite
as actual as any of the more material properties, and are
quite as properly included in the capitalization.
58 STOCK AND STOCKHOLDERS.
§ 37. Capitalization on Earning Capacity.
This is the rule in capitalizing corporate combinations
and public utilities. Usually bonds, or preferred stock or
both are issued to the extent of the real values; then com-
mon stock is issued to such amount as the estimated earn-
ing capacity will carry after payment of the dividends and
interest on preferred stock and bonds. The overwhelming
volume of watered stock emanating from these sources is
due to the excessively optimistic estimates of earning
capacity made by the promoters. If the earning capacity
were actually equal to the burden imposed upon it, the large
issues of stock would, from some points of view, be fully
justified, but, in most cases of this kind, the dividends are
uncertain and irregular and too frequently fail altogether.
(See Chap. XL, Industrial Combination.)
In determining the capitalization for speculative cor-
porations, to be organized to exploit mines, inventions and
other uncertain undertakings, the same liberal spirit pre-
vails, the promoters estimating future earning powers on
the basis of their expectations, and then capitalizing these
anticipations. In some few cases, such enterprises succeed
and dividends are paid up to the promoter's brightest hopes.
These few and exceptional instances then become an alleged
justification for the over-capitalization of all similar under-
takings.
No safe rules can be formulated for the capitalization
of these uncertain enterprises. Usually their stock must
be sold at a tremendous discount from face value. This
calls for a proportionately large over-capitalization to
which it is not possible to apply the ordinary principles of
business. Caveat emptor.
§ 38. Capitalization of Good- Will.
In the incorporation of any going concern, or of any
combination or re-organization of going concerns, good-
will is an asset of much importance and is, as a matter of
THE CAPITALIZATION. 59
course, included among the other assets to be capitalized.
This practice is entirely legitimate as the good-will stands
for the difference between a live business and the property-
value of the stock, equipments and other items which make
up its implements of trade. As a matter of fact, the good-
will is not infrequently the most valuable asset of the con-
cern, even where other assets are of considerable worth.
On account of the intangible nature of good-will, its
correct appraisement is often a matter of very considerable
difficulty. Its value varies with local conditions and is, at
the best, almost entirely a matter of business judgment.
Because of this difficulty of accurate valuation, good-will
is a favorite device for inflating purposes, and frequently
affords a basis for unjustifiable stock watering.
In the ordinary mercantile incorporation good-will is often
included without specific recognition. A lump sum is put upon
the business as a whole and the corporation capitalized at the
figure so obtained. At other times a separation is effected be-
tween the property assets and the valuable and intangible asset,
good-will. Where this is done, common stock is frequently
issued to the appraised value of the good-will, while the cash
and accounts, stock, machinery, realty and other property as-
sets are provided for by an issue of preferred stock, the two
issues making up the total capitalization of the corporation.
In this case the preferred stock represents the tangible as-
sets, and its preference dividend is in the nature of a high inter-
est on the actual value of this property. In the event of the
dissolution or liquidation of the corporation, this preferred
stock is frequently paid out or redeemed before the common
stock receives anything. (See Chap. VIII, Preferred Stock.)
The common stock, on the other hand, representing the
intangible assets — the good-will and earning capacity of the
business — receives no dividend of any kind until all other obli-
gations have been paid and then only out of surplus profits.
(See §250.)
60 STOCK AND STOCKHOLDERS.
§ 39. Form of Capitalization.
After deciding upon the capitalization of an enterprise, a
further question arises as to the form of this capitalization.
The simplest plan is to have only common stock, but at times
there are material advantages in the use of preferred stock.
Preferred stock occupies a position between common stock
and the bond. It is a safer form of investment than common
stock, but it carries no rights of foreclosure. It takes prece-
dence of common stock as to payment of dividends and fre-
quently as to its ultimate redemption, but its dividend is
not payable unless earned. Its dividend is fixed and it does
not as a rule participate in excess profits, but its rate is usually
much higher than the interest rate of a bond. Where preferred
stock can be used to raise money it is regarded as a much more
satisfactory means than an issue of bonds. (See Chap. VIII,
Preferred Stock.)
§ 40. Bond Issues.
Where a corporation has real property or invests in prop-
erty having a tangible value, it is often of advantage to issue
bonds in place of some portion of the stock capitalization. An
enterprise requiring $150,000 in actual value might instead
of capitalizing for that amount, incorporate for but $100,000,
and then issue bonds for the additional $50,000.
The interest to be paid on these bonds would be less than
the dividends a prosperous business would pay upon the same
amount of stock and the difference represents a profit for the
stock actually issued. Against this is the fact that the interest
must be paid whether profits justify it or not, as also the fur-
ther fact that if interest is not paid, foreclosure proceedings
will probably bring the corporation to an untimely termination
or reorganization. In such case the proceedings are usually
disastrous and most of the assets are likely to be absorbed in
settling the claims of the bondholders. For these reasons the
issuing of bonds is not safe unless the corporation is sound and
of quick earning powers. If there is any doubt on these points,
THE CAPITALIZATION. 61
preferred stock, the security next to bonds in safety and de-
sirability, is the more prudent method of raising money.
§ 41. Financial Exigencies.
If an enterprise is speculative in its character, and direct
profits are expected from its financing, or if promotion pay-
ments are added to the load under which the new corporation is
expected to stagger to success, the conditions do not tend to
conservative capitalization. In such cases the immediate finan-
cial necessities take precedence of almost everything else, and
the capitalization is shaped to that end. Profits for owners and
promoters, bonus stock, commissions, advertising and the gen-
eral expenses of financing are included until, finally, the actual
business necessities of the corporation represent but a fraction
of the total capitalization, and the final arrangement at
times comes dangerously close to being a fraud upon the in-
vesting public.
It is unfortunate that the capitalization of a corporation
should be influenced by considerations such as these. At times,
however, an enterprise will be of such a purely speculative na-
ture that, with all honesty of purpose, it would be impossible
to finance it on any conservative basis. Concessions to the
necessities of the situation are then imperative, divergencies
from the ideal corporate arrangements cannot be avoided, and
the best that can be done is to reduce them to the minimum.
In such cases, the real interests of the corporation — which are
the successful inauguration and prosecution of its business and
the production of profits for its stockholders — should be kept
closely in view, and only such concessions made as are abso-
lutely essential to successful financing.
CHAPTER VII.
THE STOCK SYSTEM.
§ 42. Capital Stock.
The capital stock or capitalization of a corporation is the
maximum amount of stock it may issue under the provisions
of its charter. This may bear some direct relation to the
actual property values, or " capital " possessed by the corpora-
tion — from which it is to be absolutely distinguished — or may
be far above or below this real capital. ( See § 46. ) The stock
capitalization may be based on the actual cash value of the
corporate property, or on the amount required for the develop-
ment of the undertaking, or on the earning power of the corpo-
rate business, or on the speculative basis of what these earning
powers may be when the business is developed, or on some
combination of these factors.
The capital stock of a corporation is fixed by its charter
and can usually be increased or diminished only by amendment
of that instrument. In some states, however, charters are
issued empowering the corporation itself, within certain limits,
to determine the amount of its capitalization.
The capital stock of a corporation may be issued in part or
in whole and its total authorized amount bears no necessary
relation to the amount of stock sold, subscribed or outstanding.
For instance, a corporation with a capital stock of $100,000
might have issued one-half of this amount, the remainder being
reserved for subsequent use. The outstanding stock would
then be $50,000, but its capital stock would still be $100,000,
unless changed by amendment of the charter, or other statutory
method.
In this connection it should be noted that under the
common law, a corporation was required to have its entire
THE STOCK SYSTEM. 63
capital stock subscribed before beginning business. Until
this was done it could not enforce the subscriptions to its
stock. Now, however, in most states the stringency of
this rule has by statute enactments been greatly relaxed.
Some minimum amount, fixed by statute and usually much
smaller than the total capitalization, may be designated
by the charter as the amount with which the corporation
will begin business, and so soon as this amount has been
subscribed, the corporation can enforce subscriptions to its
stock and may begin its operations. In a few states a fur-
ther proportion of the capital stock must be paid in within
a specified time, as in New York, where a corporation must
have at least one-half its total capitalization paid up within
one year from the date of incorporation.
§ 43. Shares.
For the sake of accuracy and convenience in represent-
ing the interests of the various stockholders in the capitaliza-
tion, and in the corporate enterprise and property behind
it, capital stock is divided into shares which are almost
invariably, though not necessarily, of equal value, and
together make up the whole capitalization. Unless
restricted by statute these shares may be of any desired face
value, though the greater portion of the issued stock of this
country is in the form of $100 shares. Mining stocks are
often issued in shares of the face value of $i, this being
done with a view to more impressive offerings, and to the
reception of smaller subscriptions than could well be taken
with larger shares. In any enterprise to be financed by
popular subscription, to have a small share value is con-
sidered good policy, $10 being the figure usually selected.
Where the holders of stock are few in number and it is
desirable to render the sale or other disposition of the
stock difficult or other reasons make such course advisable,
the face value of the shares — where not prohibited by
statute — is sometimes placed at $500 or more. The shares
of the Carnegie Company were $1,000 each, but the
64 STOCK AND STOCKHOLDERS.
United States Steel Corporation placed its shares at $100
each in order that they might be sold to the investing
public.
Unless there is some valid reason to the contrary, the
generally recognized share value of $100 is to be preferred
and selected.
§ 44. Certificates of Stock.
The certificate of stock is merely a convenient evidence
of the ownership of corporate shares, and its loss or
destruction does not affect such ownership in any way. The
loss of the certificate may embarrass the stockholder on
occasion, just as the loss of a deed to real estate, or bill
of sale to other property might be embarrassing, but he
could still collect his dividends, attend and vote at stock-
holders' meetings and generally perform his functions as
a stockholder just as he did before the loss of his certificate.
If he wished to sell or otherwise transfer his interest in the
corporation, his certificate would probably have to be
replaced before the purchaser or transferee would con-
sent to take over the stock. Usually the corporate by-laws
provide for the issue of a new certificate in case of loss
or destruction of one already issued. The matter is, how-
ever, troublesome, at the best, generally necessitating the
giving of a bond or other guarantee to the corporation,
and the loss of certificates is to be avoided if possible.
(See By-Law provisions, " Lost Certificates," in Forms 9
and 10.)
It is to be noted that the certificate of stock is purely a
matter of form and convenience, that the ownership of
stock may, and in most corporations does exist, before any
certificates are issued, and that it would be entirely pos-
sible to conduct a corporation — with the consent of its
stockholders — without the issue of certificates at all, the
stock books of the corporation then being the sole evidence
of stock ownership.
THE STOCK SYSTEM. 65
Stockholders are, however, entitled to certificates
evidencing the stock owned by them and can force the
issue of such certificates if withheld. This right must,
however, be exercised within proper limits. Stockholders
are not thereby authorized to make nuisances of themselves
and harass the secretary by unreasonable exactions such
as excessive transfers, or demands for large numbers of
small certificates, or for issues of fractional parts of a share.
To curb the tendency in this direction, the secretary is some-
times empowered by the by-laws to charge a small fee for
each certificate issued by him. This is legally permissible
and is usually sufficient. (Giesen vs. London & Northwest
Mortgage Co., 102 Fed. Rep. 584, 1900.) (See § 133.)
§ 45. Unissued Stock.
A corporation is empowered by its charter to issue stock up
to the full amount of its authorized capital stock. At the time
the charter is allowed all this stock is unissued. Thereafter
it may be issued, in whole or in part, at the discretion of the
corporation or as required by its operations. The unissued
stock, no matter whether it be the whole capital stock, or only
a reserved portion thereof, represents nothing whatever beyond
the potential right of issue. It has no intrinsic value. It is
merely the right — granted by the state — to issue stock up to
the prescribed amount.
This being so, the unissued stock cannot in any way be
regarded as an asset of the corporation. If sold it brings in
cash, property or other values that have a greater or less intrin-
sic worth, but the outgoing stock carries with it an interest in
the corporate property that should equal the value received for
such stock. The general corporate property has been increased,
but the ownership thereof has likewise been increased in the
same proportion. In bookkeeping parlance, the increase of
assets and liabilities is exactly equal. The unissued stock
therefore represents nothing more than the right to admit new
members, or stockholders, into the corporation, upon payment
66 STOCK AND STOCKHOLDERS.
of the proper quid pro quo. To regard it as an asset would
be as illogical as to consider the right to admit new partners
in a firm an asset of the partnership. (See § 64.)
§ 46. Issued Stock.
Stock is always supposed to be issued at its face or par
\ alue for cash or other actual values. At the time of organiza-
tion, therefore, the face value of the stock issued — if full
paid — would, theoretically, equal the actual value of the cor-
porate assets. Even if this be true in fact, these values may,
and generally do, vary widely thereafter. If the corporation
is successful, its assets may increase far beyond the nominal
value of its issued stock, while if unsuccessful, these assets will
probably fall far below the total face value of the issued stock.
That is, the value of such stocks as shown by the books of the
corporation will be far above or below the par value. The sell-
ing price may, and, depending largely upon the rate of divi-
dends maintained and the general desirability of the stock,
probably will be at a still different figure.
A corporation may by purchase, gift or otherwise regain
its issued stock. Such stock coming back into the possession
of the corporation is not thereby retired, or classed as unissued
stock, but is designated as treasury stock, may be issued when
desirable and is usually regarded as an asset. (See Chap. X,
Treasury Stock. )
§ 47. Full-Paid Stock.
In the absence of statute laws to the contrary, stock may
be issued on any basis that the directors — with the assent of
the stockholders — deem best. That is it may be issued for its
full face value in money or property, or it may be issued for
only a portion of its face value, or may be issued on a promise
to pay, or on partial payments, or on no payment at all as a
free gift. If, however, it is not paid for at its full face value
in money, property or services — where payment is allowed by
services — it is not full-paid stock, and therefore carries a lia-
THE STOCK SYSTEM. 67
bility for the amount still unpaid. (See Chap. IX, Full-Paid
Stock.)
The term " watered stock " is merely a convenient designa-
tion for stock issued in excess of the values behind it. (See
§§6oand 61.)
§ 48. Common and Preferred Stock.
Preferred stock is that to which some preference has been
given over other stock of the same corporation as to partici-
pation in profits, and often imassets in case of liquidation. If
there is no distinction in regard to these two features the stock
of a corporation is all common stock.
Different preferred stocks may be issued by the same cor-
poration in any desired variety of preference as to dividends
and redemption or liquidation rights. These would be distin-
guished from each other as first, second and third preferred
stock, or by other designations descriptive of the peculiar
status of each stock. The lowest, or non-preferred, stock
would be common stock.
§ 49. Other Classifications.
As stated, the capital stock of a corporation may be divided
into common and preferred stock on the basis of its relation to
the corporate profits or property. Stock may also be classified
in other ways. Most of these other classifications relate to
the voting right. The simplest is a division of the stock into
two classes, one class voting, the other not exercising this right.
For instance in the incorporation of a partnership where one or
more take the active management, others merely supplying the
capital, the active partners might have their interests repre-
sented by voting stock and the interest of the silent partners
represented by non-voting stock. (See Chap. XXXVIII,
Incorporating a Partnership.)
Other classifications are possible in considerable variety,
and, generally, it may be said that any desired classification is
allowable that is not repugnant to equity, to the common law,
68 STOCK AND STOCKHOLDERS.
or to the statute law of the state under which the corporation
is organized. On the other hand it may be said that such
classifications, unless clearly demanded by the conditions, are
not to be recommended. They may work unexpected hard-
ships, are at times very uncertain in their actions, and introduce
undesirable complexities into the corporate mechanism.
Classifications of stock may be authorized either by charter
or by-law provisions. As a matter of prudence they should
be incorporated in the charter where possible. The specifica-
tions relating to any class of stock — except unmodified com-
mon stock — should be printed in full on the face of each certifi-
cate by which such stock is represented. (See §§ 98, 232, 239
and 252; also Forms 29, 30.)
CHAPTER VIII.
PREFERRED STOCK.
§ 50. General.
Preferred stock is that which has some preference as to
dividends or assets over other stock of the same corporation.
This preference is usually given to make such stock safer or
more attractive, though at times its purpose is to limit divi-
dends or gain some other desired end.
The use of preferred stock is general. It is perhaps most
commonly employed where money is to be raised for the de-
velopment or operation of a corporate enterprise. For this
purpose it may be made to offer greater safety both as to prin-
cipal and dividends than common stock, while it does not carry
the dangerous foreclosure privilege of the bond.
When a business is incorporated, preferred stock is fre-
quently issued to represent or pay for the actual property as-
sets, the good-will and other intangible assets being represented
by an issue of common stock. When a partnership is incorpo-
rated, the excess investment of one partner is very often repre-
sented or satisfied by an issue of non-voting preferred stock,
while the interests of a silent partner may be conveniently
cared for by the same means. Where an invention or other
property is taken over and payment made in stock, the trans-
ferrer, on account of its greater safety, will frequently demand
a portion or the whole of his price in preferred stock, and, gen-
erally, the device will be found most useful in effecting the
adjustments and allowances so frequently necessary in incorpo-
rating.
Usually preferred stock is created by charter provision, the
preferences and restrictions being set forth at length. In many
69
7| } STOCK AND STOCKHOLDERS.
states it may be authorized by proper by-law provisions, but it
is always better and safer to provide for it in the charter.
After incorporation, unless otherwise provided by statute,
the assent of every stockholder is required for the issue of pre-
ferred stock. This is reasonable, as the value of the common
stock may be depreciated by such an issue. In many states
the statutes allow preferred stock to be issued after incor-
poration when authorized by a prescribed majority of the out-
standing stock. (Hinckley vs. S. & S. Co., 107 App. Div.,
N. Y., 470, 1905.)
Preferred stock is issued in many different forms and with
many different classifications, privileges and restrictions. The
possible range is wide and includes almost any desired attribute
not contrary to law or public policy. All the conditions of any
particular issue should appear upon the face of the certificate
by which such preferred, stock is represented. If the specifica-
tions are too voluminous for this, the fact that the certificate
represents preferred stock should appear plainly on its face,
together with a reference to the provisions of the charter by
which such stock is authorized. Such notice is sufficient to
put any intending purchaser on his guard, and if he purchases
the stock he cannot afterward assert ignorance of its conditions
as a basis for litigation or claims against the corporation.
Unless specifically prohibited therefrom by proper provi-
sion in the charter, by-laws or other authorization under which
such stock is issued, preferred stock carries the right to vote,
and the right to participate in dividends beyond the preferen-
tial dividend after the common stock has received a dividend
equal thereto. That is in any year, if the preferred dividend
is paid and the common stock has received a dividend equal in
amount to this preferential dividend, then any further dividends
belong to and must be paid to all the stock, common and pre-
ferred alike. Preferred stock would have no preference over
common stock in the distribution of assets in case of liquidation
or dissolution, unless such preference were specifically given by
statute or set forth in the authorizing provisions.
PREFERRED STOCK. 71
Preferred stock differs from a bond issue in the very mate-
rial point that interest on bonds must be paid when due and
can be enforced by a foreclosure suit, while dividends on pre-
ferred stock are only payable from net profits, and if profits are
not made, are not due and therefore cannot be collected. Also,
bonds must be paid on maturity, while preferred stock has no
fixed due date. For these reasons the issue of preferred stock
is much safer for the ordinary corporation than the issue of
bonds. Bondholders are creditors of the company. The
holders of preferred stock are not creditors of the company,
have no claim against the company except for dividends when
declared, and have no rights, save for their preferences, supe-
rior to those of the common stockholders. Preferred stock is
much favored in the formation of industrial trusts. (See
Chap. XL, Industrial Combination . )
In many states there are statutory provisions relating to
preferred stock which must be consulted when the subject is
under consideration, these statute laws taking precedence of
the general or common law herein set forth. Statutory author-
ization for the issue of preferred stock is not necessary. (See
Kent vs. Quicksilver Mining Co., 78 N. Y., 159, 1879; Rob-
erts vs. Robert-Wicks Co., 184 N. Y., 257, 1906.)
§ 51. Preference as to Dividends.
The following extract gives a common form of charter
provision authorizing the issue of a simple preferred stock :
" Of said capital stock, five hundred shares of the
par value of fifty thousand dollars shall be preferred
stock, entitled to receive from the net earnings of the
company an annual dividend of six per cent, before any
dividends are paid upon the common stock."
The holder of a preferred stock, such as provided in the
paragraph quoted, would have the same voting right as the
holder of common stock, his dividends, although this is not
specifically stated in the creating clause, would be cumulative
and he would participate in any general dividends in excess of
the preferential dividend already received. In case of liquida-
72 STOCK AND STOCKHOLDERS.
tion of the corporation he would in most states have no claim
to preference in the distribution of assets.
Preference as to dividends may be as to amount, as in the
creating clause given, or as to profits from certain sources, as
where a preferred stock is to receive all the profits of a certain
plant or a particular branch of the business.
The usual rate of dividend on preferred stock ranges from
five to seven per cent., though but few reliable stocks bear this
latter rate. In some states the rate is limited to a maximum
of eight per cent.
§ 52. Preference as to Assets.
Unless otherwise specifically provided, preferred stock
participates in any distribution of assets upon the liquida-
tion of the corporate property just as common stock does
but has no preference of any kind. Some preference in this
respect is usual, the customary arrangement requiring the
payment of the par value of preferred stock with all arrear-
ages of dividends before anything is paid upon the com-
mon stock. In New Jersey such provision would not be
necessary as the preferred stock carries this right under
the statute law, but even there it would be better incor-
porated in the charter to prevent any mistake or misappre-
hension as to the status of the stock.
§ 53. Cumulative Dividends.
Preferred stock may be cumulative or non-cumulative.
If the former, its dividends are not payable if not earned,
but when profits are earned its unpaid dividends, past or
present, are a first charge against such profits, and must
be paid before the common stock receives anything. If
preferred stock is non-cumulative, a passed dividend is lost
and is not a charge against the company in any way.
Usually a non-cumulative preferred stock is not a desirable
holding. Its existence is a standing inducement to the
improper passing of dividends. The courts sometimes
interfere on behalf of the holders of non-cumulative stock
PREFERRED STOCK. 73
where profits have been made and the directors unjustly
refuse to pay dividends.
It is to be noted that if the preferential dividend is to
be non-cumulative, this fact must be clearly expressed in the
charter provisions by which the stock is authorized. Where
not so expressed the courts have held the preferential div-
idends to be cumulative and payable in full out of the first
profits before anything is received by the common stock.
(See Boardman vs. Lake Shore etc., R. R., 84 N. Y. 157,
1881.) The cumulative feature of preferred stock is, how-
ever, for the sake of security and definiteness usually
covered by express provision.
Preferred stock bearing cumulative dividends is some-
times called " guaranteed stock " but the term is not well
applied, being used with greater propriety to describe stock
upon which the dividends are guaranteed by some other
corporation. This latter form of stock is a not uncommon
expedient in arranging the terms of railroad combinations
and the employment of the term " guaranteed stock " in
that connection is the more customary as well as the better
use.
§ 54. Participation in General Dividends.
As already stated, unless otherwise expressly provided,
preferred stock participates equally with the common stock
in all dividends after both common and preferred have
received an equal dividend. That is, if the preferred stock
has received its preferential dividend of, say six per cent,
together with any cumulated arrearages, it participates no
further in dividends until six per cent, has been paid upon
the common stock as well, but thereafter both classes of
stock stand upon exactly the same basis as to any further
dividends declared during that year. If such further par-
ticipation on the part of the preferred stock is not desired,
it must be expressly denied.
Such participation privilege beyond the preferential
74 STOCK AND STOCKHOLDERS.
dividend is not common. It is sometimes employed to
advantage in the adjustment of interests among incorpo-
rating parties, but is usually only found where the stock must
be made attractive above the common, as in a speculative
corporation where the risks are extra-hazardous, or under
other conditions necessitating unusual inducements to
investors.
The same ends are sometimes attained by the use of pre-
ferred stock limited to its preferential dividend, but accom-
panied by a common stock bonus of equal amount. This
plan is, however, much less advantageous than the use of
participating preferred stock, as it involves (i) the payment
of additional dividends on stock equal in amount to the
preferred stock, (2) an additional voting right in the man-
agement, (3) in event of liquidation a double claim against
the assets. That is one share of participating, non-voting,
six per cent, preferred stock of the par value of $100 would,
if eight per cent, dividends were paid annually, receive $8
dividends yearly, would not participate in the management
at all, and, on liquidation, would have only its own claim
against the assets. If instead the preferred stock were non-
participating, but were accompanied by a bonus of one
share of common stock, also of the par value of $100, the
two would receive $14 in dividends yearly, would have one
vote in the management, and, on liquidation would have a
double claim against the assets.
Where a participating preferred stock is issued, to avoid
misunderstanding, a distinct provision in the authorization
should cover such participation.
§ 55. Redemption Right.
Preferred stock is often issued with the proviso that after
a certain period, and after specified notice, the corporation shall
have the right to buy in, or redeem, its outstanding preferred
stock at some previously designated price.
The New Jersey statutes give the right to provide for re-
PREFERRED STOCK. 75
demption of preferred stock at any time after three years from
the date of issue. In New York there is no statutory provi-
sion as to such redemption, but in the absence of any prohibi-
tion the redemption of preferred stock under suitable condi-
tions would seem to be entirely within the power of the cor-
poration, and this is true in any state. (See Citation in § 98.)
It is to be noted, however, that under no circumstances
would the corporation have the right to redeem preferred stock
when by so doing it would impair its capital stock or affect the
rights of creditors. For this reason such redemption should
not be made mandatory, as the corporation might then later
find itself under contract obligation to do an illegal act.
The redemption right is sometimes of considerable import-
ance, and, if it can be done without injury to the sale of the
preferred stock, should be retained. Dividend rates on preferred
stock are usually much higher than interest rates on borrowed
money, and, if the corporation accumulates surplus profits, the
preferred stock may be redeemed and its high preferred divi-
dends terminated, with much advantage. Usually, if the pe-
riod prior to the operation of the redemption right is reasonably
long, and the redemption premium is attractive, this privilege
may be provided without detriment to the salability of the
stock affected.
The redemption price of preferred stock varies with the
conditions. Always, as a pre-requisite, the payment of any
accrued dividends is involved. Frequently the price is fixed
at the par value of the stock plus one year's dividend. At
other times it is arbitrarily placed at a figure thought attractive,
or fair, as 105, no, or even more under some circumstances.
Occasionally the holders of the preferred stock will be given
the option. of exchanging their stock for common stock instead
of taking the redemption price.
Preferred stock when redeemed is no longer a claim against
the dividends or assets of the company. It is, however, still
a part of the capitalization of the company, and might, with the
assent of the stockholders, be again reissued.
76 STOCK AND STOCKHOLDERS.
§ 56. Voting Rights.
Unless otherwise expressly provided, preferred stock-
holders have exactly the same right to participate in corporate
meetings and to vote upon their stock as do the holders of com-
mon stock. Usually, however, this voting right and the right
to participate in stockholders' meetings is denied the preferred
stock, the power of management being reserved to the common
stock. In such case the provisions by which the preferred
stock is created should state the fact of its non-voting character
with clearness, and this fact should also appear plainly upon the
face of the certificate by which such preferred stock is repre-
sented. Under such circumstances the preferred stockholders
have no more to do with the management of the corporation
than would its bondholders.
A variation on this plan of absolute non-representation is
to provide that the holders of preferred stock shall not vote
so long as the preferential dividends are paid with reasonable
regularity, but that if such preferential dividends shall at any
time fail, for say two consecutive years, then the holders of
preferred stock shall thereafter have the right to vote in all
respects as do the holders of common stock.
This plan has the appearance of equity. If those in charge
of the corporation cannot manage the corporate business so as
to pay dividends on even the preferred stock, it would seem
but reasonable that the holders of preferred stock, who suffer
by this mismanagement, should be allowed a voice in its control.
If interest is not paid on a bond issue, foreclosure results
and the bondholders not infrequently buy in and conduct the
business. Giving the preferred stock a conditional voice in the
management is a far milder application of the same principle.
§ 57. Convertible Stock.
In New Jersey by a statutory enactment of recent date, cor-
porations answering to certain descriptive conditions are al-
lowed to redeem their preferred stock, the holders consenting,
with bonds. By a singular coincidence, the United States Steel
PREFERRED STOCK. 77
Corporation was found to be within the descriptive prescrip-
tions, and, with the consent of two-thirds of its outstanding
voting stock, it offered the holders of its seven per cent, pre-
ferred stock the privilege of exchanging such stock for five
per cent, bonds. The exchange was entirely optional with the
holders of the preferred stock, but the measure aroused bitter
opposition and litigation. The exchange was finally upheld.
In the absence of permitting statutory provisions, any such
exchange or arrangement for such exchange would be illegal.
§ 58. Founders' Shares.
In England, founders' shares, a kind of preferred stock
which may be described as a privileged deferred stock, are fre-
quently issued. To illustrate, a corporation capitalized at
$300,000, with $100,000 of this as preferred stock and $200,-
000 as common stock, might have $25,000 of common stock
set aside as founders' shares, with perhaps dividend rights
equal to all the other common stock. That is, under the sup-
posed arrangement, after the preferred stock had received its
dividend, any further dividends would be divided into two
equal parts, one of which would go to the ordinary common
stock ; the other to the founders' shares. In other words, the
$25,000 of founders' shares would equal $175,000 of the ordi-
nary shares as far as participation in dividends was concerned.
Under this arrangement the founders' shares might have a
very high value, many times in excess of that of the common
stock. Where employed, such shares are usually reserved as
an emolument for the promoters of the enterprise, or as com-
pensation to men of eminence or financial repute for the use of
their names.
It is supposed that under the New Jersey laws, and under
the laws of some other states, these founders' shares might be
legally issued. Some few companies have been organized upon
this basis, but it does not appear that the subject has ever come
up for adjudication in this country, and it is not certain what
view might be taken of the matter by the courts. Probably,
78 STOCK AND STOCKHOLDERS.
if accomplished by proper charter provisions, and with the full
knowledge of the stockholders generally, and with all due pub-
licity, the arrangement would stand. As everything to be se-
cured by the use of the founders' shares can, however, be ac-
complished by the skilful, but recognized and adjudicated use
of common and preferred stock, it would hardly seem wise to
venture on ground that is, at the best, experimental and of
doubtful utility.
CHAPTER IX.
FULL-PAID STOCK.
§ 59. General.
Under the common law stock might be issued at any
price deemed proper by the parties to the transaction, and,
in the absence of fraud, such sale was valid and final. Now,
however, subscribers to stock on its original issue must
pay its par, or nominal value, under penalty of possible
liability to the corporation or its creditors for the amount
necessary to make up the full face value of any stock issued
for less.
In most states full-paid stock carries no liability, either
in favor of the issuing corporation, or of the creditors of
that corporation. (See § 62.)
§ 60. Watered Stock.
Stock issued as full-paid when the corporation has in
fact received nothing for such stock, or but a portion of its
par value, is commonly termed " watered stock." It is also
sometimes called " fictitiously paid stock " and many states
explicitly prohibit its issuance by statute. Watered stock
may be created by the issue of stock as a stock dividend
without sufficient increase of the corporate property to
support additional stock, by its issuance as a bonus with
preferred stock or bonds, or, as is the method in the great
majority of cases, by its issuance for property or services
at an over-valuation.
The most obvious form of watered stock is that
occasionally issued by the large public utility corporations
as a stock dividend. In such cases there is usually no
79
80 STOCK AND STOCKHOLDERS.
pretense of any increased value in the property behind the
stock and its issue is justified only by the ability of that
property to pay dividends upon the increased capitalization.
If the corporation were forced into liquidation, the stock
would receive only a fraction of its face value. Such a stock
dividend must be distinguished from a stock dividend paid
in lieu of cash dividends of equal amount, where the reserved
cash is added to the working capital of the company, and the
issued stock therefor represents actually increased values,
capable of realization in event of the liquidation of the
company.
The most common form of watered stock is that issued
in the purchase of property at an over-valuation. Such
stock is nominally full-paid and in some cases by the sub-
sequent prosperity of the corporation, the anticipations of
its promoters are realized and the stock is removed from
the category of watered stock. In the majority of cases,
however, the corporations do not meet the expectations
of their organizers, and the issued stock is left with but
little support. In such case, if the undertaking is of suf-
ficient value in actual property or in possible profits to
justify the step, a re-organization takes place, the capital
stock is greatly reduced, thereby " squeezing the water out
of it," and the corporation is placed on a decreased, but
usually, much sounder basis.
§ 61. Legal Status of Watered Stock.
Stock issued at less than its full face value without
agreement between the parties thereto as to the nature of
such stock, is partly-paid stock, and the purchaser is liable
to the corporation, or, in event of the insolvency of the
corporation to its creditors for the amount necessary to
make up the full face value of such stock. If, however, it
is agreed between the purchaser and the corporation that
the price paid shall be in full settlement of the claims of the
corporation against such stock, then as between the parties
FULL-PAID STOCK. 81
the stock is full-paid, and, in the absence of fraud, the
holder is under no liability to the corporation. (Scovill
vs. Thayer, 105 U. S., 143, 1881.)
This is true as to the corporation but not as to its
subsequent creditors, unless by agreement of thes'e latter,
and, in event of the insolvency of the corporation, these
creditors might proceed against the original purchasers
of any watered or partly-paid stock so long as such stock
remained in their hands, and collect from them the amount
necessary to render their stock full-paid.
This possible liability would follow the unpaid stock
into the hands of transferees purchasing such stock with
a knowledge of its character, but would not follow it into
the hands of an innocent purchaser for value. (See § 62.)
It is to be noted that the general doctrine as. stated
requires modification in those cases where the board of
directors of a corporation have issued stock for property
or services, in good faith and without fraud, and later
developments prove the consideration to have been — or to
be — worth less than the face value of the stock. In such
event, in most states of the Union, the courts refuse to hold
the recipients of the stock liable on the ground of failure
or insufficiency of the consideration. (See Chap. XXXII,
Issuance of Stock for Property.)
§ 62. Legal Status of Full-Paid Stock.
Full-paid stock carries no liability of any kind, either to
the corporation or its creditors, save in those few states
where by statute special liabilities have been created. This
freedom from liability, no matter what the vicissitudes of
the corporation, gives to stock its desirability as a form of
investment. As this feature pertains only to full-paid stock,
it is a great object in the organization of a new corporation
to render its stock full-paid.
Where stock is issued at par for cash, which with finan-
cial institutions is usually a matter of statutory obliga-
82 STOCK AND STOCKHOLDERS.
tion, or for cash and substantial property to the actual
face value of the stock as in the case of some solid business
corporations, the question does not arise. The ordinary
corporation, however, cannot as a rule sell its stock at par,
particularly when it is organized for the development of
some new or speculative enterprise. To issue such stock
direct for less than par would leave the purchasers — if pur-
chasers could be found — liable for the difference. Various
expedients are then utilized to render this stock full-paid
before it is sold to the actual purchasers for cash, and the
methods adopted to secure this end have given rise to most,
if not all, the litigation relating to the full payment of stock.
(See Chap. XXXII, Issuance of Stock for Property; also
Chap. X, Treasury Stock.)
§ 63. Certificates for Full-Paid Stock.
When stock is full-paid the certificates by which it is repre-
sented usually bear upon their face the words " Full-Paid and
Non-Assessable." There is no legal requirement that the cer-
tificates shall be so inscribed, but if they were not the pur-
chasers would — and very properly — be suspicious of the stock.
The direct and legitimate inference from the omission would
be that such stock was not full-paid and non-assessable and
might carry latent liabilities.
On the other hand, where certificates are marked " Full-
Paid and Non-Assessable," such stock may be bought with full
confidence that its purchase involves no unknown liabilities.
Even should it later prove to have been but partly paid, or not
paid at all, the innocent purchaser for value could not be held
liable on that account. He purchased on the faith of the un-
questioned statement on the stock certificate that such stock
was full-paid, and, as far as he is concerned, the stock will
be held to bear that character. (Young vs. Erie Iron Co.,
65 Mich., in, 1887; Rood vs. Whorton, 6j Fed. Rep., 434,
1895; Sprague vs. National Bank of America, 172 111., 142,
1898.)
FULL-PAID STOCK. 83
The word " Non- Assessable " merely indicates that the cor-
poration has either received full payment of the stock in ques-
tion, or otherwise that it has relinquished any claim it might
have on such stock for further payments or assessments of any
kind. Full-paid stock is non-assessable under any circum-
stances except in California and some few other states where
the statutes permit the corporation to levy assessments.
In some few states certificates representing stock issued for
property must bear the legend " Issued for Property " or some
equivalent statement. Elsewhere, this is neither necessary nor
desirable. Such stock is of no different nature or legal status
from any other stock, and to inscribe it in the manner indi-
cated conveys the impression that some difference actually ex-
ists. (See Chap. XXXII, Issuance of Stock for Property.)
CHAPTER X.
TREASURY STOCK.
§ 64. Definition.
The term " Treasury Stock " is employed very loosely by
business men and accountants to describe unissued stock. The
better use of the expression is to designate the " Issued and
outstanding stock of the company that has been donated to or
purchased by the corporation and which is held subject to dis-
posal by the directors." Such stock is properly treasury stock,
is the property of the company, and would be entered as an
asset on its books.
To style unissued stock " treasury stock " is a misnomer.
Unissued stock is merely the privilege of creating a liability.
It is not in any sense of the word an asset. For $20 the State
of Arizona will charter a corporation and authorize it to issue
stock to the face value of $25,000,000 or more. Such a com-
pany on organization would have an over-plentiful supply of
unissued stock, but no assets whatever. The absurdity of re-
garding its unissued stock as an asset is obvious. (See § 45.)
Stock that has been once legally issued for full value, how-
ever, is of a very different nature. It is then full-paid stock
and represents a certain interest in the corporate property. If
any of it comes back into the possession of the company it is
still " full-paid stock," and is then with some logical correct-
ness considered an asset. Such stock is properly classified as
treasury stock and may be sold below par to raise funds for the
operations of the company, may be given away as a bonus with
preferred stock or bonds, or be otherwise used without involv-
ing the recipient in any liability to creditors of the corporation.
84
TREASURY STOCK. 85
§65. Origin.
If a corporation were organized upon a strictly cash basis,
each subscriber paying the par value for his stock, it would
have no treasury stock at the time of organization. Later
should a portion of this issued stock come back into the posses-
sion of the company in settlement of some debt or through
other negotiation, such returned stock would be treasury stock
and from the bookkeeping standpoint an asset of the company.
When, however, as is so frequently the case, a corporation
is organized to exploit some mine, invention or other enterprise,
or to make a combination of existing corporations, it would
under the usual plan, issue all or a large portion of its stock
in payment for the property assigned to the corporation. This
stock is thereby rendered full-paid. Then by agreement, or
by understanding, the recipient of this stock assigns back to
the corporation, or to some trustee for the corporation, a pro-
portion of this full-paid stock to be used for company purposes.
This would be the treasury stock of the company and in the
present day it is thus as a general rule treasury stock is ob-
tained. Such stock is usually a clear donation, the disposition
to be made of the stock being sometimes prescribed, but gen-
erally left to the discretion of the board of directors upon whom
its disposal devolves.
§ 66. Transfers to Corporation.
When stock is thus donated or otherwise transferred to the
corporation, the certificates might be assigned to the "
Company " or to " Treasurer of the
Company." Such stock should not be assigned to the treasu-
rer by name, that is to " John Wilson, Treasurer," as at a sub-
sequent election the position of treasurer may be filled by some
other person, and the too definite indorsement may then cause
trouble.
A plan that is sometimes pursued when stock is thus turned
over for the benefit of the company is to assign it to trustees,
86 STOCK AND STOCKHOLDERS.
to hold and sell such stock for the benefit of the company,
either at their own discretion, or under the superintendence of
the directors, the funds so received being paid over to the
treasurer of the corporation. This plan relieves the corpora-
tion of all responsibility as to the details of the matter, and,
the transaction not appearing on the company's books until the
money from the sale of the stock is received, the bookkeeper is
relieved from some perplexity as to his ledger account with
treasury stock.
When certificates representing treasury stock are received
by the corporation, they should bear the proper indorsements,
and would then usually be turned over to the secretary. This
official would enter the transfer in the stock book, cancel the
old certificates and return them to the stock certificate book,
and, if desired, issue new certificates in the name of the cor-
poration or of the official by whom the stock is to be held.
It is to be noted that new certificates need not necessarily be
issued at all until sales of treasury stock are made, when the
certificates representing stock sold might be issued directly to
the purchasing party. In such case, until the time of sale,
the stock book, in connection with the canceled certificates of
the stock certificate book, would be the sole but sufficient evi-
dence of the status and ownership of such treasury stock.
§ 67. Transfers from Corporation.
When treasury stock is sold the formalities are simple.
The sale being duly authorized by the directors, the treas-
urer would, if the stock were held by him and the original
certificates had been canceled without reissue, merely give
the purchaser an order for the required certificates, or
instruct the secretary in writing to issue such new certifi-
cates. If the original had been canceled and new certifi-
cates issued to the treasurer, this latter official would merely
assign one of his certificates, if of the right denomination.
If otherwise he would have one broken up, the proper
number of shares being issued therefrom to the new pur-
TREASURY STOCK. 87
chaser and the unsold remainder being issued to the treas-
urer. If the certificates had been held in the name of the
corporation, the treasurer or such other official or officials
as were designated by the board would make the proper
assignments.
§ 68. Legal Status of Treasury Stock.
When its own stock is held by the corporation, or by
trustees, or by its officers, for the corporation, such stock,
so long as it is so held, is inert and can neither vote nor par-
ticipate in dividends. Should the stock be voted, such
action would be illegal and any action or election decided
by the vote of treasury stock would also be illegal and
might be set aside. If dividends should be declared and
paid upon such stock, the action would be unauthorized and
would also be meaningless as the money so paid would
come directly back into the treasury of the corporation.
§ 69. Stock of other Corporations held in Treasury.
It is to be noted that the comments of the preceding
section do not in any way apply to stock of other corpora-
tions which may be owned and held in the treasury of
any particular corporation. Such stock would be personal
property, and liable to taxation as such, and would maintain
all its corporate rights and privileges in full vigor. It would
participate to the full in any dividends declared by the cor-
poration from which it issued, and would be entitled to full
representation and voting rights at any stockholders'
meeting of that corporation. Such stock would be voted,
either in person or by proxy, by the trustee or official in
whose name it was held, or if held in the name of the cor-
poration by such person as was formally designated thereto
by the corporation. Such vote would be cast under the
general instructions of the board of directors, but, unless
matters of much importance were to be considered, the
details of his representation and the actual vote would
80 STOCK AND STOCKHOLDERS.
usually be left to the discretion of the person who rep-
resented the corporation.
It is to be noted, however, that a corporation cannot
legally hold the stock of another corporation, unless specifi-
cally authorized by statute as in New Jersey, or by charter
provision allowable under the statutes, as in New York.
(See Chap. XXXIX, Holding Corporations.)
CHAPTER XL
STATUS OF STOCKHOLDERS.
§ 70. General.
In the active affairs of the corporation the stockholders
occupy a position of minor importance. They own the
stock of the corporation, and through that ownership, the
corporation itself with all its belongings. Their control
of the organization and their management of its affairs is,
however, indirect and somewhat removed. The business
is theirs and its profits belong to them but its actual man-
agement and the general control of the corporation are
in the hands of the directors, with whom the stockholders,
either individually or collectively, cannot directly interfere.
§ 71. Functions.
The functions of the stockholders are few and simple.
They assemble once a year in annual meeting to listen to
reports, elect directors and discuss the general affairs of
the company. On rare occasions they are assembled for
particular action in special meeting. If the charter is to be
amended, they are usually required to act. If all the assets
of the corporation are to be sold, they are generally called
upon to sanction the proceeding. In some states their con-
sent is required to validate corporate mortgages. They
would act on any proposed liquidation of the corporation.
By charter provisions, their consent may be necessary to
other proposed action. One other most important function
pertains to the stockholders ; the right to make, amend and
repeal the by-laws. (See generally Part IV, By-Laws.)
The active connection of the stockholder with his corpo-
rations is, under normal conditions, limited to the functions
90 STOCK AND STOCKHOLDERS.
specified. The further control and direction of the corporate
organization and its property and business are left entirely to
the directors he has elected.
§ 72. Rights.
As a matter of common or statutory law the stockholder
has a right to due notification of all stockholders' meetings, to
participate in their proceedings and to vote on all questions sub-
mitted thereto, and in the election of directors in the manner
and to the extent to which he is entitled by reason of his stock-
holdings. In case dividends are declared he is entitled to re-
ceive his due proportion. He is also entitled to purchase, if he
so desires, his due proportion of any increased capital stock.
In addition to these rights, he is entitled to the honest and
capable management of the corporate business and interests and
to the proper disposition of the profits derived therefrom.
Rights of the first class require but little attention from
the stockholder beyond due provision as to the manner and
details of their observance. His further rights, while broadly
secured to him under existing laws, are more immediately and
more definitely secured to him by care in the selection of his
agents, the corporate directors, and by the proper regulation
and restriction of these agents in their management of the cor-
porate affairs, by intelligently drawn by-laws. It may be said
in passing that the selection of honest and capable directors
is by far the best and most effective means of safeguarding the
interests of the stockholders.
§ 73. Powers.
Under ordinary conditions the stockholders have, as a mat-
ter of course, full power and freedom in the selection of di-
rectors, and, it is to be presumed, will select men of experience
and ability in the line of the corporate affairs, and men to whom
the direction of these affairs may be safely entrusted.
Beyond this, the stockholders have somewhat broad powers
in the restriction and regulation of the directors, through their
STATUS OF STOCKHOLDERS. 91
right to make, amend and repeal the by-laws. Such regula-
tion of the management must, as a general rule, be secured in
the inception of the enterprise. Thereafter it is often difficult
and at times impossible to secure the passage of the necessary
regulations.
§ 74. Liabilities.
The liabilities of stockholders as such are few — usually
only to pay the full par value of the stock subscribed for or
purchased by them. This liability on unpaid stock may, by
agreement of the issuing corporation, be terminated as between
the corporation and its stockholders but would still exist as
between these stockholders and creditors of the corporation,
and, on the insolvency of the corporation, would become imme-
diately effective. (Dickerman vs. Northern Trust Co., 176
U. S., 181, 1900; Thompson vs. Knight, 74 App. Div., N. Y.,
316, 1902.) (See Chap. IX, Full-Paid Stock.)
In Minnesota and California additional liabilities are im-
posed on stockholders by statutory enactments.
§ 75. Relations to Directors.
If unrestricted by charter or by-law provisions, the direct-
ors' control of corporate affairs is almost absolute. They can-
not be interfered with or restrained so long as they exercise
ordinary care and honesty. Even if they fail in these elemen-
tary requirements, the stockholders' remedy is indirect and
difficult.
If the directors manage the business in opposition to the
wishes of the stockholders, the latter are almost helpless The
directors are not amenable to request or resolutions, cannot be
removed, and may pursue any policy they deem best short of
actual fraud or the grossest mismanagement.
In some cases the stockholders by means of special meetings
and the by-laws passed thereat may exercise a certain negative
control over the board, but, practically, when unrestricted by
charter or by-laws, the directors are independent of the stock-
holders as to the management of corporate affairs, and any
92 STOCK AND STOCKHOLDERS.
attention they pay to the wishes of the latter is a matter of
courtesy or policy or propriety, not one of obligation.
If the stockholders do not wish to repose such absolute con-
trol of the corporate affairs in the board, they may restrict its
power to some extent by means of suitable charter and by-law
provisions. Such provisions where permitted are best incorpo-
rated in the charter. The objection to such provisions in the
by-laws is the comparative ease with which they may be
changed. By-law provisions are quite as effective so long as
they remain in force as similar provisions in the charter.
If a majority of the stockholders are agreed as to what is
needed — more particularly in the inception of the enterprise
when the first by-laws are being formulated — their power to
restrict and regulate the actions and authority of the board is
quite extended. It is a power, however, that should be exer-
cised with discretion. If the regulation of the board be car-
ried too far, its freedom of action will be hampered to the
injury of the business and it will be difficult to secure capable
men to act as directors.
The best guaranty of the proper conduct of the corporate
business is the election of honest and capable directors, and if
such be secured, their regulation and restriction is a matter of
minor importance. As such directors are not always available,
and as mistakes as to the character of candidates sometimes
occur, it is usually advisable, however, to impose reasonable
regulations and restrictions.
Usually the restrictions on the power of the board will be
in the direction of limitations of the debt incurring power, re-
strictions as to salaries to be paid officials, regulations as to
payment of dividends and the handling and disposition of the
company's finances, and provisions for the regular inspection
and auditing of the corporate books and records. (See gen-
erally §§ 116, 117, 236, 243.)
The stockholders' regulations might be extended much fur-
ther than this. The right to elect officers might be reserved
by the stockholders, the board might be made amenable to
STATUS OF STOCKHOLDERS. 93
stockholders' resolutions, and the right to remove directors on
occasion might be retained by the stockholders as a means of
enforcing compliance with their wishes.
Measures of this kind are extreme and of questionable ex-
pediency. In some states they would be of doubtful legality,
and in any state they would be liable to introduce unnecessary,
and, at times, embarrassing complexities, in the scheme of
corporate organization. They are not found in the best-man-
aged and most successful business corporations of the country.
PART III.— THE CHARTER.
CHAPTER XII.
GENERAL CONSIDERATIONS.
§ 76. Nature of Charter.
The foundation of the corporation is a formal written
grant or authorization from the state. This instrument
was originally known as the charter, but is now usually
designated by the statute laws of the various states as the
certificate of incorporation, or the articles of association.
From a legal standpoint there is no distinction between
these different names. As a matter of convenience the
term charter is generally employed in the present volume.
The charter may be granted by a particular state, or by
the general government, as in the case of national banks
and certain other corporate organizations.
Formerly every charter was created, or authorized, by
a separate legislative act. Such charters, termed special
charters, are still granted in some states by act of legislature,
but the greater number of corporations are organized under
state laws of general application. (See § 82.)
All corporations have certain common law powers, such
as the right to sue and be sued under the corporate name,
the right to contract and to use the corporate seal. In
addition they have any general powers granted by the
statutes and the special rights granted by their respective
charters, such as the use of their particular name, the right
to carry on the special business and to have a certain capital
94
GENERAL CONSIDERATION'S. 95
stock. They also have such incidental powers as are neces-
sary to render these express powers effective. The exercise
of any further powers, privileges or limitations would be
ultra vires, and could only be authorized by proper amend-
ment of the charter.
As the charter is usually a very formal instrument, and
the procedure for its amendment is also formal and usually
troublesome, it is important that all desired purposes and
powers should be stated with clearness and fullness in the
original charter application.
The powers and privileges conferred upon a corpora-
tion by its charter are only such as are allowable under the
laws of the state of incorporation. Ordinarily any pro-
visions of a different tenor would be refused or stricken
out of the charter application by the state officials.
Occasionally it happens, however, through official ignorance,
inadvertence or indifference, that powers and privileges
illegal, or not permissible, are passed and apparently granted
by the charter of a corporation. Such appearance is decep-
tive. The corporation is empowered by its charter just so
far as that instrument is in accord with the law of the state
and no further. The charter is not and cannot be superior
to the law, and is absolutely ineffective just so far as it
goes beyond. (Eastern P. R. Co. vs. Vaughan, 14 N. Y., 546,
1856.)
§ 77. Classification.
Charters are divided into two important classes by the
general division of corporations into stock and non-stock,
or membership corporations. Charters for membership
corporations are much simpler than those for the ordinary
stock corporation, and as all that pertains to them is
included in the law relating to stock corporations, they
are not treated specifically in the present volume.
Beyond this general division, stock corporations and the
charters creating them may be divided into three important
classes.
96 THE CHARTER.
First, business corporations organized to conduct an ordi-
nary mining, mercantile, manufacturing or other private
business.
Second, public utility corporations, organized to under-
take some public function, such as the supply of heat, light,
power or water, or the construction or operation of a rail-
way, a telephone or telegraph system.
Third, financial corporations, as banks, trust companies,
building associations and insurance companies.
The corporations of each of these classes are created by
charters differing from those of the other classes in form
and terms, though all conform to the general principles
governing charters.
§ 78. Business Corporations.
This term is used to designate corporations organized
to conduct those various forms of private business not
subject to special regulations and restrictions in the interest
of the public. All corporations for mining, manufacturing
and mercantile pursuits are included under this head.
Business corporations are, as a rule, chartered in each
state under general, uniform laws and forms, have no special
privileges, and, when incorporated, are allowed to pursue
their corporate ends almost as freely and as simply as would
a private individual or firm under the same circumstances.
The majority of existing corporations belong to this class
and the great mass of corporate law and decisions applies
to them primarily. For the other classes of stock corpora-
tions there are special laws, special limitations, and, in some
cases, special privileges.
§ 79. Public Utility Corporations.
Public utility corporations are those organized for the
purpose of securing and operating under some franchise
of a public nature which confers upon such corporations
rights or privileges which other citizens and private cor-
GENERAL CONSIDERATIONS. 97
porations do not enjoy. Usually these franchises carry
with them certain rights of way, or condemnation powers
to secure such rights granted by the state under its power
of eminent domain.
An ordinary private corporation enjoys no exclusive
franchise of this nature, and, generally speaking, any other
body of citizens may incorporate for exactly the same pur-
poses and carry on exactly the same kind of business. A
company organized to operate a public utility must, however,
have special rights and powers affecting the public welfare or
convenience, and usually another similar corporation would
not be granted these identical rights and powers while the
former corporation was in active existence. For instance,
a gas company must have the right to tear up streets in
order to lay and repair its pipes. The ordinary citizen
or corporation has no such right. If such right were granted
to one company, the same right in the same territory would
not properly be granted to another company. Should such
double concession be made, it would be but a short time
until, in obedience to well-known economic laws, the two
competing companies would combine.
This peculiarity is true of all classes of public utility corpo-
rations. They enjoy franchises that cannot be granted indis-
criminately, and that tend inevitably to monopoly. They en-
joy these special privileges for the purpose of supplying cer-
tain public needs that must be supplied uniformly. They can-
not be given the liberty to make prices and conditions that
obtains in the conduct of a private corporation. Hence the
laws under which they receive charters should guard against
the indiscriminate bestowal of such rights and should carefully
regulate charges and methods.
In many states the charters of public utility corporations
are only granted by special acts of legislation, in others, com-
missions pass upon such applications and decide whether the
public welfare requires the issuance of the desired charter,
while in other states such corporations are chartered under the
provisions of general laws.
y» THE CHARTER.
§ 80. Financial Corporations.
Experience has shown that it is unsafe to allow irrespon-
sible parties to incorporate and conduct banks, trust companies,
savings institutions and similar associations dealing with the
funds of others. Hence, institutions of this sort are now so
hedged about with restrictions and limitations that, in a meas-
ure, their conduct is confined to reputable and responsible peo-
ple. Their safety is also at least partially assured by stringent
rules as to the payment of stock subscriptions in cash before
business is commenced, and as to the liability of their stock-
holders thereafter. In national banks and in many state banks
this stockholder's liability is equal to the face value of his stock,
thus nominally placing $200 behind each $100 of stock as se-
curity for deposits and credits made to such institutions.
Usually charter applications for financial corporations must
be approved by some department or official of the state; and
after incorporation their affairs are subject to the inspection
and supervision of the state officials, and their officers are re-
quired to make regular reports of their business and financial
condition. National banks are under the jurisdiction of the
United States laws and are not subject to this supervision and
regulation from the authorities of the state in which they op-
erate.
Speaking generally, both public utility corporations and
financial institutions chartered by the state are subject to the
usual statute law regulating stock corporations, and in addition
to such special legislation as may affect them. If doing busi-
ness in other states they would be governed by the local regu-
lations affecting such foreign corporations.
§ 81. Charter Details.
When a corporation is to be organized, all the important
features which are peculiar to the new corporation and which
are not secured to it by the common law, or necessarily incident
to incorporation, should appear in its charter. These are usually
GENERAL CONSIDERATIONS. 99
the name, purposes, duration, location, capitalization and the
details thereof; also in some states the number of directors
and the names of those who are to act for the first year, and any
desired special provisions that can be made a permanent part
of the corporate organization under the laws of the state of
incorporation. Temporary or less important details may be
left for by-law or other regulation, but all matters of perma-
nence or importance should appear in the charter as far as
possible. The statutes usually require the main features out-
lined above to appear in the charter.
In New York, New Jersey and some other states, special
provisions may be inserted in the charter for the regulation and
conduct of the corporate business and affairs and for any proper
limitations on the powers of its officials. This leaves wide
scope for the insertion of such provisions and many peculiar
arrangements result from this freedom.
§ 82. Application for Charter.
Special charters are secured — where not prohibited by coir-
stitutional provision — by application to the legislature of the
state. The charter application is put in the form of an act de-
claring that certain named parties and their successors are a
body corporate for the purposes enumerated. This act, if
passed, becomes the charter of the company and is its sole
authority for existence and operation.
The granting of special charters leads to grave abuses and
in many states is prohibited by constitutional provisions. In
other states, however, as in New York, such charters are still
granted, and charters may be secured either under the general
corporation laws, or, where sufficient influence exists, by direct
appeal to the legislature.
In most, if not all the states, general laws have been passed
prescribing the method whereby charters may be secured.
These laws are modified by special additional requirements in
the case of financial and public utility corporations. Under the
provisions of such general laws when due and proper applica-
100 THE CHARTER.
tion is made with payment of the proper fees, the Secretary of
State must issue a charter in accordance with the terms of the
application, or, if actual issuance of the charter is not required,
the official acceptance and filing of the application, ipso facto,
authorizes the parties to organize as a corporation.
This is the usual procedure under which the great majority
of modern business corporations come into existence. It is a
matter of right, not of favor, and is available equally for all
qualified persons who choose to comply with the necessary
formalities and pay the required fees. (See Forms i to 4.)
CHAPTER XIII.
INCORPORATORS.
§ 83. Who may Incorporate.
Corporations are creatures of the law. They derive their
right to existence either from direct legislative enactment or
from the general laws under which they are formed. This be-
ing true, only those may incorporate who are expressly author-
ized thereto by these special acts or under these general laws.
In each state the statutes must be consulted in order to ascertain
definitely just who may participate in any proposed corpora-
tion.
Usually the statutes authorizing incorporations employ the
term " persons " or " natural persons " in prescribing who may
incorporate. This wording excludes a firm, a corporation, or
any one acting in a representative capacity, from participation
in an incorporation. Any of these might hold stock in the cor-
poration when organized, but could not legally act as an incor-
porator.
As the charter is in effect a contract, a person unable to con-
tract cannot properly act as an incorporator. This is a matter
of common law and excludes minors, persons of unsound mind
and others incompetent to contract. Under the old common
law, it would also exclude married women, but this disability
has been generally removed and married women frequently act
as incorporators.
In some states one or more of the incorporators must be
citizens of the state of incorporation. Unless this were ex-
pressly prescribed, any person otherwise competent could act
whether a citizen of the state or not. Incorporators need not
even be citizens of the United States unless expressly required
101
102 THE CHARTER.
by the statutes. In New York, at least one of the incorporators
must be a resident of the state, and two-thirds of the total num-
ber must be citizens of the United States. In New Jersey none
of the incorporators need be citizens either of the state or of
the United States.
It must be borne in mind that each state has the entire right
to impose any qualifications on incorporators that may seem de-
sirable and that there is no appeal from such statutory require-
ments. Usually, however, the matter is not of great import-
ance, as, if any of the proposed incorporators are barred by
statute requirements, a substitute may be appointed who is qual-
ified, and who will act up to such point as is necessary or de-
sirable and then transfer his subscription and all his rights to
the party for whom he has been acting. (See § 87.)
§ 84. Number of Incorporators.
The minimum number of incorporators is prescribed by
statute, and in most states is three, though in a few states five
are required. No maximum number is designated in any state,
this feature being a matter of no importance from the stand-
point of the state.
As a general rule it is advisable to incorporate with the
minimum number of incorporators permitted by the statutes.
Usually each incorporator must sign and acknowledge the
charter application, and must either sanction or participate in
the first meeting, and these proceedings are much facilitated
by a small number of incorporators. At times different inter-
ests must be represented in an incorporation and the subsequent
organization, and a considerable number of incorporators is
therefore unavoidable, but without some such reason the mini-
mum number is to be preferred.
§ 85. Functions of Incorporators.
The incorporators furnish the nucleus about which the pro-
posed corporation is formed. Their function is merely to par-
ticipate in certain formalities incident to the creation of the
INCORPORATORS. 103
corporation. They must usually sign and acknowledge the
charter and are generally required to be subscribers to the stock
of the corporation. They call and conduct the first meeting.
The organization of the corporation is usually entirely in their
hands, though in case they are not the real parties in interest
the organization and first proceedings will be prescribed for
them in advance.
It will be seen that the only necessary function of the incor-
porators is to figure in certain formalities essential to the for-
mation of the new corporation. They may be the real parties
in interest who will remain with and own stock in the new cor-
poration, or they may be " dummy " incorporators, called in
merely as a matter of convenience, or for more cogent reasons,
without interest in the corporation beyond their perfunctory
subscription for one or more qualifying shares — an interest
that is usually assigned to the real parties in interest so soon as
the corporation is once organized and ready to begin its opera-
tions. (See § 87.)
§ 86. Incorporators as Stockholders.
It is usual for incorporators to be subscribers for one or
more shares of stock in the proposed corporation. In most of
the states, such subscription is either required, or it is assumed
that such subscription will be made. If not either directly or
inferentially required by the statutes, such subscription is not
essential.
When an incorporation is effected with incorporators who
do not desire, or are not desired to remain as permanent stock-
holders, it is usual after the organization has been completed,
for the incorporators to assign their subscription rights or their
stock to those parties who are to be stockholders. These latter
assume the obligations of the incorporators on the assigned
subscriptions or stock, and, if the transaction is acquiesced in
by the corporation, it is then legally complete and the original
incorporators are discharged from any subscription obligations.
(See I Cook on Corps., § 255 and cases cited.) (See § 87.)
104 THE CHARTER.
§ 87. Dummy Incorporators.
As has been stated, any competent person may join in an
incorporation without any material or permanent interest in the
matter, and such non-interested or " dummy " incorporators
are frequently employed. Sometimes this is done where the
real parties in interest do not wish to appear as incorporators,
sometimes of necessity because of the absence of the princi-
pals, and sometimes purely as a matter of convenience, the real
parties concerned being disinclined or too busy to undertake
themselves the technical duties of incorporators.
In such cases, the dummy incorporators execute the charter
and organize the corporation, usually subscribing for the small-
est number of shares that will satisfy the statute requirements.
The organization will be carried to such point as the real par-
ties in interest or their attorneys indicate, and the " dummies "
then assign their subscription rights or stock, resign any offi-
cial positions they may hold in the new corporation and step
down and out.
Such an incorporation, if properly conducted, is entirely legal
and is the method pursued in the formation of almost all the
larger corporations and combinations. The proceedings are,
as a matter of course, supervised and ordinarily conducted by
the attorneys of the parties really interested, these attorneys
dictating all that is done and seeing that the interests of their
clients are properly conserved. The proceeding is carried as
far as the conditions render advisable before the dummy incor-
porators make way for their principals. Usually they fully
complete the organization of the corporation, electing them-
selves directors, sometimes electing the permanent officers and
at other times filling these official positions temporarily them-
selves, meanwhile taking action of the greatest moment to the
future of the new corporation.
The organization of the United States Steel Corporation
was -effected in this way. Three incorporators were provided,
each of whom subscribed for ten shares of stock out of a total
INCORPORATORS. 105
capitalization of but $3,000. The incorporation was then ef-
fected, the organization of the new corporation was completed,
the incorporators were retired, and the capitalization was in-
creased to $1,100,000,000. (See Form 6.)
In such cases the incorporators are usually the junior coun-
sel and clerks in the offices of the attorneys having the incor-
poration in charge. As stated, if the incorporators are prop-
erly qualified and the proceedings are conducted in accordance
with the statute requirements, there is no question as to the
legality of the method. (See § 210 and cases there cited.)
CHAPTER XIV.
THE CORPORATE NAME.
§ 88. How Secured.
The name of any proposed corporation must be set
forth specifically in its charter application. This name, so
soon as the application is allowed, becomes the name and
property of the new corporation. For that state the right
to such name is exclusive.
If the name chosen were the same as that of some other
domestic corporation or foreign corporation licensed to
do business within the state, or so nearly the same as to
cause confusion, that fact alone would be ground for the
rejection of the charter application. If, under such circum-
stances, the application were inadvertently allowed-, the
name would technically become the property of the new
corporation, but the other corporation would have the
superior right and could by injunction prevent any con-
flicting use.
But few statutory restrictions exist in regard to the cor-
porate name. The prohibition against the adoption of a
name similar to that of a corporation already doing business
under the state laws is the most important. In some states
the prefix " The " must be used to introduce the corporate
appellation ; elsewhere " corporation," " company," " asso-
ciation " or some other word expressing the idea of asso-
ciation must be used in the corporate name. In some few
states, the word " incorporated " or " limited " must follow
the corporate designation.
The state authorities have no right to refuse a charter
application on the ground that some foreign corporation,
106
THE CORPORATE NAME. 107
not licensed by the state, is using the selected name. In
such event the charter application, if no other objection
existed, must be allowed and the right to use the name
left to be settled between the two corporations. (See § 90.)
§ 89. Selection of Name.
The selection of the corporate name is frequently a
matter of considerable importance, though usually governed
by business considerations rather than legal rules. As a
matter of both taste and business a name should be selected
that is distinctive, not too long, and, if possible, expressive
of the business to be done by the corporation.
In the incorporation of a partnership, the general plan
is to retain the partnership name with only such changes as
will indicate the corporate organization. (See § 247.)
In most states great latitude is allowed in the selection
of the corporate name, the prohibition against conflicting
names being practically the only restriction. If not required
by statute, the use of the prefix " The " is to be avoided
as unnecessarily lengthening the name and producing a
peculiarly awkward effect in legal instruments when the
name is used, following the word " said " as is frequently
the case.
Hackneyed names such as " Standard," " Excelsior,"
and " International," as well as much-used geographical
names are to be avoided, both as a matter of taste and
business. No trade-name rights can ordinarily be secured
in such well-worn designations.
§ 90. Right to Corporate Name.
One important object of incorporation is to secure per-
manence, and the corporate name is an almost essential
element of this desired commercial continuity. Once estab-
lished, the name is the embodiment of the good-will of the
enterprise and has a value in accordance. If the corpora-
108 THE CHARTER.
tion is properly managed and is successful this value may
be and frequently is very considerable. In some instances
it has been the chief asset of a valuable business.
The corporation's right to its name is the same as to
any other trade-mark or trade-name possessed by it, and is
generally more easily established. If the name is used by
other parties without authority such use may be stopped by
injunction, and, if damage can be shown, an action will lie
against the offending parties. (Higgins Co. vs. Higgins
Soap Co., 144 N. Y., 462, 1895; Columbia Co. vs. O'Brien,
101 App. Div., N. Y., 296, 1905.)
As has been stated, there is usually no statute restriction
against the adoption of the name of a foreign corporation
by a domestic corporation if such foreign corporation has
not been licensed to operate in the state. The allowance
of such name would not, however, give the new corporation
an unquestioned right to its use. If the older corporation
could show that it had a trade right in the name, and that
the use of the name by the new corporation would be inju-
rious to these rights, the new corporation might be enjoined
from the use of such name and if the injunction should be
sustained would be compelled either to secure a new name
by due and formal precedure or discontinue its operations.
(Koehler vs. Sanders, 122 N. Y., 65, 1890; Investor Pub.
Co. vs. Dobinson, 82 Fed. Rep., 56, 1897.)
§ 91. Changing the Corporate Name.
Occasionally it becomes necessary or expedient to
change the corporate name. It may be that the use of the
name first adopted is prevented by injunction, or new
interests may have come in, that, as a matter of business
policy, must be represented in the corporate name, or pos-
sibly the corporation has been unsuccessful, or has achieved
a bad reputation, and the adoption of a new name is thought
desirable. In any such case, the name may only be changed
with the permission and sanction of the state.
THE CORPORATE NAME. 109
In many states, the change of name is secured by an
amendment to the charter, which is a more or less trouble-
some operation according to the statutory requirements of
the particular state. Other more or less troublesome pro-
ceedings obtain in different states, as in New York where
the prescribed method of changing the corporate name is
by formal court proceedings. On account of these dif-
ficulties in some cases it is simpler and no more expensive
to organize a new corporation and transfer to it the assets
of the existing corporation, than to take the time and
trouble incident to a change of name by the regular pro-
cedure.
CHAPTER XV.
THE CORPORATE PURPOSES.
§ 92. General.
An individual or firm may do anything or engage in any
form of business not prohibited by the laws. A corporation,
on the contrary, may only do those things and engage in those
businesses permitted it by the law and set forth in its charter.
This renders it important that the charter should clearly and
fully empower the corporation to do all those permissible things
that may be necessary in its operations.
Usually the general corporation laws in each state specify
the purposes for which corporations may be organized. In
some states these purposes are limited to certain classes of pur-
suits, and corporations cannot be formed for purposes not
specifically included. Mining and manufacturing corporations
are authorized in all states. In most states the laws specify
mercantile and trading corporations as well. Some states go
still further and broadly authorize the formation of corpora-
tions for " any lawful business," " any lawful industry or pur-
suit " or for " pecuniary profit."
Under these latter clauses it would be difficult to discover
any legitimate calling or pursuit that can not be undertaken
by a corporation. The tendency of the present day is towards
liberality in this respect and the few limitations that do exist
are gradually being removed.
§ 93. Single Purpose.
Formerly the rule was to organize corporations for a single
purpose, as to mine for silver, to manufacture shoes, or to con-
duct a trading business in some specified line. In a few states
this is still the rule and a corporation will not be chartered for
110
THE CORPORATE PURPOSES. Ill
more than one purpose. The authorization for this one pur-
pose would, as a matter of course, carry the right with it to do
all things necessary or proper to effect that purpose, but noth-
ing further. If another line of business were to be taken up
a new corporation must be organized, as the powers of the old
corporation could not be extended to cover the new pursuit.
That is, if the silver mining company wished to mine for cop-
per also, it could not secure specific authorization thereto and
a new company would be required to accomplish this purpose.
At present this rule has been practically abrogated. It still
prevails in a few states, but generally a corporation will now
be empowered for as many legitimate purposes as may be in-
cluded in the charter application. In some few cases, however,
it is still advantageous to confine the corporate activities to one
specific purpose. For instance, if a partnership is incorporated,
it may be advisable to restrict it to the purposes of the business
already under way. This would prevent any subsequent diver-
sion of the corporate activity and resources into other and pos-
sibly dangerous channels. The corporation could conduct the
one business and that alone. It would have no power to ven-
ture into new and untried fields.
§ 94. Comprehensive Purposes.
At the present time the tendency in corporate organization
is towards comprehensive purposes — purposes that will permit
the corporation to undertake and operate any line of business,
in any part of the world and under any conditions. It is the
natural desire to secure all powers and privileges that may be
had — not that they are all needed or to be exercised, but un-
foreseen opportunities may occur when these powers will be re-
quired. Incorporators are pleased with these extensive arrays
of possible activities, investors and interested parties generally
expect them, and, as their inclusion is a matter of little diffi-
culty, nearly all modern charters enumerate almost every con-
ceivable branch of business and every kind of enterprise allow-
able under the statutes. (See Forms 6 and 7.) '
112 THE CHARTER.
In some cases this has been carried to an absurd extreme,
but in general the practice has its advantages. There is no
good reason why corporations should not have the same free
range of business activities possessed by the individual or firm,
and the effort of the present day is to approximate as nearly as
may be to this ideal.
It is to be noted, however, that this end could be attained
with equal efficiency and with much less trouble and verbosity
by a few general statements of comprehensive scope. The en-
tire purposes of the most elaborately extended charter could be
obtained in their full force and efficiency by a few well turned
phrases.
§ 95. Illegal Purposes.
No state of the Union allows the organization of a corpo-
ration for illegal or immoral purposes. Where state officers
inadvertently, or by intent, allow charters for such purposes,
the authorization of these charters is void and ineffective and
will not protect the stockholders from any penalties and liabili-
ties that would be visited upon the members of a partnership
engaged in similar undertakings.
This would apply to any business, occupation or organiza-
tion in direct violation of the laws of the state of incorporation,
such as lotteries, gambling and combinations in restraint of
trade.
Apart from these manifestly illegal or immoral undertak-
ings, any purposes not allowed to corporations under the laws
of the state are illegal. A charter for any such purpose, even
if allowed by the state officials, would be ineffective and the
stockholders would be held as partners in case of the insolvency
of the enterprise. This does not often happen at the present
day, as most of the states allow incorporation for all proper
purposes and the possibility exists only in those states where
corporate purposes are still restricted.
Also it is to be noted that if a portion of the purposes is
legitimate and proper, and a portion unauthorized, the charter
THE ^CORPORATE PURPOSES. 113
would be held good as to the legitimate portions and as non-
existent and non-effective only in those portions unauthorized
or in conflict with the laws. (Eastern P. R. Co. vs. Vaughan,
14 N. Y., 546, 1856.)
§ 96. Things " Ultra Vires."
Things otherwise legal but not specified among the charter
powers of the corporation are beyond its powers, or ultra
vires. Contracts made in pursuance of such unauthorized ends
cannot be enforced against others, although the corporation
itself is usually bound. Directors and officers may make them-
selves personally liable for involving the corporation in such
transactions.
Both creditors and stockholders have the right to object to
any action of the corporation exceeding its legal powers. It
is to be noted, however, that if the stockholders assent and
there are no creditors, there is no one to object if a corporation
does exceed its charter powers. Under these circumstances
such powers may be exceeded without danger to the officers
and directors. Owing to the broad powers that are now usu-
ally granted, the doctrine of ultra vires has much less import-
ance than formerly. A modern text book says:
" The old theory of a corporation was that it could
not legally do anything in excess of its express or implied
powers. But the modern view is that a private corpo-
ration may, if all its stockholders assent and if creditors
are paid. Public policy does not require business corpo-
rations to confine themselves strictly within the limits
of the words of their charters." i Cook on Corpora-
tions, § 3.
(See series of modern cases in 64 L. R. A., 366, et seq.,
on implied powers of corporations.)
CHAPTER XVI.
STOCK CLAUSES.
§ 97. General.
In most states the capital stock of a corporation and the
divisions and general features of this capital stock must be
stated in, and are fixed by the charter. In a few states, stock
with special preference or features may be issued after the
allowance of the charter by certain specified action of the stock-
holders, but as a general rule everything relating to the stock
is fixed once for all by the charter and may only be changed
thereafter by an amendment of that instrument.
Usually the charter must state the full amount of the capi-
tal stock, its division into common and preferred stock, if such
division exists, the number of shares into which it is divided
and the par value of each share. This par value is usually the
same for all the shares, though not necessarily so. The par
value of the common stock might be fixed at $10 per share,
while the par value of the preferred stock was fixed at $100.
Generally such variations of the par value are not advisable.
§ 98. Classifications.
Any classifications of the stock should be very clearly set
out in the charter. These classifications are varied and nu-
merous. The most usual is that of common and preferred
stock. This preferred stock may be divided into different
classes as to precedence in dividends, or as to amount of
dividend, or as to participation in assets, or as to redemption
features, or as to participation in dividends beyond preferred
dividends, "or as to voting or other powers.
The common stock is sometimes classified in regard to vot-
ing powers, each portion or class having the right to elect a
114
STOCK CLAUSES. 115
certain number of directors, or at times one portion of the
common stock may be given the sole right to vote upon certain
kinds of questions, or under certain contingencies.
Such charter classifications are not allowable in all of the
states, but the same result may be attained in many cases by
suitable by-law enactments, unanimously adopted at the first
meeting of stockholders. As stated by Judge Folger in Kent
vs. Quicksilver Mining Co., 78 N. Y., 178 (1879) :
" We know nothing in the constitution or the law
that inhibits a corporation from beginning its corporate
action by classifying the shares in its capital stock with
peculiar privileges to one share over another and then
offering its stock to the public for subscription thereto."
(See §§ 49, 114, 232, 239 and 252.)
§ 99. Common Stock.
Usually the charter provisions affecting common stock are
few and simple. If the corporation were to be capitalized at
$100,000 with shares of the par value of $100, without pre-
ferred stock or classifications of the common stock, the charter
would merely state that the capital stock was to be $100,000,
divided into 1,000 shares of the par value of $100 each. Noth-
ing more would be necessary. The fact that it was all com-
mon stock, that this was unclassified and that there was no pre-
ferred stock or restrictions of any kind on the common stock,
would be understood without specific statement.
If there are to be any classifications of the common stock,
or any restrictions upon it in any way, these must be stated in
the charter, specifically and in detail. The mere fact that com-
mon stock is usually unrestricted renders it the more necessary
to be clear and explicit if restrictions are to be created.
§ 100. Preferred Stock.
Preferred stock, by its mere existence, indicates the fact
that it has features not possessed by other stock of the corpo-
ration, but the differences and preferences which distinguish
116 THE CHARTER.
it should be stated as clearly as possible in the creating clause
and also so concisely, if it may be done, that the entire clause
may be printed on the face of each certificate of this preferred
stock.
It should be borne in mind that unless otherwise provided
by the charter, preferred stock has all the rights of common
stock in addition to its preference ; that is, it would vote, par-
ticipate in any dividends in excess of its preferential dividend,
participate in any distribution of assets on the dissolution of the
corporation, and, generally, be on exactly the same plane as
common stock, except as to the indicated preference in divi-
dends. If any of these rights are to be denied it, such denial
must be clearly expressed. If it is to have any rights other
than its preference dividends, these rights must also be clearly
indicated. Nothing should be left to implication, or be
taken for granted. (See Chap. VIII, Preferred Stock.)
CHAPTER XVII.
LOCATION AND DURATION OF CORPORATION.
§ 101. Domestic and Foreign Corporations.
In its own state — the state in which it is incorporated —
a corporation is a " domestic corporation." Elsewhere it is
designated a " foreign corporation." In its own state it usually
enjoys rights and privileges not accorded a foreign corporation,
hence, unless there is some strong reason to the contrary, it
should always be incorporated in the state in which the larger
part of its business is to be done.
§ 102. Selection of State.
The usual inducements for foreign incorporation are the
smaller fees and taxes of the selected state. (See Chap. V,
Cost of Incorporation.)
Unless there is a material difference in favor of foreign
incorporation, it should be avoided. Corporations organized
outside the state are always liable to adverse discrimination,
and, in many states, are at a positive disadvantage in event of
litigation. (See Chap. IV, Where to Incorporate.)
§ 103. Principal Office.
Usually the location of the office in which the corporation
will have its headquarters must be designated in the charter
application. In New Jersey and most of the other states, this
principal office must be located definitely. In New York, the
borough and county in which the principal office may be found
must be given, but neither then nor later is any more definite
address required. This renders it impossible to secure the
117
118 THE CHARTER.
local address of a corporation from its charter — a seemingly
serious omission.
It is a general principle of law that stockholders' meet-
ings must be held within the state of incorporation and the
principal office in that state is usually designated by the
by-laws as the place where such meetings are to be held.
One or two states, by statute provision, permit stockholders'
meetings to be held outside the state but the practice,
though convenient in some cases, is, generally speaking,
objectionable.
Meetings of the directors must also be held within the
state of incorporation unless permitted elsewhere by statu-
tory provision. Such permission is given by several of the
states, and, used under proper regulations as to the place
of meeting and notice thereof, is at times of much advantage.
Meetings of both stockholders and directors are usually
held in the principal office in the state of incorporation.
To allow meetings of either stockholders or directors to
be called elsewhere, unless in places formally designated by
the by-laws or agreed to by all parties in interest, gives
opportunity for grave abuses. The by-laws should designate
the principal office and, unless there is good reason for
doing otherwise, prescribe that all corporate meetings be
held therein.
The principal office in the state of incorporation is
usually designated by the statutes as the place where legal
process may be served on the corporation.
§ 104. Duration.
In certain states, the existence of a corporation is limited
to some fixed period as twenty or fifty years. In most of
the states, however, its duration may be made nominally
perpetual. This unrestricted duration is advantageous and
is in line with the greater liberality manifested towards cor-
porations in later years. No serious objection can be urged
against it, the re-incorporations necessary in the short
LOCATION AND DURATION OF CORPORATION. 119
period states are avoided, and the general stability of the
corporation is improved.
Where the period of corporate existence is limited, the
extreme time allowed by the statutes is usually selected with
the expectation of a re-incorporation at the end of the stated
period. At times, limited periods are preferred for the
corporate existence in order to definitely limit the period
of the associated undertaking. In such case, at the end of
the selected term, the corporation expires by limitation, its
assets are distributed, and the corporate venture is ter-
minated. Usually such distribution is made under some pre-
arranged plan in order to avoid the losses and injury to
good-will of a forced liquidation.
CHAPTER XVIII.
THE BOARD OF DIRECTORS.
§ 105. Qualifications.
At common law it was not required that directors should
be stockholders. In most states of the Union this has been
modified by statute provisions requiring that directors hold
one or more shares of stock. Such provisions do not apply,
unless expressly so stated, to directors named in or ap-
pointed by the charter. In New York, the statute requiring
directors to be stockholders may be waived by proper
charter or by-law provision, and persons not stockholders
may then be selected as directors of the corporation.
In general it is very advisable that directors should be
stockholders of the corporation in which they act, and the
liberality of the laws in permitting persons who are not
stockholders, or who hold but one or two shares, to act as
directors, is not in the best interests of stockholders.
Occasionally the privilege may be advantageous, but as a
general rule the management of a business enterprise cannot
safely be placed in the hands of those having no material
interest in its success, and the incorporation of an enterprise
does not except it from this rule.
In most states, one or more of the directors must be
residents of the state of incorporation. In such cases, where
the parties really interested reside in other states than the
one selected for incorporation, resident directors must be
secured. In some states, as New Jersey, Delaware, Maine
and South Dakota, this has led to the organization of con-
cerns whose sole business is the supplying of resident
directors and the representation of outside corporations
120
THE BOARD OF DIRECTORS. 121
organized within the state. At times this results in giving
some dummy director the deciding vote as between two
equally divided factions of the board.
Unless debarred by some statutory prohibition, anyone
capable of acting as an agent of a corporation might act
as its director. A trustee, or an executor of an estate con-
sisting in part of stock, would be eligible as a director.
Under the modern statutes removing the disabilities of mar-
ried women, they may act as directors. Unless expressly
prohibited by statute, aliens may also act as directors. (See
§ 151O
§ 106. Number.
Within certain limits the number of directors is usually
designated by the statutes. The exact number within these
limits is, in most states, fixed by the charter. In practically
all the states a minimum number of directors is fixed by the
statutes, though in many no maximum number is prescribed.
In general the board should be fixed at the lowest num-
ber that will permit due representation of the various inter-
ests involved and provide for the proper transaction of
business. In small or close corporations it is usual to select
the minimum number of directors permitted by the statutes.
In the larger corporations more directors are usually nec-
essary in order that all the interested parties may be rep-
resented, or in order that all the parties really concerned
in the management of the corporation may participate in
the deliberations and actions of the board. Frequently the
board is increased far beyond the needs of management in
order to secure names that will attract investors and add
to the apparent financial stability of the corporation or
benefit it in other ways.
If the number of directors is made too large it is difficult
to secure a quorum, meetings are apt to become infrequent and
perfunctory, the members of the board do not keep in touch
with its business, and some further device must be resorted to
122 THE CHARTER.
for the real conduct of the business. Under such circumstances
the management may be left in an irregular way to the officers
and a few actively interested directors; usually, however, the
difficulty is met by the appointment of an executive committee,
to which is sometimes added a finance committee and upon oc-
casion other special committees. These committees then exer-
cise the powers of management that usually pertain to the
board. (See § no and Chap. XXVI, Standing Committees.)
For the business operations of an ordinary corporation a
board of five or seven members — three or four, respectively,
forming a quorum — is far better than a larger board in nomi-
nal control, but with special committees doing the real work.
§ 107. Authority.
The stockholders are the owners of the corporate property,
but the direct, active and immediate control rests with the
board of directors. The authority of the board exists under
the common law, extends to all subjects connected with the
management of the corporate affairs, and, unless in some way
restricted, is practically supreme. Its actions in the conduct
of the corporate business cannot be questioned or interfered
with by the stockholders unless in case of gross mismanagement
or actual fraud. As far as the corporate management is con-
cerned, the stockholder's position is but little more than that
of an interested spectator.
If such unrestrained power in the hands of the board is
considered undesirable, it may usually be restricted by charter
provision or by-law regulations. In a few states certain re-
strictions — and in some cases extensions — of the power of di-
rectors are found in the statutes.
Where special charter provisions are permissible, restric-
tions upon the power of the board should be incorporated in the
charter. If this is not possible they may usually be embodied
in the by-laws, where they are equally effective but of much
less stability, as by-law provisions are easily changed.
By either of these methods the power of the board to incur
THE BOARD OF DIRECTORS. 123
obligations may be limited ; their power to sell the assets of the
corporation may be restricted; it may be required that two-
thirds or other proportion of the entire number must concur
in all expenditures above a certain amount; the payment of
excessive salaries may be prohibited ; expenditures within a cer-
tain period may be limited, and many other restrictions, de-
pending upon the particular conditions, may be imposed. ( See
§§ 116, 117, 181, 236 and 243.)
§ 108. Power to Pass By-Laws.
The board of directors have no power to pass by-laws, or
to amend existing by-laws, unless expressly authorized thereto
by the statute law, the charter of the corporation, or its by-
laws. Where special provision cannot be included in the char-
ter, the only method of giving the directors power to amend
the by-laws is by express by-law provision. The stockholders
may legally delegate their power in this manner.
It may be advisable that the board shall have power to pass
additional by-laws to meet new situations and emergencies as
they arise, and this power may be given them by an authoriza-
tion to supplement the by-laws adopted by the stockholders.
This is as far as is prudent. To place unrestricted power to
make and amend the by-laws in the hands of the board would
seem a dangerous and unnecessary removal of one of the most
important safeguards of the corporate form.
In the smaller corporations where a stockholders' meeting
may be readily called in case of an emergency, there would
seem to be no real object or advantage in giving the board any
power whatsoever over the by-laws. In the larger corpora-
tions the power should only be granted with caution as one that
is of but occasional utility, and that may be used to the disad-
vantage of the general corporate interests. (See § 128.)
§ 109. Classification.
The classification of directors in such manner that but a
portion of the board is elected at any one annual meeting, is at
124 THE CHARTER.
times a convenient and advantageous arrangement. Its object
is to prevent the violent alteration of policy which might occur
should the entire board be changed at one time, and also to ren-
der the selection of desirable members more probable by lessen-
ing the number to be elected at any particular election.
It is to be noted that the classification of directors is but
seldom necessary where cumulative voting prevails, as the
sudden change of the entire board that may result from a pass-
ing of the control is then hardly possible. Also in the smaller
corporations such classification is but rarely necessary and is
seldom adopted.
The most common classification of directors is the division
of the board into three classes equal in number, each class
holding for three years, and one class being elected each year.
Under this plan three years is required for a complete change
of the personnel of the board.
Classification of directors is attainable in almost every state.
Where permissible, such classification should be provided for
in the charter. Where special provisions are not allowed in
the charter, it may usually be secured by by-law provision.
Unless actually prohibited by the statutes or precluded by impli-
cation, it would be lawful to provide for such classification by
either charter or by-law provision.
It is unusual to provide for more than three classes of di-
rectors, and such classified board should preferably consist of
some such number, as three, nine or fifteen, permitting three
equal divisions. The classes might be made unequal, that is,
if the board consisted of eleven members, three might be elected
one year, four the next year and four the third. Such arrange-
ment is, however, not common.
Upon the organization of a corporation with a classified
board the whole number of directors would usually be elected
at once, the term or class of each director being decided by
some agreed method. For instance, in a board of nine mem-
bers, divided into three equal classes, the three directors re-
ceiving the greatest number of votes might constitute the
THE BOARD OF DIRECTORS. 125
longest term class, the three receiving the next highest number
of votes constitute the class for the intermediate term, and so
on. (See § 153.)
It is to be noted that the stability of management sought
by classification of directors may be secured, and, at times,
even more efficiently and conveniently by the creation of a
voting trust. This subject is considered in Chapter XXXV,
" Voting Trusts."
§110. Standing Committees.
The board of directors is the managing body of a corpora-
tion and supposed to be in direct charge of its affairs. When
the board is of moderate size this direct supervision is usually
exercised, but when the directors are numerous it is not always
practicable, and standing committees are then usually em-
ployed.
These committees are appointed or elected in such manner
as may be prescribed by charter or by-laws, must be composed
of members of the board of directors, and, subject to the pro-
visions by which they are created and empowered, usually exer-
cise all the powers of the board in their respective fields.
Any necessary number of these committees may be ap-
pointed, but they are usually limited to two, the executive com-
mittee and the finance committee, the first-named committee
exercising its powers over the general affairs of the corporation,
while the powers of the last-named committee are usually con-
fined to matters relating to finance. (See Chap. XXVI, Stand-
ing Committees.)
CHAPTER XIX.
SPECIAL PROVISIONS.
§ in. General.
The first general laws relating to incorporation were harsh.
Plurality of purpose was not allowed, the privileges granted
were few and all corporations were to be organized and oper-
ated on exactly the same lines. But one mold was provided,
and if this did not happen to fit the needs of any particular
corporation, relief could only be had by recourse to a special
charter or enabling act.
These narrow and unnecessary limitations were slowly and
grudgingly relaxed, but no marked advance was made in cor-
porate legislation until New Jersey recognized the necessity of
greater freedom and flexibility in this direction and the very
material advantages that might accrue to the state itself from
more liberal corporate legislation. Her legislators then pro-
ceeded to remodel the bare laws then existing, so as to allow
a plurality of purposes, all proper special powers and a freedom
and convenience not theretofore enjoyed by corporations
formed under general laws. To this politic concession to the
reasonable business demands of the times is principally due the
repute — and resulting revenue — New Jersey now enjoys as a
state for incorporation.
The principal statute by which this greater scope and free-
dom of action was granted to New Jersey corporations is as
follows :
" The certificate of incorporation may also contain
any provision which the incorporators may choose to
insert for the regulation of the business, and for the
conduct of the corporation, and any provisions creating,
defining, limiting and regulating the powers of the cor-
126
SPECIAL PROVISIONS. 127
poration, the directors and the stockholders, or any class
or classes of stockholders; provided that such provision
be not inconsistent with this act." Paragraph VII, sec-
tion 8, General Corporation Law of New Jersey.
This statute enables the incorporators to secure through
charters granted under the general laws, powers, privileges and
regulations formerly only possible under special charters. This
statute has been followed in Delaware, to a certain extent in
New York, and, with more or less variations, in a number of
other states.
In those states in which special charter provisions are not
allowed, many of the desired powers, restrictions or regulations
may be obtained through by-law provisions. In some in-
stances this may be done effectively by proper arrangement,
but usually the by-laws may be amended or repealed with com-
parative ease, and their provisions do not always have the nec-
essary permanence. (See Part IV, " By-Laws.")
Where the statutes do not permit special charter provisions,
and desired provisions cannot be properly or permanently in-
cluded in the by-laws, the only recourse is incorporation in
some more liberal state where such provisions are allowable.
The corporation would thereafter operate in its own state as a
foreign corporation. Outside incorporation for such a pur-
pose would only be justified where the special provisions ob-
tained thereby were of considerable importance. (See Chap.
IV, Where to Incorporate.)
§ 112. Usual Objects.
Under the head of special provisions come many of the
features already discussed, such as cumulative voting, classifi-
cation of stock, classification of directors and limitations of
the directors' power of incurring obligations. In addition
many other provisions of only individual corporate application
might be included, as limitations on the voting power, limita-
tions on salaries and provisions authorizing a reserve fund or
the accumulation of operating capital.
128
THE CHARTER.
The variation of the statute laws as affecting special pro-
visions is wide, as, for instance, in New Jersey by charter pro-
vision the directors may be empowered to alter, amend or re-
peal by-laws, while in New York the exact power of the board
as to by-laws is laid down in the statute law and cannot be
denied or modified in any way by charter provisions. Also
in New Jersey the directors may be empowered by the charter
to mortgage any or all of the corporate property without con-
sulting the stockholders ; but in New York the corporate prop-
erty may only be mortgaged with the consent of two-thirds of
the stockholders of the corporation, and any charter provision
to the contrary would be absolutely non-effective. On ac-
count of this wide difference the statutes of the state of incor-
poration must be consulted when special provisions are under
consideration.
§ 113. Cumulative Voting.
Cumulative voting is frequently employed as a protection
to minority interests. By its- action any material minority is
assured representation on the board of directors. As its name
indicates, the system depends upon a cumulation or concentra-
tion of votes. Under its provisions, the owner of a share of
stock may at any election of directors, cast one vote for each
director to be elected, or may cast the same number of votes
for one director, or may distribute such votes among two or
more as he sees fit. That is, if the total number of directors
to be elected were seven, the owner of one share of stock might
cast one vote for each of the seven directors, or might cast
seven votes for one director, or cast four votes for one director
and three for another, or apportion his seven votes in any
other way among the candidates.
Under this arrangement even a small minority, if properly
combined, may secure representation on the board. At times
this representation becomes of much importance. If the mi-
nority are not represented they may be debarred from informa-
tion and knowledge of what the majority propose to do, and
SPECIAL PROVISIONS. 129
action may be taken which cannot be undone, but which the
minority might have prevented by injunction or other means
had they been informed. Also the mere presence of a capable
minority representative on the board prevents many abuses of
power that might otherwise occur. For this and other rea-
sons, cumulative voting is, from the minority standpoint, al-
ways a wise provision, and occasionally becomes a matter of the
most vital importance.
Cumulative voting may, in many states, be secured by in-
clusion in the charter. In Pennsylvania, South Dakota, West
Virginia and some other states it is mandatory without refer-
ence to any charter provisions. In a few states, it is doubtful
whether the provision would be allowed in the charter, or
would be effective if included. Generally speaking, the method
is fair and of great advantage to the minority interests. (See
§ 231 for full discussion of this subject.)
§ 114. Classification of Stock.
Where allowable by statute, stock may be classified in many
ways. The most usual of these are the division of the capitali-
zation into common and preferred stock, division of the pre-
ferred stock into classes, as first, second, etc., division of the
common stock into classes, each class electing a due proportion
of the directors, etc. (See Chap. VII, The Stock System.)
The division into common and preferred stock and the indi-
cated division of preferred stock may be secured by charter
provision in nearly every state in the Union, together with such
other proper classifications of the preferred stock as may be
desired.
The division of the common stock into voting classes, and
the many other classifications occasionally employed, may usu-
ally be secured by special charter provision where such pro-
visions are allowed. (See §§ 49, 98, 232 and 252.)
Where permitted by the statutes, the classification of stock
may be, and occasionally is, carried into wide variations.
Sometimes a portion of the stock will be denied the voting
right entirely, or will be prohibited from voting on certain
130 THE CHARTER
questions. Certain stock may be debarred from participation
in dividends for a stated period. In New York, a peculiar
partly paid stock may constitute a part of the issue, drawing
dividends only upon the amount actually paid.
These unusual arrangements are only desirable under ex-
ceptional circumstances. Generally they are to be avoided as
being complicated, unnecessary and at times of uncertain result.
§ 115. Corporate Stockholding.
At common law a corporation cannot hold stock in
another corporation. Though the law was not formulated
with any such intent its practical effect was to render the
formation of trusts and combinations extremely difficult,
and, in many cases, impossible.
New Jersey was the first "state to modify the law in this
direction, and, under her present statutes, any corporation
may hold the stock or the securities of another. New York
followed New Jersey to the extent of allowing this right
where provision was made therefor in the charter. Many
other states have by recent enactment granted much latitude
in this same direction.
The right is, at times, a very valuable one and in those
states where allowed a provision authorizing the holding of
corporate securities by the corporation is usually included
in the charter. (See Chap. XXXIX, Holding Corpora-
tions.)
§ 116. Limitations on Indebtedness.
In a large proportion of the cases where corporations
are wrecked, the result is brought about by the directors'
abuse of the power to incur debt. In those states where
the power of the directors in this respect may be limited
by charter provision, such restriction is, on occasion, very
desirable.
Under some circumstances it may be advantageous to
fix an absolute limit beyond which the directors have no
power to obligate the corporation. Or it may be provided
SPECIAL PROVISIONS. 181
that if the directors exceed a certain sum, they shall be
held personally liable for such excess. Or it may be provided
that they shall not enter into any single contract involving
obligations over a certain amount. Or it may be provided
that obligations beyond a certain amount shall only be
incurred with the affirmative vote of two-thirds, or other
proportion of the whole board, or shall only be undertaken
after authorization thereto by due resolution of the stock-
holders.
Whatever the plan adopted it should be carefully con-
sidered and adapted to the special situation, and the limita-
tions should not be so low as to amount, or so narrow in
application, as to interfere with the ordinary operations of the
business. The abuse, not the use, of the debt incurring
power is to be prevented. (See §§ 107, 181, 236 and 243.)
§ 117. Limitations on Salaries.
The diversion of profits by excessive salaries is a not
uncommon method of draining the corporate treasury and
preventing the payment of proper dividends. If not prop-
erly guarded against at the time of the organization of the
corporation, such practice may be extremely difficult to correct
or prevent later. (Raynolds vs. Diamond Mills Paper Co., 60
Atl. Rep., 941, 1905.)
Limitations on salaries should not be made too narrow
or too inflexible. Good management is an absolutely indis-
pensable element of success and any limitations should
not prevent fair salaries, with a possibility of more liberal
payment when demanded by the welfare of the company,
or justified by the excellence of the management.
This flexibility of restriction may be provided for in
various ways. The charter provision may merely require
that salaries be fixed, and varied thereafter if need be, by
a two-third vote of the entire board. Occasionally the con-
currence of the entire board may be required. Or the sal-
aries of officers may be determined each year at the stock-
holders' annual meeting by a stated majority of the entire
132 THE CHARTER.
outstanding stock. In such case the required majority may
be fixed so high as to require the agreement of the minority
interests. Or it may be provided that no official salary
shall be increased over a stated figure, until a dividend of
say 6 per cent, has been paid upon the outstanding stock
for two or more years. Or any salary payments over a cer-
tain minimum might be made absolutely dependent each
year upon the payment of a certain dividend for the pre-
vious year.
It is to be noted that where the ease of alteration is not
objectionable, provisions limiting indebtedness and salaries
are usually included in the by-laws instead of the charter.
Here they may be modified as the circumstances demand,
whereas in the charter they may only be altered by formal
amendment of that instrument. But to protect the minority
effectually such limitations must be inserted in the charter.
(See §§107, 181, 236 and 243.)
§ 118. Sundry Provisions.
Many other provisions will on occasion be incorporated
in the charter. Especially in the incorporation of a partner-
ship or the re-organization or consolidation of corporations,
special provisions are often necessary in protection of the
varying interests as a pre-requisite to the proposed arrange-
ment. (See Chap. XXXVIII, Incorporating a Partnership.)
It is essential that these provisions shall not go counter
to any law regulating corporations and important that they
be not such as to involve the corporation in any subsequent
deadlock or entanglement. The death of parties, sale of
stock to strangers, change of industrial conditions and other
mutations may make apparently desirable arrangements
exactly the reverse. It is not always possible to amend a
charter and if there is any doubt as to the expediency, or
effect of any particular provision, it should be brought into
the by-laws rather than the charter. Then if found undesir-
able, it may usually be amended or altered by a mere majority
vote of the stockholders.
CHAPTER XX.
EXECUTION AND FILING OF CHARTER.
§ ng. General.
In each state the essential features of the charter are pre-
scribed by its corporation laws. In many states a form of
charter application is prepared by the state authorities and will
be furnished by them on application. Where this is not done
the forms are usually prepared by law stationers and kept on
sale. Care should be exercised in the use of these prepared
forms or undesirable features may be inadvertently adopted.
Most of the published forms for some states — notably those for
New Jersey and Delaware — include the objectionable provi-
sions of the trust charters whereby the minimum of power is
left with the stockholders and the rights of the minority are
reduced to their lowest terms. Such features while possibly
adapted to trust management, are not usually desirable for an
ordinary corporation. (See Form 2, Delaware Charter.)
If any of these prepared forms have received the sanction
or approval of the state authorities, such forms should either be
used or be closely followed. To depart materially therefrom
is to invite objection, which may at times be captious and in
any case will cause delay and trouble. The authorities cannot
be deemed unreasonable in their preference for these forms
which have been passed upon, with which they are familiar, and
which, when used, enable them the more readily to determine
the legality and correctness of an application.
In addition to the usual provisions of the charter, any
special provisions decided upon will be included and the charter
application is then ready for the final formalities. These con-
sist of its signing, acknowledgment and filing.
133
184 THE CHARTER.
These final formalities are in a general way similar all over
the country, but as the matter is one of statutory regulation
the laws of the particular state must be consulted for details.
§ 120. Signing and Acknowledgment.
Each of the incorporators must sign and acknowledge the
charter application. If there are but three incorporators and
they come together for the signing and acknowledgment of
the instrument, the formality is a simple one. The three ac-
knowledgments are taken at the one time and one notarial
certificate serves for all. If the notarial officer who acts in
the matter calls on the incorporators at their offices or resi-
dences and takes their several acknowledgments, the one nota-
rial certificate will still serve. If, however, the incorporators
are numerous, live in other states, or for any other reason
cannot be easily reached or assembled, separate notarial cer-
tificates may be necessary for each acknowledgment. A party
to a transactipn cannot act as notary therein. (People, etc., vs.
Commissioners, 105 App. Div., N. Y., 273, 1905.)
These acknowledgments may usually be taken by a notary
public, commissioner of deeds, justice of the peace, or other
officer authorized to take acknowledgments to deeds. If taken
in another state, a certificate may be necessary as to the due
appointment and authority of the officer by whom the acknowl-
edgment is taken. The whole matter is one of statutory regu-
lation which must be closely followed. The statutes are in
most cases explicit as to the details of acknowledgment.
In addition to the usual execution by the incorporators, in
some states it is necessary to secure the approval of the pro-
posed incorporation by some designated court, or by a judge
of such court, as one of the preliminaries to filing.
§ 121. Filing.
The technical details of filing the charter application vary
to some extent in the different states. In some the application
is sent directlv to the Secretary of State, accompanied by the
EXECUTION AND FILING OF CHARTER. 135
prescribed fees. In others, the application must be sent direct
to the Secretary of State, but the filing fees are paid the State
Treasurer, who must certify to the Secretary that this has been
done before the charter will be filed. Again in some states
the charter must be filed with the Clerk of the County Court
in the home county of the corporation, before filing with the
Secretary of State ; elsewhere the charter must be filed with the
Clerk of the County Court after its filing with the State Secre-
tary.
The treatment accorded the charter applications by the filing
officials also varies in the different states. In some, these offi-
cials consider that the insertion of unauthorized or improper
powers gives no legal authority, and that they are not called
upon to decide the legal effect of the verbiage employed, and,
in accordance with these views, accept any powers or purposes
not openly in conflict, or glaringly outside the intent of the
law.
In others, the authorities scrutinize the application in detail,
and if its purposes and powers seem to exceed the statutory
limits, the Secretary of State will decline to file the application.
In such case the application is returned with an explanation or
statement of the reasons for its refusal. At times the state
authorities clearly exceed their authority in passing upon the
legality of the indicated powers of a charter application. In
such case if the matter were of sufficient importance and the
delay not too serious, the courts might be invoked and the
points in question be decided by competent authority. Gen-
erally, however, the importance of the matter will not justify
such proceedings, and, if the official ruling cannot be changed,
the purposes or other matters in question must be either omitted
or so changed as to meet the views of the authorities.
If any required alteration in an executed charter is on some
non-essential point, and all- the incorporators agree thereto, it
is not usually necessary to redraft and re-execute the entire
instrument. The correction may be made in the original in-
strument and the document be then returned for acceptance in
its corrected form.
136 THE CHARTER.
If, however, the alteration be material, the better practice
is to have the instrument redrawn and executed afresh by the
incorporators. If, however, a material alteration were made
in the instrument without any re-execution, but with the con-
sent or subsequent acceptance of the incorporators, and the
charter so altered were duly allowed and filed by the state offi-
cials, it is not probable that it could later be successfully at-
tacked.
In some states, pursuant to the approved application, a char-
ter is issued under the seal of state granting to the corporation
the desired rights, powers and privileges. In other states the
charter application itself changes its nature, and, as soon as
filed, becomes the charter of the then authorized corporation.
Its form is not changed, but its force is, and it is then an
authorization from the state for the organization of the corpo-
ration with all the powers, privileges and characteristic features
detailed in the one-time application.
§ 122. Certified Copies.
In some states the Secretary of State issues a duly certified
charter under the great seal of state as part of the regular
routine. In others, the Secretary merely notifies the party
filing the application that it has been accepted and filed, this
accepted application then becoming the charter of the corpora-
tion. In this latter case the Secretary will at any time upon
payment of the legal fees furnish certified copies of the accepted
application, or charter, which are due legal evidence of incor-
poration.
Where certified copies of the charter are to be recorded with
the local authorities, they must, of course, be secured from the
state authorities as part of the organization routine. Beyond
this, the possession of a certified copy of the charter is of no
importance, save very rarely in cases of litigation, and, on
occasion, for its effect on interested parties, or parties to be
interested in the corporation. It is usual, however, to secure
and preserve a certified copy among the archives of the corpo-
ration.
CHAPTER XXI.
AMENDMENT OF CHARTER.
§ 123. General.
Charter amendments are usually the result of a too hasty
preparation of the original instrument. Sometimes they are
necessitated by changed conditions. At all times they are
troublesome and to some extent expensive. They may be made
either before or after the completion of the corporate organiza-
tion.
New Jersey, with its usual accommodating recognition of
possible corporate needs, permits the amendment of a charter
by a very simple process before the corporate organization is
completed. In this way new conditions may be provided for
and the cruder defects of a new charter may be easily remedied.
Thereafter, as in other states, the charter may be amended only
by the regular procedure for such cases provided.
§ 124. Subject Matter.
Any provisions may be brought into a charter amendment
that might have been brought into the original charter. As
soon as allowed the provisions of such amendment become to
all legal intents part of the original charter and as permanently
binding on the corporation.
When an amendment has been made, such amendment and
the original charter together constitute the working charter
of the corporation, the amendment taking precedence over and
modifying the original charter in all points of difference.
§ 125. Procedure.
The procedure for the amendment of a charter is, in each
state, prescribed by law. There is but little uniformity in the
137
138 THE CHARTER,
different states. In New York, for instance, the statutory
procedure varies with the nature of the amendment. To change
the name of the corporation, application must be made to desig-
nated courts. To change the number of directors, application
must be made to the state. officials.
Generally, an amendment of the charter requires a duly
called meeting of the stockholders, at which a two-thirds ma-
jority of the stock interests outstanding must vote in favor
of the proposed changes. The amendment, duly evidenced,
as to the stockholders' authorization, must usually be filed in
the same offices and with the same formalities as the original
charter.
In some states advertisement must be made for a prescribed
time before any such amendment goes into effect. The pro-
portion of the stock vote, the notices to be given, and the other
formalities also vary in the different states. In Delaware a
bare majority have power to amend the charter.
PART IV.-THE BY-LAWS.
CHAPTER XXII.
GENERAL CONSIDERATIONS.
§ 126. Function of By-Laws.
A modern corporation is regulated, first, by the general laws
under which it operates ; second, by the provisions of its char-
ter, and, third, by its by-laws. When the incorporators meet
pursuant to the authorization of their charter for organiza-
tion, both the general laws and the charter exist for the guid-
ance of the new corporation. To these must be added the by-
laws to provide for those details of organization, administra-
tion and business routine not covered by the. laws nor provided
for in the charter. This is the first and most important func-
tion of the by-laws.
In addition to this function, the by-laws are also usually
so drawn as to constitute a systematic statement of the more
important working details of both the general law and the
charter. This is not done with any idea of adding to the bind-
ing force of the requirements of these higher authorities, but
merely as a restatement, the by-laws being thereby rendered a
more complete code for the guidance of the corporate officials
and stockholders.
This use of the by-laws is customary and of considerable
importance, insuring the observance of those statutory and
charter provisions which if not in such accessible form, might
be overlooked or forgotten.
139
140 THE JBV-LAWS
§ 127. Subject Matter.
There is usually no law, save the law of necessity, com-
pelling a new corporation to adopt by-laws. Its operation
without by-laws would, however, be practically impossible —
so much so that the law confers the power to make by-laws
and takes it for granted that this right will be exercised. Pro-
visions for the regulation of the corporation are found both in
the statute law and the charter, but these are for the most part
general in their nature. There are none of the specific details
essential for the proper corporate operation.
Just what matters should be provided for in the charter, and
what in the by-laws, is, to some extent, determined by the con-
ditions of the particular corporation. The statutes usually
prescribe certain essential matters that must appear in the
charter. In addition, all such important matters, outside the
ordinary routine of corporate procedure, as are intended to be
permanent features of the organization should be incorporated
in the charter. (See Chap. XIX, Special Provisions.) The
routine details of corporate procedure, and any special provi-
sions which are not intended to be permanent, or which are
not permissible in the charter, are reserved for the by-laws.
Generally speaking, nothing should be incorporated in the
charter — outside of statute requirements — that may be as ef-
fectually provided for in the by-laws.
The by-laws, as has been stated, also usually contain many
provisions of the statute law and the charter, which are re-
peated in the proper connection in the by-laws merely that these
latter may, in themselves, be a complete working code. The
by-laws will, then, contain all the ordinary working details of
corporate regulation and most — if not all — of the important
statutory and charter provisions directly affecting the corpora-
tion, frequent reference to the charter and to the statutes being
thereby rendered unnecessary.
Under the head of routine details, the by-laws should,
in strict conformity with any requirements of statutes or
charter, provide for the issuance and transfer of stock,
GENERAL CONSIDERATIONS. 141
the meetings of stockholders and directors, the election of
directors and officers and the duties and limitations imposed
upon them, the care and management of the property and
finances of the corporation, and the other incidents of cor-
porate procedure connected with these.
§ 128. Power to Make.
The power to make by-laws is one of the old common
law powers enjoyed by corporations. Under the common
law it resides in the stockholders duly assembled in lawful
meeting. It may be delegated by them to the directors, but
may be resumed at any time, and may only be exercised by
the directors under such limitations as the stockholders pre-
scribe. This power to make by-laws is perhaps the most
important right reserved to the stockholders.
As has been stated the stockholders cannot manage the
affairs of their corporation directly, but only through the
board of directors. This board is not amenable to either
request or resolution of the stockholders and has wide
latitude and great independent power in the management
of the corporate affairs and property unless expressly re-
stricted by special charter or by-law provisions. Special
charter provisions are of limited application and not always
available, and therefore in most cases the wishes of the
stockholders as to the management of their property and
business must be expressed in the by-laws and can be effect-
ively expressed in no other way. For this reason anything
affecting the stockholders' sole right to make, repeal and
amend these by-laws is a matter of vital importance.
In New Jersey, and those other states which have
modeled after her corporation laws, the charter may be so
worded as to give the directors power to make and amend
by-laws. This gives them the power to alter the regulations
by which they themselves are controlled. The expediency
of such a proviso is exceedingly doubtful, even in the large
industrial combinations for whose benefit it was contrived.
142 THE BY-LAWS.
Its tendency is to put much power into the hands of the
directors, and of the majority stockholders by whom such
directors are elected, and to correspondingly diminish the
status and power of the minority stockholders.
In New York, the directors are, by statute provision,
given the power to adopt any desired by-laws not incon-
sistent with those passed by the stockholders. This would
seem to be quite as far as it is safe to go. It allows the
directors to pass necessary by-laws to meet an emergency,
or some unforeseen condition, and they are fully within their
powers so long as these by-laws do not conflict with the
by-laws adopted by the stockholders. They cannot, how-
ever, remove any of the safeguards thrown round the con-
duct of the business by the by-laws of the stockholders, nor
modify them in any material respect. They may act in har-
mony with what has gone before, but cannot alter or destroy.
It is to be noted that such directors' by-laws, until repealed
or superseded by action of the stockholders, are the by-laws
of the company and of equal force with those adopted by the
stockholders. (See § 108.)
§ 129. Arrangement.
By-laws intended for a close corporation with but few
stockholders and perhaps all these on the board of directors,
may be simple in form and few in number.
When intended for a large corporate combination with
many plants in different states, with hundreds or thousands
of stockholders scattered throughout the Union, with a
large directorate, many officers and numerous managing
committees, an extensive and comprehensive set of by-laws
is essential.
In either of these cases, and for the many intermediate
corporations, it is of much advantage to have the by-laws
classified and systematized so that the regulations governing
any particular subject or matter may be readily found. In
all the better prepared sets of by-laws this systematic class-
GENERAL CONSIDERATIONS. 143
ification is employed. In many cases, however, the by-laws
are hardly more than a heterogeneous jumble of uncon-
nected regulations.
The arrangement of by-laws followed in the present
volume under which the related provisions are grouped in
the order and under the headings given below is used by
a number of the best-organized corporations of the country
and has proved very satisfactory in practice.
i. Stock.
2. Stockholders.
3. Directors.
4. Standing Committees.
5. Officers.
6. Dividends and Finance.
7. Sundry Provisions.
8. Amendments.
By-laws from the simplest to the most comprehensive
sets may be readily classified on these lines. (See Forms 8,
9 and 10.)
§ 130. Preparation.
The adoption of by-laws is the first important step of
corporate organization. It is essential in order to give a
basis for the proceedings that follow.
As the by-laws are needed so early in the corporate
existence, they are customarily prepared in advance of the
first meeting, this duty usually and properly falling to the
counsel conducting the organization of the corporation.
The preparation of a set of by-laws for the usual small
corporation is a comparatively simple matter. For the
larger corporations, with their more complex and extended
organizations, the undertaking is much more difficult. Such
by-laws should be prepared with nice adaption to the needs
of the particular corporation. The use of an existing set
of by-laws as a basis for this work is entirely proper and
good practice, but such selected set should be carefully
144 THE BY-LAWS.
studied and skillfully adapted to the wants of the new cor-
poration. All unnecessary matter should be dropped, the
matter that is retained be made to fit the case in hand, and
such new matter added as may be necessary to cover the
requirements.
Too often the preparation of the by-laws of a new corpora-
tion is merely a wholesale seizure of some existing set with
hastily improvised interpolations to meet the most obvious
needs of the new organization. These by-laws may have been
a very admirable code of procedure for the original corpora-
tion, but so diverted can hardly fail to be a wretched misfit and
prove a fruitful source of trouble. By-laws so ill-prepared
give seeming grounds for the demand that the directors be
given the power to amend by-laws as the only means of avoid-
ing serious hindrance and injury to the business.
§ 131. Adoption of First By-Laws.
The formal adoption of the first set of by-laws is accom-
plished by the reading of each section and its adoption by vote,
followed by the adoption of the set as a whole at the comple-
tion of the sectional consideration. As it is usually impossible
to prepare by-laws at this first meeting, or to properly discuss
and amend a previously prepared set, the responsibility for the
by-laws rests almost entirely with the lawyers to whom their
preparation is entrusted. As a matter of fact, the by-laws
are usually presented to the meeting in their entirety, and, with-
out reading or other investigation of their details, are either
adopted by formal vote, or accepted by acquiescence. The
legal effect of such adoption is the same as under the more for-
mal procedure. (See § 192.)
By-laws varying as to scope and application are given in
Chapter XLIII of the present volume as Forms 8, 9, and 10.
As has been stated, these by-laws are all arranged on the same
general plan, each subject in its various phases being found in
GENERAL CONSIDERATIONS. 145
the same relative position in each set. The comment of the
following chapters conforms to the same logical order and is
intended to be considered in connection with the forms of by-
laws there given.
CHAPTER XXIII.
STOCK.
(See Art. I in Forms 8, 9 and 10.)
§ 132. Preliminary.
Formerly it was customary to begin the by-laws of a cor-
poration with a section setting forth the name of the corpora-
tion and the amount of its capital stock. While there is no
serious objection to this, such facts seem almost too funda-
mental in their nature to require repetition in the by-laws and
are now generally omitted.
Also in former days when preliminary subscriptions to the
stock of a corporation were usual, and in many cases payable in
instalments, a by-law provision as to the payment of these
instalments and the procedure in case of default was customary
and of some importance. In the present day, however, the
formation of a corporation with instalment subscriptions is
comparatively rare, and when it does occur, collection of the
subscription is usually provided for by resolution of the di-
rectors. This avoids cumbering the by-laws with matter that
is of no permanent utility.
The subject of stock which is considered first in the follow-
ing comment is one of the most important matters of by-law
regulation. In most of the states, the general rules relating to
the stock of the corporation, its . certificates, its transfers and
records, are matters of statutory regulation. These statutes
should be summarized and classified in the by-laws and such
additional special regulations brought in as will cover the en-
tire working details of the subject. No open question should
146
STOCK. 147
be left as a foundation for later differences of opinion, vexa-
tious disputes, and, perhaps, more serious difficulties.
§ 133. Certificates of Stock.
Every holder of stock for which the corporation has been
paid in full is entitled to a certificate or certificates, showing the
number of full-paid shares of stock held by him. A subscriber
when his subscription is accepted, becomes a stockholder of
the company and entitled to vote and draw dividends if any are
declared, but is not entitled to a certificate of full-paid stock
until he has paid the full subscription price of his stock. If
he has paid in part he is entitled to a receipt evidencing such
payment, and if the by-laws so provided, or if the corporation
made a practice of issuing certificates for partly paid stock
with the amount of payments indorsed thereon, he would have
a right to demand such a certificate as soon as his first instal-
ment was paid. In the absence of such by-law provision or of
such a custom, it does not appear that a stockholder would have
any legal right to a stock certificate until he had paid in full for
the stock represented thereby. It would be the better practice
to issue no certificates of stock until the stock represented by
them was full-paid.
The holder of a certificate of stock has the right to assign
the same, or to surrender it and have it split up or issued to
himself in certificates of different values. The assignee has
the same right and whenever a duly assigned certificate is sur-
rendered to the company, a new certificate or certificates must
be issued to the assignee in his own name if so demanded.
All these matters should be clearly set forth in the by-laws.
By-law specifications as to the signature and sealing of
certificates are useful as prescribing in detail the execution of
the certificate and the duties of the different officers concerned.
Such by-law regulations must, as a matter of course, follow any
statute provisions. For instance, in New Jersey the treasurer
must join with the president in signing the stock certificates.
In most states, this matter is discretionary and the proper offi-
148
THE BV-LAWS.
cers to sign stock certificates are designated solely by the by-
laws. No matter who the signing officers may be, the sealing
and actual issuing of the certificate is usually left to the secre-
tary. (See § 44; also Forms 29, 30.)
§ 134. Transfers of Stock.
General regulations regarding the transfer of stock as well
as the times of closing the stock books, are in many states a mat-
ter of statutory provision, but would also properly appear in
the by-laws with any other connected matter. The whole pro-
cedure should be plainly outlined in the by-laws as a guide to
the officers of the corporation, and, more particularly, for the
benefit of the stockholders who are thereby informed as to their
exact rights in the matter.
§ 135. Transfer Agent and Registrar.
In the larger corporations, or in any corporation where the
transfers of stock are numerous, the employment of special
transfer agents and registrars is usually a considerable ad-
vantage. By this means the officers are relieved of much re-
sponsibility, and the general plan offers a safety and a con-
venience in the issuance of stock not secured under any other
arrangement. For a small or close corporation and where
transfers are few, the employment of such agents is a needless
expense.
Where these agents are to be employed, the by-laws should
give the appointing power to either the board of directors or
one of the standing committees. The by-law provision cover-
ing this matter should also require the signature of the transfer
agent and of the registrar to every certificate issued. Where
a trust company is to be appointed as transfer agent or regis-
trar and the appointment is of probable permanence, such ap-
pointee is sometimes named in the same by-law provision. As
this necessitates an amendment of the by-laws in case of any
change, the arrangement is of doubtful expediency.
STOCK. 149
The duties of transfer agent and registrar are distinct but
are usually performed by one person or institution.
§ 136. Stock and Transfer Books.
In the matter of stock and transfer books, the statute laws
must be carefully consulted. New Jersey corporations are re-
quired to keep their stock and transfer books in the principal
office of the corporation in New Jersey. If it is desirable that
duplicates be kept elsewhere the by-laws might properly so pro-
vide. Every foreign corporation doing business in New York
is compelled to keep a stock book in the principal office of the
company in the state. Hence the by-laws of a corporation
organized under the New Jersey laws and doing business in
New York might very well specify in this particular the duties
of the corporation in both states.
If the closing of the transfer books before the date of the
annual meeting, with its election of directors, has not already
been provided for in the by-law relating to the transfer of stock,
it should receive attention here. Also any proviso as to the
closing of transfer books before dividend days might be in-
cluded under this head. (See Forms 34, 35.)
§ 137. Preferred Stock.
The preferred stock of a corporation will probably have
been specifically provided for in the charter. It is customary,
however, to repeat such provisions in the by-laws for easy ref-
erence and for the information of the stockholders. As all the
details relating to preferred stock are usually found in the char-
ter provisions by which such stock is created, the by-law will
be merely a more or less complete repetition of the charter
specifications. In some few states preferred stock is authorized
by the provisions of the by-laws which in such event become of
much more moment and should be drawn with the same care
and regard for the necessities of the case as would any charter
provision. The by-law authorizing the issue of preferred stock
could not be materially altered or amended after stock had been
160 THE BY-LAWS.
sold under its terms except with the consent of the holders of
the outstanding preferred stock. If it were modified without
such consent, the changes would be ineffective as regards this
outstanding stock unless accepted by its holders. (See Chap.
VIII, Preferred Stock.)
§ 138. Treasury Stock.
This subject is brought into the by-laws merely to define
the term and the status of the stock designated thereby. Such
a by-law is advisable if the corporation is likely to have any
stock of the kind. The term " treasury stock " is used very
loosely, and, without some defining provision, ambiguities are
apt to arise.
The status of this treasury stock is, where not expressly
fixed by statute, a matter of common law, but should never-
theless be clearly expressed in the by-laws as a matter of infor-
mation for both officers and stockholders. (See Chap. X,
Treasury Stock.)
§ 139. Lost Certificates.
The loss of stock certificates is a matter of not uncommon
occurrence and the procedure in such cases should be clearly
outlined in the by-laws. Stockholders have a right to certifi-
cates and, if their certificates are lost, to have them replaced,
but the corporation on its part has the right to require any
reasonable safeguards for its own protection before the re-
issuance of such certificates. If the statutes prescribe the pro-
cedure to be followed, the by-law provision must correspond.
It is seldom wise to reissue lost certificates on easier terms than
those laid down in the by-law forms given. Only the absolute
and final loss of a certificate, as in the case of its unquestioned
destruction by fire, would justify an unprotected reissue.
CHAPTER XXIV.
STOCKHOLDERS
(See Art. II in Forms 8, 9 and 10.)
§ 140. Annual Meetings.
An annual meeting of stockholders at which directors for
the ensuing year are elected is usually required by the statutes.
Where not so required, such meeting is usually provided for
in the by-laws. It is the most important function of the stock-
holders and the portion of the by-laws devoted to the stock-
holders is principally occupied with topics pertaining to the
annual meeting.
The by-laws providing for the annual meeting should fix
the time, place, and, in a general way, the proceedings of that
meeting. This specification of the business to be transacted
at the annual meeting does not in any way limit the proceedings
thereat unless expressly so stated in the charter or by-laws.
Such enumeration is merely to prevent important action being
omitted or overlooked, and it is expected that in addition any
other business or matters of interest to the stockholders will
be considered at this annual meeting.
§ 141. Special Meetings.
The by-laws must provide for special meetings of the stock-
holders, and fix the preliminary requirements for such meet-
ings. Frequently the president is given authority to call
special meetings at his discretion; it is always customary to
provide for such meetings to be held pursuant to resolution or
other specified action of the board ; at times it is provided that
151
I 52 THE BY-LAWS.
a certain number of the directors may call special meetings by
a written request or call; it is also customary and proper to
allow these special meetings to be called on demand of a certain
proportion in interest — usually one-third or a majority of the
outstanding stock.
It is usual to prescribe in the by-laws that only such busi-
ness as is specified in the call and notice shall be transacted at
a special meeting of stockholders. This is a matter of com-
mon law, and in some states, statutory law, and is included in
the by-law merely to emphasize the fact that any business to
be done at any such meeting must be previously notified to the
stockholders. The call and notice, to be sufficient, must give
the three essential facts — the time, place and purpose of the
meeting. If any one of these is omitted, the meeting is im-
properly called and its action is liable to be held illegal and of
no effect.
§ 142. Officers of Meetings.
It is customary in some corporations to organize each stock-
holders' meeting with officers of its own choosing, who may
or may not be the regular officers of the corporation. Under
some conditions this plan may be a wise one, but, generally, it
would seem better to provide in the by-laws that the officers
of the corporation shall also be the officers of the stockholders'
meeting. In such case, the president, or, in his absence, the
other officials in due order, would preside, while the secretary
would keep the records of the meeting. Such an arrangement
saves much confusion and loss of time on occasion, and con-
duces to the orderly transaction and proper record of the busi-
ness of the meeting.
The secretary is, under this arrangement, properly omitted
from the officials who may preside. The function of this of-
ficer is to record the proceedings of the meeting and it would
not be advantageous to withdraw him from his proper duties
to preside, even though all the other officers were absent.
STOCKHOLDERS. 153
§ 143. Notice of Meetings.
Unless there is some material reason for not so doing, it
will be found advantageous to adopt the same requirements as
to notice for both regular and special meetings. In such event,
these requirements may be properly included in the one by-law.
Where the notices for the two kind of meetings differ mate-
rially, the details for each meeting should occupy a separate
by-law section.
The notice, of regular meetings should specify the time,
place, and, usually, the most important objects of the meeting.
As stated in 2 Cook on Corporations, §595,
" where unusual business is to be transacted, even at
a regular meeting, the notice of the meeting should
state that unusual business."
The notice for special meetings should give the time and
place of meeting and specify in detail all the business to be
acted upon at that meeting.
Where a corporation has but few stockholders, the provi-
sions as to notice of meetings will sometimes add, that, with the
presence and participation or with the consent of all the stock-
holders, meetings may be held at any time and place and for the
transaction of any business, without notice.
Notice of meetings is best given through the regular postal
channels ; telegraphic notice is, in the larger corporations, usu-
ally provided for; personal notice is allowable, but should al-
ways be served in writing. A verbal notice is usually difficult,
and sometimes impossible, of proof.
§ 144. Voting.
The usual rule in regard to voting is that each stockholder
of a corporation is entitled to one vote for each share of stock
standing in his name on the books of the corporation. If
there are any variations, such as cumulative voting, classified
voting, or reservation of voting to one class of stock, such
variation should be stated as clearly as possible. Perspicuity
164 THE BY-LAWS.
and precision in the by-laws relating to voting may save much
trouble later. Such provisions must, as a matter of course,
conform to any state statutes on the subject.
§ 145. Certified List of Stockholders.
Under the laws of New Jersey and of some other states,
certified lists of the stockholders entitled to vote thereat must
be provided by the secretary at each regular meeting of the
stockholders. In such states a provision to this effect should be
incorporated in the by-laws either as a separate section, or as
a part of the by-law providing for annual meetings of the stock-
holders. In any state the provision is a satisfactory one and
may well be included in the by-laws. It is to be noted that
where, as is usually the case, the statutes provide that the stock
books shall be the final authority as to the right of any stock-
holder to vote, the certified list of stockholders cannot be made
a substitute for the stock book. Usually, however, it saves ref-
erence to the stock book and is much more convenient than this
latter record.
§ 146. Election of Directors.
As the election of directors is the most important business
of the annual meeting, directions for its conduct should be
very explicit. If, as is the case in certain states, the statutes
require the election or appointment of inspectors, sworn to
the proper discharge of their duties, the details of their appoint-
ment and duties should be fully outlined. If inspectors are
not prescribed by statute and are not desired, some other
method of conducting the election should be specified. It is
usually advisable that it be by ballot, though this is not essen-
tial unless prescribed by statute. If by ballot, provision must
be made for the appointment of tellers or some substitute there-
for to collect, count and announce the vote.
Unless included in the by-law on voting, any provisions as
to cumulative voting, or as to classification of the stock in
regard to voting, should be given here. Also, if the directors
STOCKHOLDERS. 155
are classified so that but one-third or one-fourth are elected
each year, such fact should be stated under this heading.
The term for which the directors are elected should also
be stated clearly. Usually this is for the ensuing year and
until the election of their duly qualified successors. The di-
rectors hold until the election of their successors in any event,
but the by-laws should state the fact.
§ 147. Quorum.
In a number of the states, the proportionate amount of the
outstanding stock which must be represented at a meeting to
constitute a quorum is fixed by statute. In such case the by-
laws can do nothing more than repeat the law in order that it
may be remembered and observed. If the statutes do not so
provide, the quorum should be distinctly prescribed by the by-
laws. If not provided by either statute or by-law, the common
law rule would prevail that the stockholders present, no matter
how few their number, constitute a quorum.
In the absence of any statutory provisions, the by-laws may
provide that less than a majority of the outstanding stock shall
constitute a quorum, but for most corporations it is not safe
to depart from the usual parliamentary rule that a majority of
the stockholders in interest are necessary for a quorum.
To illustrate the necessity of a careful consultation of the
statutes in matters- of corporate procedure, it may be noted
that in New York the by-laws may prescribe the number neces-
sary to constitute a quorum for ordinary business, but cannot
fix a quorum for the election of directors, those present at any
annual meeting being a sufficient quorum for this purpose no
matter how few their number or how small a proportion of the
outstanding stock they represent.
It is to be noted that the common law rule that those pres-
ent constitute a quorum and may elect, applies only to the con-
stituent membership of a body, such as the stockholders of a
corporation. The directors, being a selected body, require a
majority of the entire board to constitute a legal quorum.
156 THE BY-LAWS.
(i Morawetz, 2d Ed., § 476; 2 Kent's Com., § 293; Matter of
Rapid Transit Ferry, 15 App. Div., N. Y., 530, 1897.)
§ 148. Proxies.
Proxies play such an important part in all corporate meet-
ings that the by-law provisions affecting them should be clear
and explicit. At common law the right does not exist. It is
created by statute in many states, and elsewhere may be author-
ized by charter provision, or in most states by by-law enact-
ment. Where created by statute, the by-law provision must
follow the statute.
The statutory provisions in regard to proxies vary consid-
erably in the different states. In Maine the proxy must have
been executed within thirty days preceding the date of meet-
ing; in Massachusetts the limit is six months; in New York
it is eleven months ; in New Jersey three years. If not affected
by statutory provisions, a proxy would run until revoked or ter-
minated by the sale of the stock by the owner, by his death or
by the death of the proxy.
§ 149. Order of Business.
The order of business is purely formal but quite essential
to the proper transaction of the corporate business. It may be
varied to meet the needs of any particular corporation. The
order given in the by-law forms indicates the usual and logical
arrangement. The formal order of business may be suspended
at any meeting, in whole or in part, by a majority vote of those
present, or by their mere assent.
CHAPTER XXV.
DIRECTORS.
(See Art. Ill in Forms 8, 9 and 10.)
§ 150. General Considerations.
Any regulations affecting the directors and any restrictions
upon their powers and actions will, for the most part, appear
only in the by-laws. Specially important matters sometimes
appear in the charter, but in the main the stockholders must
look to the by-laws to direct and control the operations of the
directors.
Much latitude is allowable in the arrangement of the by-
laws affecting directors. In the larger corporations the sub-
divisions are frequently carried further than here indicated;
in the smaller corporations, ordinarily, not so far.
Many of the details appearing in the by-laws affecting di-
rectors are matters of law, or are fixed by charter provision
and are brought into the by-laws merely to save reference to
the authorities from which they are taken.
§ 151. Number and Qualifications.
In many states the number of directors is, within certain
limits, fixed by statute. In other states, as New Jersey and
Massachusetts, the minimum only is prescribed by statute and
any number in excess of this minimum may be fixed by the
by-laws. In most states the minimum number of directors
allowed is three.
For a small or close corporation a limited board of directors
is usually advantageous. Such a board is easily assembled,
keeps in touch with the business, and is generally prompt in
consideration and action.
157
158
THE BY-LAWS.
In the larger corporations a more numerous directory is
usual. Frequently this is a matter of necessity in order to
provide representation for the different stockholding interests
as well as to have the really necessary managing representa-
tives upon the board. Though necessary the arrangement has
many disadvantages. A quorum is only secured with diffi-
culty, the members are not close to the business and are not in-
terested actively in its management, and lengthy explanations,
much discussion and prolonged consideration are the rule when
important questions are really taken up. As a result, the ac-
tual management of the business and of the corporate affairs
generally is delegated to the standing committees, the board
only meeting to listen to reports, or to act in matters of excep-
tional importance. ( See Chap. XXVI, Standing Committees ;
also § no.)
The ownership of stock as a qualification for the directory
is usually regulated by statute. In some states such qualify-
ing stock must be owned when the director is elected. In most
states, if the director-elect is given or secures stock after his
election, the requirements of the law are held to be satisfied.
If the statutes merely state that directors must be stockholders
the ownership of one share of stock is sufficient. If the statutes
are silent on the subject of stock qualifications of directors, or
if they merely require that directors be stockholders the by-
laws may legally provide that some reasonable number of
shares shall be the qualification.
In some states it is provided that a director parting with
his qualifying stock thereby, ipso facto, ceases to be a director.
In order to prevent any discussion or misunderstanding on
this point, the by-laws should repeat the statute provision where
it exists. Elsewhere it would be prudent to state explicitly
either that the parting with the qualifying stock does or does
not terminate the director's tenure of office. As a general rule
it would seem advisable that directors should be stockholders
of the corporation to some material extent, and that if they part
with this qualifying stock they should by such disposal sever
their official connection with the board.
DIRECTORS. 159
If there is any statutory requirement as to citizenship of
directors it should be included in the by-laws. (See § 105.)
§ 152. General Powers.
At common law the directors have entire charge of the
property and affairs of the corporation with full power and
authority to manage and conduct the same. The statement
of the by-laws to this effect is, therefore, nothing more than a
reiteration of the conditions as they exist, brought in as a
matter of information. If the powers of the directors are
materially modified or restricted by the charter or by-laws, the
by-law statement should correspond.
§ 153. Classification.
The usual object of a classification of directors is to pro-
vide against any radical action or sudden alteration of policy
that might occur if the whole board were changed at one time.
In perhaps the greater number of states it must be secured
through by-law provision.
To be effective, any such classification of directors must
be permanent and therefore, wherever possible, should be by
charter provision. If dependent only upon the provisions of
the by-laws, a majority of the stockholders might at any time
assemble with due formality, repeal the by-laws in question and
thereby abrogate the whole arrangement. (See § 109.)
If classification is provided by charter or by-law provision,
and at any time the necessity arises for a complete change of
the board, as in event of a sale of the entire stock, or of a gen-
erally desired change of management, the matter. can be ar-
ranged by the resignation of the entire membership of the old
board seriatim, the new members being elected to fill each suc-
cessive vacancy as it is brought about by these resignations.
Classification in a small or close corporation is generally
a useless and somewhat troublesome formality.
160 THE BY-LAWS.
§ 154. Vacancies.
Unless so provided by statute, charter, or by-laws, the board
of directors has no power to fill vacancies caused by the resig-
nation or death of its members. In such event the power is
reserved to the stockholders and any vacancies in the board
must either wait until the next annual meeting with its election
of directors, or be filled by a special election, the stockholders
being called together for the purpose. (In re Griffing Iron
Co., 63 N. J. Eq, 168, 357, 1899.)
As long as the board can assemble a quorum of its entire
membership it may continue to act despite vacancies, but it is
safer to keep the membership up to the prescribed quota, and
it is almost an invariable rule to give the board the power to
fill vacancies as they occur. In this way the board is self-
perpetuating in the intervals between the annual meeting.
The by-laws might properly provide that continued ab-
sence from meetings of the board would, of itself, vacate the
position of such absentee director. In any such case the by-law
should specify the exact number of consecutive absences from
regular meetings, or from regular and special meetings, neces-
sary to create a vacancy.
By-laws also sometimes provide that in case the member-
ship of the board falls below the required quorum at any time,
so that the board is unable either to transact business, or to
fill the vacancies in the body so as to enable it to act, a special
meeting of the stockholders shall be called to elect such num-
ber of directors as may be necessary to restore the board to its
normal membership.
§ 155. Meetings.
The frequency of regular meetings of the board is to be
decided by the particular conditions. Monthly meetings are
usual, but in close corporations with a small board it is often
unnecessary to meet regularly more than once in each quarter,
or even once each year. In case of any emergency requiring
DIRECTORS. 161
action of such small board, a special meeting can be quickly
and easily called.
The nature and formalities of the call necessary to summon
a special meeting of the board are purely matters for the cor-
poration to determine. Usually the president is given author-
ity to call such meetings at his discretion. Generally it is pro-
vided also that such meeting shall be called upon written re-
quest of a certain number — usually two-thirds — of the di-
rectors. More rarely it is pro , ided that a special meeting shall
be called upon the written request of a certain proportion in in-
terest of the stockholders.
Where the board is small it is customary and advisable to
provide that meetings may be held at any time and place and
without previous notice by the unanimous consent, or unani-
mous participation of the board membership. Such a provi-
sion would usually be useless if the board were large.
The place of meeting should be fixed by the by-laws though
a proviso may be added that special meetings may be held else-
where by unanimous consent of the board. The office of the
corporation is the proper place for directors' meetings and they
should be held there unless otherwise agreed by all the direct-
ors. To allow a majority of the board to call meetings in
private offices, or in places difficult of access, or to permit of
adjournment to such places, except by unanimous agreement,
is to invite the gravest abuses.
§ 156. Notice of Meetings.
It is supposed that members of the board are familiar with
the date of regular meetings. Hence, there is not the same
legal necessity for notice that exists in the case of special
meetings. It is usual though to provide that notice of regular
meetings shall be given by the secretary as a matter of con-
venience and to prevent such meeting from being overlooked.
In the more comprehensive sets of by-laws it is customary to
add a proviso that failure to give such notice shall not affect
the validity of the meeting or of any proceedings thereof. (See
162 THE BY-LAWS
Form 10.) It is not probable that proceedings in a regular
meeting of directors would in any case be invalidated on ac-
count of failure to give notice, but the proviso is added out of
abundant caution.
Special meetings unless adequate notice thereof has been
given, are not legally called and their action may be set aside.
Requirements as to notice may, however, be waived and special
meetings be held without notice by unanimous consent, or with
the participation of all the directors. Business of any kind
may be transacted at any meeting if all the directors have given
written consent thereto or are participating in the proceedings.
Notices of special meetings of directors are usually sent
by either mail or telegraph such reasonable time before the
meeting as will, under ordinary conditions, permit the attend-
ance of all the members of the board. The by-laws should
prescribe the condition of such notice. The by-laws also usu-
ally reiterate the common law rule that no business except that
specifically notified in the call and notice shall be considered
or acted upon at special meetings.
§ I 57- Quorum.
If the statutes are silent as to the number of directors requi-
site for a quorum, the charter or by-laws will control. If both
the statutes and the charter and by-laws are silent, the common
law controls and a majority of the full membership of the
board is then requisite for a quorum.
If the matter is regulated by the by-laws any desired num-
ber may be designated a quorum even though this number may
be much less than a majority of the board. It is customary
and advisable, however, to require a majority of the entire
board to constitute a quorum. Under such provision, any re-
duction in the membership of the board by death, removal or
resignation, would not affect the number requisite to a quo-
rum, which still remains the same. The by-law should be
carefully worded to avoid any misunderstanding on this or
other points. As a matter of general law the statement
DIRECTORS. 163
might be included in this by-law that directors must appear
in person and cannot be represented by proxies.
§ 158. Election of Officers.
The by-laws should designate the officials of the corpora-
tion, the time of their election and the period for which they
are elected. It is also usual to provide that they shall hold
office until the election and qualification of their successors,
unless sooner removed by action of the board. It is also usu-
ally specified that election shall be by ballot, and that the board
shall fix the compensation of officers and fill any vacancies that
may occur on the official staff.
In arranging the respective dates of the stockholders' an-
nual meeting at which the directors are elected, and the meet-
ing of the directors thereafter at which the officers are usually
elected, the latter meeting should not succeed the former so
closely as to give inadequate time for the notification of newly
elected directors. Frequently such directors' meeting "will be
arranged to follow the stockholders' meeting on the same day,
but a few hours elapsing between the two meetings. If the
board be small and any possible new members readily access-
ible, or if the entire membership be re-elected the juxtaposi-
tion of the two meetings is immaterial. Where, however,
these conditions do not exist, it may occur that some newly
elected member of the board fails to receive notice of his elec-
tion, and of the subsequent directors' meeting, in time to permit
of his attendance. This might prevent the election of officers
or invalidate it if held. For this reason the board meeting for
the election of officers should, as a rule, be fixed at such date
subsequent to the annual meeting as will give full time for the
regular by-law notice of the board meeting.
It is customary and entirely proper to fix the date of the
election of officers within a reasonable time after the elec-
tion of the board in order that this new board may without
delay elect its own corps of officers.
164
THE BY-LAWS.
§ 159. Removal of Officers.
If an officer is elected for a specified term he cannot
usually be legally removed except for sufficient cause, and
not then until he has had opportunity to appear in his own
behalf. In a few states the power to remove officers at
pleasure is given the directors by statute. Otherwise, if it
is desired that the board shall have this power of removal,
it should be clearly conferred on them by the by-laws. The
by-law giving the power should be explicit and to be effec-
tive should provide for removal at pleasure with or without
cause. If such power of removal is given the directors by
the by-laws, each officer accepts his office subject to this
regulation, knows upon what tenure he holds and may
thereafter be removed at the pleasure of the board by a
mere majority resolution. (See § 177.) (See Douglass vs.
Merchants Ins. Co., 118 N. Y., 484, 1890; in re Griffing
Iron Co, 63 N. J. Eq, 168, 357, 1899.)
§ 160. Compensation of Directors.
Directors cannot claim any salary or compensation for
their services as directors other than is expressly set forth
in the by-laws. Definite salaries might be fixed, but com-
pensation is usually provided in the form of a certain stipend
for attendance upon meetings, which is not earned unless
the director is present at the entire meeting from roll call
to adjournment. The amounts paid for attendance at meet-
ings vary, rarely falling below $5 or exceeding $25. Some-
times a certain fixed sum is appropriated for each meeting
and is divided among the directors present. The whole
matter is one that rests entirely in the discretion of the
stockholders and would naturally vary in different corpora-
tions. (See § 176.)
§ 161. Power to Pass By-Laws.
In many of the states the directors are, by statute, given
extensive powers over the by-laws. Elsewhere it is a matter
DIRFXTORS. 165
for charter or by-law regulation. It is doubtful whether it
is wise in any case to allow the directors full power — as may
be done by charter provision in New Jersey — to over-ride
by-laws passed by the stockholders. The only direct con-
trol of the stockholders over the affairs of the corporation
is exercised through the by-laws, and if the directors can
repeal and abrogate these by-laws at will the board is prac-
tically unrestrained in its management of the corporate
affairs.
At times it is undoubtedly advantageous that the board
should have some power over the by-laws in order to pro-
vide for matters or emergencies not foreseen by the stock-
holders. All necessary power in this direction is, however,
given when the board is allowed to pass by-laws in harmony,
or not inconsistent with those passed by the stockholders.
Anything further is dangerous and susceptible of abuse.
(See §§ 73 and 108.)
§ 162. Order of Business.
The order of business is a purely formal regulation.
A convenient arrangement is given in the sets of by-laws
in Part VII. The order of business, although incorporated
in the by-laws, is not mandatory, and any item may be
passed or the entire regular order of business may be sus-
pended or varied at the pleasure of the board.
CHAPTER XXVI.
STANDING COMMITTEES.
(See Art. IV in Form 10.)
§ 163. Purpose.
In most of the larger corporations the board of directors
is composed of many members. Usually these are busy
men, possibly living in different parts of the country and
almost always difficult to assemble. Many of them are on
the board not because of peculiar qualifications or ability
in the conduct of the particular corporation business, but
solely as representatives of special interests. Under such
circumstances the board is not an efficient instrument for
the direction of the corporate affairs and something better
adapted to the purpose is necessary. The standing com-
mittee is then usually employed.
Standing committees are permanent committees of the
board of directors as opposed to committees of the board
appointed for temporary purposes. They frequently exer-
cise all the powers of the board. They are a natural out-
growth of the extension of the corporate system to the
larger enterprises in which unwieldy boards are commonly
found. The slow, cumbrous and uncertain action of these
large boards is replaced by the prompt, positive and effi-
cient action of a small, selected committee.
The membership of the standing committees is seldom
less than three or more than five. To increase the member-
ship of standing committees too greatly would involve the
very ills that they were created to avoid. As many stand-
ing committees may be appointed as the conditions demand.
166
STANDING COMMITTEES. 167
In many cases the executive committee alone is found suf-
ficient. In others a finance committee is added. It is but
seldom that more are necessary. These committees prac-
tically take the place of the board in the direct management
of the corporate affairs.
If the executive committee is the only standing com-
mittee, it is usually given all the powers of the board, and
becomes the active agent by whom these powers are exer-
cised. If there is a finance committee, such matters as come
within its purvey will be reserved from the powers of the
executive committee, and the two committees will then
between them exercise all the powers of the board. In
such case the executive committee will control in all general
matters, while the powers of the finance committee will be
confined to the management and supervision of the cor-
porate finances.
These standing committees, appointed with such powers,
are the real managing bodies of the corporation, the board
merely supervising their operations. They will usually act
and then report their action to the board. In some cases
where they prefer to throw responsibility upon the board,
or where some statute provision requires action of the
board, or when it is desirable to lend added weight to a
contemplated measure, they will report the matter to the
board with a recommendation that the desired action be
taken.
It is to be noted that at times an executive committee
is provided when the board itself is sufficiently small to
permit of prompt action and proper attention to the cor-
porate business. In such case the committee may become
directly injurious to the real corporate interests, the few
members composing it managing the entire business of
the corporation to the practical and improper exclusion of
the board. In such cases the directors, as a body, usually
lose interest, board meetings are neglected and the execu-
tive committee controls without supervision.
168 THE BY-LAWS.
The only danger to be apprehended from the employ-
ment of the standing committee is found in the fact that
it is at times used as a convenient means for the elimination
of the board, or certain elements of the board, from con-
trol of the corporate affairs, the real management of the
corporation being placed in the hands of the selected few
who constitute the committees. This danger can only be
avoided by careful definition and judicious regulation of the
powers of these committees in the charter or by-law pro-
visions by which they are created. (See 2 Cook on Cor-
porations, §715.)
§ 164. Appointment.
The standing committees are usually created and em-
powered and the manner of their appointment or election
is prescribed by charter or by-law provisions. Since the
powers of the board are to a greater or less degree to be
delegated to these committees they must be composed of
members of the board. The provisions as to their appoint-
ment are therefore confined to the manner of their selection
from this body. Sometimes the creating provision will
provide that certain officials of the board shall constitute
the standing committees, as for instance that the president,
vice-president and treasurer shall constitute the executive
committee. Generally the treasurer is designated as a mem-
ber of the finance committee. Also it is quite usual to pro-
vide that the president of the company shall ex officio be a
member of the executive committee and sometimes it is pro-
vided that he shall be a member and the presiding officer of
all standing committees. At times it is provided that the
president shall appoint the different standing committees.
The most common, and perhaps the safest plan, leaves the
membership of these committees to be decided by an elec-
tion in the board.
If there is any danger of the committees being used as
a device to exclude minority interests from management
STANDING COMMITTEES. 169
of the corporate affairs, such majority of the board may be
prescribed for the election of their members as to require
the aid of the minority for their formation. A provision of
this kind might result in a dead-lock, but in that case the
board would continue in the direct management of the cor-
porate interests until some agreement was reached and
acceptable standing committees elected.
There is no general rule as to the appointment or se-
lection of officers for the standing committees. In some
cases they are designated by the creating provisions, in
others they are elected by the board, while in many cases
the selection of officers is left to be decided by each com-
mittee for itself. It is probably simplest and most satis-
factory to provide that the chairman of each committee
shall be designated by the board. The only other necessary
officer is the secretary. At times it is provided that the
secretary of the corporation shall also act as secretary of
the committees. If, however, there is more than one stand-
ing committee, and especially if these committees are active,
it may be found advantageous for each committee to have
a distinct recording official who may or may not be a mem-
ber of that committee.
§ 165. Composition.
The membership of the standing committees must be
confined to the membership of the board, otherwise the
power of the board to delegate its authority to the com-
mittees would be more than questionable and the action of
such committees of doubtful legality.
Within this limitation, the standing committees should
be formed on the principles of specialization. Those most
familiar with the corporate business and most capable in
its practical management will naturally be grouped in the
executive committee. Those of most skill and standing in
financial matters will properly be selected for the member-
ship of the finance committee. Other considerations fre-
170 THE BY-LAWS.
quently intervene to prevent this ideal formation of the
standing committees but the more nearly it is approximated
the better will be the practical results.
The creating provisions not uncommonly provide that
the president, vice-president and treasurer, with or without
additional members, as may be desired, shall constitute the
executive committee. These officers being elected by the
board to the positions they already occupy, are presumedly
men of executive ability, familiar with the corporate affairs
and therefore peculiarly qualified to act as members of
the managing committee. On the other hand such appoint-
ment adds materially to the responsibility, the power and
the importance of these official positions and may for that
reason at times be unadvisable.
The treasurer should obviously be a member of the
finance committee unless special reasons to the contrary
exist. If a member of the finance committee he should
not ordinarily also act on the executive committee.
§ 1 66. Powers.
There is no doubt that the board may legally delegate
its authority to properly constituted standing committees.
(The Sheridan El. L. Co. vs. The Chatham Nat. Bank, 127
N. Y., 517, 1891; Olcott vs. Tioga Railroad Co., 27 N. Y.,
546, 1863). This delegated authority may be co-extensive
with the powers of the board in the interim between board
meetings, or may be limited to certain specified actions or
lines of action. The extent of the power to be delegated
to the standing committees is usually fixed by the charter
or by-law provisions by which the committees are created,
though it may be left to be determined by the board itself.
If the powers of the standing committees are fixed by the
creating provisions the board can not delegate powers in
excess of those prescribed.
The creating provisions frequently go into detail as to
the powers and duties of such committees. These powers
STANDING COMMITTEES. 171
should not be too extended and the committees should be
required to keep full and adequate written records of their
proceedings. These records should be open to inspection
by members of the board, and frequent reports to the board
should be required.
Properly constituted and empowered, and within the
limits of their authority, the standing committees act with
the same binding force and effect as would the board itself.
Their contracts are not affected by any subsequent disap-
proval of the board nor can the corporation refuse to carry
out any of their proper undertakings.
§ 167. Procedure.
The standing committees act as do other parliamentary
bodies. Their usual officers are a chairman and secretary,
and these officers perform the usual duties. Regular meet-
ings may be provided for by the by-laws with full provision
as to their conduct and record, or the matter may be left
to be regulated by the committees as seems to them best.
Owing to their compactness and the manner in which they
are usually constituted, the standing committees are easily
assembled and a large portion of the business of such com-
mittees is usually accomplished in special meetings, either
regularly called or assembled by unanimous consent.
All special meetings should be duly notified to the mem-
bers, and the consent or participation of every member
must be secured to consent meetings ; decisions reached and
action taken should be expressed in duly adopted resolu-
tions and minutes should be kept containing a faithful
record of all committee proceedings. These proceedings
should from time to time be reported to the board, either
by direct report, or by the reading of the committee min-
utes. Vacancies in the committees should be filled in ac-
cordance with by-law provisions, usually either by the com-
mittee itself, or by action of the board, except in the case of
an ex-officio member, who succeeds to his position on the
172 THE BY-LAWS.
committee by virtue of his election to official position in the
corporation.
A majority of the executive committee, unless other-
wise expressly provided, constitutes a quorum and a major-
ity of that quorum has power to act. It may be prudent to
provide that the .affirmative vote of a majority of the whole
committee shall be necessary for action. This does not
necessitate any increase in the number necessary to a
quorum, but if a mere common-law quorum be present
requires the affirmative vote of all the members present
to secure action.
CHAPTER XXVII.
OFFICERS.
(See Art. IV in Forms 8 and 9; also Art. V in Fortn 10.)
§ 168. Enumeration; Qualifications.
The term officers is here applied to those agents of the
corporation appointed or elected — usually by the board of
directors — as the direct executive representatives of the
board and of the corporation. The directors are themselves
at times styled officers, and with legal correctness, but to
avoid confusion the term is not so used in the present
volume.
The details relating to the officials of a corporation are
matters of by-law prescription. The statutes are usually
silent in the matter, the charter seldom takes cognizance
of anything pertaining to the corporate officials, and the
by-laws control.
Under these circumstances the stockholders as the by-
law making power have wide discretion. They fix the
number, titles, qualifications, duties, method of election and
all other details relating to the officers, and their wishes as
expressed in the by-laws, prevail. If not covered in the by-
laws such matters are regulated by common or parlia-
mentary law or custom.
The necessary officers of a corporation are the president,
secretary and treasurer. In the smaller corporations two
of these offices are sometimes held by one person. In most
cases, however, the number of officers is increased by the
addition of one or more vice-presidents, a managing director
173
174 THE BY-LAWS.
or general manager, and at times a chairman of the board,
counsel and an auditor. The officials named are, for the
most part elective, and, with the occasional exception of the
general manager, are supposed to report directly to the
board or to one of the standing committees. Outside of
committee officials, other agents and employees are not
usually designated officers and but seldom come in contact
with the board.
The election of officers naturally follows closely on the
electiofi of directors and is usually held as soon thereafter
as the newly elected board can be properly assembled.
The president and vice-president are chosen from the
board itself as they may be called upon to preside at its meet-
ings. This is not necessary in regard to the other officers,
though the treasurer is frequently chosen from the member-
ship of the board, and other officials are so selected when con-
venient. The treasurer of the larger corporations is usually
selected on the basis of his financial standing or ability. It
would seem obvious that the corporate officials should all
have special qualifications and a knowledge of the duties
of their positions, though other considerations frequently
prevail.
§ 169. Presiding Officers.
The president is the usual presiding officer. His duties
vary widely according to the size and character of the cor-
poration. In the smaller corporations he is frequently
assigned the active management of the business in addition
to the duties more strictly pertaining to his office. In the
larger corporations the duties incident to the president's
office are frequently allotted in greater or less degree to
other officers. If a chairman of the board exists, that official
presides at all meetings of the board. If there is a chair-
man of the finance committee, he takes over the super-
vision and direction of the financial matters usually assigned
to the president. At times certain of the duties ordinarily
OFFICERS. 175
pertaining to the president are performed by the vice-pres-
idents.
The utility of a chairman of the board is, in most cases,
doubtful. Where the office exists, its duties should be
clearly defined by the by-laws. If a chairman of the board
be provided, the general rule that the president must be a
member of the board is not so imperative, though even
then as the chief executive of the company he should be
present at board meetings, must almost of necessity par-
ticipate in its discussions and deliberations and should there-
fore be a member of the body.
Vice-presidents, designated and ranked as first, second,
third and so on, may be provided for in accordance with
the corporate needs. These perform the duties of the pres-
ident in the absence of that official, or of the ranking official,
in the order of precedence. In addition, in the larger cor-
porations, active functions are usually provided for several
vice-presidents. Frequently their number is swelled merely
to afford honorary positions for members of the board.
In the smaller corporations, the duties of the vice-president
are sometimes assigned to the treasurer, or this latter is
elected as vice-president and treasurer. (See § 142.)
The presiding officers of the standing committees are
usually provided for either by the by-laws or by action of the
board, but are sometimes left for the committees to elect.
The president of the company is usually president of the
executive committee; the treasurer is frequently placed at
the head of the finance committee.
§ 170. Secretary.
The duties of the secretary should be fully and explicitly
prescribed in the by-laws, especially as to signatures. He
would naturally have charge of the corporate seal and affix
and attest it when necessary, though the president is occa-
sionally authorized thereto as well. Unless the statutes, as
176 THE BY-LAWS.
in New Jersey, call for the signatures of the president and
treasurer to stock certificates, the secretary is often desig-
nated to sign such certificates with the president. He gen-
erally has entire charge of the details of the issue and
recording of stock. The corporate records are entrusted
to him, and the various state reports are usually prepared
by him. His powers and duties as to signing contracts are
entirely dependent upon the by-laws or conditions of the
particular corporation. Usually he signs with the president,
but frequently the president signs alone, or with the treas-
urer, or the matter is decided in each important instance
by resolution of the board. When his signature is not
affixed to sealed contracts, it should appear on such instru-
ment in attestation of the seal.
§ 171. Treasurer.
The treasurer is usually given full charge of the cor-
porate finances and all that immediately relates thereto;
also the custody of all corporate instruments and evidences
of value. He signs all checks, with or without the president
as the by-laws or directors may prescribe, and participates
in the execution of all the instruments pertaining to the
financial transactions of the corporation. The by-laws
should clearly define the extent of the treasurer's powers
and responsibilities.
Whenever the treasurer's position involves the handling
or possession of large sums of money, or of considerable
property values, he should be required to give bond. In a
small corporation, or one where the responsibilities of the
treasurer are light, such requirement is an unnecessary
formality.
The finance committee, if such a committee exists, takes on
itself many of the duties and responsibilities of the treasurer,
and, unless that official is chairman of the finance committee,
renders his position much less onerous.
OFFICERS. 177
§ 172. Managing Officers.
The position of managing director is only found in the
larger corporations, and the position and duties of this official
are often somewhat indeterminate. In some cases his duties
are practically those of the general manager; in others he is
given much of the power and many of the duties of the presi-
dent. At times, the position is in the nature of a compromise,
the duties of the managing director being carved out from
those of the president and general manager.
The position of managing director is supposed to be more
dignified than that of the general manager. Its duties should
be clearly prescribed by the by-laws, in order to prevent possi-
ble conflicts of authority. "This is the more necessary, as the
duties of the position are not so definite or well understood as
those of the other officials and custom cannot be referred to
for missing details.
The general manager is only accounted an officer of the
company — in contradistinction to the employees — because he is
selected by and usually reports to the board. His position gen-
erally differs materially from that of the other officials. At
times he is instructed to report and act under the direction of
the president. If the by-laws did not specifically provide for
the election of a general manager, the board would have
authority to appoint or employ such official and prescribe his
duties and salary, just as they might employ any other neces-
sary agent or employee of the company. In such case the
usual laws and customs relating to the contract of employment
would control.
§ 173. Counsel; Auditor.
In the larger corporations counsel is usually retained as a
regular and permanent feature of the management. Such
official has no original powers, even his control of litigation
being subject to the direction of the board, or, if it be so
referred, to one of the standing committees.
178 THE BY-LAWS.
In the smaller corporations by-law provision for counsel
is not usual, the board being left to employ counsel at such
times and on such terms as it may deem expedient. The
employment of counsel then becomes merely a matter of
contract.
The compensation of counsel is usually fixed at some
minimum amount, which is considered a retainer, any further
payments depending upon the services rendered.
The auditor is usually an essential officer of the larger
corporations. Where the work that may properly be referred
to the auditor is not sufficient to justify his regular employ-
ment, the by-laws may provide for periodical audits, or the
whole matter may be left to the discretion of the board. Where
the volume of corporate business is at all large, the employ-
ment of an auditor or some provision for suitable audits of
the corporate books and accounts is a wise precaution.
§ 174. Assistant Officers.
The president is usually well provided with assistant
officers in the vice-presidents. The treasurer is frequently
materially assisted by the personnel of the finance committee.
Where this is not the case, and sometimes in addition thereto,
an assistant treasurer is not unusual. In the larger corpo-
rations an assistant secretary is frequently appointed.
Such official duties as the board may deem expedient are
delegated to these assistant officers, or their duties may be
prescribed at discretion by the officials they assist. In any
event, the by-laws should clearly prescribe their status and
manner of appointment. If these assistant officers are to per-
form the duties of their principals in the absence of these latter,
the by-laws should so prescribe.
In the smaller corporations assistant officers, outside of
the vice-presidents, would be an unnecessary and possibly
complicating addition to the corporate mechanism.
OFFICERS. 179
§ 175. Delegation of Official Powers.
Exigencies may arise in which it may be desirable or even
necessary for one official to exercise the powers and perform
the duties of another, in whole or in part. The board would
have authority to temporarily delegate the powers of certain
officers under such circumstances without special by-law pro-
vision, but to save question and possible trouble, the power,
if likely to be necessary, should be specifically conferred by
the by-laws. One official could not delegate his powers to
another, even temporarily, in any material matter, unless
specially authorized thereto by the by-laws or action of the
board.
§ 176. Salaries.
Officers are distinguished from employees by the fact that
unless it is specified that they are to receive salaries they are not,
as a rule, entitled to charge for their official services. Neither is
it ordinarily legal for the directors to vote a salary for such
services after they are performed. To avoid misunderstand-
ing, however, it should be clearly stated in the by-laws, either
that the officers of the corporation shall receive no salaries, or
that the officers shall receive only such compensation for their
services as the board may designate at the time of their
appointment, or the salary attached to each office may be
specifically stated. The whole matter is one to be adjusted
from a business standpoint and much trouble is likelyto be saved
by a definite arrangement. (See Henry Woods Sons' Co. vs.
Schaefer, 173 Mass., 443, 1899; Met. El. R. Co. vs. Knee-
land, 120 N. Y., 134, 1890; Ellis vs. Ward, 137 III, 509,
1890; Kilpatrick vs. Penrose F. B. Co., 49 Pa. St., 118, 1865.)
If, however, such an officer is neither stockholder nor
director of the company and stands in no relation which would
make it his interest to serve without compensation, there will
be a prima facie obligation to pay him. (Smith vs. Long
Island R. R. Co., 102 N. Y., 190, 1886.)
180 THE BY-LAWS.
Officers who are also directors cannot vote salaries to them-
selves even though they are also holders of a majority of the
stock. (Jacobson vs. B. Lumber Co., 184 N. Y., 152, 1906.)
But an officer who is also a stockholder and director may re-
cover for services rendered outside his official duties if such
services are authorized by the directors. (Bagby vs. Carthage,
etc., Co., 165 N. Y., 179, 1900; Corinne Mill Co. vs. Toponce,
152 U. S., 405, 1893.)
§ 177. Removals ; Vacancies.
The power of removal and the filling of vacancies is
usually provided for in the by-laws under the head of
" Directors," as already discussed in Section 159. It would
be proper, however, to repeat any powers given the board in
this direction, in a short by-law under the heading of officers,
or the ground might be covered by a reference to the by-law
by which this power was conferred. If the occasion arises
for the exercise of the power of removal, or it becomes neces-
sary to fill a vacancy, there should be no possible basis for any
doubt or question as to the authority of the directory to act.
CHAPTER XXVIII.
DIVIDENDS AND FINANCE.
(See Art. V in Forms 8 and 9; also Art. VI in Form 10.)
§ 178. General.
All those provisions directly relating to the financial
management of the corporation will be grouped in the by-
laws under the general heading of " Dividends and Finance."
Any limitations on the control exercised by the directors
over the finances of the corporation, and any directions as
to the management of these finances, must, unless incor-
porated in the charter, appear in the by-laws. If this is
not done the directors are in complete control, except in
so far as they may be restrained by statute law.
It is to be noted that any restrictions on the salaries of
officials, if of a general nature, would appear in the by-laws
relating to finance. If the amount of each official salary
were fixed, such limitations might appear in these by-laws,
but would also be included in the by-laws relating to the
respective officers.
§ 179. Dividends.
The by-law provisions on this subject are for the most
part merely declaratory of the common or statutory law on
the subject. Their inclusion in the by-laws is very desirable,
not only on account of the importance of the matter, but
because the statutory or common law provisions against
illegal dividends are otherwise frequently overlooked or
disregarded.
181
182
THE BY-LAWS.
§ 1 80. Reserve Funds.
Under the laws of most states the directors have full
power, unless otherwise provided by charter or by-laws, to
set aside any portion or all of the profits at their discretion
as a reserve fund or for the purpose of accumulating a
working capital. In New Jersey, on the contrary, the
directors, unless otherwise expressly authorized by charter
or by-laws, must annually distribute all the corporate
profits as dividends. Such compulsory distribution of
profits might at times be prejudicial and even disastrous
to the corporate interests, and, accordingly, it is usual in
New Jersey to authorize the accumulation of a reserve fund
by charter or by-law provisions.
In other states the matter of reserves is sometimes left
entirely to the discretion of the directors, but usually the
matter is regulated by suitable provisions. The minimum
reserve fund to be maintained will be prescribed in which
case no dividends must be paid while the reserves are below
this minimum, or a stipulated annual dividend will be
required from the annual profits before anything is passed
to the reserve, or a certain percentage of the annual profits
will be passed to the reserve fund. Whatever the arrange-
ment it should be so clearly expressed as to admit of no
misunderstanding.
§ 181. Limitations of Debt.
By-law restrictions upon the power of the directors to
incur debt are at times employed. These limitations are of
various forms. At times the debt incurring power of the
board will be limited to a stated gross amount which must
not be exceeded without special authorization by the stock-
holders ; or it may be provided that such limit of indebtedness
shall not be exceeded unless authorized by a specified
majority of the directors, as a two-thirds vote of the entire
board, or perhaps by unanimous action of that body. Occa-
sionally the board will be restricted as to the amount of any
DIVIDENDS AND FINANCE. 183
one contract or obligation, as for instance that no contract
or obligation involving liabilities of more than $2,000 shall
be entered into or incurred by the board unless specifically
authorized thereto by resolution of the stockholders.
The advisability of such limitations is open to question.
Peculiar cases will undoubtedly arise where such restric-
tions are desirable, and at times they are necessary, but as
a general rule it would seem better to elect a responsible
board rather than to attempt restraints upon its action.
(See §§ 107, 116, 117, 236 and 243.)
§ 182. Bank Deposits.
The by-law provisions as to the corporate bank deposits
are important and should be very explicit in their terms.
They should prohibit absolutely any irregular retention or
disposition of the funds by the treasurer, and provide that
all moneys coming into his hands be promptly deposited in
the name of the company. This latter point should be
covered specifically by the by-laws, as the occasional prac-
tice of allowing deposits to be made in the individual name
of the treasurer, or in his name as treasurer, is a standing
invitation to irregularities and resulting trouble.
The by-laws should also prescribe the signature to cor-
porate checks. Practice varies as to this matter but unless
there is reason for doing otherwise checks should be signed
with the company name, affixed by the treasurer and veri-
fied by his signature, with, usually, a countersignature
affixed by the president.
The by-laws relating to bank deposits should cover the
ground fully and clearly, leaving nothing to the discretion
of the board or finance committee save the designation of
the depositaries.
CHAPTER XXIX.
SUNDRY PROVISIONS.
(See Art. VI in Forms 8 and 9; also Art. VII in Form 10.)
§ 183. General.
Under this head will come all those by-laws that cannot be
included under the titles already discussed and that are too
few or unimportant to justify separate classification. Some of
these matters are of particular application. A few are of
general application, are found in all complete sets of by-laws
and are considered in the following sections of the present
chapter.
§ 184. Corporate Seal.
It is customary to prescribe the details of the corporate
seal in the by-laws, the provision being usually so worded as
to serve as a formal adoption of the described seal. This seal
usually gives the corporate name, the year and the state of in-
corporation. These are customary, but not essential, as any other
wording or device, if properly adopted, would be the legal
seal of the corporation. Any additional designs, mottoes or
ornamentation may be added as desired and will neither add
to nor detract from the legal effectiveness of the seal.
§ 185. Penalties.
The enforcement of by-laws by means of penalties is of
doubtful utility. Cases may arise where penalties may be
profitably employed, but usually such measures are futile and
inadequate. Where the power of removal exists, persistent
disregard of the by-laws by officials of the corporation would
184
SUNDRY PROVISIONS. 185
undoubtedly be proper grounds for the exercise of this power.
If such power is not given by the by-laws or statutes, official
disregard of the by-laws would probably be sufficient reason
for a removal on common law grounds. If the directors act
in disregard of the requirements of the by-laws, such action
is illegal, and the personal liability that may follow is a much
more effective penalty than anything that could be inflicted by
direct by-law provision.
§ 1 86. Amendments.
The usual by-law provision on this subject requires
majority action of the stockholders for amendment of the by-
laws. This conforms to the provisions of the common law.
Where greater stability is desirable, on account of special pro-
visions incorporated in the by-laws, or generally, as a protec-
tion to minority interests, it is sometimes provided that two-
thirds in interest, or even a larger proportion of the stock-
holders, must vote in favor of any amendment before it is
effected.
Such provisions, merely made part of the by-laws, unless
reinforced in some way, are of but little avail. The majority
have the right to amend and repeal the by-laws, and it cannot
be taken from them by a mere unsupported by-law inhibition.
(Smith vs. Nelson, 18 Vt., 511, 1846.)
Such a provision, to be effective, must either be incor-
porated in the charter, or, if in the by-laws only, must be so
established and confirmed by vested rights accrued under it as
to have become in effect a contract between the corporation
and the stockholders, and, therefore, unchangeable, except in
accordance with its own provisions. The New York Court
of Appeals in Kent vs. Quicksilver Mining Co., 78 N. Y., 159
(1879), said:
" A private corporation cannot repeal a by-law,
so as to impair rights which have been given and
become vested by virtue of the by-law; and this
although the power is reserved by its charter to alter,
amend or repeal its by-laws."
186 THE BY-LAWS.
This is stated yet more strongly in Loewenthal vs. Rubber
Reclaiming Co., 52 N. J. Eq., 440, a case where stock had
been sold on the strength of the safety afforded by special
charter and by-law provision :
" The certificate of organization and the by-laws
contemporaneously adopted, constituted a contract
between the stockholders and the corporation, and
it is not competent for the legislature to authorize
either to be changed without the consent of all the
stockholders, except it be done in the mode provided
by the by-laws themselves." See also Mills vs. Cent.
R. R. Co., 14 Stewart Eq., 1.
It is worthy of note, that it has been decided in Pennsylva-
nia that the by-laws cannot be amended by a majority of the
stockholders at an annual meeting in any important particular,
such as an increase of directors, unless the notice of that meet-
ing informed all the stockholders that such action was con-
templated. (Bagley vs. Reno, etc. Co., 201 Pa. St., 78, 1902.)
PART V.— ORGANIZATION OF CORPORATION.
CHAPTER XXX.
FIRST MEETING OF STOCKHOLDERS.
§ 187. General.
In the great majority of the states procedure for the
organization of a corporation is uniform as to the main
features. First, the charter is prepared and is executed by the
incorporators ; next, this duly executed charter is filed with the
officials prescribed by statute, then the meeting of incorpo-
rators is held, by-laws adopted, directors elected and such
other action taken as may be necessary. The directors then
meet, elect the officers of the corporation and its organization
is complete.
In a few states, however, this procedure is practically re-
versed, the election of directors and officers and adoption of
by-laws preceding the filing of the charter. In other words,
the by-laws are adopted and directors and officers elected
before the corporation has any legal existence. The
arrangement seems somewhat illogical, but is prescribed by
the statutes of certain states and in those states must be fol-
lowed. It merely amounts to a preliminary determination of
these details, of no force unless the charter application is
allowed, but then becoming automatically effective and bind-
ing on the new corporation. This variation of the usual pro-
cedure is found in Maine, Massachusetts and some other
states. In these states the proceedings outlined in the present
and following chapters must be modified to meet the statute
requirements.
187
188 ORGANIZATION OF CORPORATION.
Under the customary procedure, after the charter applica-
tion has been duly submitted for approval and filing in the
office or offices designated by the statutes, and after such
approval and filing has taken place and been notified to the
incorporators, these latter are authorized to assemble and per-
fect the organization of the new corporation.
The incorporators or their proxies are the only persons
entitled to act at this time. Their power to call the first meet-
ing and to act thereat for the corporation is derived from the
recognition and express authorization given them by statute.
If their subscriptions are set forth in the charter itself each
incorporator votes at this first meeting in accordance with such
stock subscription. In those states where the first meeting is
held before the charter is granted, each incorporator is usually
entitled to one vote in the organization meeting.
There may be numerous subscribers to the stock of the
new corporation who are not named in the charter, but their
subscriptions not having as yet been accepted by the new cor-
poration, the subscribers, as such, are not stockholders of the
corporation and are not entitled to any participation in its
affairs until after express acceptance of their subscriptions.
Unless there is some good reason to the contrary, the
number of incorporators is usually fixed at the minimum
allowed by the statutes. This is done purely as a matter of
convenience and as simplifying the formalities preliminary and
incident to the first meeting.
Where the number of incorporators is small, the first meet-
ing is most conveniently assembled by means of a written call
and waiver of notice, which must be signed by all the incor-
porators. This call and waiver must fix the time and place of
meeting, and should also specify the business to be transacted
thereat, though, by reason of all the interested parties signing,
so much particularity is not necessary as in the call for the
usual special meeting. A blanket phrase consenting to the
transaction of any and all business brought before the meeting
is in this case allowable and authoritative. Such a call and
FIRST MEETING OF STOCKHOLDERS. 189
waiver, to be effective, must be signed by every incorporator.
It need not be issued or signed any definite time before the
meeting, as it is a waiver of all statutory requirements of
notice. A meeting so called and properly conducted is legal
in any state of the Union. (Braintree, etc. Co. vs. Braintree,
146 Mass., 482, 1881.)
Where for any reason the call and waiver of notice cannot
be used, any form or method of procedure prescribed by the
statutes for the assembling of the first meeting should be fol-
lowed to the letter. If no form is prescribed by the statutes
it will be necessary for a majority of the incorporators to
unite in a call for the first meeting. This call must fix the
time, place and business to be transacted at the meeting, and
must be served on the other incorporators a reasonable time
before the date of meeting. Any convenient place of meeting
may be selected, the time of notice must be sufficient to permit
all the incorporators to be conveniently present, and the busi-
ness to be transacted should be set forth in detail. The meet-
ing is practically nothing more than a special meeting of the
stockholders, and, in the absence of statutory prescription, its
notice should follow the general rules in regard to notice for
special meetings.
§ 188. Preparation of Minutes.
The first meeting of stockholders, and usually the first
meeting of the directors as well, are of the cut and dried order.
The incorporation has been undertaken for a specific purpose
and usually by certain people, who have already settled among
themselves just how the corporation is to be organized in all
main details. The organization meetings are merely a formal
execution of these prearranged plans. It is, therefore, cus-
tomary to have the minutes of these first meetings written out
in advance and often with much particularity. The advantages
of the plan are found in the orderly procedure thereby outlined,
the better presentation of the matters to be considered and the
inclusion of all matters that ought to be considered. If any-
190 ORGANIZATION OF CORPORATION.
thing occurs at or during the time of the meeting to modify
the minutes as already written, the necessary changes are
quickly made by erasure or interlineation and no confusion
need result. (See Forms 36-40.)
§ 189. Method of Conducting Meeting.
The manner of conducting the first meetings varies widely
with the conditions. In certain cases, where everything is
settled in advance, and is to be kept in the precise shape deter-
mined upon, the entire minutes are put in final shape before
the time of meeting. Then the attorney, or other party having
the incorporation in hand, after due assembling of the
incorporators, reads to them these cut and dried minutes as
the proceedings of the meeting. With the assent of those
present, or in the absence of express objection, the minutes
so presented are declared to be the minutes of the meeting,
which is thereupon adjourned. The minutes are then tran-
scribed in the minute book, are signed by the parties respec-
tively mentioned in the minutes as the presiding officer and
secretary and the matter is closed. The directors' meeting is
conducted in the same perfunctory manner and with the same
precision of result.
This method though informal and irregular cannot be
said to be illegal. The presence of all the parties in interest
and their assent and active participation, acts to estop them
from objecting to the proceedings and no one else would
have the right to object.
It is needless to say that when this method is employed
the incorporators are generally dummies, who, after the
completion of the organization, step aside and make way
for the real parties in interest.
When the exact proceedings of the minutes are to be
carried out, but the attorney in charge is unwilling for it
to be so purely a matter of form, the minutes will be read
but the parties named therein will go through the indicated
motions. Thus if the minutes state that the charter is pre-
FIRST MEETING OF STOCKHOLDERS. 191
sented by the president, or chairman, a copy of the charter
will be handed the party named in the minutes as the pre-
siding officer and the minutes verified by its due presenta-
tion to the meeting. Likewise the parties named as making
and seconding motions will be asked if they make and
second such motions, their ready assent usually verifying
the predictions of the minutes to a nicety. Also as each
motion is reached in the reading, the meeting will be asked
if it favors such motion, the assent of the meeting usually
being readily obtained. Such a meeting is much less of a
legal fiction than the meeting conducted entirely by the
reading of the minutes and is to be preferred.
Where the real parties in interest participate in the first
meetings the proceedings are not usually of such a per-
functory nature. The minutes then serve more as a detailed
order of business and are varied as the needs of the occasion
seem to indicate. The presiding officer really presides, the
secretary performs his functions, motions are made and any
elections actually take place, discussions are in order if the
necessity arises, and, in short, the assemblage is a meeting
intelligently acting, and not a collection of dummies, useful
only as pegs upon which to hang the prescribed proceedings.
In the comments which follow, it has been taken for
granted that the actions of the meeting are to be really
taken.
§ 190. Opening the Meeting.
At the duly appointed time and place, the incorporators,
or a majority of them, having assembled, some one of those
present will call the meeting to order, and, in the absence
of objection thereto, will call on some other incorporator
present to take the chair. If there should be any objection
to the appointee, or to the selection of a chairman by ap-
pointment, the party calling the meeting to order would let
the matter be decided by vote. The chairman, as soon as
his appointment or election is announced, will take charge
192 ORGANIZATION OF CORPORATION.
of the meeting and, if there is no objection thereto, appoint
some one present to act as secretary. The secretary will
then note the names of those present and ask for the proxy
of any one of the incorporators not present in person. It
is desirable to have all the incorporators represented at this
first meeting, though a majority in interest could legally act.
The secretary should now produce proper evidence that
the meeting has been duly called and this evidence should
be ordered spread upon the minutes. If the meeting has
been assembled by call and waiver signed by all the incor-
porators, such call and waiver should be produced and
ordered entered in the minutes of the meeting. If called
by publication, copies of the newspapers in which the- notice
appeared would be adequate evidence. If called by notice
served personally or by mail, a copy of the notice should
be presented accompanied by a certificate of the party by
whom it was served that such service was duly effected. If
the meeting assembled in any other way, the procedure and
the evidence that it had been properly carried out should be
laid before the meeting and should appear in the minutes.
§ 191. Reception of Charter.
The chairman or secretary should now produce a copy
of the certificate of incorporation, and report the fact and
date of its allowance and of its filing in the office or offices
required by the statutes. Motion should then be made that
the certificate of incorporation as presented be accepted or
received and spread upon the minutes as a part of the
record of the meeting.
It is not essential that this copy of the charter be certi-
fied by the Secretary of State, though such certified copy
is customarily procured and is generally more satisfactory
to the interested parties than an uncertified copy. The
charter is entered preferably on the first pages of the minute
book, followed by the by-laws, with the other instruments
that are made part of the record following the minutes
FIRST MEETING OF STOCKHOLDERS. 193
proper, each beginning at the head of a page. So arranged,
these instruments are much more easily found and referred
to than if incorporated and buried in the body of the minutes.
Also the minutes themselves are clearer and more intel-
ligible if not broken up by the interjection of the lengthy
instruments ordered spread upon the minutes. The legal
effect of the entry of these instruments in the way indicated,
if so ordered by the meeting, is exactly the same as if they
appeared in the context.
§ 192. Adoption of By-Laws.
The by-laws will usually have been prepared in advance
of the first meeting and have been fully considered by those
interested. At the time of the meeting, they are presented,
read article by article by the secretary or by such other
party as may be requested thereto by the presiding officer,
and adopted as a whole. At times each article will be
adopted as read, followed by the adoption of the by-laws
as a whole, though this is not a necessary formality.
If serious objection is offered to any of the by-law provi-
sions, such objection will be taken under consideration by
the meeting and any proposed modifications settled by for-
mal action. As the time at this first meeting is, however,
usually fully occupied with routine procedure, such matters
cannot be given the consideration they deserve and any
objections or suggestions in regard to the by-laws should
be discussed, and, if possible, settled before the meeting.
Where the by-laws have been fully considered by the
interested parties in advance of the meeting and all are
familiar with their provisions, the reading of the by-laws
may, either by unanimous consent, or by formal motion,
be dispensed with and the by-laws adopted as presented and
as a whole. The reading of the by-laws before adoption is,
however, the safer plan, preventing any unauthorized sub-
stitutions with possible resulting disagreement later as to
just what was adopted.
194 ORGANIZATION OF CORPORATION.
§ 193. Election of Directors.
In most of the states the election of directors properly
follows the adoption of the by-laws, such election being the
only method by which the directors may be properly desig-
nated and empowered. In New York and in some other
states, however, the directors for the first corporate year
are named in the charter. In such case no action in regard
to the directors is necessary at the first stockholders' meet-
ing, the board being already in existence with full power to
take up and manage the affairs of the corporation. If the
incorporators do not meet at this time, the board would,
pending such meeting, of necessity, be forced to adopt by-
laws of more or less completeness. To avoid any such con-
tingency and to avoid other possible inconvenience, it is
the better practice in these as in other states to have the
stockholders meet prior to any meeting or action of the
board.
Where directors are to be elected at the incorporators'
meeting, any statutory directions must be followed exactly
and the minutes should show in detail that this has been
done. In the absence of statutory provisions, an election
by ballot, conducted by tellers appointed by the presiding
officer would be legal and proper. In such case the meeting
would be the judge of the qualifications of voters, each
incorporator or other participant voting according to the
number of shares of stock subscribed for by him. If an
agreement exists as to the parties to be elected as directors,
these parties might be nominated by the meeting and the
secretary by motion instructed to cast the vote of the
meeting for the parties so nominated.
§ 194. Exchange of Stock for Property.
The board of directors is the proper and final authority
to conclude an exchange of stock for property. Where,
however, as is often the case, a large proportion or pos-
sibly all the stock of the corporation is to be issued in pay-
FIRST MEETING OF STOCKHOLDERS. 195
ment for some particular property, it is customary and
advisable to have the proposed purchase sanctioned and
authorized by express action of the stockholders. Such
action if unanimous commits all the stockholders to the
purchase, and estops any participant from later objection
to the transaction.
The proposal for exchange of stock for property is
usually presented to the meeting, read, discussed if desired,
and then a resolution passed approving the proposed pur-
chase, referring it to the directors and instructing them to
consummate the same. (See Chap. XXXII, Issuance of
Stock for Property.)
§ 195. Other Business.
Usually there will be other business to come before the
stockholders at this first meeting depending upon the con-
ditions surrounding the particular corporation. In some
states specific action is required of the stockholders by the
statutes. If there is any action to be taken by the directors
in which there is doubt of their power, or some advantage
to be gained by an authorization from the stockholders, the
necessary action should be taken at this time. Beyond
this, however, it is not advisable for the stockholders to go.
All matters of general management are in the hands of the
board and any uncalled for action in regard thereto on the
part of the stockholders can have no advantageous results
and may embarrass the proper action of that body.
CHAPTER XXXI.
FIRST MEETING OF DIRECTORS.
§ 196. General.
In the majority of the states, the directors of a new cor-
poration are elected at the first meeting of stockholders,
and, of necessity, the" first board meeting is held subsequent
thereto. Even in those states where by charter appoint-
ment of the board, that body might meet in advance of the
first meeting of stockholders, the general practice is for
the meeting of stockholders to precede the first meeting
of the board.
At their first meeting the stockholders usually adopt
by-laws. The board in its first meeting has therefore the
guidance of these by-laws so far as they may apply. As the
first meeting of the board is not a regular meeting, it is
governed by the by-law provisions relating to special meet-
ings, except as variations are made necessary by the unor-
ganized condition of the board at this time.
No secretary having as yet been elected, the meeting
cannot be called or assembled as it otherwise might but
must either be assembled by a call signed by a majority of
the members of the board, such call being in its general
form similar to the usual call for special meetings and com-
plying in every way with its requisites, or otherwise, and
as is usually done, the meeting must be brought together
by a written call and waiver of notice, which must be signed
by all the members of the board. This instrument should
specify the time and the place of meeting, and give in detail
the various matters to be considered and acted upon. If the
stockholders have selected any office or definite headquar-
196
FIRST MEETING OF DIRECTORS. 197
ters for the new corporation, the meeting of the directors
would naturally be called for that place, if not, any conven-
ient place would be proper. The most important matters
for consideration at this meeting are the election of officers,
the issuance of stock for property — where this is to be done
— and the authorization of any proceedings necessary to
the commencement of business. A blanket provision per-
mitting the transaction of any and all business pertaining
to the affairs of the corporation should be included in the
call and waiver. Signed by the entire membership of the
board this provision would be effectual and would permit
action on any corporate matters that may come up for con-
sideration. At times this latitude of action is of considerable
advantage.
§ 197. Minutes.
As in the case of the stockholders' first meeting, the pro-
ceedings of the first meeting of directors may usually be antici-
pated and minutes be prepared in advance with considerable
accuracy. Occasionally in such case, the minutes are pre-
pared in permanent form and the proceedings conducted in
accordance by a mere reading of the minutes — their adoption
as the minutes of the meeting being signified by silent ac-
quiescence, by express assent or by a more particularized
assent on each important point as the reading progresses.
Usually, however, the prepared minutes are used more as
memoranda, the meeting at least going through the motions
of transacting the outlined business.
It is hardly necessary to say, that " cut and dried "
minutes should not be prepared or used where there is any
probability of a difference of opinion in the board. Courtesy
would forbid, even if there were a decided majority in favor of
the outlined action. Also, speaking generally, it would neither
be politic nor advisable to ignore so openly the consideration
and deliberation which should in any case of disagreement be
characteristic of board action. (See Forms 41-45.)
198 ORGANIZATION OF CORPORATION.
§ 198. Opening the Meeting.
When the board assembles in its first meeting it is
unorganized and must therefore be called to order by some
one of its members, who, on his own volition, or at the request
of other members, takes the initiative. This member merely
calls the meeting to order, and, in the absence of objection,
names a temporary chairman or presides until a temporary
chairman is appointed or elected by the meeting. This latter
then takes the chair and a temporary secretary is at once
appointed or elected. This completes the temporary organiza-
tion of the board.
The call, or call and waiver, or other authorization under
which the meeting has assembled, should then be presented
to the meeting, and, if it appears that the meeting has been
duly assembled, the evidence thereof should be ordered
entered on the minutes. In the absence of objection this might
be so ordered by the presiding officer, otherwise by formal
action. As the meeting is a special meeting it is important
that it shall have been properly called and that due record be
made of this fact.
A roll call, or its equivalent, the recording of those present
by the secretary completes the opening formalities and the
meeting is ready for business.
§ 199. Election of Officers.
If, as is almost invariably the case, the officers of the cor-
poration are to be elected by the board, their election is the
first business before the meeting. The by-laws already
adopted by the stockholders should designate the officers to be
elected and the manner of their election, and these require-
ments should be strictly followed. Generally the election is
by ballot. Candidates for the various offices might be sev-
erally nominated with due second thereto, but, as usually the
candidates for the various offices have been agreed upon in
advance, formal nominations are dispensed with and the de-
tails of election taken up at once. Where all are agreed, a
FIRST MEETING OF DIRECTORS. 199
motion is frequently passed instructing the secretary to cast
the single ballot of the meeting for the recited list of officers.
This is proper, and, at times, convenient.
If the election is to be carried out in detail, the presiding
officer will, in the absence of objection, appoint tellers. The
members of the board then prepare their respective ballots
and the tellers collect and count these ballots and announce
the results. Each officer may be balloted for separately, or,
as is usually the case, one ballot be made to serve for all the
officers.
Immediately after the election the newly-elected president
and secretary, if present, will take charge of the meeting and
assume their respective official duties. If, however, these
officials-elect are absent, or if anything prevents their imme-
diate assumption of their duties, the temporary officers will
continue to act until the close of the meeting, unless the per-
manent officers sooner take charge. If, as in New Jersey,
the secretary is required to be sworn, he should comply with
this requirement before acting in his official capacity, though
his failure so to do would not vitiate his records, nor affect in
any way the legality of the meeting.
§ 200. Adoption of Stock Certificate.
The stockholders may, if they so desire, either by reso-
lution or by-law provision, adopt a form of stock certificate.
The matter is one, however, that, on account of its nature, is
usually left to the discretion of the board. Frequently tem-
porary certificates are adopted, to be replaced later by more
elaborate permanent certificates. Changes of conditions may
occur necessitating change in the certificate originally adopted.
Other contingencies affecting its form not infrequently arise.
For these and other reasons the matter is one best handled by
the board.
Frequently a form of stock certificate will have been
selected and possibly printed or engraved before the time of
the first board meeting. Even if this be so, the selected form
200 ORGANIZATION OF CORPORATION.
should be formally adopted and either the secretary be author-
ized and instructed to procure the necessary books of stock
certificates, or, if the books have already been procured, such
action be ratified and the books as presented be accepted. The
resolution by which this is effected should also authorize the
secretary to provide a seal, minute book and such other cor-
porate books and stationery as may be required.
The form of seal is customarily determined in the by-
laws which have already been adopted by the stockholders.
If this is not the case the form of seal should be selected and
adopted by the directors. (See Forms, Chapter XLVIII.)
§ 201. Acceptance of Subscriptions.
Subscriptions made by the incorporators of a new com-
pany need no formal acceptance. The mere fact of their
having executed the charter, in which their subscriptions
usually appear, and of having participated in the organiza-
tion meetings obviates the necessity of acceptance. If there
are other subscribers to the stock of the new company,
such other subscriptions require formal acceptance. This is
accomplished by resolution of the board of directors. Such
acceptance completes and makes binding the contract
between the corporation and those who have offered to take
its stock. Neither party can then recede and the sub-
scribers, by this acceptance, become stockholders of the
corporation and entitled to all the rights of stockholders.
The issue of certificates to these stockholders does not
usually take place until their subscriptions are fully paid
and then is only a convenient method of evidencing their
status not affecting their rights as stockholders one way or
the other. If they do not fulfil the conditions of subscrip-
tion their stock may be forfeited, but until that time their
rights are in full existence.
The acceptance of subscriptions is followed by such
action in regard to the payment thereof as may be necessary.
If part or all of the subscription price of the stock were due
FIRST MEETING OF DIRECTORS. 201
on acceptance, the treasurer of the company would be em-
powered to collect the amounts due. If, as in New Jersey,
thirty days' call, unless waived by the subscribers, must be
made before any part of the subscription price of stock can
be collected, either the board would instruct such call to
be issued, or, as is usually done, would secure a waiver of
this condition by the subscribers and take immediate steps
for the collection of the amounts then due.
If the corporation has been organized with the minimum
amount of subscriptions permitted by the statutes and
additional subscriptions are necessary, or desired, the proper
officers of the corporation would be instructed to offer for
sale or subscription such portion of the capital stock as is
to be sold. Such action would be governed entirely by the
conditions of the particular corporation.
§ 202. Exchange of Stock for Property.
If, as is almost invariably the case with business corpora-
tions of the present day, all or a portion of the corporate
stock is to be issued in exchange for property, the matter
is usually brought before the first meeting of the board by
the submission of a formal written proposition for the
exchange. This is usually accompanied by a resolution
of the stockholders approving the exchange and instructing
the directors to accept the proposition. These matters
are usually presented with proper explanations by the
presiding officer, but may with entire propriety come
through the secretary. Usually the proposition is ordered
received and spread in full upon the minutes of the directors'
meeting. If already in the stockholders' minutes this would
not be necessary, but preferably the proposition should be
reserved to appear in the directors' minutes in connection
with the final action taken thereon.
Usually such a proposal calls for little discussion as the
matter has already been fully considered. The presentation
and formal disposal of the documents in the case is there-
202 ORGANIZATION OF CORPORATION.
fore generally followed by a formal resolution of acceptance.
This resolution should briefly recite the conditions, specifi-
cally accept the proposition, and instruct the officers to take
the necessary steps to consummate the transaction. It
should also authorize the proper officers to issue the stock
consideration and deliver it against the delivery of the duly
assigned property for which it pays. (See Chap. XXXII,
Issuance of Stock for Property.)
§ 203. Financial Provisions.
In all cases where a bond is required of the treasurer,
such instrument should be submitted to the board and for-
mally approved by it before the treasurer assumes the active
duties of the office. As the treasurer is usually agreed upon
before this first meeting of the board, it will be possible and
entirely proper for him to have the form of his bond and the
name or names of his proposed sureties ready for submis-
sion at the first convenient interval in the board proceedings
after his election. The form and sureties of the bond, if
approved, will be accepted, and the instrument after execu-
tion be entrusted to either the president or secretary for
safe keeping. The treasurer will then at once enter on
his duties.
The by-laws should already have provided that the funds
of the corporation be deposited in some bank or trust com-
pany, or one or more of these institutions as may be neces-
sary and as may be designated by the directors, such funds
to be drawn out only by check signed usually by two desig-
nated officers of the corporation. It now devolves upon the
board to select the corporate depositary. Such selection
should be expressed by resolution which should be furnished
the selected institution at the time of opening the account.
The copy of the resolution furnished the bank should be
certified by the secretary, and the names of the officers
authorized to sign checks and the form of signature should
also be certified to the bank. Often the banks have their
FIRST MEETING OF DIRECTORS. 203
own special forms for such resolutions of corporate de-
positors. In such case, the resolution would conform to
the bank's requirements.
§ 204. Other Business.
Many matters of lesser importance will be brought up
before the first meeting of directors depending upon the
particular conditions. Authority may be needed to rent and
furnish suitable offices for the new corporation. In some
states provision must be made for a state agent and office.
Various statutory requirements must be fulfilled. Certain
certificates and reports may need authorization. Details of
the general business require consideration.
If the matters requiring attention cannot be all properly
considered at this first session of the board, adjournment
should be taken to the next day or to some other conven-
ient date. Such adjourned meeting is considered as merely
part or a continuation of the original meeting and may
re-assemble at the appointed time without formality and
complete its work. If on the other hand the board adjourned
without date, it could only be re-assembled — prior to the
next regular meeting — by the methods prescribed in the
by-laws for the calling of special meetings.
Matters requiring the attention of the board are usually
so numerous in the first days of the corporate existence
that it is a wise precaution — even if not necessitated by
business actually on hand — to adjourn the first meeting over
a few days. Then, if necessary, such adjourned meeting may
be held. If not necessary, the members need not attend
and the meeting will lapse, the effect being then exactly the
same as if the board had adjourned without date at the
first meeting.
CHAPTER XXXII.
ISSUANCE OF STOCK FOR PROPERTY.
§ 205. General.
The great majority of modern corporations issue their
capital stock in whole or in part in payment for property.
This practice gives rise to many questions of more or less
complexity, varying with the circumstances of each particular
transaction.
Financial and trust institutions are generally forbidden to
issue their stock for anything but cash, hence questions as to the
full payment of their stock or the legality of its issue rarely
arise.
Also, in the many cases where corporations are organized
to take over prosperous businesses, large estates, patents of
proved value or other properties of substantial worth, diffi-
culties are not likely to occur, there being in such cases little
if any temptation to over-capitalize the corporations or over-
value the property taken in exchange for stock.
In perhaps the majority of incorporations, however, the
property acquired is of speculative or unascertained value, as
a mining claim, an untried invention, a new process or a going
concern. Also such incorporations are usually under the
direction of optimistic promoters, who capitalize largely and
take over the properties at valuations so generously elastic as to
nominally full pay the stock issued, no matter what its amount.
These are the cases that give rise to litigation.
Questions as to the validity of a stock issued, or of the
full payment therefor, rarely rise so long as the corporation is
prosperous or even solvent. Under such conditions, few, if
any, would have the right to bring these matters up, or, having
the right, would care to do so. If, however the corporation
204
ISSUANCE OF STOCK FOR PROPERTY. 205
becomes insolvent and any doubt exists as to the proper pay-
ment of the stock issued, the question rises promptly, and
usually the receiver or some creditor institutes suit to compel
the stockholders to* pay the difference between the real value
of the property received by the corporation and the par value
of the stock issued therefor. The point upon which a suit of
this kind hinges is the alleged fraudulent overvaluation.
Such a suit could only be instituted by dissenting stock-
holders, by creditors of the corporation or by its receiver. As
such transactions are usually carried through at the inception
of the undertaking and with the knowledge and consent of
all existing stockholders, the holders of this consenting stock
would be estopped from legal action, and if all the stock of
the corporation were included in such issue, suit could then
only be brought on behalf of creditors. (Blum vs. Whitney,
185 N. Y., 232, 1906; Insurance Press vs. Montauk Wire Co.,
103 App. Div., N. Y., 472, 1905.) Generally speaking, these
latter would have to be subsequent bona fide creditors who had
given credit in ignorance of the real conditions.
Usually, any alleged overvaluation of the property taken
by the corporation in payment of its stock would be a question
for a court of equity to decide. In case it were found that
the property had been fraudulently overvalued the stock issued
against such property might be held as but partly paid, and the
holders called upon for such additional payments as would
make up the full face value of the stock. This liability would
not extend to purchasers of stock if their purchases were
made in ignorance of the conditions of issue, no matter what
prices were actually paid by them for their stock.
In the present consideration of the issuance of stock for
property, reference is made solely to original issues at the
time of organization of the corporation. Property may be
received in exchange for stock after organization, but in such
case another factor, the rights of existing stockholders, enters
in, and, though the general principles are the same in both
cases, differentiates the transaction from an original issue.
206 ORGANIZATION OF CORPORATION.
Neither, in the present consideration, is any distinction
made between a subscription to stock which is paid in property
and a sale of stock with payment in property, the conditions
affecting the validity of the stock issue and the character of
the stock when issued being the same in either case.
It is to be noted that promoters will frequently turn prop-
erty in to the corporation at figures in excess of its real cost,
the difference representing a secret profit to the promoter.
These, and other cases of promoters' secret profits, represent
a different phase of the subject and are considered elsewhere.
(See Chap. XXXIII, Concerning Promoters.)
§ 206. Present Doctrine.
Unless prohibited by constitutional or legislative enact-
ment, the power of a corporation to issue stock for property is
a common-law right that has in many states been reaffirmed
by express statutory provision.
In former days such issuance of stock for property and
any overvaluation of this latter were nominally concealed and
decently habilitated by the passing of cash or checks. The
owner of the desired property subscribed for a sufficient
amount of stock and paid for it by check or in cash. The
check or cash was thereupon, after due authorization on the
part of the corporation, returned to the party from whom it
was received in payment for his property. The transaction
was then complete. The corporation had the property, the
former owner the agreed value in stock, while the medium of
exchange had returned to the source from which it came.
In the present day this circuitous method is rarely adopted.
If the property to be taken over were such as the corporation
might legally purchase for cash, it might generally, with equal
legality and propriety be taken directly for stock. The follow-
ing quotations give a fair idea of the present status of the law
on this subject:
" Even where a charter, statute or other govern-
ing instrument by its terms requires payment in money,
ISSUANCE OF STOCK FOR PROPERTY. 207
yet unless the language is such as to import a prohibi-
tion of anything but money the courts are generally
agreed that payment may be made in any kind of
property or services which the corporation may law-
fully purchase in the prosecution of its business ; pro-
vided it be done in good faith and provided such prop-
erty or services be conveyed or rendered at a fair
valuation.
"The reason is that the law does not require the.
parties to go through the vain transaction which would
be exhibited if the subscriber should pay for his shares
in cash and if the corporation should hand back the
cash in purchase from the subscriber of such property
as the corporation might wish to buy from him; or
what would be the equivalent of such a transaction,
that there should be a mere exchange of checks
between the parties." Seymour Thompson in 10 Cyc,
472.
" If the property is taken at a valuation made with-
out fraud, the payment is as effectual and valid as
though made in cash to the same amount." i Cook
on Corporations, § 18.
" Whether stock is issued upon subscription or
sold, the corporation, in the absence of express restric-
tions, may receive, or contract to receive payment
therefor in property, labor, or services, provided it
would, under the express or implied powers conferred
upon it by its charter, have the power to purchase the
property or incur a debt for the labor or services, and
provided the transaction is in good faith, and no fraud
is perpetrated upon other stockholders or creditors."
2 Clark & Marshall, Private Corporations, § 384a.
From this it appears the great essential in the issuance
of stock for property is that such property be taken over
at a valuation justified by the conditions and that the ex-
change be made in good faith and without fraud. If so
taken over the transaction may be made without the passing
of cash and will not in most states of the Union be invali-
dated for that cause or by reason of subsequent depreciation
or even by the fact that the directors erred in their valuation.
208 ORGANIZATION OF CORPORATION.
In the absence of constitutional or legislative prohibi-
tions, the only ground upon which such a proceeding could
be attacked, leaving technical irregularities out of considera-
tion, is the one point as to the good faith and freedom from
fraud of the transaction.
If the consideration was adequate, the stock issued there-
for is without qualification full-paid and its holders are not
liable. If inadequate, or of doubtful adequacy, the full pay-
ment of the stock issued therefor is open to question, and
if fraud appears, and in some states without fraud, the
holders of such stock may be involved in a further liability.
The most liberal presentation of the general doctrine
in cases of inadequate payment of stock by property, or what
is the same thing, the overvaluation of property received in
exchange for stock, is found in i Cook on Corporations,
§ 46, where it is stated :
" At common law there is no contract, express or
implied, to pay to the corporation or to corporate
creditors the par value of stock which is issued for
property. Not only is there no such contract, but there
is no implied fraud even though the property was over-
valued. If there is express fraud the law provides
ample remedies, but such a fraud must be clearly
proven and is not implied from proof that the property
was worth less than the par value of the stock.
" This principle of law, that there is no liability on
stock issued for property the value of which is less than
the par value of the stock, seems a self-evident prin-
ciple of law. Moreover, this principle is based on busi-
ness usage and is sound practice. There is no more
harm in the issue of stock below par than there is in
the issue of a note or bond below par. The extent to
which courts have gone in sustaining such issues
of stock for property is shown by the fact that even
constitutional and statutory prohibitions against
watered stock have been practically construed away
by the courts. Moreover, the laws of trade are more
powerful than the laws of men, and in business circles
it has become customary to capitalize property at a
ISSUANCE OF STOCK FOR PROPERTY. 209
reasonably high figure. This is due to the fact that
it is easier to sell stock at less than par than at par,
and also to the fact that by a large capitalization, divi-
dends are kept low enough to avoid the cupidity of
possible competitors and the interference of legis-
latures. To such an extent is this practice carried by
issuing stock for property at an overvaluation, that
the investing public and persons who give credit to
corporations rather expect it, and they no longer rely
upon the nominal capitalization of the company. Ex-
perience has taught them that they must investigate
the real financial condition of the company, and invest
or give credit upon that alone."
The acknowledged repute of the text book from which
this extract is taken gives weight to what would otherwise
seem an extreme statement of the prevailing doctrine. It
excuses and justifies the overvaluation of property, and,
what is the same in principle, the issuance of stock for less
than its par value provided the transaction be characterized
by good faith.
From the standpoint of logic and common sense the
author's position is undoubtedly correct, but whether it
entirely accords with the existing law is not so certain.
As stated, there is no obligation or liability under the
common law for the issue of stock for cash at less than par,
nor, as a necessary consequence, any liability for the issuance
of stock for property no matter what the value of the prop-
erty, or the valuation placed upon it, or the amount of stock
issued therefor. It is merely a matter of contract between
the particular parties, and if the corporation does not value
its stock at par, or valuing its stock at par, chooses to give
more than the value of the property it is taking over, at
common law it has the right and does not by the exercise
of this right saddle an indefinite possibility of liability upon
its stockholders.
But the whole matter of liability on stock issued for
property has now become one of constitutional or statutory
210 ORGANIZATION OF CORPORATION.
creation and differs with the varying provisions of the dif-
ferent states. Therefore no general statement of the
doctrine can be made with safety, and in each particular case
before issuing stock for property the statutes of the state
of incorporation should be examined, and any decision of
the state courts in construing these statutes must also be
taken into consideration.
The general doctrine, however, as existing in the greater
number of states, seems to be that in any case property may
be safely taken for stock at a fair valuation, and, beyond
this, that so long as the transaction is in good faith and
free from fraud, it will not be invalidated because of over-
valuation due to mistake or honest error of judgment, or
made without intent to defraud.
As will be noted, this allows much latitude in the estima-
tion of values. In most cases, more particularly where
speculative values are taken over, there is room for an
honest difference of opinion as to the real value, and, as a
general rule, the valuations must be obviously excessive,
or absolutely fraudulent before the transaction will be dis-
turbed.
This is the position taken by the Supreme Court of the
United States in Coit vs. Gold Amalgamating Co., 119 U.
S., 343 (1886).
" But where full-paid stock is issued for property
received there must be actual fraud in the transaction
to enable creditors of the corporation to call the stock-
holders to account. A gross and obvious overvalua-
tion of property would be strong evidence of fraud."
It must be said, however, that the force of this decision
is weakened by the conflicting and harsher opinion of the
same court in the later case of Camden vs. Stuart, 144 U. S.,
104 (1892), as follows:
" It is the settled doctrine of this court that the
trust arising in favor of creditors by subscriptions to
the stock of a corporation cannot be defeated by a
ISSUANCE OF STOCK FOR PROPERTY. 211
simulated payment of such subscription, nor by any
device short of an actual payment in good faith. And
while any settlement or satisfaction of such subscrip-
tions may be good as between the corporation and the
stockholders, it is unavailing against the claims of the
creditors. Nothing that was said in the recent cases
of Clark vs. Bever, 139 U. S., 96; Fogg vs. Blair, 139 U.
S., 118, or Hanley vs.Statz, 139 U.S., 417, was intended
to overrule or qualify in any way the wholesome prin-
ciple adopted by this court in the earlier cases, espec-
ially as applied to the original subscribers to stock."
Certainly under this decision an overvaluation of prop-
erty even in good faith would not stand as full-payment
of the stock taken in exchange therefor.
Also in Scoville vs. Thayer, 105 U. S., 143 (1881), the
discussion of a contract between a corporation and its stock-
holders providing that stock received by these latter should
be considered full-paid, it is stated :
" But the doctrine of this court is, that such a con-
tract though binding on the company, is a fraud in
law on its creditors, which they could set aside ; that
when their rights intervene, and to satisfy their claims,
the stockholders could be required to pay their stock
in full."
In most of the state courts, however, the more liberal doc-
trine already stated prevails, as set forth in the following
decisions :
"In charging the jury the judge said ' The real
question, therefore, is whether the property was placed
and taken at a higher valuation with a fraudulent pur-
pose, with the intent of evading the provisions of the
statute.' "
" We are of opinion that the court committed no
error in the submission of the case to the jury. In
Douglass vs. Ireland (73 N. Y., 100) it was laid down
as the law in this state, that to charge a holder of stock,
issued upon and for the purchase of property, indi-
vidually for the debts of the company, it is not enough
to prove that the property has been purchased and
312 ORGANIZATION OF CORPORATION.
paid for at an overvaluation through a mistake or
error of judgment on the part of the trustee, but it
must be shown that the purchase at the price agreed
upon was in bad faith and to evade the statute." Lake
Superior Iron Co. vs. Drexel, 90 N. Y., 92 (1882).
" The enquiry, therefore, in the court below, should
have been, whether the agreement in question was
fraudulent or not ; for, if the transaction was an honest
one, the difference in value between the property con-
stituting the consideration of the sale and the stock
had no legal significance. The charter of this company
authorizes the corporation to exchange its capital
stock for property, and, under that condition of things,
a court of equity cannot set aside a transaction of
that kind simply on the ground that the bargain on
the side of the corporation is a disadvantageous one.
* * * In the absence of deceit, or some other
corrupt constituent, the bargain between the parties
cannot be disturbed." Bickley vs. Schlag, 46 N. J.,
Eq., 533 (1890).
In both these cases the crucial point was as to whether
there was fraud in the valuation of the properties taken over.
Gross or obvious overvaluation would be prima facie evidence
of fraud, but would not be final. If the original parties could
show that it was made in good faith and without intent to
defraud, in most states the transaction would stand.
If, however, this could not be shown, or if the excessive
valuation had been kept secret and debts incurred without
those extending credit having full information as to the
method by which the stock of the corporation had been full-
paid, the transaction would not stand and the stockholders
might be forced to pay the difference between the real value
of the property and the face value of the stock issued in ex-
change for such property.
The reluctance of the courts to disturb transactions in-
volving the exchange of stock for property where the valua-
tions are undoubtedly excessive, but made without intent to
defraud is strongly shown in the following decision :
ISSUANCE OF STOCK FOR PROPERTY. 213
" The parties fixing the valuation were the only
parties in interest, and we know of no principle of pub-
lic policy which condemns an agreement between
parties about to form a corporation, because by the
arrangement, the capital stock is to be represented
by property which they severally contribute, at a valua-
tion agreed upon between themselves. If it had
appeared, that the organization of the corporation in
this way, was a device to defraud the public by putting
valueless stock on the market, having an apparent
basis only, a different question wotild be presented."
Lorillard vs. Clyde et al., 86 N. Y., 388 (1881). See
also Seymour vs. S. F. C. Assn., 144 N. Y., 333 (1895).
The foregoing statement of the law applies with much
aptness to the issue of stock for property on the organization
of the corporation. At this time no creditors exist and the
owners of the property and the stockholders of the new cor-
poration are the only parties concerned, and they have the
right to put the property into the corporate form at any cap-
italization they choose. If all are fully aware of the circum-
stances, if none are making a concealed profit on the trans-
action and if the purposes of the valuation adopted are free
from fraud, such issuance of stock for property is proper
and not to be thereafter set aside.
If, however, the organization of the corporation and the
valuation placed upon the property taken over are merely part
of a scheme to foist doubtful stock upon the public, or to de-
fraud in other ways, then the essential feature of good faith is
lacking and the purchasers of such stock as well as subsequent
creditors of the corporation may bring those concerned in the
fraud to account.
It may be noted, that since the foregoing decisions of the
New York and New Jersey courts, the statutes of both states
relative to the issuance of property for stock have been
changed by the insertion of clauses providing that, " in the
absence of actual fraud, the judgment of the directors as to
the value of property purchased shall be conclusive." As the
214 ORGANIZATION OF CORPORATION.
decisions in both states had, prior to these enactments, upheld
such transactions when not tainted with fraud, the amended
statutes would seem merely to express what was already the
law. In both states the absence or presence of fraud has been
the deciding point upon which such transactions have been
sustained or condemned.
While the general doctrine sustains full-payment of stock
by property so long as fraud is absent from the transaction, in
some important states of the Union the constitutions or
statutes provide expressly that when stock is issued for prop-
erty, it shall be " to the actual value thereof," or " to the
amount of the value thereof." The intention of these pro-
visions is undoubtedly to secure the full and actual payment
of stock issued for property and to prevent its nominal full-
payment by overvaluation of the properties taken in exchange
therefor.
Even in these states the decisions are of varying tenor.
In Alabama, where express limitations exist, the following
decision clearly recognizes the possibility of an honest varia-
tion of judgment as to the value of property. No overvalua-
tion is allowed, but full-payment of stock by means of such
property is not questioned so long as honesty and good faith
characterize the transaction :
" The creditors are entitled to demand that the
payment on the stock shall be an actual and bona fide
discharge of the liability imposed by the contract of sub-
scription. The defendants in making and accepting
payment in property, were bound to exercise their
judgment and discretion fairly and honestly directed
to secure a substantial compliance with the terms of
the contract. In the exercise of that judgment and
discretion they are entitled to the benefit of whatever
margin there may be for honest difference of opinion
in the valuation of the property but a deliberate and
intentional overvaluation of the property is not per-
missible." Elyton Land Co. vs. Birmingham W. and
R. Co., 92 Ala., 407 (1891).
ISSUANCE OF STOCK. FOR PROPERTY. 215
In the following Missouri decisions the law as laid
down is enunciated with much harshness. No allowance is
made ior errors of judgment or other human frailty. Pre-
sumably, under this construction, a valuation and transaction
of entire legality at the time of the corporate organization
might be vitiated by subsequent developments as to the value
of the property. Just how this absolute precision of valuation
demanded is to be obtained is not indicated by the decisions.
" Hence the enquiry in a case between the creditor
and a stockholder, when property has been paid for
in the capital stock of a corporation, is not whether
the stockholder believed or had reason to believe, that
the property was equal in value to the par value of the
capital stock, but whether, in point of fact, it was such
equivalent." Van Cleve vs. Berkey, 145 Mo., 109
(1898).
" The general rule of law is that it is beyond the
power of a corporation to issue its stock at less than
its par value, and that where it does so issue its shares,
the taker of them is liable in a proceeding by or on
behalf of creditors, to make good the difference
between their par value and what he actually gives
for them. If an exception to this rule is claimed in
any particular case, the party claiming the exemption
must put his hand upon some statute authorizing the
corporation so to deal with its shares." Leucke vs.
Tredway, 45 Mo. App., 507 (1891). Seymour D.
Thompson, Justice.
The general position of this last decision holding that
the issuance of stock at less than par is at variation with the
principles of the law and impossible unless expressly per-
mitted by statute is in almost diametrical opposition to the
doctrine enunciated in the quotation already given from
Cook on Corporations, and the two are impossible to recon-
cile. It must be said, however, that Judge Thompson has
always taken an extreme position in regard to the full-pay-
ment of stock and has been a vigorous opponent of any
mitigation of the rule laid down in his decision. It is not
216 ORGANIZATION OF CORPORATION.
probable that the rule would now be enforced in any state
with the severity indicated. It would, nevertheless, be pru-
dent in the organization of corporations in the states where
express limitations exist, to make a careful study of the
decisions before risking any excessive valuation of property
to be taken over for stock.
§ 207. Cases in Point.
As has been stated, parties interested in a property may
organize a corporation, capitalize at any figure they see fit,
and exchange the property for the stock of the corporation.
As all concerned are fully informed as to the transaction
they are within their rights and there is no one in a position
to object. 1 So long as the corporation is solvent, litigation
can hardly occur. The test of the transaction occurs on the
insolvency of the corporation, when creditors not cognizant
of the circumstances attending its organization find them-
selves unable to collect their claims and suit is brought on
their behalf. Then the whole matter is gone into and the
adequacy of the consideration, the good faith of the transfer
and the other conditions of the organization are scrutinized.
The following cases are in point:
In Lloyd vs. Preston, 146 U. S., 630 (1892), an Ohio cor-
poration had taken over property in payment for its capital
stock. All the directors authorizing the transaction were
relatives or employees of one of the interested parties, and
the property was not worth, according to plaintiff's claim,
one-fiftieth of the par value of the stock issued against it.
It was held that the overvaluation was so gross and obvious
as, in connection with the other facts in the case, clearly
to establish fraud and to entitle bona fide creditors to enforce
payment of their claims against the original subscribers to
the stock of the corporation.
In Hebbard vs. S. W. Land & Cattle Co., 55 N. J. Eq.,
18 (1896), the capital stock of the corporation having been
issued for property not worth five per cent, of the par value
'The Insurance Press w.Montauk, etc,Co.,l03App. Div., N.Y. (1905).
ISSUANCE OF STOCK FOR PROPERTY. 217
of the stock, apparently in pursuance of a scheme to secure
the issue of the stock full-paid without value having been
received therefor, such stock was held not to be full-paid in
the hands of those cognizant of, or parties to, the scheme
and its execution.
In the case of the National Tube Works vs. Gilfillian,
124 N. Y., 302 (1891), the company was organized with a
capital stock of $300,000, which was issued for five unpat-
ented inventions. The substantial issue being whether the
obvious overvaluation was an error of judgment, or in bad
faith, the jury found the stock unpaid and the verdict was
upheld.
In Douglass vs. Ireland, 73 N. Y., 100 (1878), a company
was incorporated with a capital stock of $300,000, all of
which was issued in exchange for two contracts, upon which
nothing had then been paid, one for the purchase of a mining
property and furnace, the other for the purchase of stand-
ing timber. The stock was issued to one of the directors,
full-paid and non-assessable, and $100,000 par value was
turned back to the company to be sold to raise working cap-
ital, the balance being divided among the directors. The
defendant had purchased a portion of this treasury stock at
forty cents on the dollar, and was well aware of the manner
in which it had been issued. The jury found that the
contracts turned in to the company were worth on a liberal
estimate but $65,000. The court held that the transaction
was a fraud and that the capital stock of the company had
not been full-paid as provided by the New York statutes.
The higher court affirmed the judgment.
In Brockway vs. Ireland, 61 How. Pr. N. Y., 372 (1880),
on the same statement of facts as in the preceding case,
another jury, differing absolutely as to the bearing of these
facts, sustained the transaction and the stock was held to be
full-paid, the two verdicts being in direct contradiction.
In Lake Superior Iron Co. vs. Drexel, 90 N. Y., 87
(1882), iron works at Pittsburgh together with certain
318 ORGANIZATION OF CORPORATION.
patents were turned over to the company in exchange for
its entire capitalization of $2,500,000. Of this issue a certain
proportion was turned over to a trustee to be sold at the
stipulated price of $50 per share, and of the first $100,000
received from this sale of stock, $50,000 was to be paid to
the vendors of the property, all other proceeds going to the
company. The arrangement was carried into effect. In
charging the jury, the lower court said, " The real question,
therefore, is whether the property was placed and taken
at a higher valuation with a fraudulent purpose." The jury
decided that the transaction was in good faith and the
higher court refused to disturb the verdict.
§ 208. Resume' of Doctrine.
From the foregoing general consideration of the sub-
ject the following deductions may be made :
In the absence of constitutional, statutory or charter
provisions affecting the issuance of stock for property, the
common law prevails, and under it stock may be issued for
property at the discretion of the corporation and without
danger of subsequent liability on the stock so issued. In
case of fraud, the perpetrators would be liable on that
ground but the issued stock would not be held unpaid.
Where legislative or other prohibitions exist against
the issuance of stock except for cash, stock may nevertheless
be issued for property that is fairly of the face value of the
stock given therefor and there can be no subsequent liability
on stock so issued.
In a few states, valuation of the property received in
exchange for stock must be made with much precision,
and any error of judgment — which might be shown only
by subsequent developments — may bring about a liability
on the stock so issued equal to the difference between the
actual values received for such stock and its face value.
These stringent provisions are found in but a few states.
Elsewhere the law and the construction of the law are as
ISSUANCE OF STOCK FOR PROPERTY. 219
a rule liberal, and any honest error of judgment as to the
value of property taken in exchange for stock, even though
it brings about an excessive valuation of the property, will
not entail a liability therefor upon the holders of the stock.
Also a " reasonable margin for honest difference of opinion "
is allowed, and a moderate overvaluation is not likely to be
disturbed if made without intent to defraud.
Any obvious and excessive overvaluation will, however,
in any of the states be held as prima facie evidence of fraud,
and the burden of proof will be thrown upon the stock-
holders to show that fraud does not exist. If they fail in
this the stock will be held but partly paid and the original
stockholders, knowing the circumstances attendant upon the
issue of their stock, will be held liable for its full value.
In all the states, any overvaluation of property taken
in exchange for stock with the knowledge and consent of
all the parties thereto will be upheld as between these parties
and as between the corporation and its stockholders.
In most of the states overvaluation made with the consent
of all parties interested will not only stand as between them,
but as to subsequent creditors if these latter extend credit
with a full knowledge of the method by which the stock was
full-paid.
Any definite " danger line " in the valuation or over-
valuation of properties taken in exchange for stock is impos-
sible to fix. Even the very liberal views expressed in
Cook on Corporations on this subject are qualified as
follows :
" There is a limit beyond which the courts will
not go in sustaining the issue of stock for property
taken at an overvaluation. If the property which is
turned in is practically worthless, or is unsubstantial
and shadowy in its nature, the courts will hold that
there has been no payment at all, and that the stock-
holders are liable on the stock." i Cook on Corporations,
§ 46.
220 ORGANIZATION OF CORPORATION.
This is probably a correct statement of the situation
in the more liberal states. Property less than 6 per cent,
of the value of the stock issued for it, and property not worth
one-fifth of the stock issued therefor were, in the decisions
already quoted, held as payments in fraud and set aside.
Where there is, however, a really substantial value to give
a basis for the transaction and to differentiate the enterprise
from the " unsubstantial and shadowy," the courts are slow
to disturb the arrangement and will not do so if it can
reasonably be avoided.
It should be noted that this liability on stock nominally
full-paid but so characterized improperly extends only to
the original and such subsequent stockholders as are cog-
nizant of the transaction. Innocent purchasers of stock for
value, buying it as full-paid and knowing nothing of the
proceedings by which their stock was supposedly full-paid,
could not be held, no matter what the price paid by them for
their stock, (i Cook on Corporations, § 50, and cases there
cited.)
§ 209. Property that may be Received.
The corporation has the same liberty as to the character
of property taken for stock as it has in the purchase of prop-
erty for cash. It is essential that the property be such as
the corporation under its charter has power to take. If the
property is not necessary to the conduct of its authorized
business, any contract for its purchase, either for stock or
cash, is, unless expressly permitted by its charter, ultra vires,
and stock issued therefor would not be paid-up stock.
(Powell vs. Murray, 3 App. Div. N. Y., 273; aff'd 157 N. Y.,
717, 1899; Montgomery vs. Brush El. L. Co., 48 App. Div.,
N. Y., 12; aff'd 168 N. Y, 657, 1901.) The importance
of this principle is, however, much diminished by the modern
practice of redundant charters which permit the acquisition,
either directly or by obvious implication, of every kind of
existing property which a corporation may hold.
ISSUANCE OF STOCK FOR PROPERTY. 221
The property taken in exchange for stock is usually an
existing business, a mining property, patented invention,
real estate, lease, copyright, trade-mark, license to use pat-
ents or something of similar nature. There is no doubt but
that these, the ordinary properties of commerce, may be
taken.
A railroad may issue its stock and bonds for construction,
material and right of way, and any corporation may issue
stock for labor done or services performed in pursuance
of a valid contract.
A corporation may issue its stock in payment for the stock
of other corporations in all those states where it may hold
the stock of other corporations of similar or collateral
purposes. It may also issue its stock for contracts if such
contracts have a substantial value.
Stock may be issued for options if these latter are really
of value. A single option, for which and upon which noth-
ing had been paid, would hardly be a sufficient consideration
for an issue of stock. It would not seem reasonable, how-
ever, to hold this view in connection with an option such
as that for which Carnegie received $1,000,000 in the nego-
tiations prior to the formation of the Steel Trust. Also a
number of related options, whereby a valuable consolidation
could be effected, would seem to be a property of value and
a sufficient consideration for a reasonable stock issue. The
validity of stock issues against property of this kind has
not, however, been fully adjudicated, and in case of insol-
vency it is probable that the valuations usually placed upon
options and contracts exchanged for stock would be held
excessive. (See vs. Heppenheimer, 61 Atl. Rep., 842, 1905.)
Stock may be issued in payment for good-will where
this latter really exists. (Washburn vs. National Wall
Paper Co., 81 Fed. Rep., 17, 1897.) In the case of Camden
vs. Stuart, 144 U. S., 104 (1892), the court rejected the claim
for the " experience and good-will " of the partners, but the
rejection was based upon the facts of the particular case
222 ORGANIZATION OF CORPORATION.
and was not expected or intended to establish any general
doctrine. Not infrequently good-will is one of the most
valuable single assets of a going concern and would with
entire propriety and legality be recognized to the full in any
issue of stock in payment for the business.
§ 210. Usual Procedure.
The usual procedure in the organization of the large
modern industrial corporations or trusts, which are formed
for the purpose of taking over property against the issue
of all, or a large portion of their stock, is to utilize so-called
" dummies " for both incorporators and the first directors.
These are usually young men connected with or furnished
by the parties having charge of the incorporation. The only
requisites are that they be of age, capable of contracting,
and one or more, as may be requisite, citizens of the state
in which incorporation is had. These " dummy " incor-
porators pay the necessary fees, take out the certificate of
incorporation, and comply literally and exactly with the
statutes of the state of incorporation.
After allowance of the charter these incorporators meet,
adopt by-laws, and, if the directors are not named in the
charter, elect a board of directors. The owners of the prop-
erties to be taken over, or the parties controlling them, then
present a formal proposition to exchange their properties
for a portion or the whole of the capital stock of the new
corporation. This is not accepted by the stockholders of
the new corporation, but is formally approved by them and
referred to the board of directors with a resolution instruct-
ing its acceptance. The work of the dummy incorporators
is then complete unless, as is usually the case, these incor-
porators are likewise to act as directors.
Usually the directors of the new corporation are named
or chosen from among the incorporators, are of the same
somewhat inadequate financial responsibility, and are of like
temporary tenure. They, usually meet immediately after
ISSUANCE OF STOCK FOR PROPERTY. 223
the adjournment of the first stockholders' meeting, elect
officers (who are usually likewise temporary) and then take
up the proposition for the exchange of stock for property
together with the stockholders' resolution directing its
acceptance. The proposition is accepted by resolution, and
the proper officers of the corporation are authorized and
instructed to receive the property and to issue the requisite
stock therefor, full-paid and non-assessable, to the order
of the vendors.
The shares subscribed for by the incorporators are
usually included in the stock paid for by the accepted prop-
erties, and are generally retained by the dummy directors
until such time as their work is completed. Sometimes the
dummy incorporators and directors are allowed to keep
the one or more shares respectively subscribed, as their profit
on the transaction. More frequently this stock, or the sub-
scription therefor, is assigned over to the vendors and an
honorarium of from $5 to $20 paid each of the incor-
porators, though at times they do not receive even this
modest recognition of their services.
After the completion of the formalities laid out for them
by the counsel in charge of the incorporation, the original
directors, one by one, resign, their places are filled seriatim
as dictated by the parties behind them, and the real parties
in interest come into nominal as well as actual control.
The officers of the dummy board are sometimes retained
to carry out the formal details of the issuance of stock and
the receipt of the property, but usually resign and allow the
permanent officers of the company to complete the details
of the transfer.
This method of organization by means of " dummies "
has been much criticized, but is entirely legal, is usually
under the direct control and direction of skilful counsel, and
is made to conform to the exact letter of the law. In
Dickerman vs. Northern Trust Company, 176 U. S., 181
(1900), a case in which the transaction was so grossly fraud-
224 ORGANIZATION OF CORPORATION.
ulent that the court would have seized any opening to con-
demn the promoters, Justice Brown reluctantly admitted
that there was no legal flaw in the organization by means
of dummy incorporators and directors. He said :
" While the first board of directors seem to have
been mere tools in the hands of the New York firm
with no real interest in the company, they appear to
have conformed to the letter of the law, and until for-
mally dissolved the corporation had a legal existence."
If the new organization is successful, the method of
organization is never questioned. If the property is not over-
valued, the matter would have no bearing even though the
company went into insolvency. If, however, the property
is so obviously overvalued — as is often the case in the large
organizations — that fraud is at least implied, those attacking
the matter add rhetorical effect by vigorous denunciations
of the dummy incorporators and directors.
As a matter of fact, the real status of the matter is not
effected by the employment of a temporary organization
and dummy agents. Everything has been decided upon —
intelligently, whether properly or otherwise — before these
dummies are brought into the plan, and they are merely
employed as a convenient means to a clearly designed and
pre-arranged end. The principals may escape some unde-
sired publicity as well as much inconvenience and loss of
time by the employment of these agents, but they do not
escape responsibility, and, in case of any wrong doing in
these preliminary operations, would be as liable as if they
had acted directly. The whole matter is purely one of form,
and merits but little of the attention and indignation it
occasionally receives. (See § 87.)
Promoters' frauds are usually worked in the organiza-
tion of a corporation through the means of dummy incor-
porators and directors. Illogically both the corporate
system and the use of dummy representatives are denounced
for these frauds instead of the men who use legitimate
ISSUANCE OF STOCK FOR PROPERTY. 225
agencies for ill ends. (See Hutchinson vs. Simpson, 92 App.
Div. N. Y., 382 (1904); also case of Dickerman vs. North-
ern Trust Co., 176 U. S., 181 (1900), above cited, and See vs.
Heppenheimer, 61 Atl. Rep., 842, 1905.) (See Chap. XXXIII,
Concerning Promoters.)
§ 211. Donation of Stock to Treasury.
In the organization of a corporation to take over prop-
erty, it is customary to return to the company for treasury
purposes a portion of the stock issued for the property.
Having been full-paid by the issue for property it may be
sold at less than par, or be given as a bonus with preferred
stock or bonds without involving the holders in liability.
(See Chap. X, Treasury Stock.)
Such return of stock to the treasury is legitimate. In a
few cases, the courts have instanced the fact that this has
been done as an evidence that the property received for
such stock was overvalued. This is obviously not a correct
construction as, if the stock were properly issued in the
first place, it becomes the actual property of the holders,
and if they see fit to devote a portion of it to the general
interest and upbuilding of the business, the matter is within
their power and entirely legitimate. (See 1 Cook on Cor-
porations § 46 ; also 2 Clark & Marshall, Private Corpora-
tions, §390e; The Insurance Press vs. Montauk, etc. Co., 103
App. Div., N. Y., 472, 1905.)
CHAPTER XXXIII.
CONCERNING PROMOTERS.
§ 212. The Promoter's Function.
A promoter is one who actively engages in the financing
and organization of an enterprise under the corporate form.
The term is described by an English authority as a " short and
convenient way for designating those who set in action the
machinery by which the Act enables them to create a cor-
poration." Cook briefly classifies the promoter as a " person
who brings about the incorporation and organization of a cor-
poration."
Another idea enters into the modern everyday business
use of the term. The promoter's activity and interest in the
affairs of the enterprise are incited by the expectation of
special profits. If he does not realize or expect to realize
special profits out of the undertaking he is not, in modern
parlance, a promoter, though filling every requirement of the
legal definition.
In the organization of most modern corporations the pro-
moter plays an active and very important part. His anticipated
special profits from these efforts are usually large and not
infrequently excessive. His arrangements whereby these
special profits are to be secured have given rise to a class of
cases turning solely upon the relations existing between the
promoter, his associates and the corporation. The ideal of
the law in regard to these relations is high. It is to be re-
gretted that the methods of promoters are usually on a much
lower level.
226
CONCERNING PROMOTERS. 227
§ 213. Promoter's Relation to Corporation.
For the purposes of the present consideration the promoter
is one who concerns himself in the financing and organization
of a corporation with a view of realizing special profits. In a
large proportion, if not the majority of such cases, the pro-
moter has brought about the organization of the corporation
for the express purpose of securing these special profits. There
is no intrinsic iniquity or injustice in so doing. The only
question is as to the propriety and legality of his arrangements
for their collection. Too frequently the methods of the pro-
moter are not only of doubtful moral status, but directly in
conflict with the established law.
The relation of the promoter both to the corporation and
to those associated with him in its organization is one of trust.
He is guiding the affairs of the incipient corporation and is
supposed to be safeguarding its interests as he would his own.
" Their relation to the persons who become cor-
porators or subscribers to stock, and their relation to
the proposed corporation, when formed, is a fiduciary
relation, or a relation of trust and confidence." i Clark
& Marshall, Private Corporations, § nob.
This doctrine is too clearly established to be questioned.
The confidential relations of the promoter being admitted, it
follows then, that while he may with entire propriety and
legality profit by his connection with the corporation, such
profit must be made and taken in such ways as are compatible
with these existing confidential relations.
§ 214. Illegal Arrangements.
The usual mistake of the promoter is in dealing with the
corporation as he would with a stranger. Unreasonable or
even large profits are difficult of attainment if the party from
whom they are to be drawn is informed as to the facts, and for
this reason the promoter wishing to sell property to the cor-
poration usually conceals, or worse still, misrepresents its real
cost. If the property were actually owned by the promoter
228 ORGANIZATION OF CORPORATION.
and had been so owned before the organization of the corpora-
tion was undertaken, the status would be different. Then,
under proper conditions, there would be no compulsion upon
him to reveal the cost of the property and he might sell it to
the corporation at any agreed price, and, in the absence of
misrepresentation, without fear of legal consequences.
Usually, however, the promoter does not own the prop-
erty taken over by the corporation, but either holds it under
option or is acting in the interests of the real owner, who pays
him a percentage of the price secured, or allows him to offer
it to the corporation at an advanced price, protecting the pro-
moter in all excess over the real price to the owner. When
the promoter occupies this position, unless with the full
knowledge of his associates and the corporation, he is in con-
flict with the law, for it has been laid down clearly and unmis-
takably that a promoter must not make any secret profit out
of his corporation, or out of those associated with himself in
the formation of the corporation. As stated by Clark and
Marshall, in conclusion of the quotation of the preceding
section :
" And for this reason it is well settled that they
will not be permitted to take advantage of their
position in order to make a secret profit out of their
transactions on behalf of the proposed corporation or
of the corporators or out of their dealings with the cor-
poration or corporators."
The leading case on this subject is that of Erlanger vs.
New Sombrero Phosphate Co., 5 Ch. Div., 73 ; aff'd in 3 App.
Cases, 12 1 6 (1878). This is an English case, but its doctrines
have been generally followed in this country. Erlanger and
his associates formed a syndicate to purchase a phosphate
island which was offered to them for £55,000. Through agents
a company was then formed, Erlanger naming the five
directors. Of these two were at the time out of the country.
Of the three remaining one was Erlanger's private agent, one
was Lord Mayor of London and the third was a Rear Admiral
CONCERNING PROMOTERS. 229
of the British Navy. These two latter were not interested in
any way with Erlanger in the sale of the island to the corpo-
ration, were not informed as to the circumstances and did not
make any inquiry, but, acting with the Erlanger director,
accepted Erlanger's proposition to sell the island to the cor-
poration for £80,000 in cash and £30,000 in shares. Stock
in the corporation was then sold until some 400 shareholders
were interested in the company. Later these secured control
of the company, and promptly brought suit against all
parties concerned in the sale of the island to the company.
As a result the sale was ordered rescinded and the vendors
were ordered to return the price of the island to the com-
pany, upon which the island was to be restored. This
decision was affirmed upon appeal. The Lord Chancellor,
in rendering the decision, said :
" I do not say that the owner of property might
not promote and form a joint stock company and then
sell his property to it, but I do say that if he does he
is bound to take care that he sells it through the
medium of a board of directors who can and do exer-
cise an independent and intelligent judgment on the
transaction, and who are not left under the belief that
the property belongs not to the promoters, but to some
other person."
The doctrine of the case was, first, that independent
directors should have been named; and second, that the pro-
moters should have made full disclosure to these directors of
all material facts. In the decision it was intimated that if one
director personally beyond suspicion had known the real facts
as to the increased price, it might have been sufficient to
validate the sale.
The doctrine in this country seems to be similar. When
property is taken by promoters for the purpose of sale to
the corporation, whether by purchase, option or agreement,
they are bound to disclose any private bargain or secret
profits. The relations are confidential and each person is
bound, as in partnership, to act with entire openness and
230 ORGANIZATION OF CORPORATION.
fairness to those with whom he is associated. The law as
to this is very clear and has been passed upon again and
again. As stated in Densmore vs. Densmore, 54 Pa. St.,
43 (1870):
" Where persons form such an association or begin
or start the project of one, from that time they do
stand in a confidential relation to each other and to
all others who may subsequently become members or
subscribers and it is not competent for any of them
to purchase property for the purpose of such company
and then sell it at an advance without a full disclosure
of the facts."
From the cases cited and the additional cases given
hereafter, it is clear that any special profits made by the
promoter are illegal unless made with the full knowledge of all
the others interested or with the consent of an independent
and fully informed board of directors, or with dis-
closure of the conditions to intending stockholders. Suit
for redress might be brought at any subsequent time by the
corporation, or, under some circumstances, by the stock-
holders who have immediately contributed to the promoter's
improper profits by the purchase of stock on its first issue,
or of treasury stock thereafter.
It is to be noted that purchasers of stock from others
than the corporation do not have a right to any such redress.
As stated in Walker vs. Anglo-Am. M. & T. Co., 72 Hun,
341 (1893):
" A purchaser of shares in an existing corporation
from a stockholder, has no interest in the application
of the money which he pays for the shares, but it is
quite different with one who agrees to subscribe for
shares in a corporation to be created." Also see
Twycross vs. Grant, 2 C. P. Div., 483.
These cases where suit is brought for the restoration of
promoters' profits must not be confused with that other class
in which recovery is had by creditors because of the over-
valuation of property turned into the corporation in ex-
CONCERNING PROMOTERS. 231
change for stock, or bonds, or both. The two cases often go
together, but are radically different in their nature. An
improper profit to promoters might exist without any over-
valuation and an overvaluation might exist without any
improper profits to the promoter. For instance, property
at an overvaluation might be accepted by the corporation
and its stockholders with a full knowledge of the promoters'
profits. They would then have no basis for proceedings
against the promoter. A creditor might, however, in such
case proceed against the stockholders on the ground of an
overvaluation. On the other hand, the property might be
put into the corporation at a fair figure, but the promoters
receive a secret commission, or rebate or other improper
profit on the sale. No suit for overvaluation would then
hold, though there would be good grounds for proceeding
against the promoter for the recovery of the improperly-
gotten profits.
For further decisions affecting improper arrangements
of promoters, see : Getty vs. Devlin, 54 N. Y., 403 ; S. C. 70
N. Y., 504 (1877); Brewster vs. Hatch, 122 N. Y., 349
(1890) ; Woodbury Heights Land Co. vs. Loudenslager, 55
N. J. Eq., 78 (1896); Ex-Mission Land and Water Co. vs.
Flash, 97 Cal., 610 (1893); Plaquemines Tropical Fruit Co.
vs. Buck, 52 N. J., 219 (1893); and Densmore Oil Co. vs.
Densmore, 64 Pa. St., 43 (1870).
§ 215. Legitimate Arrangements.
The laws are very clear in their denunciation of the pro-
moter's secret profits. They are hardly less explicit in their
recognition of the promoter's right to profits if secured and
taken under proper conditions. In 1 Morawetz on Private
Corporations, § 293, it is said :
" However, there is no rule of law prohibiting a
person from forming a corporation for the purpose of
selling property to it and making a profit from the
sale. The law merely requires that such a transaction
232 ORGANIZATION OF CORPORATION.
be entirely open and free from deception upon the
company and upon those who become members."
Also in Densmore vs. Densmore, 64 Pa. St., 43 (1870),
already quoted from, the court said :
" Any men or number of men, who are owners of
any kind of property, real or personal, may form a
partnership or association with others and sell that
property to the association at any price which may be
agreed upon between them, no matter what it origi-
nally cost, provided there be no fraudulent misrepre-
sentations made by the vendors to their associates.
They are not bound to disclose the profit which they
may realize by the transaction. They were in no sense
agents or trustees in the original purchase, and it fol-
lows that there is no confidential relation between
the parties which affects them with any trust. It is
like any other case of vendor and vendee."
Also in Plaquemines Tropical Fruit Co. vs. Buck, 52 N.
J. Eq., 219 (1893), following the case of Erlanger vs. N. S.
P. Co., already quoted from, the court said :
" Buck as the promoter of the corporation stood in
a fiduciary relation to the company as soon as it was
organized. As said promoter it was open to him to
sell property which he owned to the company on mak-
ing full and fair disclosure of his interest and position
with respect to this property. Not only was such
disclosure necessary, but it was incumbent on him, as
sole promoter of the company formed to purchase this
special property, controlling and moulding its organ-
ization, to furnish it with an executive or board of
directors capable of forming a competent and impar-
tial judgment as to the wisdom of the purchase at the
price which was paid."
From these quotations it seems very clear that the pro-
moter is well within his rights when he organizes a corpora-
tion to purchase his own property, provided that such pur-
chase by the corporation is directed by an independent
board capable of impartial judgment as to the value of the
CONCERNING PROMOTERS. 233
property and the advisability of the purchase by the cor-
poration, and is made with full knowledge of the fact that
the property in question belongs to the promoter. In such
cases the promoter having purchased or otherwise acquired
such property before the inception of the corporation, was
not and could not then in any way have been acting as the
agent or trustee of the corporation. He may have acquired
such property at any price or in any way, and, when later
the corporation is organized, he is at liberty to offer this
property to the corporation at any advanced, or different
price he may choose, without divulging the profits to be
made thereby. The one essential is that such offering shall be
absolutely without misrepresentation. If he represents that
the property is owned by him when only held by option, or
that it is turned in to the corporation at the cost to him when
he is really making a profit, such misrepresentations are,
under the circumstances, material and render the promoter
liable for the secret profits so secured. Without such mis-
representation, however, he may make what profit he will.
The courts go even further than this, as in the later
English case of Lagunas Nitrate Co. vs. Lagunas Nitrate
Syndicate, 2 Ch., 392 (1899), where the ground was taken
that when a full disclosure was made to the parties who were
later induced to join the company, the independent and
competent board of directors could properly be dispensed
with.
Also in re Ambrose Lake Tin & Copper Mining Co., 14
Ch. Div., 390 (1880), where a mine valued at £6,000 was
assigned to a company by its promoters for £24,000 of its
stock. Later the official liquidator brought suit against
the promoter for the difference between the real value of
the mine and the nominal value of the stock received by the
promoters, but, no stock having been sold to outsiders and
the transaction being altogether between the parties con-
cerned and there having been no concealment, no one was
wronged and the Court refused to hold the promoters. This
234 ORGANIZATION OF CORPORATION.
decision was sustained on appeal. No rights of unpaid
creditors came into this case.
In this country the position of the courts is the same.
In Parsons vs. Hayes, 14 Abb. N. C, N. Y., 419 (1883),
property was turned in at a gross overvaluation, but the
only persons in interest were informed of all details and did
not object, therefore the promoters were held to be within
their rights and the contract not subject to rescission. This
case is discussed in 1 Morawetz on Private Corporations,
§290.
Also in Tompkins vs. Sperry, Jones & Co., 96 Md., 580
(1903), a receiver attempted to hold the promoters respon-
sible under the same circumstances but his application was
denied on the ground that there was no concealment and
therefore no wrong. The New York case of Seymour vs.
Spring Forest Cemetery Assn., 144 N. Y., 333 (1895), and
also Blum vs. Whitney, 185 N. Y., 232 (1906), is to the same
effect.
From this would appear that if with the full knowledge
of all concerned as to the circumstances thereof, a corpora-
tion is organized and property is exchanged for a portion
or the whole of its stock, the completed transaction has
harmed no one, is absolutely legal and is not open to later
objection by any of the parties consenting thereto. The
promoters may make such profits as they please and the
other participating parties consent to, and up this point the
transaction is legitimate and unobjectionable. (The Insur-
ance Press vs. Montauk, etc. Co., 103 App. Div., N. Y., 1905.)
Nor, if the price paid for the property taken was within
reason, or capable of justification, is there danger of any
subsequent objection, no matter what profit may have been
made by the promoters. Nor, even if the price and profits
were entirely out of reason and totally unjustifiable, is there
any danger of adverse legal action if creditors and subse-
quent stockholders are informed as to the conditions before
they give credit to the corporation or invest in its securities.
CONCERNING PROMOTERS. 235
If, however, under such conditions, stock is sold or obliga-
tions contracted by the corporation without proper publicity
as to the basis of credit or stock value, a cause of action may
accrue either against those who originally transferred the
overvalued property to the corporation, or against the
holders of the stock which, as shown by results, was not
full-paid. This would, however, be a matter only of over-
valuation, the profits received by promoters being merely an
incident and not the point at issue. (Salomon vs. Salomon
& Co., App. Cases, 22, 1897.)
A recent and typical case of interest in this connection
is that of Hutchinson vs. Simpson, 92 App. Div., N. Y., 382
(1904). An interesting discussion of this case and of the
questions involved is given in the dissenting opinion by
Judge Hatch.
§ 216. Incidental Liabilities.
The relations between associated promoters will be
determined by their agreements. In the absence of any
agreement to the contrary, one promoter may require con-
tributions from his associates for any expenses or outlay in-
curred in connection with their undertaking.
Promoters receiving subscriptions for the stock of a
corporation to be organized by them are responsible to the
subscribers for the amounts received if they fail to complete
the organization.
If promoters perform services and incur expenses in pro-
curing subscriptions, or in doing things for the benefit
of the prospective corporation, the corporation when organ-
ized cannot be held responsible for such expenses and ser-
vices unless it expressly undertakes to assume them. If it
does assume them, the benefits received by the corporation
from such acts and expenditures will be deemed sufficient
consideration to support such assumption.
Contracts and agreements made for a corporation before
its organization by a promoter do not bind it, unless the cor-
236 ORGANIZATION OF CORPORATION.
poration accepts the same, either by express action, or
impliedly, by taking the benefit of such contracts and agree-
ments.
A promoter entering into a contract on behalf of a cor-
poration to be formed, will be himself liable on such contract
unless it is expressly understood that the other party is to
look to the corporation alone.
An agreement by a promoter with the vendor of property
to the promoter's corporation, for a private commission, or
the excess obtained over a specified price, such payment or
profit being unknown to the corporation, is contrary to
public policy and illegal and the promoter could not main-
tain an action to recover. (See § 16.)
§ 217. Restrictions on Sale of Stock.
It is often desirable to restrict the sale of outstanding stock
for a limited period, in order to permit the prior sale of
treasury stock or to obtain other ends. This may be effected
to a certain extent by placing such stock in a voting trust for
a specified period. In this case, however, the trustees' cer-
tificates might be sold and interfere with the purposes of the
restrictions. (See § 226.)
In New York it has been decided that promoters, by agree-
ment, may deposit their certificates of stock with a trust com-
pany, not to be withdrawn therefrom or sold for a specified
period unless by mutual consent. (See Williams vs. Mont-
gomery, 148 N. Y., 519, 1896.)
It has also been decided in New York that stockholders
may associate themselves and have their stock issued to them
jointly, with an agreement that such certificates shall not be
changed, sold or pledged for ten years, except upon consent of
all interested. (See Hey vs. Dolphin, 92 Hun, N. Y, 230,
1895.) I n this case the contract was practically one of part-
nership in the stock for the designated period. A power of
attorney given one of the partners to vote upon this stock was
held to be irrevocable.
CONCERNING PROMOTERS. 237
* All parties consenting, it would- probably be practicable to
make a valid agreement, to which the corporation would be a
party, providing that certificates for certain stock should not
be issued to those entitled to them, unless by mutual agreement,
until a certain specified time, or until a stated proportion of
treasury stock had been sold.
Generally, however, courts do not favor agreements sus-
pending or restricting the right of alienation of stock, such
agreements being usually held contrary to public policy and
void. (Brown vs. Britton, 41 App. Div., N. Y., 57, 1899.)
PART VI.— SUNDRY CONSIDERATIONS.
CHAPTER XXXIV.
UNDERWRITING.
§ 218. General.
When any very large or important enterprise is to be
incorporated and financed, it is customary to underwrite
the corporate securities before they are offered at public
sale. This practice has been particularly characteristic of
the organization of the many industrial combinations formed
in the last decade, their securities, almost without exception,
having been underwritten before the date of issue.
Underwriting is a guarantee of the sale of the under-
written securities at a specified minimum price. It is, in
fact, a conditional subscription for such securities, the under-
writers obligating themselves to purchase at a specified
price all of the underwritten securities not sold at an
advanced price at public offering or otherwise, on or before
a fixed date, or within a certain time of the underwriting.
The inducement offered the underwriters for the re-
sponsibility they assume is usually a certain portion, or even
the whole of the advanced price at which it is expected the
securities will be sold to the public. That is, if the price to
the underwriters on an issue of bonds is 95 per cent, such
bonds might be offered to the public at 98 per cent, or at
par. If offered at par, the underwriters' agreement might
call for half this excess over the underwritten price, that is,
2% per cent, of the total amount received on such sales.
If all the bonds were sold, the underwriters would then
receive $25.00 for each $1,000 bonds of the issue, this amount
238
UNDERWRITING. 239
being pro rated among the underwriters in accordance with
their subscriptions. If but a part of the issue were sold,
the underwriters would receive $25.00 on each bond sold,
but would themselves have to purchase the unsold bonds
at the underwriters' price of $950 for each $1,000 bond. A
stock bonus is frequently given the underwriters in addition
to the contemplated cash profits or in place thereof.
It is obvious that the underwriters, if their obligations
are to be of any effect, must be men of considerable financial
responsibility. It is expected that the securities underwrit-
ten will be sold, but the underwriters must always be pre-
pared in case of failure to take up the unsold securities them-
selves. They would therefore hardly underwrite securities
of doubtful value, and as the underwriting price is supposed
to be a little below the real worth, the possibility of having
to purchase such securities is not — if the underwriters are
financially strong — disquieting. If compelled to purchase,
their money would be invested in the securities, but these
presumably would be desirable, and the price at which they
were purchased below what might reasonably be estimated
as their value.
If the public offering or other sale of the underwritten
securities is successful, the underwriters profit largely with-
out the investment of a dollar. That is they are handsomely
paid for their guarantee, without having been called upon to
do more than to be ready to follow it up if the necessity had
arisen. The operation is a legitimate one, and at times
very advantageous both to the underwriters and the cor-
poration to which the underwritten securities belong.
During the flush times, but lately passed, when the
investing public was anxious to share in the profits of
monopoly and flocked with enthusiasm to purchase the
highly watered stocks of the various industrial combinations,
the underwriters reaped a golden harvest. During this
period the underwriting responsibilities were nominal. The
public absorbed everything offered by the magnates of the
240 SUNDRY CONSIDERATIONS
financial world, the underwriters' profits were taken with-
out risk or responsibility beyond that involved in the tem-
porary use of their names and the profits were extraordi-
narily large. This period culminated with the flotation of
the Steel Trust, in which the underwriters' profits were enor-
mous.
After the financing of the Steel Trust the underwriters
of the succeeding period fell upon evil days. The almost
invariable success of the larger underwritings had rendered
usually conservative financiers reckless. They underwrote
beyond their real financial ability or in excess of prudence,
and without proper investigation of the underwritten enter-
prises, and when buyers did not respond to the public offer-
ings and the underwriters were called upon to " make good "
the results were disastrous.
It is obvious that the underwriting of any enterprise not
absolutely safe and well conceived is beyond the realm of
sound finance. Reckless underwriting as that of the Ship-
building Trust is merely gambling on a princely scale.
§ 219. Method.
Common stock, preferred stock or bonds may be under-
written, though usually only the latter two are utilized for
the purpose.
The underwriting agreement is in form a subscription
to the stocks or bonds involved, the body of the agreement
stating in detail the terms and conditions under which the
subscriptions are made. The amount of securities to be
offered, the price to the underwriters — or members of the
syndicate when the underwriting is taken by a syndicate —
the date, price or terms of the public offering, the profits
to the underwriters and the terms of the underwriting sub-
scriptions are all important features of the agreement. It is
usually provided that the instrument shall not be effective
until a fixed sum has been underwritten.
If certain amounts of cash are needed before the cor-
UNDERWRITING. 241
poration is in shape to offer its securities at public sale, for
purchase of plants or preliminary expenses or other pur-
poses directly pertaining and necessary to the matter in
hand, the underwriting agreement may provide for advances
or payments on account by the underwriters, such amounts
to be repaid from the moneys received from public sub-
scriptions. Or, if it is not desired to call upon the under-
writers directly, such preliminary amounts are secured on
the credit of the underwriting from trust companies or other
financial institutions. If the underwriters are of sufficient
financial strength to make their underwriting effective, their
subscriptions, in connection with the obligations and secur-
ities of the corporation itself, furnish ample security for
reasonable advances.
The underwriters' respective subscriptions mark the limit
of their liabilities and responsibilities, and, in event of profits
ensuing, determine the proportion of profits each is to
receive. These respective subscriptions will specify so many
shares of stock or such a number of bonds. If the public
offering or other sale should be a total failure, the under-
writers will be called upon to take the full amount of stocks
or bonds called for by their subscriptions. If but a portion
of the proffered securities are purchased by the public, the
underwriters receive their respective proportions of the
profits on the securities actually sold, and the balance of
the underwritten securities are pro-rated among them in
due proportion.
It is usual in underwriting agreements to provide that
the underwriters shall have the privilege at any time before
the public offering, or up to some specified time before the
public offering, of purchasing the securities underwritten
by them — in whole- or in part — at the specified underwriting
price. When the underwriting is a sound one this privilege
is frequently exercised. This proceeding terminates the con-
nection of the individual underwriter with the agreement
to the extent of his purchase.
242 SUNDRY CONSIDERATIONS.
The underwritten securities are usually offered to the
public through some trust company, or other financial insti-
tution which has been designated by the underwriting agree-
ment to act as trustee. Or when the underwriting is done
by a syndicate, this syndicate may make the public offering
directly or through its own channels. If offered through a
trust company, such company will apportion the proceeds
in accordance with the terms of the agreement. If offered
by a syndicate, the apportioning would be done within the
syndicate, the corporation merely holding the syndicate for
the net price to be received by it for its securities. In this
latter case the underwriting agreement would probably only
call for a certain net price on the securities involved, the
syndicate being left free to offer the securities at such price
— possibly within specified limits — as they may deem advis-
able, the syndicate bearing all expenses of the sale and
retaining as their profits all excess secured by them over
the net underwriting price. (See Forms u and 12.)
§ 220. Advantages.
The advantages of a substantial underwriting are in most
cases very material. The success of the flotation is secured
from the moment that the underwriting is completed, and
the immediate managers of the undertaking are relieved
from the necessity of giving their attention to this important
matter. Also, if funds are needed for preliminary opera-
tions, underwriting advances may usually be made a part
of the contract, or if this is not desired, money may be
easily raised on the credit of the underwriting. The under-
writing is a guarantee by responsible people that the nec-
essary money for the securities for the corporation will be
forthcoming at the time fixed by the agreement, and such
a guarantee under proper conditions may easily be turned
into cash.
In addition to this, the mere fact that men of the repute
and financial strength necessary for effectual underwriting
UNDERWRITING. 243
are behind the enterprise, or are willing to stand for it even
temporarily, is in itself a very strong endorsement of the
undertaking, giving it weight and position, and materially
assisting in the public sale of its securities.
Underwriting is not ordinarily employed when an issue
of securities is to be floated by a corporation so strong, or
an undertaking so excellent and well known as to command
public confidence and money on its merits. Its proper field
is found in those cases where the enterprise is new, or in a
new form, or is not properly understood, or the conditions
are so unfavorable that no matter what the real merits of
the offering may be there is danger of an inadequate re-
sponse to the public offering. Under these circumstances,
the financiers, well knowing the real strength of the offering,
or confident of their own ability to place it, may be perfectly
willing to assume the responsibility of such an underwriting,
and thereby insure the success of the issue.
Under any such conditions the corporation can very
well afford the liberal payment usually accorded under-
writers, and financiers fairly earn their profits, even if they
are called upon to do nothing more than loan the use of their
names. Even so strong and well-known a corporation as
the Pennsylvania Railroad resorted to underwriting in a
recent issue of its stock, and, though the underwriting profits
ran into the hundreds of thousands of dollars, the Company's
course was not criticized by sound financiers. The times
were unfavorable, the success of the issue was not abso-
lutely assured and its failure, even though partial, would
have been disastrous, involving loss of prestige, as well as
failure of the anticipated funds. The price paid to avoid
these possibilities — if not probabilities — was a well justi-
fied employment of the company's funds.
CHAPTER XXXV.
VOTING TRUSTS.
§ 221. General.
It is frequently necessary or important that the agreed
management of a corporation be preserved consecutively for
a term of years. This may be for the protection of minority
or special interests, or to maintain a control satisfactory to
the majority as then existing, or in pursuance of organization
agreements, or in accordance with the terms of a re-organ-
ization or consolidation. In any case the voting trust is the
usual means by which this is secured. It is also called a
" stock pool."
The voting trust is an arrangement under which suffi-
cient stock to insure the desired ends is placed in the hands
of trustees for some certain period of time with definite
instructions as to the way in which this stock shall be voted.
Other features may enter in, as the prevention of the aliena-
tion of the stock held by these trustees, special dispositions
of the dividends thereon, etc., but the designated exercise
of the voting power of the trusteed stock for the given period
is the main end sought in the formation of the voting trust.
(See Knickerbocker Inv. Co. vs. Voorhees, ioo App. Div.,
N. Y., 414, 1905.) (See §§ 233, 240 and 252.)
It is to be noted that the objects to be attained by the
voting trust can often be secured more permanently by the
formation of a " holding corporation." (See Chap. XXXIX,
Holding Corporations.)
§ 222. Distinctions.
The voting trust as here considered applies only to the
stock of a single corporation and must be distinguished
244
VOTING TRUSTS. 245
from the voting trust arrangement under which attempts
were formerly made to combine a number of corporations
under one management. That system was legally unsound
and has been abandoned. (See Chap. XL.) Neither has a
voting trust any necessary connection with restrictions on
the sale of stock. Provisions restricting the sale of stock
for a specified period or to anyone not embraced in the
agreement may be included but are merely incidental to
the voting restrictions which are the main end of the trust.
§ 223. How Formed.
A voting trust is formed by placing in the hands of
trustees such proportion of the stock of the particular cor-
poration as may be necessary to secure the desired control.
These trustees act under and their powers are defined by an
agreement, styled the voting trust agreement, subscribed
to by all the parties entering the trust. This agreement
specifies the length of time for which the stock is to be held
and the manner in which it is to be voted at the annual
election of directors. If the management then in power
is to be retained, the trustees would be instructed to cast
the vote of the trusteed stock in all elections of directors
for the parties then constituting the board, suitable pro-,
vision being made in case of the possible death of any of
the parties named. If the object of the trust were to insure
minority representation on the board, the trustees would
be instructed to cast the trustee vote in favor of parties
named by the designated minority interests up to such num-
ber of directors as were to be allowed the minority, the
other members of the board being named by the majority inter-
ests. Or if the object of the trust were to secure an efficient and
non-partisan board, the trustees might be merely instructed
to cast the vote of the stock held by them for such persons
as in their judgment would be suitable and acceptable to the
interests involved. The trust agreement might also provide
the manner in which the trustees' stock was to be voted
246 SUNDRY CONSIDERATIONS.
in matters of general interest, or it might be forbidden to
vote on these matters, or its vote under such circumstances
might be left to the discretion of the trustees.
Whatever the instructions, the stock must be voted as a
unit by the trustees in accordance therewith, and in case of any
refusal so to vote, provided the conditions of the trust be
proper, the courts will enforce compliance.
The stock included in a voting trust is actually transferred
to the trustees and is by them taken out in their own names.
Trustees' receipts are given to the parties depositing stock,
these receipts being negotiable in form and representing the
equitable ownership of the stock held in the trust.
The trustees are authorized to collect and receive any divi-
dends and profits accruing on the stock held by them, but must
pay over the same in due proportion to the equitable owners
of the trusteed stock.
The trust agreement also provides the method of dissolu-
tion of the trust upon the expiration of the specified time limit,
and any other desired features or details. In order to avoid
any possibly illegal suspension of the rights of alienation in
the stock held in trust, the agreement may provide that at
any time, by consent of all the parties in interest, the trust may
be terminated. (Williams vs. Montgomery, 148 N. Y., 519,
1896.)
When it is only desired to control a single election, the use
of proxies is the most convenient method by which this may be
accomplished. These, being revocable and of limited dura-
tion, are not available for any permanent purposes.
§ 224. Legal Status.
New York is the only state of the Union in which the
voting trust is expressly sanctioned by statute. This was done
in 1901, when an amendment to the General Corporation Law
was passed, providing:
" A stockholder may by an agreement in writing,
transfer his stock to any person or persons for the
VOTING TRUSTS. 247
purpose of vesting in him, or them, the right to vote
thereon for a time not exceeding five years upon
terms and conditions stated, pursuant to which such
person or persons shall act; every other stockholder,
upon his request therefor may, by a like agreement
in writing, also transfer his stock to the same person
or persons and thereupon may participate in the
terms, conditions and privileges of such agreement;
the certificates of stock so transferred shall be sur-
rendered and cancelled and certificates therefor issued
to such transferee or transferees * * * " § 20,
General Corporation Law.
Under the statute a duplicate of the voting trust agreement
must be kept on file in the principal business office of the cor-
poration, open to the inspection of any stockholder during
business hours.
Prior to the passage of this statute, voting trusts existed
in New York and were regarded favorably by the courts.
(Williams vs. Montgomery, 148 N. Y., 519, 1896.) Since
its passage, the conditions prescribed by the statute would
probably have to be followed in detail to establish an enforce-
able trust.
In New Jersey (Chapman vs. Bates, 47 Atl. Rep., 638,
1900) ; Massachusetts (Brightman vs. Bates, 175 Mass., 105,
1900) ; California (Whitehead vs. Sweet, 126 Cal., 67,
1899) ; Alabama (Mobile, etc., Co. vs. Nicholas, 98 Ala., 92,
1893), and other states, although no statutes on this subject
exist, the courts have rendered decisions favoring similar
arrangements and intimating that where the trust was for a
proper purpose and for a reasonable time, and did not contem-
plate any advantage from which other stockholders of the
same corporation were excluded, it was not contrary to any
principles of law or equity. It is probable that a voting trust,
reasonable as to its duration and equitable as to its purposes,
would be sustained in any state of the Union. (See Forms 13
and 14.)
248 . SUNDRY CONSIDERATIONS.
§ 225. Requisites.
The primary requisite of a legally defensible and enforce-
able voting trust is that it be for some object not illegal in
itself, or calculated to injure or discriminate against other
stockholders of the same corporation. It must also be reason-
able as to its duration and terms, and its possible advantages
should be open to all stockholders of the particular cor-
poration.
Any voting trust to promote a monopoly, or to dominate
the corporation in the interests of another corporation, or to
deprive other stockholders of any of their rightful powers,
would be held illegal.
§ 226. Restriction of Stock Sales.
The voting trust as a means of restricting the sale of the
stock held under its provisions is of doubtful efficacy. It un-
questionably prevents the transfer of the actual stock during
the life of the trust, and thereby prevents the transfer of any
of the stockholders' rights that would accompany delivery of
the stock. On the other hand, the trustees' receipts, or certifi-
cates, are transferable, and if the object of restricting the sale
is to maintain the market price of the stock, or to give prefer-
ence to the sale of treasury or other special stock, the sale of
the trustees' certificates might interfere with these purposes
almost as effectually as would the sale of the stock itself.
CHAPTER XXXVI.
PROTECTION OF MINORITY.
§ 227. General.
The corporate rights of minority stockholders are much
circumscribed, are frequently ignored and are difficult of
enforcement. Usually any proposed action of the board
infringing upon these rights is not known to the minority
until too late for prevention, and legal redress is, as a rule,
slow, costly and inadequate. The proper protection of the
minority, is therefore on occasion a matter of much im-
portance.
This protection is best secured by due provision at the
time of incorporation. It is unfortunate that the interests
which control at this time -are too often indifferent or act-
ually inimical to the rights of the minority and give them no
consideration save as compelled by statute law, or by respect
for the sensibilities of the investing public.
As a rule, however, the parties in control of the organ-
ization either voluntarily recognize the rights of the minor-
ity, or are compelled thereto by the conditions, and the min-
ority may then secure efficient protection for such rights as
are properly theirs.
§ 228. Rights of Minority at Common Law.
Under the common law the rights of the minority were
not extensive. They were entitled to be present and par-
ticipate at stockholders' meetings. They were entitled to
inspect the corporate stock books during the usual hours of
business and copy the names therein if they so desired. They
also had the right under reasonable conditions to inspect the
248
250 SUNDRY CONSIDERATIONS.
books of account. Also a few important matters such as the
amendment of the charter and the sale of the entire cor-
porate assets required authorization by unanimous vote of
the stockholders, and this requirement gave the minority
a certain veto power in such matters. At stockholders'
meetings the minority might assist in the deliberations but
the majority had absolute power to adopt by-laws and to
elect the entire board of directors. The minority might
not even have a representative present at board meetings
save by grace of the majority.
§ 229. Encroachment on Minority Rights.
There is in some quarters at the present time a certain
trend toward the limitation and curtailing of the somewhat
slender common law minority rights.
At common law the minority had the right at reasonable
times to inspect the books and accounts of the corporation.
This right has been so narrowed down by latter-day statutes
and decisions that it is, in many states, negligible. In New
Jersey, it is customary to limit this privilege still further to
such inspection as the directors may prescribe. Even the
stock and transfer books may only be seen under restric-
tions.
As to books of account, this change of custom is prob-
ably necessary, as otherwise business competitors might
avail themselves of the formerly easily acquired right of
inspection of the books to obtain information and trade
secrets to the injury of the corporation. Also with the many
stockholders and the complex accounts of modern corpora-
tions, the right, if freely exercised, would interfere with the
regular transaction of business.
While this is true, some substitute for the stockholders'
inspection of the books of account should be provided, that,
without danger to the corporation, would give to the stock-
holders proper information as to the status of the corporate
business. To deny it entirely is a flagrant and unjustifiable
PROTECTION OFJ MINORITY. 351
disregard of the rights of those whose property is at stake.
Also the abridgement of the stockholders' right to inspect
the stock and transfer books is to be viewed with some
distrust.
Again, the right to make by-laws was formerly a pre-
rogative of the stockholders alone, and these by-laws usually
imposed certain proper restraints and limitations upon the
directors. Now, in New Jersey and a few other states, it is
possible and not uncommon by charter provision to give the
directors absolute power to repeal by-laws passed by the
stockholders, and to substitute, if they so desire, by-laws
of their own of exactly opposite effect. This is perhaps
the most dangerous of all the innovations upon the old
rules, as it virtually releases the directors from all necessity
for compliance with the wishes of the stockholders and
leaves in their hands the unrestrained management of the
affairs of the corporation.
It will be understood without discussion that any change
in the law acting to increase the powers of the directors, or
to remove or prevent limitations thereon, distinctly aug-
ments the power of the majority. The board is elected by
the majority and any restraining influences that exist, out-
side of the charter, by-laws and statutes, rest with this major-
ity. If then the statutes are relaxed, charter limitations
omitted and the board itself given the power to make and
amend by-laws, the power of the board as the representative
of the majority is greatly increased, and the minority be-
comes in effect a negligible quantity.
Also the charter may be more easily amended than for-
merly. In New Jersey such amendment may be accom-
plished by a two-third vote of the stockholders, in New York
by a three-fifth vote, and in Delaware by a bare majority in
interest. This latter is a somewhat remarkable relaxation
of the former rule, and apparently permits a mere majority
to change the entire nature of the corporate business, as
for example, to divert capital invested for the purpose of
252 SUNDRY CONSIDERATIONS.
starting a printing business into the exploitation of a mining
claim. It is doubtful whether material change in the charter
should be allowed under any circumstances, unless by the
practically unanimous vote of all concerned.
In consequence of these tendencies the present condition
of the minority stockholder, unless special provision is made
for his protection, is even less satisfactory than under the
common law.
§ 230. Protective Measures.
The legitimate ends sought by the minority are honesty,
efficiency and reasonable publicity of management — a man-
agement for the good of all and not in the interests of the
majority alone.
The means that may be employed to secure these ends
are of two general classes, the one consisting of such
arrangements, modifications or restrictions of the voting
power as to secure to the minority at least a reasonable rep-
resentation on the board of directors; the other consisting
of provisions in charter or by-laws restraining and regulat-
ing the powers of the board and prescribing safe rules for
the conduct of the business.
The first-mentioned method is the most effectual for the
protection of the minority interests. The usual cases of
oppression or fraud on the part of the majority occur in the
absence of minority representatives. If the minority have one
or more directors on the board the majority will still, as a
matter of course, control, but it is in the highest degree im-
probable that this control will be exercised to the injury of
minority interests. If any such attempts are made, the minor-
ity will be fully cognizant of the proposed action, may enter
such immediate protests and make such representations as
they see fit, and, if such prejudicial action is persisted in, may
take prompt legal action to protect their interests.
Without this board representation, charter and by-law pro-
visions for the protection of the minority are apt to be of but
PROTECTION OF MINORITY. 253
little effect. With the assistance of counsel skilled in evasion
of the law, such unsupported provisions may be easily over-
come or avoided. With an intelligent minority representation
on the board such infringements of minority rights would not
usually even be contemplated.
It is to be noted that in any state, as Delaware, where the
constitution or statutes prescribe one vote for each share of
stock held, no modification of the voting power can be
effected.
The usual measures for the protection of minority interests
are considered in the following sections of the present
chapter.
§ 231. Cumulative Voting.
Cumulative voting is one of the most effectual means of
securing minority representation on the board of directors.
So highly are the results of this system esteemed that its use
in corporate elections is prescribed by constitutional provisions
in Pennsylvania, Illinois, California and a number of other
states. In New York, New Jersey and some other states it
may be used if so provided in the corporate charter. The
Constitution of the State of Pennsylvania outlines the system
with much conciseness, as follows :
" In all elections for directors or managers of a
corporation, each member or shareholder may cast
the whole number of his votes for one candidate or
distribute them upon two or more candidates as he
may prefer."
The New York statutes go into the matter more fully :
" The certificate of incorporation of any stock com-
pany may provide that at all elections of directors of
such corporation, each stockholder shall be entitled
to as many votes as shall equal the number of his
shares of stock multiplied by the number of directors
to be elected, and that he may cast all of such votes
for a single director or may distribute them among
the number to be voted for, or any two or more cf
254 SUNDRY CONSIDERATIONS.
them as he may see fit, which right, when exercised,
shall be termed cumulative voting."
Under this system the majority control and manage the
corporation absolutely, but the minority will elect one or more
directors to represent them. If they elect capable men there
is but little danger that the minority interests will suffer.
To obtain the best results from cumulative voting the
minority must be organized to some extent at the time of the
annual election, and should delegate by proxy to some few
trusted representatives the casting of their ballots.
To cast these aggregated votes to the best advantage some-
times requires nice calculation. For instance, in a corporation
with a board of five directors and one hundred shares of voting
stock, each share will have the right to cast five votes, or a
total for all the voting stock of five hundred votes. In such
case any person or persons controlling seventeen shares would
cast eighty-five votes, and if this total vote were cast for a
single candidate he would infallibly be elected. The aggre-
gate of the other votes cast would be four hundred and fifteen,
but no matter how they were divided among the other candi-
dates, "the candidate with eighty-five votes could not be de-
feated. If evenly divided among the five aspirants for board
membership, each would receive eighty-three votes, but only
four of these five could be elected, because the minority candi-
date, with eighty-five votes, would have a plurality of the votes
cast.
There are no material objections to the system of cumula-
tive voting, and it should be adopted wherever possible. Its
increasing use is a practical testimonial to its value. It must,
however, be used with intelligence, or the results are some-
times surprising. On occasion, an unsuspecting majority has
so scattered its votes that a compact, well-handled minority
has actually gained control of the board. In other words, the
majority threw themselves into a minority by scattering. For
instance, in the example given above, if the minority controlled
forty-five shares of stock, they would be able to cast two hun-
PROTECTION OF MINORITY. 255
dred and twenty-five votes as against two hundred and sev-
enty-five votes cast by the majority. The minority might then
very safely divide their votes among three candidates, with the
assurance that they would elect at least two directors and
might elect the third. The majority would have votes enough
to elect three directors, but, if they thoughtlessly scattered
those votes among four or five candidates, the three minority
candidates, with over seventy votes each, would be elected
and would control the board. Such an election, though
somewhat unexpected in its results, is legal and would be up-
held wherever cumulative voting is employed. (See § 113.)
§ 232. Classification of Stock.
Where definite divisions of interest exist among the
stockholders, or intending stockholders, at the beginning of
the corporate organization, classification of stock may in most
states be employed with entire confidence that each class will
receive due representation on the board. Such classification
should be secured by charter provision where possible, else-
where by by-laws adopted before stock is issued. Such by-
laws so adopted become in effect a contract with those pur-
chasing stock and hence are not susceptible of repeal save by
consent of all interests. (Kent vs. Quicksilver Mining Co., 78
N. Y., p. 178, 1879.)
Under such an arrangement stock may be divided into any
classes desired, equal or unequal in amount. To each of these
classes may be assigned one or more directors, and so long
as the corporate organization exists unchanged, each of these
classes will elect its own directors to the board. This arrange-
ment is very effective. Specific examples of its application are
given in Sections 239 and 252 of the present volume. (See
also § 98.)
§ 233. Voting Trusts.
The general subject of voting trusts is considered else-
where. (See Chap. XXXV.) It is only referred to here as
~56 SUNDRY CONSIDERATIONS.
a method of protecting minority rights where these interests
are in a position to demand such protection before entering
the corporation. This may occur where stock in a corporation
is offered for sale, or where a partnership is to be incorporated
with some of the partners holding comparatively small
interests.
In such event, the proposed investment or arrangements
may be acceptable to the parties concerned, even though
the stock obtained is in a hopeless minority, if they can be
assured of representation on the board, or that an acceptable
management will be elected and retained for at least a
reasonable length of time. In any such case the desired end
may be effectually secured by means of the voting trust.
In this connection it may be noted that a mere agreement
between parties holding stock that such stock shall be voted
for certain persons or in a prescribed manner will not be
enforced by the courts. Under some circumstances damages
might be obtained for breach of such a contract, but the con-
tract itself could not be enforced and damages would
usually be very difficult to prove. (Gage vs. Fisher, 5 N. D.,
297, 1895.)
§ 234. Special Arrangements.
Many other arrangements for the protection of the min-
ority, or of particular interests are possible, depending upon
the circumstances, the statutory provisions of the state of
incorporation and the decisions of its courts.
In those states where special provisions may be inserted
in the charter, it is entirely possible in the absence of express
constitutional and statutory prohibitions to decrease the
proportionate vote of stock as its holding increases, or to
deny the voting right absolutely after a certain maximum
vote has been reached. For instance, it may be provided
that each stockholder shall cast one vote for each share of
stock held by him up to a total of ten shares ; that on stock
in excess of this amount up to one hundred shares, he shall
PROTECTION OF MINORITY. 257
have one vote for each five shares; that on all stock in
excess of one hundred shares he shall have one vote for each
ten shares. This is the voting provision of the English
Companies Act which has some merits. Any other appor-
tionment of the voting power may be made, or it may be
provided that after some maximum vote has been reached,
as for instance ten votes for ten shares held, no further vote
shall be cast by such stockholder no matter what his holding.
It is also possible to place the number of votes necessary
to elect a director so high that under any ordinary circum-
stances, directors cannot be elected save by agreement. For
instance if a three-fourths' vote of the outstanding voting
stock were necessary to elect, it would be but seldom that
the majority could elect without minority assistance. Then
they must either allow the management to remain without
change, as will be the case if there is no election, or unite
with the minority to elect. If this were necessary they would
hardly propose anyone objectionable to the minority
element. This plan presupposes an existing management
acceptable to all the stockholders. (See § 236.)
§ 235. Annual Audits.
In the larger corporations the auditing of the books of
account is a very important feature of the corporate opera-
tions, and, if properly conducted, may be made to eliminate
any necessity for the inspection of such books by the rank
and file of the stockholders. Such auditing may be annual,
quarterly, or held at irregular intervals, and, if made by
proper parties, serves both as a check on the management
and a verification of their accounts. The results of these
audits, expressed in such manner as to prevent the revela-
tion of trade secrets, give the stockholders the general
information in regard to the business that they have a right
to demand, and, as has been stated, thereby remove the
necessity for examination of the accounts by these latter.
It is, of course, imperative that the professional accountants
258 SUNDRY CONSIDERATIONS.
employed as auditors be absolutely reliable and thoroughly
qualified for their work.
§ 236. Charter Limitations.
In New York, New Jersey and some other states, limita-
tions on the power of the majority may be inserted in the
charter. At the inception of the enterprise, the minority
are not infrequently in a position to demand the inclusion
of such limitations as a condition precedent to their par-
ticipation. Even if otherwise, an era of good feeling gen-
erally exists at this stage of the enterprise and reasonable
concessions may then be obtained which later would not
be possible.
An instance is afforded by the charter of one of the
prominent industrial trusts in which the following provision
is found :
" It is hereby provided that it shall require a
majority of seventy-five per cent, of the outstanding
voting stock to amend the charter, to amend the by-
laws, or to elect directors in this company."
Such a provision is directly in the interests of the min-
ority. In this case it may have been conceded voluntarily,
but probably its adoption was demanded by some of the
smaller, but necessary, component corporations as one of
the conditions of their entrance into the combination. Under
such a provision no changes could be made in charter, by-
laws or the board of directors against the wishes of a
minority controlling twenty-six per cent, of the voting stock.
Under such circumstances a minority judiciously handled
could always protect its interests. This arrangement can
not be had in New York as the statute specifies that directors
shall be elected "by a plurality of the votes at such election."
As damage to minority interests, or the wrecking of
corporations is almost invariably caused by improvident
contracts, unwarrantable salaries, or excessive indebtedness,
charter limitations upon the power of the board in these
PROTECTION OF MINORITY 259
directions are of frequent occurrence. Some flexibility is
usually given to these restrictions by provision that their
limits may be exceeded by a unanimous vote of the board,
or by a two-thirds' or three-fourths' vote of the outstanding
voting stock, or by some similar provision.
Where these limitations exist, it is important that some
such flexibility be provided, as otherwise the interests of
the corporation might on occasion suffer severely. Being
charter provisions, their limits could not be legally exceeded by
the corporation, either by action of the directors or stock-
holders except as specifically allowed by the charter, and
business opportunities of obvious advantage to the cor-
poration might be lost for lack of the power to meet their
terms or conditions.
It is also possible to provide in the charter that the
minority may have reasonable access to the books and
records of the corporation, and any other desired privileges
not in conflict with the statutes may be so secured. (See
§§ 107, 116, 181 and 243.)
CHAPTER XXXVII.
PROTECTING AN INVENTOR.
§ 237. General.
A specific case that comes up frequently and is so typical
in its nature as to merit special consideration is that of the in-
ventor who desires to finance or exploit his invention under the
corporate form, but fears that in the process he may be " frozen
out," or in some other way defrauded of the profits he should
enjoy. In practice these fears are frequently realized. In
some instances it is due to his credulity, avarice or lack of
business experience, which leads him to entertain impossible
propositions, intended only to defraud the inventor or delude
the public. In many cases, however, it is caused solely by the
ignorance of the inventor as to how his interests may best be
safeguarded and protected.
In this connection it may well be noted that investors in
exploiting corporations have quite as often lost money through
the unreasonable exactions, the mechanical failures and the
lack of business judgment of inventors, as have these latter
by the financial misdeeds of the former. As the exploiting
corporation must be made safe and attractive to investors as
well as to inventors, this condition has a direct bearing and
must be kept in mind.
It is usually assumed that the men with money can protect
themselves. This is generally true, and if the corporation as
organized does not afford the proper protection the intelligent
investor will either keep out, deal only on the basis of a control
or insist on a reorganization. If, however, the corporation has
been properly organized, with a view to the protection of both
inventor and investors, these latter will be found much more
260
PROTECTING AN INVENTOR. 261
reasonable in their demands and more willing to agree to the
due protection of the inventor.
Another feature which often affects the organization of ex-
ploiting corporations is the fact that inventors so frequently
fall into the hands of professional promoters, who are much
more concerned about promotion profits than they are about
the protection of inventor or investor, or the future welfare
of the undertaking. Under such conditions the inventor's in-
terests are hardly worth protecting. Usually an enormously
over-capitalized corporation appears, a few confiding investors
are parted from their money, this is quickly absorbed by ex-
perimental work and general expenses, and, after a brief and
futile existence, the corporation disappears.
It may be said that an invention, as a more or less specu-
lative undertaking of undetermined value, is, when incorpo-
rated, entitled to a liberal capitalization, but this should be
kept within the bounds of reason. Over-capitalization is dis-
tinctly injurious to the enterprise, is discouraging to intelli-
gent investors and is frequently sufficient in itself to stifle the
most hopeful invention.
Also, generally speaking, an unperfected or unpatented in-
vention is not a proper or sufficient basis for an exploiting cor-
poration. At this stage it is an entirely fit matter for private
enterprise, but to incorporate on such an unsubstantial basis
and offer stock for general investment approximates a fraud
upon the public.
§ 238. Stock Control.
The usual procedure in the organization of a corporation to
take over an invention is to issue all the authorized capital
stock to the inventor, or to some trustee acting for the inter-
ested parties, in payment for the invention. The stock is
thereby rendered nominally full-paid and non-assessable. Such
portion of this stock as is to be actually retained by the in-
ventor and the other parties interested with him, is reserved
for the purpose and the balance of the stock is turned back to
262 SUNDRY CONSIDERATIONS.
the corporation, to be used in raising capital and for the general
purposes of the company.
If the inventor is in a position to secure or retain a majority
of the voting stock of the corporation and can keep this in his
own hands or under his immediate control, he has the most
efficient corporate protection that is possible. Through his
power to elect a majority of the directors, he then has the
entire management of the company and the enterprise in his
own hands.
Directors elected under such circumstances are usually
either associates, employees or friends of the party in control,
he himself naturally being included among the number. There
is no way in which these directors can be bound to carry out
the wishes of the party electing them, and it therefore behooves
such party to elect only directors in whom he can repose the
utmost confidence. If he does make a mistake and one or more
of his directors rebel, possibly throwing the majority of the
board against him, he can usually do nothing but submit until
the following annual election, when he may replace the objec-
tionable directors by others more compliant. A small board
is desirable where one party has the control, which he wishes
to retain.
If the inventor is able to keep control of this company he
should need no other safeguarding of his interests. If any
protection is required it should be for the other parties. It is but
rarely, however, that the inventor is in a position to retain con-
trol. Money is needed for the exploitation of his invention
and this the inventor cannot usually supply. Stock must then
be sold and the offering must be made attractive to investors.
It is usually impossible to do this and retain control, and at
this point the balance of power passes from the hands of the
inventor. In this connection it may be stated that there is
a prejudice, not entirely without foundation, against inventors
as business men, and this fact would operate against the sale
of stock in a corporation dominated by an inventor.
Where large individual investments are made, those who
PROTECTING AN INVENTOR. 263
invest expect to control as a matter of course. Where small
investments can be secured in sufficient numbers to make up
the required amount, the inventor's position is better, but even
here such inducements must be offered the investor and such
liberal compensation is demanded by the promoters, that the
inventor seldom retains the corporate control.
§ 239. Classification of Stock.
In most states stock may be classified in several varia-
tions in protection of the inventor's interests. If there is
no objection to his active control of the corporation, though
the necessities of the case compel the disposition of a major-
ity of its stock, this stock may be divided into two classes,
the one being held by the inventor and his associates, the
other being offered to the public or used in other ways. To
the class retained by the inventor would be secured the
election of the majority of the board of directors, the second
class electing the remainder. The inventor would then elect
a majority of the board of directors and thereby control.
For instance, if the corporation were capitalized at
$100,000, of which the inventor was to retain $35,000, the
number of directors being five, the stock might be divided
into two classes, " A " and " B," of which class " A," consist-
ing of $50,000 face value of the stock, elects three members
and class " B " elects two. Then if the inventor received
the greater part of class " A " he would control this class
and thereby the corporation.
Or the stock might be divided into five classes, each
equal as to amount and each electing one director. Each
class would then consist of $20,000 face value of stock,
and the inventor might easily so divide his holding of $35,000
among three of these classes that he would control each,
thereby electing three directors and controlling the board.
$12,000 of stock in each of two classes and $11,000 in the
third would effectually secure this result.
Usually, however, control by the inventor is out of the
264 SUNDRY CONSIDERATIONS.
question, and the classification of stock when employed is
merely intended to secure to the inventor — as an important
minority stockholder — due representation on the board.
Probably then the capitalization of $100,000 would be sep-
arated in two classes of $50,000 each, one electing two and
the other three directors, and the inventor's $35,000 would
be allotted him out of the first-named class. If so, he
would unfailingly name two out of the five directors just
so long as he retained control of his class.
To secure representation on the board is a very impor-
tant matter in the protection of an inventor or any other
minority interest, and, by classification of stock, such rep-
resentation may be safely and permanently secured.
The results obtained by this classification may be carried
further if desired, certain officers being elected by the direc-
tors of each class, as for instance one class electing the
president and secretary, the other class the vice-president
and treasurer, etc. It may also be provided that no change
shall be made in charter or by-laws except with the consent
of a majority of each of these classes. It is, however, seldom
advisable to carry the matter to the extreme indicated even
when possible, as complications and friction in the corporate
machinery are too apt to result. (Fee §§ 98, 1 14, 232 and 252.)
§ 240. Voting Trust.
Where the inventor and those interested, or to be inter-
ested with him, can agree on a management acceptable to all,
the voting trust offers a suitable and effectual means of main-
taining such management for a term of years. It is obvious
that any desired composition of the board may be maintained
by this method. Specific parties may be elected, or a certain
number of directors may be nominated by the inventor, or
by the stock assigned the inventor, while the remaining
directors are nominated by other interests, or left to the
discretion of the trust. (See Chap. XXXV. Voting Trusts.)
PROTECTING AN INVENTOR. 265
§ 241. Cumulative Voting.
Where the inventor merely desires representation on
the board of directors, it may usually be secured absolutely
by the adoption of cumulative voting. This device is equally
advantageous whether inventor or investor is in control, and
is commonly employed. (See §§113 and 231.)
§ 242. Specified Majorities.
The inventor's interests may be efficiently protected in
some lines by means of charter provisions requiring certain
specific majorities for important actions of the stockholders,
as, for instance, that the affirmative vote of two-thirds or
three-fourths of the voting stock shall be necessary for the
election of directors and the amendment of the by-laws.
Unless prevented by statutory enactments, such an arrange-
ment is possible in all those states where special charter
provisions are allowed, and, elsewhere, might be secured by
proper by-law provisions, so arranged as to become in effect
a contract between the stockholders and the corporation.
In the incipiency of the organization the inventor should
be able to secure any reasonable provisions of this kind that
may seem to him desirable. It is also to be noted that the
board elected at this time is usually selected by agreement
and is acceptable to the inventor. The majorities required
by the special provisions for the designated actions should
be large enough to necessitate the concurrence of the inven-
tor's stock before they can be secured. Then under these
special "provisions, neither charter nor by-laws may be
amended, nor new directors elected save with the assent
of the inventor and he need not assent to any change, or to
any election of new directors, unless such change, or such
new directors are entirely acceptable to him. It is within
his power to maintain the status quo until he is satisfied that
his interests will be benefited, or at least, not injured by a
change.
266 SUNDRY CONSIDERATIONS.
§ 243. Limitation of Expenditures.
Corporations are usually wrecked, when such disaster
occurs, by unwise or unwarranted expenditures. If then
the power of the board to expend is so restricted by suitable
charter or other provisions as to prevent this danger a con-
siderable measure of protection is afforded. This is espe-
cially true in the case of an inventor holding a minority
interest. If the board can neither increase salaries, nor
make any expenditures above a certain sum, nor incur
indebtedness in excess of a specified amount, except by such
a majority as necessitates the inventor's concurrence, the
wrecking of the corporation by intent would be difficult if
not impossible. Circumstances must decide when such a
measure is advisable. If the board is restricted too severely,
such conditions may re-act and injure the business of the
corporation. Such restrictions are not usually needed when
a suitable board is in control. (See §§ 107, 116, 181 and
236.)
§ 244. Assignment of Patent to Trustee.
Under some circumstances the inventor may advan-
tageously assign his patents to a trustee to hold for a term of
years, giving rights to the corporation to manufacture there-
under in the meantime, with the condition that, at the expira-
tion of that period, the patents shall be assigned the corpora-
tion in case it has a certain paid-in capital, is not in debt, has
paid certain dividends, or has accomplished some other specified
results, otherwise, the trustee to reassign to the inventor.
This plan may be so modified to meet the varying condi-
tions as to be a perfect protection of the inventor's interests.
It is, however, usually objectionable, inasmuch as it leaves the
corporation, in the absence of other assets, with only a condi-
tional right to the patent, and, therefore, in no condition to sell
its stock or to obtain credit. No one would wish to invest
money in or extend credit to a corporation which may have
PROTECTING AN INVENTOR. 267
valuable patents if it complies with certain conditions, but
otherwise will have nothing. For this reason the plan is sel-
dom practicable.
§ 245. Reservation of Royalties.
Probably the safest arrangement for the inventor is the
reservation of a royalty, with a prescribed minimum annual
production or utilization. When the patent rights are assigned
with this condition incorporated in the assignment and this
assignment is properly recorded with the Commissioner of
Patents, the royalty follows the patent, and, no matter who
holds the rights, such holder must pay the specified royalties
and be governed by the general conditions of the assignment.
It is, of course, always possible under this arrangement
that the corporation, or its assigns or successors, may, in the
interests of competitors, merely operate to the annual minimum
required by the assignment and go no further. This danger
is, however, remote and the annual minimum may usually be
fixed at such an amount as to practically secure the inventor
against any such possibility, or render its occurrence a matter
of minor importance. The minimum might be made to in-
crease from year to year at a specified ratio.
Under this arrangement the inventor cannot interfere with
the management so long as his royalties are paid, and on the
other hand, it is not possible for other interests to secure the
patent without the royalty obligation to the inventor. This
latter should, as a matter of course, have some contract pro-
vision for the examination of the records that will show what
the utilization of his patent really is, and the date and manner
of payment of royalties should be clearly specified. The
penalty to ensue if royalties are not paid should also be
specifically provided. It may be arranged that in such case
the control of the business shall pass to the inventor, or that
the patents revert to him. In the absence of any specific
arrangement, he will have the somewhat inadequate remedy of
a suit for damages.
CHAPTER XXXVIII.
INCORPORATING A PARTNERSHIP.
§ 246. General.
The incorporation of partnerships involves problems dif-
fering from those of the incorporation of a new enterprise.
These problems vary with the conditions and requirements of
the particular partnership.
If the partners are willing to adopt the simplest and most
obvious corporate arrangements; if they will capitalize at the
actual values; issue all the capital stock in payment for the
values transferred to the corporation; allot this full-paid stock
to the various partners in the proportion of their partnership
interests, and thereafter let matters take their natural corporate
course, the duties of the incorporating counsel are not onerous.
Usually, however, the parties to such an incorporation are
not willing to commit themselves so irrevocably to the opera-
tions of the unmodified corporate system. They are accustomed
to the conditions of the partnership, and they wish these ap-
proximated as nearly as may be under the new regime. Possi-
bly all the partners, without regard to investment, may be
participating equally in the management, or one partner, with
a relatively small investment, may be the leading spirit and
practically in control, or a silent partner, taking no active part
in the management, may have a preponderant investment. In
any of these cases, the ordinary operations of the corporate
system would work a radical change, and it is not to be sup-
posed that the partners would agree to the entire abolition of
the conditions under which they have achieved success. On
the contrary, the existing conditions must be continued. This
may be done with much precision, for nowhere does the flexi-
268
INCORPORATING A PARTNERSHIP. 269
bility of the corporate system appear to better advantage than
in its ready adjustment to the varying needs of partnership
incorporations.
§ 247. Name.
The partnership name should in itself represent a consider-
able trade value that would be lost if it were dropped on in-
corporation. To avoid this, the name of the partnership is
usually adopted, as nearly as may be, as the name of the new
corporation. In those states where permitted the partnership
name is not infrequently taken without modification as the
corporate designation. This practice is, however, open to ob-
jection, as there is then nothing in the corporate name to indi-
cate that the concern is a corporation, and parties doing busi-
ness with it might, unless informed of its corporate nature, be
able to hold the stockholders as partners.
Such a possibility largely eliminates the most advan-
tageous single feature of incorporation — its limited liability —
and to retain this feature, while still preserving the actual
form of the partnership name, the word " Incorporated " is fre-
quently added to this latter. This usually appears in small
letters below or after the name, sometimes in parenthesis, and
effectually prevents any danger of partnership liability.
In some states the word " Company " must form part of
every corporate name, and in these states the usual practice is
to adopt the partnership name with the word company follow-
ing, Smith & Jones becoming on incorporation the Smith &
Jones Company. This practice is very common in all the
states, whether required by law or otherwise, and is generally
preferable to the use of the unmodified firm name, or its use in
connection with the word " Incorporated."
Another common modification of the firm name is to sub-
stitute a hyphen for the connecting word and add " Company,"
Smith & Jones then becoming the Smith- Jones Company. In
most of the states the prefix " The " either may or may not
be made part of the corporate name, though in a few states its
370 SUNDRY CONSIDERATIONS.
use is obligatory. Owing to the additional length given the
corporate name by its vise, and its exceeding awkwardness in
certain legal constructions, the word " The " is better omitted
unless there are special reasons for its retention. (See Chap.
XIV, The Corporate Name.)
§ 248. Capitalization.
If the business is to go on under the corporate form just as
before, without sale of stock to outsiders, the simplest, and
possibly most satisfactory basis of capitalization, is the actual
value of the assets turned in to the new corporation, without
allowance for good-will, trade name or any other intangible
assets. Then on incorporation each partner will participate in
the stock by which this capitalization is represented to the
amount of his existing partnership investment.
Under this plan the capital stock of the new company is
kept at a comparatively low figure, taxation is to some extent
avoided, while the respective proportionate interests of the
different partners are accurately preserved. As will be readily
seen, no very exact estimate of the value of the business is
necessary under this arrangement. The capital stock merely
serves as a convenient method of adjusting the proportionate
interests of the partners, and no matter what its amount, these
interests are still represented in proper proportion.
If, however, new members are to be taken into the incor-
porated business, or any of the partners expect to sell stock, or
it is anticipated that at any time in the near future stock will
change hands, the proper valuation and capitalization of the
business become matters of considerable importance. Then
the value of the good-will should be added to the property
values; also any other intangible assets, such as trade names,
trade marks and copyrights should be included at a fair figure.
All of these are valuable assets and are legitimately represented
in the capitalization of the business.
Any desired property may, of course, be reserved to the '
partnership. If the partners wish to retain a portion of the
INCORPORATING A PARTNERSHIP. 271
cash on hand, or certain portions of the firm realty or other
property, or think certain accounts better in their own hands,
the whole matter is in their discretion. They may retain what
they will and transfer what they will.
The form of capitalization is also a matter of conditions
and discretion. It may be all common stock, or, if desired,
preferred stock and bonds may be added. The matter rests
entirely with the partners. If it is decided to issue bonds the
corporate capitalization will naturally be reduced by just that
amount. If preferred stock is issued, the common stock will
be reduced by that amount, but the total capitalization will
remain the same.
If additional capital is needed for the business of the new
corporation, and stock must be sold to secure it, the amount of
capitalization determined by the total value of the partnership
assets — including good-will — would be increased by the
amount of stock to be so sold.
§ 249. Exchange of Property for Stock.
The value of the partnership business and property having
been determined, and the capitalization of the corporation
fixed at this total value, the business, as a going concern, will
be offered to the new corporation in exchange and full pay-
ment for all its capital stock. This offer should be by formal
written proposition, which would usually be signed by one of
the partners with the firm name, but might be signed by all
the partners.
This proposition is usually accepted without demur, the
new corporation authorizing the issue of its capital stock in
payment for the property. The capital stock will then be
issued in accordance with the terms of the proposition, and
the partnership business and property as tendered will be
transferred to the corporation, usually by formal bill of sale,
though sometimes by mere delivery of possession, and the
transaction as between the partnership and the corporation is
272 SUNDRY CONSIDERATIONS.
complete. (See Chap. XXXII, Issuance of Stock for
Property. )
The corporation then owns the business as transferred to
it, but the partnership still exists, with the stock as its sole
asset, unless some of the partnership property has been reserved
from the sale to the corporation. The distribution of this
stock among the partners in accordance with previous agree-
ments, or usually in proportion to their respective firm in-
terests, completes the usefulness of the partnership. It may
then be continued in a quiescent condition, be dissolved by
formal agreement, or merely be allowed to lapse. If no part-
nership property was reserved and the stock received by the
firm is distributed, and there are no special reasons for its
continuation, dissolution by formal agreement is the better
practice, avoiding any possibility of subsequent entanglements
or liabilities. If it is desired to avoid all possible liability
under the old firm, formal notice should be given, by mail or
publication, of the incorporation of the business and the dis-
solution of the partnership.
§ 250. Stock Adjustments.
In an ordinary partnership when the investments are
equal, or nearly so, the stock received in exchange for the
partnership property would usually be all common stock
and would be distributed among the partners in equal pro-
portion. If, however, the interests were not equal, or special
conditions were to be met, this very simple arrangement
might be varied almost indefinitely.
At times preferred stock is desired by the partners to
represent a portion, at least, of the property transferred
by them to the corporation. Such stock has the advantage
of its fixed preferential dividend that must be paid if any
profits are made, and it may be given any other stock powers
or privileges deemed necessary.
At other times the partners will prefer to have a portion
of the property transferred to the corporation paid for by
INCORPORATING A PARTNERSHIP. 273
bonds. Corporate taxation is usually thereby avoided
though personal taxation may be proportionately increased.
Beyond this, bonds are a safe and very convenient form of
corporate security to hold if the incorporated business is,
in whole or in part, going into new hands.
A silent partner's interest might be properly provided
for by a preferred stock, drawing a preferential dividend
equal to the rate of interest theretofore paid upon his invest-
ment, or participating otherwise in profits to the same extent
as his investment did before. This preferred stock might
be allowed to vote, or if it were not desirable that the
silent partner should participate in the management, the voting
right might be denied, or his entire interest might be pro-
vided for by an issue of bonds which would draw a fixed
rate of interest without regard to profits, but could not vote.
If one partner's investment were much larger than that
of other partners, but equality in management were desired
in the new corporation, such excess interest might be pro-
vided for by non-voting preferred stock, by a bond issue,
or by an issue of common stock without the voting right.
In the latter case such partner would participate in all
profits on the basis of the full amount of stock held by him
but would not vote on the excess portion. If his excess
investment were in bonds he would vote and participate in
dividends on the basis of the amount of stock actually
received by him, but would receive in addition the fixed
amount of interest called for by his bonds. Also at some
specified date he would receive payment of the face of his
bonds, his excess investment under these conditions con-
stituting a preferred claim against the corporate property.
Under the preferred stock plan, he would participate in
profits to the full on his quota of common stock, but on this
preferred stock would, presumably, only participate in
profits to the extent of his preferred dividend. The final
redemption of such preferred stock might or might not,
according to the arrangement, take precedence over any
274
SUNDRY CONSIDERATIONS.
liquidation of the common stock. (See Chap. VIII, Pre-
ferred Stock.)
§ 251. Board of Directors.
If the partners take the amount of stock in the new cor-
poration to which their respective firm interests entitle them
and let the selection of the board take its natural course
thereafter, the matter is simple. Usually, however, the
partners wish an equality of power in the board, or a speci-
fied representation, or a classification or some other arrange-
ment, and the composition and method of electing the board
of directors frequently becomes the most difficult question
arising in the incorporation of a partnership.
Where equality of power is desired each partner will
usually designate one or more directors so that the com-
pleted board will contain ?n equal number of representatives
for each partner. Where the partnership consists of three
or more, the usual practice is to make the number of direc-
tors equal to the number of partners, elect all the partners,
or the chosen representatives of any partners not wishing to
appear on the board, and then make provision for the main-
tenance of the board so constituted. (See § 252.)
Where there are two partners, the matter is less easily
arranged. Three is the minimum number of directors
usually allowed, and the necessity of having a third director
who really has the deciding vote in any point of difference
makes the situation difficult. Sometimes a confidential
clerk, or a mutual friend, or the wife of one of the partners
is chosen, but in event of any difference, the result is apt
to be very unsatisfactory. If possible, a mutual friend of
character and standing may be elected with the understand-
ing that he is not to be involved or troubled in any way unless
serious difference arises, when he will virtually act as an
arbitrator. Another plan is to have some indifferent person
accept the office and immediately resign, leaving the third
position vacant with the two partners in control to fight
INCORPORATING A PARTNERSHIP. 275
out any differences just as they would have done in the days
of partnership. If this plan were objectionable on account
of the incomplete condition of the board, the membership
of the directorate might be fixed at four, each partner being
elected to the board and designating an additional member.
Arbitration might be provided for in case of a deadlock.
§ 252. Maintenance of Agreed Management.
When the composition and manner of election of the
board of directors has once been decided, some means of
securing the permanency of the agreed arrangement is
usually desirable. If mere representation of the minority
interest on the board is desired, this may usually be secured
by the adoption of cumulative voting. In some states, how-
ever, cumulative voting is not permissible, and in many cases
more than minority representation is desired. Other means
must then be adopted. Some of these are as follows :
(a) By Voting Trust.
The voting trust is often the most satisfactory means of
preserving the agreed status of corporate management, the
members of the old partnership usually constituting the
membership of the trust.
The objections to the voting trust for such a purpose are
its limited duration and the fact that the stock owned by the
partners is itself locked up in the trust, and, for purposes oi
sale, or other use, must be represented by trustees' certifi-
cates.
In New York the life of a voting trust is by statute
expressly limited to five years, and it is doubtful whether
the arrangement could be enforced or continued save by
mutual consent for a longer period. In states where there
is no legislative provision in regard to the voting trust, it
is probable that a trust for the purposes of maintaining an
agreed management would be sustained for any reasonable
period, as ten or even more years.
276 SUNDRY CONSIDERATIONS.
In case of the formation of a voting trust the actual
assignment of the stock to the trustees cannot be avoided.
Irrevocable proxies would be practically impossible under
the usual conditions. The owners of the stock must there-
fore content themselves with trustees' certificates. For hold-
ing and for some other purposes these certificates would not
be objectionable. For selling or for use as collateral they
would not be as available as the stock itself. (See Chap.
XXXV, Voting Trusts.)
(b) By Voting Requirements.
In most states where special charter provisions are
allowed, it may be provided that any desired majority shall
be necessary for the election of directors and this majority
may be made so large — even up to the unanimous vote of
all the outstanding voting stock — that the agreed status
of the board can only be disturbed by the active consent
of all interested parties. Deadlocks may occur at times
under such a provision but their only effect would be to
leave the board in statu quo, thus maintaining the agreed
arrangement but dispensing with the election.
It would be but rarely advisable or wise to require unani-
mous consent to the election of directors. The same ends
may be practically secured by a two-thirds or three-fourths
majority and the danger of factious opposition by holders of
a small number of shares is thereby avoided. (See § 242.)
It is to be noted that under this arrangement in event of
the death or resignation of a director, the interests for which
such director stood would be unrepresented on the board
and could only regain such representation by consent of
sufficient stock to make up an electing majority. This
objection to the plan would under some conditions be fatal.
(c) By Classification of Stock.
The classification of stock offers a very permanent
method of maintaining a representative directorate. Each
INCORPORATING A PARTNERSHIP. 277
partner's stock may be constituted a class with some con-
venient arbitrary designation, as " Class A," " Class B," or
" Class I," " Class 2," etc., and each one of these classes
may be endowed with the right to elect one or more direc-
tors. If desired, one class may be allotted a greater number
of directors than others, though usually each class is allowed
equal power as to the number of directors it may elect.
For instance, in the incorporation of a partnership with
property and other assets of the estimated value of $100,000,
of which $50,000 belongs to one partner, $30,000 to a second
and $20,000 to a third, it might be desired that the same
equal participation in the management that characterized
the partnership should be continued in the corporation. This
might be effected with absolute certainty by a division of the
stock into three classes, $50,000 in the first, $30,000 in the
second and $20,000 in the third, and giving to each class
the right to elect one-third of the membership of the board.
Each partner would then be given all of one of these classes
of stock, and, notwithstanding their very unequal interests
in the business, each would elect one-third the total number
of directors. If it were not desired to secure this absolute
equality in the management of the business but merely to
insure representation to the two minority partners, this stock
might be classified as before, the first class being given say three
directors of a board of five and the second and third classes
one each, or any other apportionment deemed expedient
might be made.
Under this system the interests holding any one class
are absolutely sure that so long as they hold their stock
intact, or hold a clear majority of it, they can elect their
allotted membership of the board, and that in no other way
than by the purchase of at least a majority of their stock can
this representation be wrested from them. It is obvious that
the plan is capable of considerable variation to fit the con-
ditions of any particular case.
A modification of this plan where equal representation is
278 SUNDRY CONSIDERATIONS.
desired is to divide the classified voting stock equally among
the partners and then issue preferred stock without the
voting power to cover the excess of investment of any
partner. Also, where more capital is desired, such non-
voting preferred stock may be sold without interfering with
the original division of power. (See § 98.)
§ 253. Officers.
In the conversion of a partnership into a corporation
little difficulty is usually experienced in the selection of
officers, the partners taking these positions, and their pre-
vious habits, duties and positions in the firm designating
with more or less precision the official position for which
each is best fitted.
It may be noted, however, if there is difficulty in the
assignment of the official positions, that outside of a few
matters specified or implied by the statutes of some states,
the powers and duties of officers may be fixed absolutely by
charter or by-laws. In New Jersey for instance, the certifi-
cates of stock must be signed by the president and treasurer,
certain reports must be signed by designated officials, and
other matters of minor importance are required of specified
officials. Beyond this, however, the corporation is free to
authorize its officers as it deems best. The power of the
president may be so restricted that he is incapable of inde-
pendent action, any desired limitations may be placed upon
the power of the treasurer, the secretary may be assigned
any powers or duties that the conditions seem to require,
and any or all of these officers may be made as dependent
upon or independent of the board and of their fellow officers
as may be deemed expedient.
Usually it is not the part of wisdom to vary the usual
powers and relations of the corporate officers but occasion-
ally in the adjustment of partnership relations under the
corporate form such changes may be made to advantage.
CHAPTER XXXIX.
HOLDING CORPORATIONS.
§ 254. General.
A holding corporation in the modern sense of the term
is a corporation formed for the express purpose of controll-
ing other corporations by the ownership of a majority of
their stock.
Under the common law, which did not permit one cor-
poration to invest in the stock of another, holding corpora-
tions were impossible. 1 The common law rule has, however,
been gradually relaxed and set aside until now the purchase
of stocks by a corporation may be provided for in most
states of the Union. The courts have held that corporations
such as insurance companies which necessarily receive large
amounts for investment, may as a consequence of the con-
ditions and without specific authorization, purchase stocks
in other corporations. Also, any corporation is allowed to
take stock to save a debt, or, where stock has been deposited
with it as collateral and then forfeited, to retain and hold
such forfeited stock.
The general right to purchase and hold the stock of
other corporations, under which the holding corporation is
possible, is, however, derived from legislative enactment,
either by virtue of statutes expressly conferring on corpora-
tions the power to buy and hold the stocks of other corpora-
tions, or under the operation of statutes permitting the
formation of corporations for any legitimate purpose.
§ 255. Statutory Enactments.
New Jersey was the first state to enact statutes spe-
cifically empowering corporations organized under its laws
'People vs. Pullman Co., 17s 111., 125 (1898), 64 L. R. A., 366.
279
280 SUNDRY CONSIDERATIONS.
to hold the stock of other corporations. This law was
adopted in the year 1888, and reads as follows :
" Any corporation may purchase, hold, sell, assign,
transfer, mortgage, pledge or otherwise dispose of the
shares of the capital stock of, or any bond, securities
or evidences of indebtedness created by any other cor-
poration or corporations of this or any other state,
and while owner of such stock may exercise all the
rights, powers and privileges of ownership, including
the right to vote thereon." § 51, The General Cor-
poration Law of New Jersey.
The enactment of this law by New Jersey paved the
way for the great industrial combinations. Theretofore they
had been attempted by the appointment of a board of trus-
tees in whose hands was placed a majority of the stock of
the corporation to be controlled, these trustees then electing
boards of directors who managed their respective corpora-
tions in the common interest. This arrangement was
declared illegal and has been abandoned for the holding
corporation under the New Jersey law. (See State vs.
Standard Oil Co., 49 Ohio St., 137, 1892.) (People vs. North
River Sugar Refining Co., 121 N. Y., 582, 1890.)
Delaware and Maine have enacted statutes similar to
those of New Jersey, permitting corporations to buy, hold
and sell stocks, and in New York these privileges may be
enjoyed if so provided in the charter.
§ 256. Present Status.
At the present time the holding corporation occupies a
position of great importance, being the means by which
many of the great industrial combinations have been formed
and are now controlled. Sometimes these corporations are
confined strictly to the function of holding companies, as
in the case of the Northern Securities Company which was
formed solely to hold sufficient stock of the Great Northern
Railway Company and the Northern Pacific Railway Com-
HOLDING CORPORATIONS. 281
pany to control the two companies and combine their
interests. Usually, however, such a corporation is given,
in addition, ample powers to carry on directly any business
or industry in the line of the proposed combination. Then
it can operate by controlling the majority of the stock of its
component corporations, or by buying up the manufacturing
plants engaged in the particular industry, or by initiating
new industrial operations on its own account, or by doing
all of these things. The United States Steel Corporation
has such a charter as this which is given in full in Part VII
of this work. (See Chap. XL, "Industrial Combination.")
It is possible for the holding corporation itself to be con-
trolled by the ownership of but fifty-one per cent, of its stock,
and so long as the parties in control hold this amount they can
part with any additional stock without interfering with their
control of the holding corporation and through it of the sub-
sidiary corporations. This device makes it possible for those
who are on the inside to control hiuch capital with a compara-
tively small investment on their own part. For a full dis-
cussion of this subject see Robotham vs. Prudential Insurance
Co., 53 Atl. Rep., 842 (1903) ; 1 Cook on Corporations, §317,
and Noyes on Intercorporate Relations, §285 et seq.
§ 257. Limitations.
The holding corporation is the instrument by which most
of the great industrial combinations have been effected and is
generally recognized as the proper legal means to this end.
In some cases, however, these corporations may be found to
violate provisions of the laws- against combinations and
monopolies. It is also more than possible that some of the
states may pass laws to prevent foreign holding corporations
from controlling corporations formed under the laws of such
states.
In the recent Northern Securities case, the United States
courts held the attempt to prevent competition between two
opposing interstate railways by means of a holding corporation
282 SUNDRY CONSIDERATIONS.
illegal. (See Northern Securities Co. vs. United States, 193
U. S., 197, 1903.)
In any case of abuse of power by means of a holding cor-
poration, the courts would undoubtedly afford relief. (See
Farmers' Loan and Trust Co. vs. N. Y., etc., R. Co., 150 N. Y.,
410, 1896; Niles vs. N. Y. C. & H. R. R. Co., 69 App. Div.,
N. Y., 144, 1902.)
§ 258. Parent Companies.
A useful variant of the holding company is frequently em-
ployed with advantage in the exploitation of inventions. A
parent corporation, in which the patent rights for such inven-
tions are vested, is formed in some selected state where the
power to hold the stock of other corporations may be had.
Subordinate companies are then formed in the several states
or other territorial districts, and to these companies rights in
the invention are assigned for their respective districts, the
parent company usually reserving or acquiring a controlling
interest in each subordinate company. The patent rights
may be sold absolutely, or with reservation of royalties, or
merely a license may be issued. The subordinate company then
operates in its own territory as an independent company, but
under the general direction of the parent company, this direc-
tion becoming immediate and absolute in case of necessity.
Under this plant the parent corporation makes certain the
proper fulfilment of its contracts with the subordinate com-
panies, and also the proper and harmonious conduct of the
general business.
For a discussion of this subject see People vs. Am. Bell
Telephone Co., 117 N. Y., 241 (1889.)
CHAPTER XL.
INDUSTRIAL COMBINATION.
§ 259. General.
The modern industrial combination is an aggregation of
corporations of like or collateral purposes, with such various
additions to or modifications of the powers and holdings of
the central or controlling corporation as may be dictated by the
particular conditions. The term " trust," by a somewhat sin-
gular verbal perversion, is applied colloquially to such a com-
bination to express the idea that it controls a sufficient pro-
portion of the industry affected to give it more or less of
monopolistic powers.
In former days combinations of this kind were effected by
placing the controlling stock interests of the various corpora-
tions in the hands of trustees, who by this means elected the
majority of the directors of each corporation, and through the
compliant boards thereby secured dictated the policy and de-
tails of management for each corporation. Thus competi-
tion was avoided and such co-operation secured as was deemed
necessary.
This arrangement was, however, summarily and effectively
checked by the adverse decisions of the courts, and recourse
was then had to the unity secured by combining all the desired
interests under one dominating central corporation. This
method now prevails. The controlling corporation may ac-
quire the properties and businesses of the subordinate corpora-
tions outright, thereby effecting a consolidation, or may pur-
chase a majority interest in the stock of each one, thereby con-
trolling their operations, or a combination of these methods
may be employed. In any event, the result is the same, the
283
884 SUNDRY CONSIDERATIONS.
absolute domination and direction of the business and policy
of each of these subordinate corporations by the central power.
The combinations so secured are, when properly arranged,
very effective, are upheld by the courts, and apparently with-
stand successfully the varied anti-trust legislation of the dif-
ferent states of the Union.
The organization of large combinations of this kind is a
difficult and complicated undertaking, demanding the most
skillful promotion, able financing, experienced and resource-
ful counsel and general business and executive ability of the
highest order. A brief resume of the usual procedure is
given in the following sections :
§ 260. Preliminaries.
In some instances the initiative in forming an industrial
combination has been taken by the leaders of the particular in-
dustry. It is but seldom, however, that such a combination has
been carried through by these leaders. They are too fully
occupied, lack the wide experience, and, possibly, the financial
position, essential to the formation of a large combination.
Men who occupy the same relative position in the financial
world that these leaders do in the industrial world are usually
requisite to success.
Not infrequently the movement for a combination will be
inaugurated by men entirely outside the industry involved,
these men being actuated by the exceptionally rich emolu-
ments that have rewarded the promoters of successfully-
effected combinations. These promoters may be financiers
who have the ability to secure the co-operation of the repre-
sentative men of the industry in which the combination is to
be effected, or they may be parties of no great financial weight
themselves, but able to interest both financiers and the leaders
of the particular industry in the combination proposed. In
any event, if the combination is to be successful, the co-opera-
tion of the leading men of the industry is essential, and, on the
other side, the active participation of men of sufficient position
INDUSTRIAL COMBINATION. 285
to finance the proposed combination, either directly or in-
directly, is equally essential.
Some combinations have come to pass as the resultant of
unsuccessful " pools," " gentlemen's agreements " and other in-
effctive devices of the kind. These were too loose, too un-
manageable and too easily broken to accomplish the desired
purpose, and have been abandoned in favor of the stronger,
more effective and permanent corporate combination.
Usually the details of any proposed combination are
mapped out in advance, possibly by the promoters and the
leading men of the particular industry involved, or by a com-
mittee appointed for the purpose by the interested parties. In
any event, a careful preliminary investigation of the whole
matter is most essential. Such an investigation, carried out
thoroughly and intelligently, should demonstrate almost con-
clusively the possibilities of the proposition — should deter-
mine if the plan is practicable, if so, under what conditions,
and whether these conditions can be met. If the results of
such investigation are sufficiently encouraging, the general
plan of action will be arranged by the parties in charge, a
working organization of some kind effected among them-
selves and the actual work begun.
§ 261. Option Agreements.
In the incipiency of the combination option contracts oc-
cupy a most important position. These are in effect agree-
ments between the promoters of the proposed combination and
the owners of the desired properties, defining the terms upon
which these properties may be brought into the combination.
A large combination could hardly be formed without their
employment, and generally speaking, the greater the number
of desirable options secured and the better their terms, the
greater the possibilities of success for the combination and the
larger the profits of promotion. (See Forms 46-51.)
In this work the genius of the promoter has full play and
much depends upon his ability and efficiency. The best possi-
286 SUNDRY CONSIDERATIONS.
ble terms must be obtained from those willing to enter the
combination, and unwilling owners, by persuasion, argument
and even covert threats, must be brought into line. In some
cases the demands of owners are extravagant and unjustifi-
able, and it then frequently becomes a matter of nice judgment
whether their demands shall be acceded to or they shall be
left out, temporarily at least. It is at times easier to deal with
such cases after the actual formation of the trust.
Sometimes conditional options are secured on a few of
the most important plants of a particular industry before any
other attempt is made to formulate the trust. These options
are then made the basis upon which the lesser plants are invited
to enter the combination.
Occasionally options are taken without accurate appraise-
ment or other valuations, the parties in charge being willing
to take the properties in on the owner's terms. Usually, how-
ever, the option price is contingent on verification by subse-
quent inspection and appraisement. Or the price is left con-
tingent on the results of such later inspection and appraise-
ment.
These options may be on the plants direct, or on a sufficient
stock interest in the corporations to carry their control. Some-
times options on the stock will include an agreement by the
directors and stockholders to sell the entire assets of the com-
pany. The option prices are usually made, as far as possible,
payable in the stock or other securities of the combination.
§ 262. Inspection and Appraisements.
In the organization of any large combination, the inspec-
tion and appraisement of the various properties and businesses
involved is a matter of much difficulty and of the greatest im-
portance. Expert accountants go over the books and accounts
of the various concerns and compile carefully itemized reports,
going back a number of years and showing the business done,
the expenses and the profits, as well as the existing conditions.
Appraisers meanwhile take careful and detailed inventories of
INDUSTRIAL COMBINATION. 287
the plants and stocks with full estimates and valuations. In
both cases the investigations are extensive in their range and
the reports embodying their results should be accurate as to
fact and conservative as to deduction. Condensed and tabu-
lated statements are made from these reports.
These tabulations are used for two general purposes; the
one, to determine the actual values of the properties and the
basis upon which they may be properly taken into the trust;
the other, which is even more important, to determine what
net income is likely to result from the united properties when
operated under the economies possible to such a combination.
The combinations of the early part of the decade were
generally over-capitalized, mainly because, in nearly every case,
the calculations were predicated upon the few years immedi-
diately preceding, which had been years of great prosperity
for all manufacturing interests. It is probable that the ac-
countants and appraisers did their work in these cases with
entire correctness, but the data and the estimates drawn
therefrom, being based on exceptional conditions, were mis-
leading when applied to a future to which these exceptional
conditions did not extend.
It has also since become evident that the economies of com-
bination were generally exaggerated, and that in some cases,
instead of destroying competition, the conditions under which
the combinations were formed necessitated an increase of
prices to a point that actually stimulated competition. The
over-capitalized trusts were then the principal sufferers in the
industrial war they had themselves provoked.
It need hardly be said that, while the general industrial con-
ditions preceding and existing at the time of the formation of
a trust should be given full weight in its capitalization and
general arrangement, such conservative allowance should also
be made for the years to come, that, no matter what the condi-
tions, short of an industrial crisis, the combination will survive
in good condition. If this is done the combination is a safe one.
If not, it is intrinsically unsound.
288 SUNDRY CONSIDERATIONS.
§ 263. Underwriting.
In all important combinations of late years underwriting
has been an important feature. The obvious purpose of this
underwriting is to assure the sale of the combination's se-
curities. In most, if not all cases, an equally important pur-
pose is the immediate cash to be secured thereby.
Any large combination is practically impossible without
considerable amounts of ready cash. Payments must be made
on options. Debts or bonds that encumber desired properties
must be paid. The direct organization expenses are heavy.
When the properties are taken over, large payments are
usually required. An adequate operating capital is a necessity.
Most, if not all, of these demands must be met before money
can be secured from the public by the sale of stock or other
securities of the combination.
The underwriting meets this emergency effectually. The
underwriters themselves may agree to pay or advance certain
amounts of cash on their underwriting. Usually, however,
the money is secured from some financial institution on the
strength of the underwriting and the pledges of the incipient
combination, or of its trustees. If the underwriting is re-
sponsible and sufficient in amount the necessary cash is readily
secured.
The underwriting, if made by suitable parties, is also a
strong endorsement of the combination. It means that if the
public do not buy the securities offered by the trust the under-
writers will, and, if these underwriters are responsible, their
opinion, as indicated by this obligation, has great weight with
the investing public. The successful organization of the great
modern industrial combinations could hardly have been
achieved without the ready financial aid afforded by the
modern system of underwriting. (See Chap. XXXIV, Under-
writing. )
INDUSTRIAL COMBINATION. 289
§ 264. Organization.
The general rule in large combinations is to issue preferred
stock to the value of the actual property assets, and then issue
common stock in addition up to the estimated earning powers
of the combination. As in recent years the earning capacity
has been usually estimated on the basis of preceding pros-
perous years, with a too liberal addition to cover the savings
resulting from the supposed economies of trust management,
the common stock of most of the later trusts has generally de-
preciated and has little value, except as derived from its voting
power.
Bonds are not usually issued at the time of organization,
unless there are existing bonds or other obligations on some of
the desired properties or corporations which must be taken up
by bonds of the combination. If issued, interest must be paid
when due, regardless of profits or losses, and this necessarily
may result in disaster. Also, the bonds themselves must be
redeemed at maturity, and this may be difficult. It is, there-
fore, a recognized rule that bonds must only be issued, if at
all, in a very small proportion to the capitalization. The Ship-
yard Trust is the only prominent example in which this
prudent rule was openly and flagrantly disregarded, and here
the very unfortunate results testify forcibly to the soundness
of the general rule.
The charter will probably be taken out under the laws of
New Jersey, these laws having been expressly framed to per-
mit the formation and convenient operation of corporate com-
binations doing business in many states. (See § 24.)
The final organization of a trust does not differ from that
of any other incorporation and proceeds along the lines indi-
cated in Chapters XXX to XXXII of the present volume.
Temporary incorporators and directors are the rule, though,
in the incorporation of the Carnegie Steel Company and a few
other combinations of importance, the real parties in interest
participated in the first organization. (See Charter Forms,
Part VII.)
PART VIL— FORMS AND PRECEDENTS.
CHAPTER XLI.
CHARTER FORMS.
Form i. — Connecticut Charter.
Certificate of Incorporation
of
THE NATIONAL PUBLICITY CORPORATION.
We, the subscribers, certify that we do hereby associate ourselves as a
body politic and corporate, under and by virtue of the provisions of an act
of the General Assembly of the State of Connecticut, entitled " An Act
Concerning the Formation of Corporations," being chapter 157 of the Public
Acts of 1901, and all acts amendatory thereof ; and we further certify :
First — That the name of the corporation is
" The National Publicity Corporation."
Second — That said corporation and its principal office or place of busi-
ness is to be located in the Town of Hartford, in the State of Connecticut.
Third — That the nature of the business to be transacted and the purposes
to be promoted or carried out by said corporation are as follows :
(a) To act as and carry on the general business of advertising agents
and to engage in and conduct the business of advertising in all its
branches, including the preparation and arrangement of advertise-
ments and advertising matter of all kinds ; the purchase, preparation,
manufacture, utilization and disposal of advertising toys, pictures,
devices, novelties, inventions and all other means and instru-
mentalities for advertising; the acquisition and preparation of adver-
tising space and facilities, mural and of independent construction,
and the letting and selling of space and privileges upon the same,
and the purchase and utilization of all letters patent, patent rights,
trademarks and copyrights pertaining to or useful in the conduct
of the said business of advertising.
(b) To buy, sell, manufacture and deal generally, as printers,
publishers, stationers, engravers, designers, booksellers and pro-
prietors and publishers of newspapers, magazines, periodicals, literary
works and publications and printed and illustrated matter of all
kinds and descriptions.
(c) To engage generally in the art, trade and business of photo-
graphic printing, photo-engraving, lithographing and all other modes
290
CHARTER FORMS. 291
of reproducing or producing printing, engraving, drawings, paintings,
pictures and representations and impressions of all kinds, in color
or otherwise.
Fourth — That the amount of the capital stock of said corporation hereby
authorized is two thousand dollars ($2,000). divided into twenty (20)
shares, of the par value of one hundred dollars ($100) each.
Fifth — That said corporation will commence business with a capital
stock of one thousand dollars ($1,000).
Sixth — That no period is hereby limited for the duration of said corpo-
ration.
Seventh — Signature of incorporators:
NAMES. RESIDENCES.
Adam M. Johnson City and State of New York.
William C. Kelsey City and State of New York.
James L. Sands City and State of New York.
Dated at New York this 14th day of March, 1908.
(Affidavit of incorporators to truth of certificate.)
Form 2. — Delaware Charter.
Certificate of Incorporation
of the
INTERSTATE BISCUIT COMPANY.
First — The name of this corporation shall be
" Interstate Biscuit Company/'
Second — Its principal office in the State of Delaware shall be located
in the City of Wilmington and County of New Castle. The agent in chargf
thereof shall be Philip L. Garrett.
Third — The objects and purposes for which this corporation is formed
are to do any and all of the things herein set forth, as fully and to the same
extent as natural persons might or could do, and in any part of the world,
namely :
(o) To manufacture, buy, sell, pack, prepare and generally to
deal in and with biscuits, crackers, cakes, Italian paste, confectionery,
cereals, coffees, teas, dried fruits, and foods and food products and
materials of all kinds, either raw or manufactured, that may be used
in foods and food products and beverages, or for the packing, adapt-
ing, preparing or preserving of such foods, food products or bever-
ages ; and generally to mix, adapt, refine, prepare, preserve, manu-
facture and dispose of all such goods, wares, merchandise and
materials, either in original packages or in such cans, jars, boxes,
cartons or other containing packages as may be found desirable.
(&) To purchase, lease or otherwise acquire lands, buildings,
tenements and factories in Delaware or elsewhere, for the plants,
offices, workshops, warehouses, laboratories and manufactories of the
Company, and to purchase, lease or otherwise acquire tools, imple-
ments, engines, machinery, apparatus, fixtures and conveniences of
all kinds for the manufacture, manipulation, preparation, preserva-
292 FORMS AND PRECEDENTS.
tion, packing and handling of the materials and products of the
Company.
(c) To apply for, obtain, purchase, lease or otherwise acquire,
and to register, hold, own and use any and all trademarks, trade
secrets, processes, formulae, inventions and improvements capable
of being used in connection with the work of the Company, whether
secured under letters patent in the United States, or elsewhere or
otherwise; and to use, operate and manufacture under the same, and
to sell, assign, grant licenses in respect of or otherwise dispose of
and turn the same to the account and profit of the Company.
(d) To do any and all things set forth in this certificate as
objects, purposes, powers or otherwise to the same extent and as
fully as natural persons might do, and in any part of the world, as
principals, agents, contractors, trustees or otherwise, and either
alone or in company with others.
(e) To have offices, conduct its business and promote its objects
within and without the State of Delaware, in other States, the Dis-
trict of Columbia, the territories and' colonial dependencies of the
United States, and in foreign countries, without restriction as to
place or amount.
Fourth — The amount of the total authorized capital stock of this corpo-
ration is Five Hundred Thousand Dollars ($500,000), divided into five
thousand (5,000) shares of the par value of One Hundred Dollars ($100)
each.
The amount of capital stock with which this corporation will commence
business is the sum of One Thousand Dollars ($1,000).
Fifth — The names and residence of each of the original subscribers to
the capital stock are as follows :
NAMES. RESIDENCES.
Francis G. Fawcett Pittsburgh, Pa.
Randolph C. Blythe Pittsburgh, Pa.
A. C. Bentley Philadelphia, Pa.
Sixth — The existence of this corporation shall be perpetual.
Seventh — The private property of the stockholders shall not be subject
to the payment of corporate debts to any extent whatever.
Eighth — The Directors shall have power to make, alter, amend and
repeal the By-Laws ; to fix the amount to be reserved, and to authorize and
cause to be executed mortgages and liens, without limit as to amount, upon
the property and franchises of this corporation.
With the consent in writing, and pursuant to a vote of the holders of
a majority of the capital stock issued and outstanding, the Directors shall
have power and authority to dispose, in any manner, of the whole property
of this corporation.
The Directors shall from time to time determine whether and to what
extent the accounts and books of this Corporation, or any of them, shall
be open to the inspection of the stockholders; and no stockholder shall have
any right of inspecting any account, or book, or document of this Corpora-
tion, except as conferred by law, or the By-Laws, or by resolution of the
stockholders.
The stockholders and Directors shall have power to hold their meetings
and keep the books, documents and papers of the Corporation outside of the
State of Delaware, at such places as may be from time to time designated
by the By-Laws or by resolution of the stockholders or Directors, except as
otherwise required by the laws of Delaware.
CHARTER FORMS. 293
_ It is the intention that the objects, purposes and powers specified in the
third paragraph hereof shall, except where otherwise expressed in said
paragraph, be nowise limited or restricted by reference to or in inference
from the terms of any other clause or paragraph in this certificate of incor-
poration, but that the objects, purposes and powers specified in the third
paragraph and in each of the clauses or paragraphs of this charter shall be
regarded as independent objects, purposes and powers.
We, the undersigned, for the purpose of forming a corporation under the
laws of the State of Delaware, do make, file and record this certificate,
and do certify that the facts herein stated are true; and we have accord-
ingly hereunto set our respective hands and seals, this seventeenth day of
March, A. D. 1908.
Francis G. Fawcett. [seal.]
Randolph C. Blythe. [seal.]
A. C. Bentley. [seal.]
In presence of
(Acknowledgment in due form.)
Form 3. — Maine Charter.
Article of Agreement
of
THE MARCHMONT DRUG COMPANY.
We, the undersigned, hereby associate ourselves together for the pur-
pose of forming a corporation under the laws of Maine.
First — The name of the said corporation shall be
" The Marchmont Drug Company."
Second — The purposes for which it is to be formed are :
(1) To acquire and take over from the Marchmont Drug Corpo-
ration, a corporation under the laws of New Jersey, but having its
factory and principal place of business in the. City of New York,
the recipes and formulas for and information as to the processes of
manufacturing and preparing and the right to prepare, manufacture
and deal in the proprietary articles and medicines owned by the
said New Jersey corporation, together with the trade names, trade-
marks and patented preparations owned by said corporation, and
all its plant, factory and offices held under lease in said City of
New York, and all the apparatus and appliances and materials therein
contained.
(2) To 1 buy, sell, refine, prepare, manufacture, manipulate, import,
export and deal in and with all substances, materials, apparatus and
things capable of being used in connection with the preparation and
manufacture of the articles and remedies which this company may
become entitled to prepare and manufacture, and to construct, main-
tain and alter any plant, buildings or factories and laboratories suit-
able or convenient for the purposes of the company.
(3) To carry on the business of chemists, druggists, chemical
manufacturers, importers, exporters and dealers in chemical, pharma-
ceutical, medicinal and other preparations and chemicals.
Third — Said corporation shall be located and shall have its principal
office at Portland, in the County of Cumberland and State of Maine.
294 FORMS AND PRECEDENTS.
Fourth — We do hereby waive all statutory requirements as to notice
of the first meeting for organization, and hereby call such first meeting
for the 6th day of March, 1908, at 3 o'clock p. m., at the office of
Wellman & Shields, in Portland, Maine, and we hereby consent to the
transaction of all such business as may come before said meeting or at any
adjournment thereof.
Dated this 27th day of February, 1908.
Morton Rhoades.
Louis Hoffman.
Robert W. Styles.
The foregoing articles are sent to Maine, accompanied by
the subscriptions of the parties for one share each of stock,
with proxies signed by these parties in blank. Four residents
of Maine are then introduced into the matter, likewise sign the
articles, subscribe for one share each of stock and the blank
proxies are made out to one or more of them as convenient.
These Maine parties, being a majority of the incorporators
and holding proxies from all the other incorporators, are fully
empowered to act and hold the first meeting.
This meeting adopts by-laws, fixes the amount of capital
stock and elects directors and officers. A certificate of organ-
ization is then prepared, is signed by the officers and filed in
the office of the Secretary of State. The corporate existence
begins from the date of filing of this certificate, which is in
form as follows:
STATE OF MAINE.
Certificate of Organization of a Corporation under the General Law.
The undersigned, officers of a corporation organized at Portland, Maine,
at a meeting of the signers of the articles of agreement therefor, duly called
and held at the office of Wellman & Shields, in the City of Portland, on
Friday, the 6th day of March, A. D. 1008, hereby certify as follows:
The name of said corporation is
" The Marchmont Drug Company."
The purposes of said corporation are :
(As set forth in Articles of Agreement.)
The amount of capital stock is One Hundred Thousand Dollars
($100,000) .
The amount of common stock is One Hundred Thousand Dollars
($100,000).
The amount of preferred stock is nothing.
CHARTER F6RMS. 295
The amount of capital stock already paid in is nothing.
The par value of the shares is One Hundred Dollars ($100).
The names and residences of the owners of said shares are as follows :
NO. OF
NAMES. RESIDENCES. SHARES.
Morton Rhoades New York, New York
Louis Hoffman New York, New York
Robert W. Styles New York, New York
Wm. P. Darby Portland, Maine
H. C. Fisher Portland, Maine
Thos. Ashby Portland, Maine
Oliver Haines Portland, Maine
Number of shares of stock unsubscribed 993
Total number of shares of stock.
Said corporation is located at Portland, in the County of Cumberland.
The number of directors is three and their names are Wm. P. Darby,
H. C. Fisher and Thos. Ashby.
The name of the Clerk is Wm. P. Darby and his residence is Portland.
The undersigned H. C. Fisher is President; the undersigned Thos.
Ashby is Treasurer ; and the undersigned Wm. P. Darby, H. C. Fisher and
Thos. Ashby are a majority of the directors of said corporation.
Witness our hands this seventh day of March, A. D. 1908.
H. C. Fisher, President.
Thos. Ashby, Treasurer.
Wm. P. Darby,")
H. C. Fisher, [-Directors.
Thos. Ashby, J
(Affidavit of directors in due form.)
(Certificate of Attorney-General that the certificate is conformable to
Maine law.)
Form 4. — South Dakota Charter.
Articles of Incorporation
of
ANDES EXPLORATION AND DEVELOPMENT COMPANY.
Know All Men By These Presents :
That we, the undersigned, George N. Wright, James Powers and John
E. Evans, for ourselves, our associates and successors, have associated
ourselves together for the purpose of forming a corporation under and by
virtue of the statutes and laws of the State of South Dakota, and we do
hereby certify and declare as follows, viz. :
First — The name of this corporation shall be
" Andes Exploration and Development Company."
Second — The purpose for which this corporation is formed is to conduct
the business of:
1. Mining, smelting, refining, reducing and dealing in and with
all sorts of ores, metals, minerals, and the prospecting, locating,
296 FORMS AND PRECEDENTS.
opening, operating and developing of mines, oil wells, quarries and
mineral deposits of all descriptions.
2. Constructing and operating mills, factories, machine shops and
industrial plants of all descriptions, and the buying, selling and deal-
ing in and with all supplies, merchandise and materials, raw or
prepared, useful or convenient, in connection therewith.
3. Establishing and conducting savings institutions, loan, trust
and investment companies, and guarantee and insurance institutions,
either directly or indirectly, in such form and manner as the laws
may permit.
4. Farming, planting and tilling the soil and the operating of
farms, ranches, orchards, plantations and haciendas, and all industries
appurtenant thereto.
5. Constructing and operating tramroads, canals, irrigating sys-
tems, steamboats, steamships and ships and vessels of all kinds.
6. Buying, selling, leasing and improving lands, town sites and
territories, and laying out, plotting, subdividing and colonizing the
same.
Third — The place where the principal business of this corporation shall
be transacted is Pierre, in the County of Hughes and State of South
Dakota, but a branch office may be located at New York City, where said
corporation may hold meetings of its stockholders and directors, and the
said corporation may do business in any part of the world.
Fourth — The term for which this corporation shall exist shall be twenty
(20) years.
Fifth — The number of directors of this corporation shall be five (5),
and the names and residences of such, who are to serve until the election
of their successors, are as follows :
NAMES. RESIDENCES.
George N. Wright New York City, N. Y.
James Powers New York City, N. Y.
Henry Decker Brooklyn, N. Y.
John E. Evans Pierre, S. D.
Richard Conley Pierre, S. D.
Sixth — The amount of the Capital Stock of this Corporation shall be
and is Two Million Five Hundred Thousand Dollars ($2,500,000), divided
into Two Hundred and Fifty Thousand (250,000) Shares, of the par value
of Ten Dollars ($10) each.
In Testimony Whereof, we have hereunto set our hands this
14th day of March, 1908.
(Signed) George N. Wright.
James Powers.
John E. Evans.
(Acknowledgments in due form.)
(Special affidavit by two incorporators that incorporation is in good faith,
and not to avoid the provisions of the South Dakota anti-trust laws.)
CHAPTER XLII.
SPECIAL CHARTERS.
Form 5.— New York Charter (Midvale Realty).
Certificate of Incorporation
of the
MIDVALE REALTY CORPORATION.
We, the undersigned, all being of full age and two-thirds being citizens
of the United States and one of us a resident of the State of New York,
for the purpose of forming a corporation under the Business Corporations
Law of the State of New York, do hereby certify and set forth :
First— The name of said corporation shall be
" Midvale Realty Corporation."
Second — The purposes for which said corporation is to be formed are
as follows:
(Purposes omitted.)
Third — The amount of capital stock of said corporation shall be one
million dollars ($1,000,000).
The amount of capital with which said corporation will begin business
is one thousand dollars ($1,000).
Fourth — The number of shares of which said capital stock is to consist
shall be ten thousand (10,000) shares, of the par value of one hundred
dollars ($100) each.
Of said capital stock five thousand (5,000) shares, of the par value of
five hundred thousand dollars ($500,000) shall be cumulative preferred
stock, entitled to an annual dividend of six per cent. (6%) from the profits
of the corporation, payable semi-annually, on the tenth days of January
and July in each year, before any dividends are paid upon the common
stock, and to share equally with the common stock in any excess paid in
any year above six per cent. (6%) to all the stock, and in the event of
liquidation or dissolution from any cause said preferred stock shall be
entitled to be paid in full from the assets of the corporation before any-
thing is paid to the common stock. The holders of such preferred stock
shall not be entitled to vote in any meeting of the stockholders or election
of directors, unless the accumulated dividends due and unpaid such pre-
ferred stock at the time shall equal or exceed fifteen per cent. (15%) of
the par value of said stock.
Of said capital stock five thousand (5,000) shares, of the par value of
five hundred thousand dollars ($500,000) shall be common stock of the
corporation.
Fifth — The principal business office of said corporation shall be located
in the Borough of Manhattan and in the City, County and State of
New York.
297
298 FORMS AND PRECEDENTS.
Sixth — The duration of said corporation shall be perpetual.
Seventh — The number of directors of said corporation shall be five.
Eighth — The names and post-office addresses of the directors of said
corporation for the first year are as follows :
(Names and addresses of directors omitted.)
Ninth — The names and post-office addresses of the subscribers to this
certificate, and the number of shares which each agrees to take in said
corporation are as follows :
NAMES. ADDRESSES. SHARES.
John B. Clark 203 Broadway, New York City 1
Charles F. Holbrook Mount Vernon, N. Y 1
Douglas Raymond 212 Madison Ave., New York City 1
Tenth — At all elections of directors of this corporation each stockholder
shall be entitled to as many votes as shall equal the number of his shares
of stock, multiplied by the number of directors to be elected, and he may
cast all of such votes for a single director or may distribute them among
the number to be voted for, or any two or more of them, as he may see fit.
In Witness Whereof, we have made and signed this certificate
in duplicate this 13th day of January, one thousand nine
hundred and eight.
(Signatures of incorporators.)
(Notarial acknowledgment in due form.)
Form 6. — New Jersey Charter (United States Steel).
Amended Certificate of Incorporation
of
UNITED STATES STEEL CORPORATION.
We, the undersigned, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the provisions of the Act of the
Legislature of the State of New Jersey, entitled "An Act Concerning Corpo-
rations (Revision of 1896)," and the acts amendatory thereof and supple-
mentary thereto, do hereby certify as follows :
I. — The name of the corporation is
United States Steel Corporation."
II. — The location of its principal office in the State of New Jersey is
at No. 51 Newark street, in the City of Hoboken, County of Hudson. The
name of the agent therein and in charge thereof, upon whom process
against the corporation may be served, is Hudson Trust Company. Said
office is to be the registered office of said corporation.
III. — The objects for which the corporation is formed are :
To manufacture iron, steel, manganese, coke, copper, lumber and
other materials, and all or any articles consisting or partly consisting
of iron, steel, copper, wood or other materials, and all or any products
thereof.
To acquire, own, lease, occupy, use or develop any lands contain-
ing coal or iron, manganese, stone or other ores, or oil, and any
woodlands, or other lands, for any purpose of the company.
SPECIAL CHARTERS. 299
To mine or otherwise to extract or remove coal, ores, stone and
other minerals and timber from any lands owned, acquired, leased
or occupied by the company, or from any other lands.
To buy and sell, or otherwise to deal or to traffic in, iron, steel,
manganese, copper, stone, ores, coal, coke, wood, lumber and other
materials and any of the products thereof, and any articles consisting
or partly consisting thereof.
To construct bridges, buildings, machinery, ships, boats, engines,
cars and other equipment, railroads, docks, slips, elevators, water
works, gas works and electric works, viaducts, aqueducts, canals
and other waterways, and any other means of transportation, and
to sell the same, or otherwise dispose thereof, or to maintain and
operate the same, except that the company shall not maintain or
operate any railroad or canal in the State of New Jersey.
To apply for, obtain, register, purchase, lease or otherwise to
acquire, and to hold, use, own, operate and introduce, and to sell,
assign, or otherwise to dispose of, any trademarks, trade names,
patents, inventions, improvements and processes used in connection
with or secured under letters patent of the United States, or else-
where, or otherwise; and to use, exercise, develop, grant licenses
in respect of, or otherwise turn to account any such trademarks,
patents, licenses, processes and the like, or any such property or
rights.
To engage in any other manufacturing, mining, construction or
transportation business of any kind or character whatsoever, and to
that end to acquire, hold, own and dispose of any and all property,
assets, stocks, bonds and rights of any and every kind, but not to
engage in any business hereunder which shall require the exercise
of the right of eminent domain within the State of New Jersey.
To acquire by purchase, subscription or otherwise, and to hold
or to dispose of stocks, bonds or any other obligations of any corpo-
ration formed for, or then or theretofore engaged in or pursuing any
one or more of the kinds of business, purposes, objects or operations
above indicated, or owning or holding any property of any kind
herein mentioned ; or of any corporation owning or holding the stocks
or the obligations of any such corporation.
To hold for investment, or otherwise to use, sell or dispose of, any
stock, bonds or other obligations of any such other corporation; to
aid in any manner any corporation whose stock, bonds or other
obligations are held or are in any manner guaranteed by the com-
pany, and to do any other acts or things for the preservation, protec-
tion, improvement or enhancement of the value of any such stock,
bonds or other obligations, or to do any acts or things designed for
any such purpose; and, while owner of any such stock, bonds or
other obligations, to exercise all the rights, powers and privileges
of ownership thereof, and to exercise any and all voting power
thereon.
The business or purpose of the company is from time to time to do
any one or more of the acts and things herein set forth; and it
may conduct its business in other States and in the Territories and
in foreign countries, and may have one office or more than one office,
and keep the books of the company outside of the State of New
Jersey, except as otherwise may be provided by law; and may hold,
purchase, mortgage and convey real and personal property either in
or out of the State of New Jersey.
Without in any particular limiting any of the objects and powers
of the corporation, it is hereby expressly declared and provided that
the corporation shall have power to issue bonds and other obligations
in payment for property purchased or acquired by it, or for any other
300 FORMS AND PRECEDENTS.
object in or about its business; to mortgage or pledge any stock,
bonds or other obligations, or any property which may be acquired
by it, to secure any bonds or other obligations by it issued or
incurred; to guarantee any dividends or bonds or contracts or other
obligations; to make and perform contracts of any kind and descrip-
tion ; and in carrying on its business, or for the purpose of attaining
or furthering any of its objects, to do any and all other acts and
things, and to exercise any and all other powers which a copartner-
ship or natural person could do and exercise, and which now or
hereafter may be authorized by law.
IV. — The total authorized capital stock of the corporation is eleven
hundred million dollars ($i, 100,000,000), divided into eleven million shares
of the par value of one hundred dollars each. Of such total authorized
capital stock five million five hundred thousand shares, amounting to five
hundred and fifty million dollars, shall be preferred stock, and five million
five hundred thousand shares, amounting to five hundred and fifty million
dollars, shall be common stock.
From time to time the preferred stock and the common stock may be
increased according to law, and may be issued in -such amounts and propor-
tions as shall be determined by the Board of Directors and as may be
permitted by law.
The holders of the preferred stock shall be entitled to receive, when and
as declared, from the surplus or net profits of the corporation, yearly divi-
dends at the rate of seven per centum per annum and no more, payable
quarterly on dates to be fixed by the by-laws. The dividends on the pre-
ferred stock shall be cumulative, and shall be payable before any divi-
dends on the common stock shall be paid or set apart; so that, if in any
year dividends amounting to seven per cent, shall not have been paid
thereon, the deficiency shall be payable before any dividends shall be paid
upon or set apart for the common stock.
Whenever all cumulative dividends on the preferred stock for all
previous years shall have been declared and shall have become payable,
and the accrued quarterly installments for the current year shall have been
declared, and the company shall have paid such cumulative dividends for
previous years and such accrued quarterly installments, or shall have set
aside from its surplus or net profits a sum sufficient for the payment
thereof, the board of directors may declare dividends on the common stock,
payable then or thereafter, out of any remaining surplus or net profits.
In the event of any liquidation or dissolution or winding up (whether
voluntary or involuntary) of the corporation, the holders of the preferred
stock shall be entitled to be paid in full both the par amount of their shares
and the unpaid dividends accrued thereon before any amount shall be paid
to the holders of the common stock ; and, after the payment to the holders
of the preferred stock of its par value and the unpaid accrued dividends
thereon, the remaining assets and funds shallbe divided and paid to the
holders of the common stock according to their respective shares.
V. — The names and post-office addresses of the incorporators, and the
number of shares of stock for which severally and respectively we do
hereby subscribe (the aggregate of our said subscriptions, being three
thousand dollars, is the amount of capital stock with which the corporation
will commence business), are as follows:
(— NUMBER OF SHARES.— 1
PREFERRED COMMON
NAME. POST-OFFICE ADDRESS. , STOCK. STOCK.
Charles C. Cluff 51 Newark St., Hoboken, N. J. . . 5 5
William J. Curtis 51 Newark St., Hoboken, N. J. . . 5 5
Charles Mac Veagh .. 51 Newark St., Hoboken, N.J... 5 5
VI. — The duration of the corporation shall be perpetual.
SPECTAL CHARTERS. 301
VII. — The number of Directors of the company shall be fixed from time
to time by the by-laws ; but the number, if fixed at more than three, shall
be some multiple of three. The Directors shall be classified with respect
to the time for which they shall severally hold office by dividing them into
three classes, each consisting of one-third of the whole number of the
Board of Directors. The Directors of the first class shall be elected for a
term of one year; the Directors of the second class for a term of two
years, and the Directors of the third class for a term of three years ; and
at each annual election the successors of the class of Directors whose terms
shall expire in that year shall be elected to hold office for the term of
three years, so that the term of office of one class of Directors shall expire
in each year.
The number of Directors may be increased as may be provided in the
by-laws. In case of any increase of the number of the Directors the addi-
tional Directors shall be elected as may be provided in the by-laws, by
the Directors or by the stockholders at an annual or special meeting; and
one-third of their number shall be elected for the then unexpired portion
of the term of the Directors of the first class, one-third of their number
for the unexpired portion of the term of the Directors of the second class,
and one-third of their number for the unexpired portion of the term of
Directors of the third class, so that each class of Directors shall be increased
equally.
In case of any vacancy in any class of Directors through death, resig-
nation, disqualification or other cause, the remaining Directors, by affirma-
tive vote of a majority of the Board of Directors, may elect a successor
to hold office for the unexpired portion of the term of the Director whose
place shall be vacant, and until the election of a successor.
The Board of Directors shall have power to hold their meetings outside
of the State of New Jersey, at such places as from time to time may be
designated by the by-laws or by resolution of the Board. The by-laws may
prescribe the number of Directors necessary to constitute a quorum of the ■
Board of Directors, which number may be less than a majority of the whole
number of the Directors.
Unless authorized by votes given in person or by proxy by stockholders
holding at least two-thirds of the capital stock of the corporation, which is
represented and voted upon in person or by proxy at a meeting specially
called for that purpose or at an annual meeting, the Board of Directors
shall not mortgage or pledge any of its real property, or any shares of the
capital stock of any other corporation ; but this prohibition shall not be
construed to apply to the execution of any purchase-money mortgage or
any other purchase-money lien. As authorized by the Act of the Legislature
of the State of New Jersey, passed March 22, 1901, amending the 17th
section of the Act Concerning Corporations (Revision of 1896), any action
which theretofore required the consent of the holders of two-thirds of
the stock at any meeting after notice to them given, or required their
consent in writing to be filed, may be taken upon the consent of, and the
consent given and filed by the holders of two-thirds of the stock of each
class represented at such meeting in person or by proxy.
Any officers elected or appointed by the Board of Directors may be
removed at any time by the affirmative vote of a majority of the whole
Board of Directors. Any other officer or employee of the company may
be removed at any time by vote of the Board of Directors, or by any com-
mittee or superior officer upon whom such power of removal may be con-
ferred by the by-laws or by vote of the Board of Directors.
The Board of Directors, by the affirmative vote of a majority of the
whole Board, may appoint from the Directors an executive committee, of
which a majority shall constitute a quorum; and to such extent as shall
be provided in the by-laws, such committee shall have and may exercise
all or any of the powers of the Boarc' of Directors, including power to
302 FORMS AND PRECEDENTS.
cause the seal of the corporation to be affixed to all papers that may
require it
The Board of Directors, by the affirmative vote of a majority of the
whole Board, may appoint any other standing committees, and such stand-
ing committees shall have and may exercise such powers as shall be con-
ferred or authorized by the by-laws.
The Board of Directors may appoint not only other officers of the
company, but also one or more Vice-Presidents, one or more Assistant
Treasurers, and one or more Assistant Secretaries; and to the extent
provided in the by-laws the persons so appointed respectively shall have
and may exercise all the powers of the President, of the Treasurer and
of the Secretary, respectively.
The Board of Directors shall have power from time to time to fix and
to determine and to vary the amount of the working capital of the company ;
and to direct and determine the use and disposition of any surplus or net
profits over and above the capital stock paid in; and in its discretion the
Board of Directors may use and apply any such surplus or accumulated
profits in purchasing or acquiring its bonds or other obligations, or shares
of its own capital stock, to such extent and in such manner and upon such
terms as the Board of Directors shall deem expedient; but shares of such
capital stock so purchased or acquired may be resold, unless such shares
shall have been retired for the purpose of decreasing the company's capital
stock, as provided by law.
The Board of Directors from time to time shall determine whether and
to what extent, and at what times and places, and under what conditions
and regulations, the accounts and books of the Corporation, or any of
them, shall be open to the inspection of the stockholders, and no stock-
holder shall have any right to inspect any account or book or document of
the Corporation, except as conferred by statute or authorized by the Board
of Directors, or by a resolution of the stockholders.
Subject always to by-laws made by the stockholders, the Board of
Directors may make by-laws, and, from time to time may alter, amend
or repeal any by-laws, but any by-laws made by the Board of Directors
may be altered or repealed by the stockholders at any annual meeting, or
at any special meeting, provided notice of such proposed alteration or
repeal be included in the notice of the meeting.
In Witness Whereof, we have hereunto set our hands and seals
the 23d day of February, 1901.
Charles C. Cluff. [l. s.]
William J. Curtis. [l. s.]
Charles MacVeagh. [l. s.]
Signed, sealed and delivered in }
the presence of J
Francis Lynde Stetson.
Victor Morawetz.
( Acknowledgment. ;
SPECIAL CHARTERS. 303
Form 7. — New Jersey Charter (Chicago Subway).
♦Certificate of Incorporation
of
CHICAGO SUBWAY COMPANY.
The undersigned, for the purpose of forming a corporation under and
pursuant to an Act of the Legislature of the State of New Jersey, entitled
"An Act concerning Corporations (Revision of 1896)," and the acts
amendatory thereof and supplemental thereto, do hereby set out and
certify as follows:
Article First — The name of the corporation is
"CHICAGO SUBWAY COMPANY."
Article Second — The location of the principal office of the corporation
in the State of New Jersey is at No. 15 Exchange place, in the City of
Jersey City, County of Hudson, in said State, which shall also be its regis-
tered office. And the name of the agent of said corporation in said State,
who is in charge of said principal office and upon whom process against
this corporation may be served, is the Corporation Trust Company.
Article Third — The objects for which the corporation is formed are as
follows, viz.:
To furnish, transmit, convey, transport and deliver sounds, signals
and intelligence, packages, mail matter, freight and general merchan-
dise, power, heat, light and refrigeration, by steam, water, air, elec-
tricity or otherwise, and to acquire, construct, dispose of, hold, main-
tain, operate and lease to, or rent from others, all tunnels and other
subways and space therein, and all terminals, structures, appliances
and other property, real or personal, useful in carrying out any
lawful purpose whatsoever; to produce or otherwise acquire and to
furnish and distribute electric current or other mechanical power,
for light, heat, power, refrigeration, signaling, traction or other pur-
poses, both public and private; to operate a telephone exchange and
system ; to operate a system for the delivery of parcels and messages
by messengers, vehicles, or otherwise; to carry on the business of
storage and warehousing in all its branches ; to construct and operate
subways, tunnels, pneumatic tubes, telephone systems, telegraph lines,
power houses, terminals and other structures incidental to any of
the purposes herein enumerated; to construct, control, lease and
operate, by electricity or other power, railways for the transportation
of passengers or freight; to produce, manufacture and to otherwise
prepare and to deal in and deal with any materials, machinery, ap-
pliance, supplies or products which may be used in or in connection
with any of the objects aforesaid; to hold, purchase or otherwise
acquire, to sell, assign, mortgage, pledge or otherwise dispose of the
shares of the capital stock, bonds or other evidences of debt incurred
or created by other corporations, and while the holder of such stock,
to exercise all the rights and privileges of ownership, including the
right to vote thereon, to the same extent as a natural person might
or could do ; to apply for, obtain, register, lease or otherwise acquire,
and to hold, use, operate, sell, assign or otherwise dispose of, any
trade-marks, trade-names, patents, inventions, improvements and
* By courtesy of the Corporation Trust Company
304 FORMS AND PRECEDENTS.
processes used in connection with or secured under letters patent
of the United States, or of any other countries, or otherwise ; and
to carry on any other business whatsoever which the corporation
may deem proper or convenient to be carried on in connection with
any of the foregoing purposes, or calculated directly or indirectly to
promote the interests of the corporation or to enhance the value
of its property, and to have and enjoy and exercise all the rights,
powers and privileges which are now or which may hereafter be
conferred upon corporations organized under the act herein men-
tioned; provided, always, that the corporation shall not construct,
maintain or operate any railroad or telegraph or telephone lines
in the State of New Jersey, or engage in any business hereunder
which shall require the exercise of the right of eminent domain within
said state, unless power in either or any of said respects shall here-
after be conferred upon it by law ; nor shall anything herein set forth
be construed to authorize or evidence the formation hereby of an
insurance, safe deposit or trust company, banking corporation, sav-
ings bank or other corporation deemed to possess any of the powers
prohibited to corporations formed under the statutory provisions
aforesaid.
The purpose of the corporation is from time to time to do any
one or more of the acts and things herein set forth.
The corporation may, from time to time, conduct its business in,
other states and in the territories, District of Columbia and depend-
encies of the United States, and in foreign countries ; it may have
an office or offices, and, except as otherwise required by law, keep
its books, in whole or in part, at a point or points outside of
the State of New Jersey; and it may hold, purchase, mortgage and
convey real and personal property in any such state, territory, district,
dependency or foreign country.
Without in any particular limiting or restricting any of the ob-
jects and powers of the corporation, it is hereby expressly declared
and provided that the corporation shall have power to issue bonds
and other obligations in payment for property purchased or acquired
by it, for money borrowed, or for any other lawful object in and
about its business; to mortgage or pledge any property which may
be acquired by it; to secure any bonds, guarantees or other obliga-
tions by it issued or incurred; to guarantee any dividends, bonds,
contracts or other obligations ; to make and perform contracts of
every kind and description; and in carrying on its business, or for
the purpose of attaining or furthering any of its objects or purposes,
to do any and all other things and exercise any and all other powers
which now or hereafter may be permitted by law.
Article Fourth — The total authorized capital stock of the corporation
is Fifty Million Dollars ($50,000,000), divided into Five Hundred Thousand
(500,000) shares of the par value of One Hundred Dollars ($100) each.
Article Fifth — The names and post-office addresses of the incorporators,
and the number of shares of stock for which, severally and respectively, the
said incorporators do hereby subscribe (the aggregate of our said sub-
scriptions being Five Thousand Dollars, which is the amount of capital
stock with which the corporation is authorized to commence business), are
as follows:
NO. OF TOTAL PAR
NAME. POST-OFFICE ADDRESS. SHARES. VALUE.
Howard K. Wood. . .15 Exchange Place, Jersey City, N. J. . 20 $2,000
Horace S. Gould 15 Exchange Place, Jersey City, N. J. . 20 2,000
Kenneth K. McLaren. 15 Exchange Place, Jersey City, N. J. . 10 1,000
SPECIAL CHARTERS. 305
Article Sixth — The duration of the corporation shall be perpetual.
Article Seventh — The number of directors of the corporation shall be
fixed and may be increased or decreased as may be provided, from time to
time, in the by-laws. In case of any increase in the number of directors,
the additional directors shall be elected as may be provided in the by-laws
by the directors or by the stockholders at an annual or special meeting.
The corporation shall have the power, at any time, to provide for the clas-
sification of its Board of Directors and to do all things by it deemed neces-
sary or proper to accomplish such classification. In case of any vacancy
in the Board of Directors, the remaining directors, by an affirmative vote of
the majority of the Board of Directors, may elect a successor to hold office
for the unexpired portion of the term of the director whose place shall
have become vacant and until the election of a successor.
The Board of Directors shall have power to hold their meetings outside
of the State of New Jersey at such place or places as may be from time
to time designated by the by-laws or by resolution of the Board of Di-
rectors. ,
The Board of Directors, in its discretion, may submit any contract for
the purchase or sale of property, the sale, incumbrance or other disposition
of shares of stock, bonds or other obligations to be issued by the corpora-
tion, or of any other securities, or for the borrowing of money by the cor-
poration, for authorization, approval or ratification at any annual meeting by
the stockholders or at any meeting of the stockholders called for the pur-
pose of considering any such contract, and any contract or act in connection
therewith that shall be authorized, approved or be ratified by the vote of
the holders of a majority in amount of the capital stock of the company
which is represented in person or by proxy at such meeting (provided
that a lawful quorum of stockholders be there represented in person or by
proxy), shall be as valid and as binding upon the corporation and upon
all the stockholders as though it had been authorized, approved and rati-
fied by every stockholder of the corporation.
As authorized by the act of the Legislature of the State of New Jersey,
passed March 22, 1901, amending the Seventeenth Section of the Act con-
cerning Corporations (Revision of 1896), any action which theretofore
required the consent of the holders of two-thirds of the stock at any meet-
ing after notice having been given, or required their consent in writing
to be filed, may be taken, upon the consent of and the consent given and
filed by the holders of two-thirds of the stock represented at such meeting,
in person or by proxy; provided, that the consent or approval of a majority
or of two-thirds of the stock of the corporation at the time outstanding
be not required by the provisions hereof, in respect of some action herein
provided for.
Any officer elected or appointed by the Board of Directors may be
removed at any time, with or without cause, by an affirmative vote of two-
thirds of the whole Board of Directors. Any other officer or employee
may be removed at any time, with or without cause, by the vote of the
Board of Directors, or by any committee or superior officer upon whom
such power of removal may be conferred by the by-laws, or by a vote of
the Board of Directors.
The Board of Directors, by the affirmative vote of a majority of the
whole board, may appoint from their number an Executive Committee and
a Finance Committee, of each of which committees a majority shall con-
stitute a quorum ; and to such extent as shall be provided in the by-laws,
such committees shall respectively have and may exercise all or any of
the powers of the Board of Directors, including the power to cause the
seal of the corporation to be affixed to all papers.
The Board of Directors, by the affirmative vote of a majority of the
whole board, may appoint any other standing committees ; and such stand-
306
FORMS AND PRECEDENTS.
ing committees shall have and may exercise such powers as may be con-
ferred and authorized by the by-laws or by the Board of Directors.
The Board of Directors may appoint, not only other officers of the cor-
poration, but also one or more Vice-Presidents, one or more Assistant
Treasurers, and one or more Assistant Secretaries ; and, to the extent pro-
vided in the by-laws, or by the Board of Directors, the persons so appointed,
respectively, shall have and may exercise all the powers of the President
and of the Treasurer and of the Secretary, respectively.
The Board of Directors shall have power, from time to time, to fix and
determine and to vary the amount of the working capital of the corpora-
tion, and to direct and determine the use and disposition of any surplus or
net profits over and above the capital stock paid in.
Except as herein otherwise provided, the Board of Directors shall have
power and authority to sell, assign, transfer, convey or otherwise dispose
of all or any of the property and assets of the corporation on such terms
and conditions as the said Board of Directors shall deem just and expedi-
ent, and to issue the bonds, debentures, notes and other obligations or
evidences of the debt of the corporation.
With the consent in writing, or by vote at a special meeting of the
stockholders called for the purpose, of the holders of not less than two-
thirds of the capital stock of the corporation at the time outstanding, the
directors of the corporation shall have power to sell, convey or otherwise
dispose of all the property, rights and franchises of the corporation as an
entirety upon such terms and conditions, and for such considerations,
whether in cash, stocks, bonds or other property, as the directors may in
their discretion determine.
The Board of Directors, from time to time, shall determine whether
and to what extent and at what times and places and under what conditions
and regulations the accounts and books of the corporation, or any of them,
shall be open to the inspection of the stockholders; and no stockholder
shall have any right to inspect any account or book or document of the
corporation, except as conferred by statute, or authorized by the Board of
Directors, or by resolution of the stockholders.
Subject always to by-laws made by the stockholders, the Board of
Directors may make by-laws and, from time to time, may alter, amend, or
repeal any by-laws ; but any by-laws made by the Board of Directors may
be altered or repealed by the stockholders at any annual meeting, or at
any special meeting, provided notice of such proposed alteration or repeal
be included in the notice of the meeting.
In Witness Whereof, we have hereunto set our hands and
seals the 16th day of November, A. D. 1904.
Howard K. Wood. [l. s._
Horace S. Gould. [l. s.'
Kenneth K. McLaren, [l. s."
Signed, sealed and delivered in the presence of
Harry W. Meen.
( Acknowledgment. )
(Endorsement and Certificate of Secretary of State.)
CHAPTER XLIII.
BY-LAW FORMS.
Form 8. — By-Laws. Simple Form.
By-Laws
of the
COLLINGWOOD TOOL COMPANY.
New York City.
Article I. — Stock.
i. Certificates of Stock shall be issued to each holder of full paid stock,
in numerical order, from the stock certificate book, be signed by the Presi-
dent and Treasurer and sealed by the Secretary with the corporate seal.
A record of each certificate issued shall be kept on the stub thereof.
2. Transfers of Stock shall be made only upon the books of the Com-
pany, and before a new certificate is issued the old certificate must be
surrendered for cancellation. The stock books of the Company shall be
closed for transfers twenty days before general elections and ten days
before dividend days.
3. The Treasury Stock of the Company shall consist of such issued
and outstanding stock of the Company as may be donated to the Company
or otherwise acquired, and shall be held subject to disposal by the Board
of Directors. Such stock shall neither vote nor participate in dividends
while held by the Company.
Article II. — Stockholders.
1. The Annual Meeting of the stockholders of this Company shall be
held in the principal office of the Company, in New York City, on the second
Monday in January of each year, at 12 m., if not a legal holiday; But if a
legal holiday, then on the day following.
2. Special Meetings of the stockholders may be called at the principal
office of the Company at any time by resolution of the Board of Directors,
or upon written request of stockholders holding one-third of the outstand-
ing stock.
3. Notice of Meetings, written or printed, for every regular or special
meeting of the stockholders, shall be prepared and mailed to the last known
post-office address of each stockholder not less than ten days before any
such meeting, and if for a special meeting, such notice shall state the object
or objects thereof. No failure of or irregularity of notice of any regular
meeting shall invalidate such meeting or any proceeding thereat.
4. A Quorum at any meeting of the stockholders shall consist of a
majority of the voting stock of the Company, represented in person or by
307
308 FORMS AND PRECEDENTS.
proxy. A majority of such quorum shall decide any question that may
come before the meeting.
5. The Election of Directors shall be held at the annual meeting of
stockholders, and shall, after the first election, be conducted by two inspec-
tors of election, appointed by the President for that purpose. The election
shall be by ballot, and each stockholder of record shall be entitled to cast
one vote for each share of stock held by him.
6. The Order of Business at the annual meeting, and, as far as possible,
at all other meetings of the stockholders, shall be :
1. Calling of Roll.
2. Proof of due notice of Meeting.
3. Reading and disposal of any unapproved Minutes.
4. Annual Reports of Officers and Committees.
5. Election of Directors.
6. Unfinished Business.
7. New Business.
8. Adjournment.
Article III. — Directors.
1. The Business and Property of the Company shall be managed by a
Board of seven Directors, who shall be stockholders and who shall be
elected annually by ballot by the stockholders for the term of one year,
and shall serve until the election and acceptance of their duly qualified
successors. Any vacancies may be filled by the Board for the unexpired
term. Directors shall receive no compensation for their services.
2. The Regular Meetings of the Board of Directors shall be held in the
principal office of the Company in New York City on the third Tuesday of
each month, at 3 p. m., if not a legal holiday; but if a legal holiday, then
on the day following.
3. Special Meetings of the Board of Directors, to be held in the prin-
cipal office of the Company in New York City, may be called at any time
by the President, or by any three members of the Board, or may be held
at any time and place without notice, by unanimous written consent of all
the members, or by the presence of all members at such meeting.
4. Notices of both regular and special meetings shall be mailed by the
Secretary to each member of the Board not less than five days before any
such meeting, and notices of special meetings shall state the purposes
thereof. No failure or irregularity of notice of any regular meeting shall
invalidate such meeting or any proceeding thereat.
5. A Quorum at any meeting shall consist of a majority of the entire
membership of the Board. A majority of such quorum shall decide any
question that may come before the meeting.
6. Officers of the Company shall be elected by ballot by the Board of
Directors at their first meeting after the election of Directors each year.
If any office becomes vacant during the year, the Board of Directors shall
fill the same for the unexpired term. The Board of Directors shall fix the
compensation of the officers and agents of the Company.
7. The Order of Business at any regular or special meeting of the Board
of Directors shall be:
1. Reading and disposal of any unapproved Minutes.
2. Reports of Officers and Committees.
3. Unfinished Business.
4. New Business.
5. Adjournment.
BY-LAW FORMS. 309
Article IV. — Officers.
i. The Officers of the Company shall be a President, a Vice-President,
a Secretary and a Treasurer, who shall be elected for one year and shall
hold office until their successors are elected and qualify. The position of
Secretary and Treasurer may be united in one person.
2. The President shall preside at all meetings, shall have general super-
vision of the affairs of the Company, shall sign or countersign all certifi-
cates, contracts and other instruments of the Company as authorized by
the Board of Directors; shall make reports to the Directors and stock-
holders and perform all such other duties as are incident to his office or
are properly required of him by the Board of Directors. In the absence
or disability of the President, the Vice-President shall exercise all his
functions.
3. The Secretary shall issue notices for all meetings, shall keep their
minutes, shall have charge of the seal and the corporate book's, shall sign,
with the President, such instruments as require such signature, and shall
make such reports and perform such other duties as are incident to his
office, or are properly required of him by the Board of Directors.
4. The Treasurer shall have the custody of all moneys and securities
of the Company and shall keep regular books of account and balance the
same each month. He shall sign or countersign such instruments as require
his signature, shall perform all duties incident to his office or that are
properly required of him by the Board, and shall give bond for the faithful
performance of his duties in such sum and with such sureties as may be
required by the Board of Directors.
Article V. — Dividends and Finance.
1. Dividends shall be declared only from the surplus profits at such
times as the Board of Directors shall direct, and no dividend shall be
declared that will impair the capital of the Company.
2. The Moneys of the Company shall be deposited in the name of the
Company in such banks or trust companies as the Board of Directors shall
designate, and shall be drawn out only by check signed by the Treasurer
and countersigned by the President.
Article VI. — Seal.
1. The Corporate Seal of the Company shall consist of two concentric
circles, between which is the name of the Company, and in the centre shall
be inscribed " Incorporated 1904, New York," and such seal, as impressed
on the margin hereof, is hereby adopted as the Corporate Seal of the
Company.
Article VII. — Amendments.
1. These By-Laws may be amended, repealed or altered, in whole or in
part, by a majority vote of the entire outstanding stock of the Company, at
any regular meeting of the stockholders, or at any special meeting where
such action has been announced in the call and notice of such meeting.
2. The Board of Directors may adopt additional by-laws in harmony
therewith, but shall not alter nor repeal any by-laws adopted by the stock-
holders of the Company.
310 FORMS AND PRECEDENTS.
Form 9. — By-Laws. Extended Form.
By-Laws
of the
HAMILTON SILK MILLS COMPANY.
Incorporated under the Laws of New Jersey.
Article I. — Stock.
Sec. 1. Certificates of Stock.
Each stockholder of the Company whose stock has been paid for in full
shall be entitled to a certificate or certificates showing the amount of stock
of the Company standing on the books in his name. Each certificate shall
be numbered, bear the signatures of the President and Treasurer and the
seal of the Company, and be issued in numerical order from the stock
certificate book. A full record of each certificate of stock, as issued, must
be entered on the corresponding stub of the stock certificate book.
Sec. 2. Transfers of Stock.
Transfers of stock shall be made upon the proper stock books of the
Company, and must be accompanied by the surrender of the duly endorsed
certificate or certificates representing the transferred stock. Surrendered
certificates shall be cancelled and attached to the corresponding stubs in
the stock certificate book and new certificates issued to the parties entitled
thereto. The stock books shall be closed to transfers twenty days before
general elections and twenty days before dividend days.
Sec. 3. Lost Certificates.
The Board of Directors may order a new certificate or certificates of
stock to be issued in the place of any certificate or certificates of the Com-
pany alleged to have been lost or destroyed, but in every such case the
owner of the lost certificate or certificates shall first cause to be given to
the Company a bond in such sum, not less than the par value of such lost
or destroyed certificate or certificates of stock, as said Board may direct,
as indemnity against any loss or claim that the Company may incur by
reason of such issuance of stock certificates ; but the Board of Directors
may, in their discretion, refuse to replace any lost certificate, save upon the
order of some court having jurisdiction in such matter.
Sec. 4. Stock and Transfer Books.
The stock and transfer books of the Company shall be kept in its prin-
cipal office, No. 525 Main street, East Orange, New Jersey, and shall be
open during business hours to the inspection of any stockholder of the
Company. All other books and records of the Company shall be kept in
its office in New York City, and shall include a stock book, which shall be
open during business hours to the inspection of any stockholder or judg-
ment creditor of the Company.
Sec. 5. Preferred Stock.
The capital stock of this Company shall be One Hundred Thousand
Dollars, consisting of One Thousand Shares, each of the par value of One
Hundred Dollars. Of these, Five Hundred Shares shall be preferred
stock, and Five Hundred Shares shall be common stock.
BY-LAW FORMS. 311
Said preferred stock shall receive from the net earnings of the Com-
pany a six per cent, annual cumulative dividend before any dividends are
paid upon the common stock, but such stock shall not entitle the holders
thereof to vote at the meetings of the stockholders of the Company.
Sec. 6. Treasury Stock.
All issued and outstanding stock of the Company that may be donated
to or be purchased by the Company shall be treasury stock, and shall be
held subject to disposal by the action of the Board of Directors. Such
stock shall neither vote nor participate in dividends while held by the
Company.
Article II. — Stockholders.
Sec. i. Annual Meetings.
The regular annual meetings of the stockholders shall be held in the
office of the Company, at No. 525 Main street, East Orange, New Jersey,
at 12 m., on the second Monday of January in each year, if not a legal
holiday; but if a legal holiday, then on the day following. At this meeting
the Directors for the ensuing year shall be elected, the officers of the
Company shall present their annual reports, and the Secretary shall have
on file for inspection and reference an alphabetical list of the stockholders,
giving the amount of stock held by each, as shown by the stock books of
the Company twenty days before the date of such annual meeting.
Sec. 2. Special Meetings.
Special meetings of the stockholders may be held at any time, in the
office of the Company, pursuant to a resolution of the Board of Directors,
or by a call signed by stockholders holding a majority of the voting stock
of the Company. Calls for special meetings shall specify the time, place
and object or objects thereof, and no other business than that specified in
the call shall be considered at any such meeting.
Sec. 3. Notice of Meetings.
A written or printed notice of every regular or special meeting of the
stockholders, stating the time and place, and, in case of special meetings,
the objects thereof, shall be prepared and mailed by the Secretary, postage
prepaid, to the last known post-office address of each stockholder, at least
ten days before the date of any such meeting. No failure or irregularity
of notice of any regular meeting shall invalidate the same or any proceed-
ing thereat.
Sec. 4. Voting.
Only stockholders of record shall be entitled to vote at the regular and
special meetings of stockholders. At such meetings each stockholder shall
be entitled to one vote for each share of stock held in his name.
Sec. 5. Election of Directors.
At the first meeting of the stockholders a Board of seven Directors shall
be elected, who shall serve until the election and acceptance of their duly
qualified successors. Thereafter, at each annual meeting of the stock-
holders of the Company, seven Directors shall be elected, who shall serve
until the election and acceptance of their duly qualified successors. All
elections for Directors shall be by ballot, and the candidates, to the number
to be elected, receiving the highest number of votes, shall be declared
elected.
If for any reason Directors are not elected at the regular meeting of
stockholders, a special meeting shall be called for the purpose within thirty
312
FORMS AND PRECEDENTS.
days thereafter, at which Directors shall be elected in all respects as at
the annual meeting.
Two inspectors of election shall be appointed by the President to con-
duct the election of Directors to serve for the ensuing year. These inspec-
tors shall be sworn to the faithful discharge of their duty and shall then
take charge of the election. - No person who is a candidate for the office
of Director shall act as an inspector of election.
Sec. 6. Quorum.
A majority of the outstanding stock, exclusive of treasury stock, shall
be necessary to constitute a quorum at meetings of stockholders. When
a quorum is present at any meeting, a majority of the stock represented
thereat shall decide any question brought before such meeting. In the
absence of a quorum those present may adjourn the meeting from day to
day, but until a quorum is secured may transact no business.
Sec. 7. Proxies.
Any stockholder entitled to vote may be represented at any regular or
special meeting of stockholders by a duly executed proxy. Proxies shall be
in writing and properly signed, but shall require no other attestation. No
proxy shall be recognized unless executed within eleven months of the
date of the meeting at which it is presented.
Sec. 8. Officers of Meetings.
The President, if present, shall preside at all meetings of the stock-
holders. In his absence, the next officer in due order who may be present
shall preside. For the purposes of these by-laws, the due order of officers
shall be as follows : President, Vice-President and Treasurer.
The Secretary of the Company shall keep a faithful record of the pro-
ceedings of all stockholders' meetings.
Sec. 9. Order of Business.
The order of business at the annual meeting, and, so far as practicable,
at all other meetings of the stockholders, shall be as follows :
1. Calling of Roll.
2. Proof of due notice of Meeting.
3. Reading and disposal of any unapproved Minutes.
4. Annual Reports of Officers and Committees.
5- Election of Directors.
6. Unfinished Business.
7. New Business.
8. Adjournment.
Article III. — Directors.
Sec. 1. Number and Authority.
A Board of seven Directors shall be elected, who shall have entire
charge of the property, interests, business and transactions of the Com-
pany, with full power and authority to manage and conduct the same.
Sec. 2. Qualifications.
No person shall be elected, nor shall be competent to act as a Director
of this Company, unless he is at the time of election the holder of record
of at least one share of its stock. At least one of the Directors of the
Company must be resident in the State of New Jersey.
Sec. 3. Vacancies.
Any vacancy occurring in the Board of Directors may be filled for
the unexpired term by a majority vote of the remaining members. In
BY-LAW FORMS. 313
event of the membership of the Board falling below the number necessary
for a quorum, a special meeting of the stockholders shall be called and
such number of Directors shall be elected thereat as may be necessary to
restore the membership of the Board to its full number.
Sec. 4. Regular Meetings.
The regular meetings of the Board of Directors shall be held in the
office of the Company, in the City of New York, at 3 p. m., on the second
Monday of each month, if not a legal holiday; but if a legal holiday, then
on the day following.
Sec. 5. Special Meetings.
Special meetings of the Board of Directors may be held at any time,
in the office of the Company, in the City of New York, on the written call
of the President or of any three members of the Board. Special meetings
may be held at any time and place and without notice, by unanimous con-
sent of the Board.
Sec. 6. Notice of Meetings.
The Secretary shall notify each member of the Board of all regular
or special meetings, by mailing to each member's last known post-office
address, postage prepaid, at least five days before any such meeting, a
written or printed notice thereof, giving the time, place and, in case of
special meetings, the objects thereof, and no other business shall be con-
sidered at any such meeting than shall have been so notified to the members.
No failure or irregularity of notice of any regular meeting shall invalidate
the same or any proceeding thereat.
Sec. 7. Quorum.
A majority of the Board of Directors shall constitute a quorum, and
a majority of the members in attendance at any Board meeting shall, in
the presence of a quorum, decide its action. A minority of the Board
present at any regular or special meeting may, in the absence of a quorum,
adjourn to a later date, but may not transact any business until a quorum
has been secured.
Sec. 8. Election of Officers.
At the first meeting of the Board of Directors after the election of
Directors each year, a President, Vice-President, Secretary, Treasurer,
General Manager and Counsel shall be elected to serve for the ensuing year
and until the election of their respective successors. Election shall be by
ballot, and a majority of the votes cast shall be necessary to elect. If not
detrimental to the business or operations of the Company, any two offices
may be conferred upon one person. The Directors shall fix the compensa-
tion of officers, subject to the limitations of the Charter and the By-Laws.
Any vacancies that occur may be filled by the Board for the unexpired term.
The Board shall have the right to remove any officer for cause by a two-
thirds vote of the entire membership of the Board.
Sec. 9. Compensation of Directors.
Each Director shall receive the sum of five dollars as compensation for
his attendance at any regular or special meeting of the Board of Directors,
and shall receive no other salary or compensation for his services as a
Director of the Company.
Sec. 10. Power to Pass By-Laws.
The Board of Directors shall have no power to amend, alter or repeal
the by-laws, but may pass such additional by-laws in conformity therewith
314
FORMS AND PRECEDENTS.
as may be necessary or" convenient to facilitate the business of the Com-
pany.
Sec. n. Executive Committee.
The President, Vice-President and Treasurer shall together constitute
an Executive Committee, which shall be a part of the permanent executive
organization of the Company, and shall, in the interim between meetings
of the Board of Directors, exercise all the powers of that body, in accord-
ance with the general policy of the Company and the directions of the
Board.
Meetings of the Executive Committee shall be held on call of the Presi-
dent, or of any two members of the Committee. All of the members of
the Committee must be duly notified of meetings, and a majority of the
members shall constitute a quorum. The Executive Committee shall keep
due record of all meetings and actions of the Committee, and such records
shall at all times be open to the inspection of any Director.
Sec. 12. Corporation Offices.
The principal office of the Company within the State of New Jersey
shall be at 525 Main street, East Orange, and the agent therein and in
charge thereof upon whom process may be served shall be the Registration
and Trust Company. An office shall also be maintained in New York City,
and such other offices for the transaction of its business shall be maintained
at such other places, in or outside of said State, as may be determined
upon by the Board of Directors.
Sec. 13. Order of Business.
The regular order of business at meetings of the Board of Directors
shall be as follows :
1. Reading and disposal of any unapproved Minutes.
2. Reports of Officers and Committees.
3. Unfinished Business.
4. New Business.
5. Adjournment.
Article IV. — Officers.
Sec. 1. Enumeration, Election and Qualification.
The officers of the Company shall be a President, Vice-President, Treas-
urer, Secretary, General Manager and Counsel. These officers shall be
elected by the Board of Directors at the first regular meeting after the
election of Directors each year, and shall hold office for the term of one
year, and until their respective successors are duly elected and qualify.
The President and Vice-President shall be elected from among the Board
of Directors.
Sec. 2. The President.
The President, when present, shall preside at all meetings of the stock-
holders and of the Board of Directors ; shall sign ail certificates of stock ;
shall sign or countersign, as may be necessary, all such bills, notes, checks,
contracts and other instruments as may pertain to the ordinary course of
the Company's business ; and sign, when duly authorized thereto, all con-
tracts, orders, deeds, liens, licenses and other instruments of a special
nature.
He may also, in the absence or disability of the Treasurer, endorse
checks, drafts and other negotiable instruments for deposit or collection,
and shall, with the Secretary, sign the minutes of all meetings over which
he may have presided.
BY-LAW FORMS. 315
At the first regular meeting of the Board in January he shall submit
a complete report of the operations of the Company for the preceding year,
together with a statement of the Company's affairs as existing at the close
of such year, and shall submit a similar report at the annual meeting of
stockholders; also he shall report to the Board of Directors, from time
to time, all such matters coming within his notice and relating to the
interests of the Company as should be brought to the attention of the
Board.
He shall be ex oMcio, a member of all standing committees, shall have
such usual powers of supervision and management as may pertain to the
office of President, and perform such other duties as may be properly
required of him by the Board of Directors.
Sec. 3. The Vice-President.
The Vice-President shall familiarize himself with the affairs of the
Company, and, in the absence, disability or refusal to act of the President,
shall possess all of the powers and perform all of the duties of that officer.
Sec. 4. The Secretary.
The Secretary shall keep full minutes of all meetings of the stock-
holders and of the Board of Directors; shall read such minutes at the
proper subsequent meetings; shall issue all calls for meetings and notify
all officers and Directors of their election; shall have charge of and keep
the seal of the corporation, and affix the same to certificates of stock when
such certificates are signed by the President and Treasurer, and shall affix
the seal, attested by his signature, to such other instruments as may require
the same.
He shall keep the stock certificate book and the other usual corporation
books, and shall prepare, record, transfer, issue, seal and cancel certificates
of stock, as required by the transactions of the Company and its stock-
holders. He shall also sign with the President all contracts, deeds, licenses
and other instruments when so ordered.
He shall make such reports to the Board of Directors as they may
request, and shall also prepare such reports and statements as are required
by the State laws. He shall make out, twenty days before any election
of Directors, a complete list of the stockholders entitled to vote at such
election, arranged in alphabetical order, and giving the number of shares
of stock that may be voted by each, and shall keep the same open to inspec-
tion at the office of the Company until the time of and during the said
election. He shall allow any stockholder, on application in business hours,
to inspect the stock certificate books, the stock transfer book and the stock
ledger.
He shall attend to such correspondence, and to such other duties, as
may be incidental to his office, or properly be assigned him by the Board.
He shall receive such salary, not exceeding twelve hundred dollars per
annum, as may be fixed by the Board of Directors.
Sec. 5. The Treasurer.
The Treasurer shall have the custody of and be responsible for all
moneys and securities of the Company; shall keep full and accurate records
and accounts in books belonging to the Company, showing the transactions
of the Company, its accounts, liabilities and financial condition, and shall
see that all expenditures are duly authorized and are evidenced by proper
receipts and vouchers. He shall deposit, in the name of the Company, in
such depository or depositories as are approved by the Directors, all moneys
that may come into his hands for the Company account. His books and
accounts shall be open at all times during business hours to the inspection
of any Director of the Company.
316
FORMS AND [PRECEDENTS.
The Treasurer shall also endorse for collection or deposit all bills, notes,
checks and other negotiable instruments of the Company; shall pay out
money as may be necessary in the transactions of the Company, either
by special or general direction of the Board of Directors, and on checks
signed by the President and himself, and shall generally, together with
the President, have supervision of the finances of the Company.
He shall also make a full report of the financial condition of the Com-
pany for the annual meeting of the stockholders, and shall make such other
reports and statements as may be required of him by the Board of Directors
or by the laws of the State.
He shall give bond in the sum of five thousand dollars, with sureties
satisfactory to the Board of Directors, for the faithful performance of his
duties and for the restoration to the Company, in event of his death,
resignation or removal from office, of all books, papers, vouchers, money
and other property belonging to the Company that may have come into his
custody. He shall receive such compensation, not exceeding eighteen
hundred dollars per annum, as may be fixed by the Board of Directors.
Sec. 6. The General Manager.
The General Manager shall, under the supervision of the Board of
Directors and the President, have charge of and manage the active business
operations of the Company. He shall perform such further duties and
make such reports as may be required of him by the Board of Directors,
and shall receive such salary, not exceeding twenty-four hundred dollars
per annum, as may be fixed by the Board.
Sec. 7. Counsel.
Counsel of the Company shall prepare all such contracts and agree-
ments required in the business of the Company as may be referred to him
by its officers, and shall inspect and pass upon all such instruments pre-
sented to the Company as may be of sufficient importance to justify such
examination; also he shall advise with the officers of the Company in all
such legal matters pertaining to the affairs of the Company as may require
his consideration. He shall receive such annual retainer, not exceeding
six hundred dollars per annum, as may be fixed by the Board of Directors.
Article V. — Dividends and Finances.
Sec. 1. Dividends.
Dividends shall be declared at such times as the Board may direct, but
no dividend shall be declared or paid save from surplus profits remaining
after all current liabilities of the Company have been fully paid, nor shall
any dividend be declared that would impair the capital of the Company.
Sec. 2. Reserve Fund.
No dividend to exceed six per cent, per annum shall be declared by
the Board of Directors until there shall have been accumulated from
surplus profits a reserve fund of ten thousand dollars, such fund to be used
for the extension or enlargement of the business of the Company and the.
betterment of its plant, or for such other purposes as may be necessary or
advisable.
Sec 3. Debt.
No debt shall be contracted, nor liability incurred, nor contract made
by or on behalf of this Comoany in excess of one thousand dollars unless
the same be authorized or directed by the by-laws or by a duly recorded
two-thirds vote of the entire Board of Directors at a regular meeting, or at
a special meeting called for the purpose.
BY-LAW FORMS. 317
Sec. 4. Bank Deposits.
The Treasurer shall deposit the moneys of the Company, as the same
may come into his hands, in such depository or depositories as may be
designated by the Board of Directors, and such deposits shall be made in
the name of the Company, and moneys shall be withdrawn therefrom only
by check signed by the Treasurer and countersigned by the President.
Article VI. — Sundry Provisions.
Sec. 1. Corporate Seal.
The corporate seal of the Company shall consist of two concentric
circles, between which shall be the name of the Company, and in the centre
shall be inscribed " Incorporated 1905, New Jersey," and such seal, as
impressed on the margin hereof, is hereby adopted as the corporate seal
of the Company.
Sec. 2. Penalties.
Any officer, director or stockholder who shall disobey or violate any
of the provisions of these by-laws shall be fined in an amount not to exceed
twenty dollars, such fine to be imposed by the Board of Directors, and if
not paid at the time, to be deducted from any salary or dividend then due
or that may thereafter become due said person.
Sec. 3. Amendment.
These by-laws may be amended, repealed or altered, in whole or in part,
at any regular meeting of the stockholders, or at any special meeting where
such action has been duly announced in the call, provided that a majority
of the entire voting stock of the Company shall vote for such amendment,
repeal or alteration.
The Board of Directors shall have no power to amend, alter or repeal
the by-laws, but may pass such additional by-laws in conformity therewith
as may be necessary or convenient to facilitate the business of the Com-
pany.
Form 10. — By-Laws. Comprehensive Form.
By-Laws
of the
SOUTHERN TEXTILE COMPANY.
Incorporated under the Laws of New Jersey.
Contents.
ARTICLE I.— Stock.
Sec. 1. Certificates of Stock.
" 2. Transfers of Stock.
" 3. Transfer Agent and Registrar.
" 4. Regulation of Transfers.
" 5. Stock and Transfer Books.
" 6. Lost Certificates.
" 7. Treasury Stock.
318
FORMS AND PRECEDENTS.
ARTICLE II. — Stockholders.
Sec. i. Annual Meeting.
2. Notice of Annual Meeting.
3. Special Meetings.
4. Notice of Special Meetings.
5. Voting.
6. Certified List of Stockholders.
7. Proxies.
8. Quorum.
9. Officers of Meetings.
10. Elections.
11. Inspectors of Election.
12. Order of Business.
ARTICLE III— Directors.
Sec. 1. Number and Qualifications.
" 2. General Powers.
" 3. Classification.
" 4. Vacancies.
" 5. Place of Meeting.
" 6. Regular Meetings.
" 7. Notice of Regular Meetings.
" 8. Special Meetings.
" 9. Notice of Special Meetings.
" 10. Quorum.
" 11. Election of Officers.
" 12. Removal of Officers.
" 13. Compensation of Directors.
" 14. Working Capital and Surplus.
" 15. Inspection of Books.
" 16. Order of Business.
ARTICLE IV. — Standing Committees.
Sec. 1. Executive Committee.
" 2. Powers of the Executive Committee.
" 3. Officers of Executive Committee.
" 4. Finance Committee.
" 5. Powers of the Finance Committee.
" 6. Chairman of Finance Committee.
" 7. Vacancies.
" 8. Procedure.
ARTICLE V.— Officers.
Sec. 1. Enumeration.
2. Qualifications.
3. The President.
4. The Vice-Presidents.
5. The Secretary.
6. The Assistant Secretary.
7. The Treasurer.
8. The Assistant Treasurer.
9. The Auditor.
10. The General Counsel.
11. Delegation of Duties.
ARTICLE VI— Dividends and. Finances.
Sec. 1. Dividends.
" 2. Working Capital and Surplus.
" 3. Depositaries.
BV-LAW FORMS. 319
ARTICLE VII. — Sundry Provisions.
Sec. i. Offices of Company.
" 2. Corporate Seal.
" 3. Amendment.
By-Laws.
Article I. — Stock.
Sec. 1. Certificates of Stock,
Each stockholder of the Company whose stock has been paid for in full
shall be entitled to a certificate or certificates prepared or approved by the
Board of Directors, showing the amount of stock of the Company standing
on the books in his name. Each certificate shall be numbered, bear the
signatures of the President or Vice-President and Treasurer or Assistant
Treasurer and the seal of the Company, and be issued in numerical order
from the stock certificate book. A full record of each certificate of stock,
as issued, must be entered on the corresponding stub of the stock certificate
book.
Sec. 2. Transfers of Stock.
Transfers of stock shall be made upon the proper stock books of the
Company and must be accompanied by the surrender of the duly endorsed
certificate or certificates representing the transferred stock. Surrendered
certificates shall be cancelled and attached to the corresponding stubs in
the stock certificate book, and new certificates issued to the parties entitled
thereto. The stock books shall be closed to transfers twenty days before
general elections and twenty days before dividend days.
Sec. 3. Transfer Agent and Registrar.
The Board of Directors or the Finance Committee may appoint a Trans-
fer Agent and Registrar of Transfers, and may require all stock certificates
to bear the signature of such appointee.
Sec. 4. Regulation of Transfers.
The Board of Directors and the Finance Committee shall have power
and authority to make all such further rules and regulations as they may
respectively deem expedient to govern the issue, transfer and registration
of stock certificates.
Sec. 5. Stock and Transfer Books.
The stock and transfer books of the Company shall be kept in the
principal office of the Company, No. 15 Exchange place, in Jersey City,
New Jersey, and shall be open during business hours to the inspection of
any stockholder of the Company. All other books and records of the
Company shall be kept in its office in New York City, and shall include
a stock book, which shall be open during business hours to the inspection
of any stockholder or judgment creditor of the Company.
Sec. 6. Lost Certificates.
The Board of Directors may order a new certificate or certificates of
stock to be issued in the place of any certificate or certificates of the Com-
pany alleged to have been lost or destroyed, but in every such case the
owner of the lost certificate or certificates shall first cause to be given to
the Company a bond, with one or more responsible sureties, in such sum,
not less than double the par value of such lost or destroyed certificate or
certificates of stock, as said Board may direct, as indemnity against any loss
320 FORMS AND PRECEDENTS.
or claim that the Company may incur by reason of such issuance of new
stock certificates ; but the Board of Directors may, in its discretion, refuse
to issue such new certificates, save upon the order of some court having
jurisdiction in such matter.
•Sec. 7. Treasury Stock.
All issued and outstanding stock of the Company that may be donated
to or purchased by the Company shall be treasury stock, and shall be held
subject to disposal by the action of the Board of Directors. Such stock
shall neither vote nor participate in dividends while held by the Company.
Article II.— Stockholders.
Sec. 1. Annual Meeting,
The regular annual meetings of the stockholders of the Company shall
be held at the principal office of the Company in the State of New Jersey,
at twelve o'clock noon on the second Monday in January of each year, if
not a legal holiday, and, if a legal holiday, then on the next succeeding
Monday not a legal holiday, for the purpose of electing Directors, and for
the transaction of such other business as may be properly brought before
the meeting.
Sec. 2. Notice of Annual Meeting.
It shall be the duty of the Secretary to cause notice of the annual meet-
ing to be published once in each of the four calendar weeks next preceding
such meeting in at least one newspaper in New York City and in Jersey
City; and a written or printed notice of the annual meeting shall be
mailed, postage prepaid, to each stockholder of record, not less than ten
days before the date of such meeting; but a failure to publish or mail
such notice, or any irregularity in such notice, or in the publication thereof,
shall not affect the validity of any annual meeting, or of any of the proceed-
ings at any such meeting.
Sec. 3. Special Meetings.
Special meetings of the stockholders may be held at any time in the
principal office of the Company in New Jersey, by order of the President,
or pursuant to a resolution of the Board of Directors, or upon written
call signed by stockholders of record owning a majority of the entire out-
standing voting stock of the Company. Calls for special meetings shall
specify the time, place and object or objects thereof, and no other business
than that specified in the call shall be considered at any such meeting.
Sec. 4. Notice of Special Meeting.
A written or printed notice of every special meeting of the stockholders,
stating the time and place and the objects thereof, shall be prepared and
mailed by the Secretary, postage prepaid, to the last known post-office
address of each stockholder of record not less than five days before the
date of such meeting.
Sec. 5. Voting.
At each meeting of the stockholders every stockholder shall be entitled
to vote in person or by proxy, and he shall have one vote for each share
of stock standing in his name on the books of the Company at the time
of the closing of the transfer books for such meeting. The votes for
Directors, and, upon demand of any stockholder, the votes upon any
question before the meeting, shall be by ballot.
BY-LA Wi FORMS. '321
Sec. 6. Certified List of Stockholders.
At least ten days prior to each regular meeting of the stockholders a full,
true and complete list, in alphabetical order, of all the stockholders entitled
to vote at such meeting, indicating the number of shares held by each, shall
be prepared and certified by the Secretary. Only the persons in whose
names shares of stock stand on the books of the Company at the time of
the closing of the transfer books for such meeting shall be evidenced by the
list of stockholders so furnished and be entitled to vote in person or by
proxy at such meeting. Such list shall be open to inspection by the stock-
holders at the principal office of the Company during business hours until
such election or meeting shall have been held.
Sec. 7. Proxies.
Any stockholder entitled to vote at meetings of the stockholders may
be represented and vote thereat by proxy appointed by an instrument in
writing, subscribed by such stockholder or by his duly authorized attorney,
and delivered to the Secretary at or before the time of such meeting.
Proxies shall be properly signed and sealed, but shall require no other
attestation.
Sec. 8. Quorum.
A majority in amount of the stock issued and outstanding, exclusive of
treasury stock, represented by the holders of record thereof, in person or
by proxy, shall be requisite to constitute a quorum at any meeting of stock-
holders. When a quorum is present at any such meeting, a majority vote
of the stock represented thereat shall decide any matters brought before
such meeting.
If a quorum is not present at the time and place fixed by the by-laws
for the annual meeting, or fixed by notice as herein provided for a duly
called special meeting, a majority in interest of the stockholders present
in person or by proxy may adjourn from time to time, without notice other
than by announcement at the meeting, until a quorum is secured. At any
such adjourned meeting at which a quorum may be present, any business
may be transacted which might have been transacted at the meeting as
originally called and notified.
Sec. 9. Officers of Meetings.
Meetings of the stockholders shall be called to order and presided over
by the President; or, in his absence, by one of the Vice-Presidents in the
relative order of position; or, in the absence of President and Vice-Presi-
dents, the stockholders present may from their number appoint a presiding
officer for that meeting.
The Secretary of the Company shall perform the duties of Secretary
at meetings of the stockholders, but, in his absence from any such meeting,
the presiding officer shall appoint some suitable person to act as Secretary
thereat.
Sec. 10. Elections.
The Directors of the Company, to the number to be elected each year,
shall be elected by a plurality vote, cast by ballot, at the annual meeting of
stockholders for that year. The Directors so elected shall hold office until
the expiration of their respective terms or until the election and qualification
of their resnective successors.
At all elections of Directors the polls shall remain open for at least
one hour, unless every stockholder of record has sooner voted in person
or by proxy, or in writing has waived the statutory provision.
322 FORMS AND PRECEDENTS.
Sec. ii. Inspectors of Election.
Every election of Directors shall be conducted by three Inspectors of
Election, appointed by the Board of Directors prior to the time of each
meeting at which any such election is held; or, if the Board fail to make
such appointment, then by the presiding officer of such meeting prior to the
holding of such election. Said Inspectors shall be sworn to the faithful
discharge of their duties, shall open and close the polls, pass upon all
questions as to proxies, receive and count the ballots, pass upon all ques-
tions as to the qualification of voters and the acceptance or rejection
of votes, and decide and direct these and all other matters directly pertain-
ing to the election by their majority action. If for any reason any Inspector
shall fail to attend at the meeting for which he was appointed, or shall
refuse or be unable to serve thereat, then the presiding officer of such
meeting shall appoint an Inspector or Inspectors to fill the vacancy or
vacancies so caused.
Sec. 12. Order of Business.
The order of business at the annual meeting of stockholders, and, so
far as practicable, at all other meetings thereof, shall be as follows :
i. Roll Call.
2. Reading and Disposal of any unapproved Minutes.
3. Reports of Officers and Committees.
4. Election of Directors.'
5. Unfinished Business.
6. New Business.
Article III.— Directors.
Sec. 1. Number and Qualifications.
The number of the first Board of Directors shall be fifteen (15), but at
any time this number may be increased by by-law provision therefor. No
person shall be elected, nor be competent to act as a Director oi the Com-
pany, unless a stockholder of record at the time of election. If any Direc-
tor shall cease to be a stockholder of record his term of office shall forthwith
determine and cease.
Sec. 2. General Powers.
The Board of Directors shall have entire charge of the property, busi-
ness, interests and general operations of the Company, with full power and
authority to manage and conduct the same. In addition thereto and to the
specific powers conferred on the Board by the charter and by-laws, the
Board of Directors shall have general power to do all such things as may-
be necessary for the interests of the Company and not inconsistent with the
State statutes, or the charter or by-laws of the Company.
Sec. 3. Classification.
The Directors may at their discretion divide the membership of the
Board into three classes, each consisting of one-third of the whole number.
In such case, the allotment of the Directors to the different classes shall
be made in such manner as the Board may elect, and the Directors allotted
to the first class shall hold office until the annual election of Directors
following; the Directors of the second class until the second annual elec-
tion of Directors following; and the Directors of the third class until the
third annual election of Directors following; and at each annual election
the successors to each class of Directors whose terms expire in that year
shall be elected to hold office for three years, so that the term of office of
one class of Directors shall expire in each year. In event of any increase
of the number of Directors, one-third of the additional Directors shall be
1Y-LAW FORMS.
323
elected for the then unexpired portion of the term of the Directors of the
first class ; one-third for the unexpired portion of the term of the Directors
of the second class ; and one-third for the unexpired portion of the term
of the Directors of the third class, so that each class of Directors shall be
increased equally.
Sec. 4. Vacancies.
In case of any vacancy in any class of Directors through death, resigna-
tion, disqualification or other cause, the remaining Directors, by affirmative
vote of a majority of the Board of Directors, may elect a successor to hold
office for the unexpired portion of the term of the Director whose place
shall be vacant, and until the election of a successor by the stockholders
of the Company.
In case of any increase in the Board of Directors between the annual
elections of Directors, the newly created directorships shall be considered
as vacancies and shall be filled forthwith by the Board.
Should the membership of the Board of Directors at any time fall below
the number necessary to constitute a quorum, then a special meeting of the
stockholders shall be called by the President and such number of Directors
shall be elected thereat as may be necessary to restore the Board to its full
membership.
Sec. 5. Place of Meeting.
Meetings of the Board of Directors shall be held in the office of the
Company in New York City, unless with the written consent of the entire
membership of the Board, in which case meetings may be held at any place
so determined.
Sec. 6. Regular Meetings.
Regular meetings of the Board shall be held monthly, at 3 p. M. on the
first Tuesday of each month, if not a legal holiday ; otherwise on the next
succeeding Tuesday not a legal holiday, at the same hour.
Sec. 7. Notice of Regular Meetings.
The Secretary shall mail notices of every regular meeting to the last
known post-office address of each Director at least five days before such
meeting, and such notices shall give the time and place of such meeting;
but no failure of such notice or irregularity therein shall affect the validity
of any regular meeting or of any of the proceedings thereof.
Sec. 8. Special Meetings.
Special meetings of the Board of Directors may be held at any time
on call of the President, or on written call of not less than one-third of
the Directors at that time in office, or may be held at any time and place,
and without notice, by the unanimous written consent of the Board. Such
calls or consent shall specify the time, place and object or objects of the
meeting.
Sec. 9. Notice of Special Meetings.
Notice of every special meeting other than by unanimous written con-
sent shall be mailed to each Director not less than five days before such
meeting, or be telegraphed not less than three days before, and such notice
shall give the time, place and objects of such special meeting, and no other
business shall be transacted thereat than shall have been so notified to the
Directors.
Sec. 10. Quorum.
A majority of the Board of Directors shall constitute a quorum for the
transaction of business, and, in the presence of a quorum, a majority vote
324 FORMS AND PRECEDENTS.
of the members present at any Board meeting shall decide its action. In
the absence of a quorum at any meeting of the Board, a majority of those
present may adjourn the meeting from time to time, but may transact no
other business until a quorum is secured.
Sec. ii. Election of Officers.
At the first regular meeting of the Board of Directors after the time
fixed for the annual meeting of stockholders each year, or at a special
meeting called for the purpose, but after the time for the annual meeting
of stockholders, the Board shall elect, by ballot, from their number, a Presi-
dent, who shall also be Chairman of the Executive Committee; one or
more Vice-Presidents, a Chairman of the Finance Committee, a Secretary,
an Assistant Secretary, a Treasurer, an Assistant Treasurer, an Auditor,
a General Counsel, and the elective members of the Executive and Finance
Committees. The Board shall also elect such other officers as may, in the
discretion of the Board, be deemed necessary. The Board shall fix the
compensation of officers and may fill any vacancies among the officers for
the unexpired term.
Sec. 12. Removal of Officers.
Any officer, agent or employee of the Company shall be subject to
removal at any time, with or without cause, by the affirmative vote of a
majority of the whole Board of Directors.
Sec. 13. Compensation of Directors.
Directors and members of the Executive and Finance Committees, as
such, shall receive no stated salaries for their services, but shall be allowed
ten dollars each for attendance at either regular or special meetings if
present at roll call and thereafter until adjournment, or until sooner
excused. Directors residing outside the City of New York shall, in addi-
tion, receive their actual traveling expenses.
Sec. 14. Working Capital and Surplus.
The Directors shall have power from time to time to fix and determine
and to vary the amount of the working capital of the Company, and to
direct and determine the use and disposition of any surplus or net profits
over and above the paid-in capital stock; and, in its discretion, the Board
of Directors may use and apply any such surplus or accumulated profits
in purcha ;ing or acquiring the Company's bonds or other obligations or
shares of its own capital stock, to such extent and in such manner and
upon such terms as the Board of Directors shall deem expedient; but
shares of such capital stock so purchased or acquired may be resold unless
such shares shall have been retired, as provided by law, for the purpose of
decreasing the Company's capital stock.
Sec. 15. Inspection of Books.
The Board of Directors shall determine the conditions and regulations
under which the books and accounts of the Company, or any of them, shall
be open to the inspection of stockholders of the Company; but no such
books and accounts, except the stock and transfer books, shall be open to
the inspection of any stockholder holding less than five hundred shares of
the Company's stock.
Sec. 16. Order of Business.
The regular order of business at meetings of the Board of Directors
shall be as follows :
1. Pending and Disposal of unapproved Minutes.
2. Reports of Officers of the Company.
3. Report of Executive Committee.
BY-LAW FORMS. 325
4. Report of Finance Committee.
5. Unfinished Business.
6. New Business.
7. Adjournment.
Article IV.— Standing Committees.
Sec. 1. Executive Committee.
There shall be an Executive Committee of five or more members, as
may be determined by the Board of Directors, consisting of the President
of the Company, the Chairman of the Finance Committee, and three or
more other members, to be chosen annually by ballot by the Board of
Directors from their own number, at the first meeting of the Board after
the annual meeting of the stockholders, or as soon thereafter as may be
convenient. A majority of the whole number of Directors shall be neces-
sary for an election, and the members so elected shall hold office for the
ensuing year and until their successors are elected, unless sooner removed
by action of the Directors. The elected- members of the Executive Com-
mittee may be removed at any time by a majority vote of the whole number
of Directors.
Sec. 2. Powers of the Executive Committee.
The Executive Committee shall have and exercise, by action of a
majority of all its members, all the powers and duties of the Board of
Directors when the latter is not in session, save and except as limited by
the by-laws, and in such matters as have been delegated to the Finance
Committee, or in which specific instructions have previously been given
by the Board of Directors.
The Executive Committee shall fix the salaries and compensation to
be paid to all agents and employees of the Company, except where other-
wise provided in the by-laws or by resolution of the Board of Directors.
The Executive Committee shall have power to order the seal of the
corporation to be affixed to all papers which in their judgment may require
the same.
The Executive Committee shall not increase, enlarge or extend the
plants or operations of the Company except with the express approval of
the Finance Committee.
The Executive Committee shall not have power to purchase or contract
for any large or unusual quantities of supplies or materials except with the
written approval of the Finance Committee.
The Executive Committee shall keep a record of its proceedings, and
the same, duly certified by the Secretary, shall be read at the next meeting
of the Board of Directors.
Sec. 3. Officers of Executive Committee.
The President of the Company shall be ex officio a member and Chair-
man of the Executive Committee, and shall preside at all meetings of the
same.
The Chairman of the Finance Committee shall be ex officio a member
of the Executive Committee, and in the absence of the Chairman shall
preside at all meetings of the same.
The Secretary of the Company shall act as Secretary of the Executive
Committee and shall call meetings of the said committee on the written
request of the President, or of the Chairman of the Finance Committee, or
of any two of the members of the Executive Committee.
Sec. 4. Finance Committee.
There shall be a Finance Committee of three or more members, as may
be determined by the Board of Directors, consisting of the President of the
326 FORMS AND PRECEDENTS.
Company and of two or more other members, to be chosen annually, by
ballot, by the Board of Directors, from their own number, at the first
meeting of the Board after the annual meeting of the stockholders, or as
soon thereafter as may be convenient. A majority of the whole number
of Directors shall be necessary for an election, and the members so elected
shall hold office for the ensuing year and until their successors are elected.
The Board of Directors shall designate one of said elected members to be
the Chairman of the Finance Committee, and the Chairman so appointed
shall preside over the meetings of that committee.
Sec. 5. Powers of the Finance Committee.
The Finance Committee shall have general and special charge and
control of all financial affairs of the Company, and shall have and exercise
all of the powers of the Board of Directors in such financial matters when
the latter is not in session. The Treasurer and the Auditor of the Com-
pany shall be under the direct control and supervision of the Finance
Committee.
The Finance Committee shall fix all salaries and compensation paid or
payable to officials of the Company, except as otherwise provided in these
by-laws or fixed by resolution of the Board of Directors.
Sec. 6. Chairman of Finance Committee.
The Board of Directors shall designate the Chairman of the Finance
Committee, who shall preside over the meetings of that committee, and shall
be ex officio a member of the Executive Committee. The Chairman of the
Finance Committee shall be charged with the general oversight, care and
management of the finances and financial affairs of the Company, except
as otherwise prescribed in these by-laws, by the Board of Directors, or by
the Finance Committee.
Sec. 7. Vacancies.
All vacancies in either of the standing committees shall be filled for the
unexpired term by the remaining members of such committee, subject to
the approval of the Board of Directors at its next meeting.
Sec. 8. Procedure.
The standing committees shall fix their respective regulations and rules
of procedure, and shall meet where and as provided by such rules, or as
provided by the resolution of the Board of Directors ; but at every meeting
a majority of the whole committee shall be necessary to constitute a
quorum, and the affirmative vote of a majority of the whole committee
shall be necessary for the adoption of any resolution or course of action.
Full minutes of the proceedings at committee meetings shall be kept, and
reports made to the Board of Directors when requested.
Article V.- — Officers.
Sec. 1. Enumeration.
The executive officers of the Company shall be a President, one or more
Vice-Presidents, a Chairman of Finance Committee, a Secretary, a Treas-
urer, an Auditor, a General Counsel, and such other officers as may from
time to time be elected by the Board of Directors.
The Board of Directors, or the Finance Committee, may appoint an
Assistant Secretary or more than one Assistant Secretary. Each Assistant
Secretary shall have such powers and perform such duties as may be
assigned to him by the Board of Directors, or by the Finance Committee.
The Board of Directors, or the Finance Committee, may appoint an
Assistant Treasurer, or more than one Assistant Treasurer. Each Assistant
BY-LAW FORMS. 327
Treasurer shall have such powers and perform such duties as may be
assigned to him by the Board of Directors, or by the Finance Committee.
Sec. 2. Qualifications.
The President, Chairman of Finance Committee and any Vice-Presi-
dents elected shall be members of the Board of Directors. The other
officers may or may not be members of the Board of Directors, at the
discretion of the Board.
Sec. 3. The President.
The President shall be the chief executive officer of the Company and
shall exercise general supervision and administration over all its affairs.
He shall when present preside at all meetings of the stockholders and Board
of Directors, and shall appoint all special or other committees, save and
except the Executive and Finance Committees, unless otherwise ordered
by the Board of Directors. He shall, by virtue of his office, be a member
and Chairman of the Executive Committee and a member of the Finance
Committee. He shall sign and execute all authorized bonds, contracts,
agreements and other obligations in the name of the Company, and shall,
with the Treasurer or an Assistant Treasurer, sign all certificates of shares
in the capital stock of the Company.
He shall submit a complete report of the operations of the Company
for the year, and a statement of its affairs as of the 31st day of December
preceding, to the Directors at their first meeting in February, and to the
stockholders at their annual meeting, each year, and from time to time shall
report to the Board all matters within his knowledge which the interests
of the Company may require to be brought to their notice.
He shall be ex officio a member of all committees, and shall have the
general powers and duties of supervision and management usually vested
in the president of a corporation.
He shall, as far as may be possible and desirable, familiarize himself
with and exercise supervision over the affairs of any other corporations
in which this corporation may be interested.
He shall freely consult and advise with the various committees and
their Chairmen in regard to the business and interests of the corporation.
Sec. 4. The Vice-Presidents.
The Vice-Presidents of the Company shall respectively, in the absence
of the President, in order of their rank, be vested with all the powers of
the President and be required to perform all his duties. They shall per-
form such other duties proper to their positions as may be prescribed by
the Board of Directors.
Sec. 5. The Secretary.
The Secretary shall be sworn to the faithful discharge of his duties,
shall keep full minutes of all meetings of the stockholders and Board of
Directors, and shall perform the same duty for the Standing Committees
when required; he shall give due notice of all meetings of stockholders
and Directors, and shall notify all newly elected Directors and officers of
their election ; he shall have charge of the seal of the corporation and affix
the same to certificates of stock when such certificates are duly signed by
the proper officers, and shall affix the seal, attested by his signature, to
such other instruments as are duly authorized by the Board of Directors,
the Executive Committee or the Finance Committee.
He shall have charge of the stock certificate books, the stock transfer
books and stock ledgers, and such other books and papers as the Board of
Directors may place in his care.
He shall make such reports to the Board of Directors and to the Execu-
tive and Finance Committees as may be required of him, and shall prepare.
328 FORMS AND PRECEDENTS.
or have prepared, such reports and statements as are required by the State
laws. He shall also make out, twenty days before any election of Directors
by the stockholders of the Company, a complete list of the stockholders
entitled to vote at such election, arranged in alphabetical order, and giving
the number of shares of stock that may be voted by each at such election,
and he shall keep said list open to inspection at the office of the Company
until the time of and during the said election.
He shall perform all such other duties as are incident to his office or
may be assigned him by the Board of Directors, the Executive Committee
or the Finance Committee.
Sec. 6. The Assistant Secretary.
The Assistant Secretary, when appointed, shall, in the absence, the
inability, the neglect or refusal to act of the Secretary, be vested with all
the powers and be required to perform all the duties of that official. At
other times he shall assist the Secretary in the discharge of his duties, and
shall do such other things incidental to the position of Assistant Secretary
as may be directed by the Board of Directors or either of the standing
committees.
Sec. 7. The Treasurer.
The Treasurer shall be the custodian of the funds and securities of the
Company, except as otherwise directed by the Board of Directors, and
shall be responsible for all moneys and other property of the Company
under his charge ; he shall keep full and accurate records and accounts, in
books belonging to the Company, of all receipts, disbursements, credits,
assets, liabilities and general financial transactions of the Company ; he shall
deposit all moneys and other valuable effects of the Company coming into
his hands in such depositaries as may be designated by the Board of
Directors or by the Finance Committee. His books and accounts shall be
open at all times during business hours to the inspection of any Directors
of the Company.
He shall disburse the funds of the Company asmay be ordered by the
specific or general instructions of the Board of Directors or the Finance
Committee, taking proper vouchers for all such disbursements; he shall
endorse for collection or deposit all bills, notes, checks and other negotiable
instruments of the Company, and deposit the same to the Company's credit ;
he shall sign all receipts and vouchers for payments made the Company,
and shall, jointly with such other officer as may be designated by the
Finance Committee, sign all checks made by the Company; he shall sign,
with the President, or with such other person or persons as may be desig-
nated for the purpose by the Board of Directors or Finance Committee,
all bills of exchange, promissory notes and bonds of the Company, and
shall sign with the President, or with a duly authorized Vice-President,
all certificates of shares of the Company's capital stock.
He shall give bond to the Company in such sum, and with such sureties,
and in such form, as shall be satisfactory to the Finance Committee, for
the faithful performance of the duties of his office, and for the restoration
to the Company, in the event of his death, resignation or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his custody and belonging to the Company.
He shall render to the Directors and to the Finance Committee, as called
for, all such statements and accounts as may be required of him ; shall pre-
pare an annual report showing the financial condition of the Company on
the 31st day of December in each year, which report when made shall be
presented to the next succeeding meeting of the Board of Directors and
to the annual meeting of stockholders ; and shall make such other reports
and do such other things incidental to his position as may be required of
him by the Board of Directors or by the Finance Committee.
BY-LAW FORMS. 329
Sec. 8. The Assistant Treasurer.
The Assistant Treasurer, when appointed, shall, in the absence, the
inability, the neglect or refusal to act of the Treasurer, be vested with all
the powers and be required to perform all the duties of that official. At
other times he shall assist the Treasurer in the discharge of his duties, and
shall do such other things incidental to the position as may be directed by
the Board of Directors or Finance Committee. He shall give bond to the
Company in such amount and in such form and with such security as may
be prescribed by the Finance Committee.
Should other Assistant Treasurers be appointed by the Board, they shall
have such powers and perform such duties connected with the financial
administration of the Company as may be assigned to them by the Board
of Directors or the Finance Committee, and the Directors shall have power
to assign to any such assistant official such of the powers and duties of the
Treasurer as may in their judgment be necessary or expedient
Sec. g. The Auditor.
The Auditor shall have supervision over the account books, and over
all books and papers relating thereto, subject to the Finance Committee,
and shall examine all vouchers and audit all accounts. He shall keep such
records of the business of the Company as will at all times show the condi-
tion of its accounts. He shall render statements to the President and to
the Finance and Executive Committees as may be required, showing all
disbursements and the amount of money due to the Company from all
sources, or otherwise remaining to the credit of the Company, and he shall
make such reports and statements as may be required of him from time
to time.
He shall, when requested, furnish the Board of Directors or Executive
or Finance Committees, a statement of the earnings and expenses of the
corporation, or of any company or companies controlled by this corporation,
and shall have such books and statistics kept as may be necessary for this
purpose.
He shall verify the assets reported by the Treasurer at least twice a
year, and make report of the same to the Board of Directors and to the
Finance Committee.
He shall cause the books and accounts of all officers and agents charged
with the receipt or disbursement of money to be examined as often as
practicable, or when requested by the President or Finance Committee,
and shall ascertain whether or not the cash and vouchers covering the
balance are actually on hand.
, He shall render such assistance and advice as the President, Finance
Committee or Executive Committee may desire concerning the books and
accounts and financial systems of all corporations in which this corporation
is interested.
In case of any default within his information he shall forthwith notify
the President.
Sec. 10. The General Counsel.
The General Counsel shall be the chief consulting officer of the Company
in all legal matters, and, subject to the Board of Directors and Finance
Committee, shall have general control of all matters of legal import con-
cerning the Company. He shall prepare or supervise the preparation of
all important instruments required in the operations of the Company, and
shall inspect and pass upon all such instruments presented for the accept-
ance of the Company as may be of sufficient importance to justify such
examination; he shall have general direction and control for the Company
of all litigation in which its interests may be involved, and shall advise
with the officers of the Company in all such matters relating to the Com-
pany's affairs as may require legal consideration.
330 FORMS AND PRECEDENTS.
He shall be present at all meetings of the stockholders and Directors,
and give such legal opinions and advice thereat as may be necessary; he
shall also attend meetings of the Executive and Finance Committees when
requested to attend by the Chairman of those committees, or when so
directed by the Board, and he shall perform such other legal duties in
connection with the affairs of the Company as may be requested of him
by the Board of Directors or Finance Committee.
Sec. ii. Delegation of Duties.
In case of the absence, the disability, or the refusal to act of any officer
of the Company, the Board of Directors, or Executive Committee, or, in
case of a financial officer, the Finance Committee, may delegate his powers
and duties to any other officer or officers, or to any Director or Directors,
for the time and until the proper official returns, or again performs his
duties or his successor is elected.
Article VI. — Dividends and Finances.
Sec. i. Dividends.
The Board of Directors, in its discretion, may declare dividends from
the surplus or net profits of the Company over and above the amount which
from time to time may be fixed by the Board as the amount to be reserved
for working capital.
Sec. 2. Working Capital and Surplus.
The Board of Directors shall reserve from the surplus or net profits of
the Company such amount for working capital as may from time to time
be fixed by resolution, and shall not be required in January of each year
to declare a dividend of the whole of its accumulated profit.
Sec. 3. Depositaries.
The Finance Committee or the Board of Directors shall from time to
time designate the depositaries of the Company, and the Treasurer of the
Company shall deposit the Company funds therein, in the name of the
Company, in such manner and amounts as may be provided.
Article VII. — Sundry Provisions.
Sec. i. Offices of Company.
The principal office of the Company in the State of New Jersey shall
be at No. 15 Exchange Place, Jersey City, New Jersey.
The principal office of the Company in the State of New York shall be
in the City of New York.
The Company may also have offices at such other places as the Board of
Directors may from time to time appoint.
Sec. 2. Corporate Seal.
The Corporate Seal of the Company shall consist of two concentric
circles with the name of the Company between, and in the centre shall be
inscribed " Incorporated 1904. New Jersey," and such seal, as impressed
on the margin hereof, is hereby adopted as the Corporate Seal of the Com-
pany.
Sec. 3. Amendment.
These by-laws may be amended, repealed or altered, in whole or in
part, at any regular meeting of the stockholders, or at any special meeting
where such action has been duly announced in the call for such meeting.
Subject to these by-laws, the Board of Directors shall have power to
make additional by-laws of the Company and to amend and repeal by-laws
so made, but shall not have power to amend or repeal any by-laws adopted
by the stockholders.
CHAPTER XLIV.
UNDERWRITING AGREEMENTS.
Form ii. — Underwriting Agreement. United States Ship-
building Company.
THE UNITED STATES SHIPBUILDING COMPANY.
A corporation to be organized under the laws of the State of New Jersey,
either by that or some similar name, proposes to acquire the plants and
equipment of the following concerns, or their capital stocks, free from any
liens:
The Union Iron Works San Francisco, California
The Bath Iron Works, Limited/
and
The Hyde Windlass Company,
The Crescent Ship Yard,
and
The Samuel L. Moore & Sons Co.,
The Eastern Shipbuilding Company.... New London, Connecticut.
The Harlan & Hollingsworth Co Wilmington, Delaware.
and
The Canda Manufacturing Company... Carteret, New Jersey.
Bath, Maine.
Elizabethport, New Jersey.
Underwriting Agreement.
For $9,000,000 Series A First Mortgage, Five Per Cent. Sinking Fund,
Gold Bonds, due 1932, part of an authorized issue of $16,000,000, Bonds of
$1,000 each, $5,500,000 being withdrawn from public issue for disposal under
the Vendor's and Subscribers' Contracts, and $1,500,000 being Reserved
in the Treasury of the Company. Additional Bonds may be issued only
for the purpose of acquiring Additional Plants and Equipment and for
Improvements and Betterments, upon such Terms and Conditions as shall
be Approved by the Holders of a Majority of the Bonds under the Present
Issue Outstanding at the Time of such Approval.
We, the undersigned, each for himself, with The Mercantile Trust
Company, for itself and for the United States Shipbuilding Company, and
to and with each other, agree to subscribe to, receive and pay for the amount
of five per cent, first mortgage, sinking fund, gold bonds of the United
States Shipbuilding Company of one thousand dollars each, set opposite
our respective signatures hereto, at the price of $900 for each bond, 25 per
cent, to be paid upon allotment and the balance upon the demand ,of The
Mercantile Trust Company.
331
332
FORMS AND PRECEDENTS.
We further agree to receive and pay for any smaller amount than that
subscribed for which may be allotted to us respectively.
The conditions of this underwriting agreement are as follows :
(i) That this agreement shall not be binding upon the undersigned
unless the entire amount of $9,000,000 of bonds shall have been under-
written.
(2) That within such reasonable time as shall be fixed by The Mercan-
tile Trust Company the said $9,000,000 of bonds, less any amount with-
drawn by the underwriters, as hereinafter set forth, will be offered to the
public, through such banker or bankers or brokers as shall be designated
by The Mercantile Trust Company, for subscription at not less than 95
per cent.
(3) With the consent of The Mercantile Trust Company, any other
concern may be included in this combination, or others substituted therefor,
provided the working efficiency or values are not lessened or impaired.
(4) That, if the amount of bonds subscribed and paid for upon such
public issues shall be at least equal to the amount of bonds so offered to
the public, then all liability under this agreement shall cease.
(5) That, in case the amount of bonds subscribed for upon such public
offering shall be less than the total amount of bonds so offered to the public,
or in case the bonds subscribed for upon such public issue shall not be
paid for to an amount equal, at the rate of 95 per cent., to the total of such
public offering, then such deficiency in subscriptions and payments will,
upon the demand of The Mercantile Trust Company, be made good by the
subscribers hereto in the manner aforesaid, pro rata in the proportion their
subscriptions for bonds not withdrawn by them from public issue bear to
the total amount of bonds so offered to the public.
(6) That each underwriter shall receive in preferred and common stock
of the United States Shipbuilding Company 25 per cent, of the par value
of the bonds hereby underwritten in each kind of stock, and also that all
the proceeds, not to exceed 5 per cent., realized from the sale of the bonds
at public issue in excess of 90 per cent., after deducting issue expenses, shall
belong to the underwriters.
(7) That any underwriter shall have the option of withdrawing from
the public issue any of the bonds hereby underwritten by him, provided
that he notify The Mercantile Trust Company five days prior to the date
fixed for the public issue, that he elects to purchase said bonds, provided
that, in the proportion of the bonds so purchased, he waives his said right to
participate in the cash proceeds realized from the public issue.
(8) That no underwriter shall sell or offer for sale the bonds so pur-
chased, nor any of the bonus shares he receives, until twelve months after
the date of payment, without the consent of The Mercantile Trust Company.
New York, April 19, 1902.
UNDERWRITING AGREEMENTS. 833
Form 12. — Underwriting Agreement. Globe Telegraph Com-
pany.
THE GLOBE TELEGRAPH COMPANY.
A corporation to be organized in the State of New Jersey, or in such
other State as may be agreed upon, under the name " Globe Telegraph
Company," or such other name as may be adopted therefor, to acquire all
United States patents for the Alwyn System of Rapid Telegraphy, to build
and operate Telegraph Lines, etc.
Capital Stock $15,000,000
Common $8,000,000
Preferred 7,000,000
Six Per Cent, Non-Cumulative, Voting.
Stock full paid and non-assessable.
Shares, $100.
In Treasury of Company $12,000,000
Preferred $7,000,000
Common 5,000,000
Withdrawn from Public Issue under Contract with Vendors :
Common Stock $3,000,000
To raise funds for the purposes of the Company, $6,000,000 of Preferred
Stock, with a bonus of $3,000,000 of _ Common Stock, is now offered for
underwriting as set forth below, leaving in the Treasury of the Company
$1,000,000 of Preferred Stock and $2,000,000 of Common Stock.
Underwriting Agreement.
We, the undersigned, each for himself, agree with the Standard Trust
Company, of New York City, for itself and for the Globe Telegraph Com-
pany, and to and with each other, to subscribe to, receive and pay for the
amount of 6 Per Cent., Non-cumulative, Preferred Stock of the Globe
Telegraph Company, set opposite our respective signatures hereto, at the
price of $95 for each $100 share ; 25 per cent, to be paid on allotment and
the balance upon call of the said Standard Trust Company; but no call
to be made until after four months from date of allotment and no single
call to be for more than 25 per cent. ; thirty days' notice to be given prior
to any call, and the interval between calls to be not less than three months.
We further agree to receive and pay for any smaller amount than that
subscribed for, which may be allotted to us respectively.
The conditions of this Underwriting Agreement are as follows:
(1) That this agreement shall not be binding until at least $2,000,000
face value of said preferred stock shall have been underwritten hereunder,
and the subscribers hereunto formally notified thereof by the said Standard
Trust Company.
(2) That any underwriter shall have the option of withdrawing from
the public offering hereinafter provided for any of the preferred stock
hereby underwritten by him, provided that he notify the Standard Trust
Company, in writing, not less than ten days prior to the date fixed for said
public offering, that he elects to so withdraw said preferred stock, and the
stock so withdrawn shall be paid for as hereinbefore set forth.
334 FORMS AND PRECEDENTS.
(3) That within such reasonable time as shall be fixed by the said
Standard Trust Company, the preferred stock hereby underwritten, less
any amount withdrawn by the underwriters, shall be offered to the public
through such banker or bankers or brokers as shall be designated by the
said Standard Trust Company, at such price in excess of $95 per share,
and with such bonus of common stock therewith, as may be agreed upon
between the said Standard Trust Company and a majority in interest of
the unwithdrawn stock hereby underwritten.
(4) That if the amount of preferred stock subscribed for upon such
public offering, and paid for, shall be at least equal to the amount of pre-
ferred stock not withdrawn and offered to the public as above provided,
then all liability under this agreement shall cease except as to stock with-
drawn from public offering.
(5) That in case the preferred stock subscribed for upon said public
offering, and paid for at the demanded price, shall be less than the total
amount of the withdrawn preferred stock so offered, then upon demand
of the said Standard Trust Company, such stock remaining unsubscribed
or unpaid for shall be taken and paid for by the subscribers hereto at the
rate of $95 per share, and upon the terms hereinbefore set forth, in propor-
tion to, but only up to the amounts of, their respective subscriptions not
withdrawn from public offering.
(6) That from the proceeds of the withdrawn preferred stock, sold as
aforeprovided at public sale, and paid for, such amount or amounts shall,
be paid so soon as it may be done, to the underwriters of the stock so sold
and paid for, as shall respectively and fully reimburse them for any install-
ments paid by them upon said stock under the terms of this agreement.
(7) That each underwriter shall receive with each two shares of pre-
ferred stock withdrawn or paid for by him one share of common stock.
(8) That all proceeds in excess of $95 per share, after deduction of all
issue expenses, realized from the sale of preferred stock underwritten here-
under and sold at public offering as aforeprovided, and such portion of the
common stock attaching as a bonus to the preferred stock underwritten
hereunder, not given as a bonus to subscribers on public issue, or delivered
with, or held for, preferred stock withdrawn, shall belong to the under-
writers hereunder, and shall be delivered to them in proportion to their
respective subscriptions not withdrawn from public offering.
(9) That stock withdrawn or paid for as hereinbefore provided shall
be held by the Standard Trust Company until full payment be made there-
for, and until delivery is made of the stock subscribed at public offering,
when such withdrawn or paid-for stock shall be delivered to the owners
thereof.
(10) That this agreement may be executed in separate instruments
with the same force and effect and individual obligation as if all the signa-
tures thereto were affixed to a single instrument.
And Whereas, to insure the proper establishment of the Company's busi-
ness, a Voting Trust is to be formed, to hold and vote the stock of the
Globe Telegraph Company for a term of five years, and Trustees' receipts
are to be issued for the stock so held and voted ;
Now Therefore, we, the undersigned, hereby respectively agree that we
will accept and receive, in lieu of the stock hereby subscribed for, said
Trustees' receipts to the full amounts of our respective subscriptions here-
under.
New York.
NAME. ADDRESS. SHARES. AMOUNT.
CHAPTER XLV.
VOTING TRUST AGREEMENTS.
Form 13. — Voting Trust Agreement. Glen Harbor Improve-
ment Company.
Voting Trust Agreement.
We, The Undersigned, stockholders of the Glen Harbor Improvement
Company, a corporation duly organized under the laws of the State of
New York, and having its principal office in the City of Yonkers, in said
State of New York, do hereby, in consideration of the premises and of our
mutual undertakings as herein set forth, severally agree to transfer and
deliver the shares of stock held by each of us in said corporation, to Emmett
M. Brown, William Swift and Andrew McBride, all of the said City of
Yonkers, as Voting Trustees hereunder, and mutually agree with them
and with each other that said Trustees shall hold and vote the said stock
for the period of five years from the date hereof, for the purposes and
under the following terms and conditions :
1. All stockholders of the said Company may join in the voting trust
hereby created, by signing this present agreement and transferring, in
whole or in part, the shares of stock held by them in said Company to the
said Trustees, under the conditions and for the purposes of this present
agreement.
2. Each stockholder in said Company joining this voting trust as afore-
provided shall become a party thereto from the date on which stock owned
by such stockholder in said Company shall be transferred and delivered to
said Trustees for the purposes of this agreement.
3. The said Trustees shall surrender to the proper officer of the said
Glen Harbor Improvement Company, for cancellation, the certificates for
all shares of stock transferred to said Trustees, and shall, in place thereof,
have certificates of said Company issued to themselves as Trustees, and
on the face of each said Trustees' certificate shall be stated the fact that
such certificate has been issued pursuant to this agreement.
4. The said Trustees shall collect and receive all dividends and profits
accruing to said stock and shall pay over the same to the respective equitable
owners thereof.
5. The said Trustees shall issue to each stockholder becoming a party
thereto one or more transferable Trustees' receipts for the number of
shares of stock placed by each of said stockholders respectively in this
voting trust, and when such Trustees' receipts are duly transferred to other
parties, said Trustees shall recognize such other parties as the lawful
assigns and successors of the original parties hereto, entitled to all of their
rights in the premises.
6. The stock held under this agreement shall, except as hereinafter
specially provided, be voted at any meeting of the stockholders of said
Company by such of the said Trustees as may be present thereat, and said
335
336 FORMS (AND PRECEDENTS.
vote shall be cast as in the judgment of a majority of the said Trustees
present at any such meetings may be for the best interests of the stock-
holders subscribing to this agreement.
7. In all elections for Directors the said stock shall be voted for the
re-election of the present members of the Board of Directors of said Com-
pany, or, in the event of the death, disability or refusal to serve of any
such members, the said stock shall be voted for such other person or
persons as, in the judgment of said Trustees, shall be most suitable for
such office.
8. This agreement shall terminate five years from the date hereof, and
upon such termination the said Trustees shall, as the outstanding Trustees'
receipts are surrendered to them, duly endorsed, give over to the said
Company the certificates of stock held by said Trustees, in pursuance of
this agreement, properly endorsed, and shall direct the officers of said
Company to deliver to the respective owners of the said surrendered
Trustees' receipts certificates for such number of shares of stock as may
be necessary to satisfy the requirements of the said surrendered Trustees'
receipts.
9. In event of the death, disability, resignation or refusal to act of any
of the Trustees herein named, the remaining Trustees, or Trustee, shall
have power to suitably fill such vacancy or vacancies, and the person or
persons so appointed shall be empowered and authorized to act hereunder
in all respects as if originally named herein.
10. A duplicate of this agreement shall be filed in the principal office
of the said Company in Yonkers and shall there be kept for the inspection
of any stockholder of the Company, daily, during business hours.
In Testimony Whereof, the parties to this agreement have here-
unto affixed their hands and seals in the said City of Yonkers
this 27th day of February, 1908.
SHARES
voting trustees. stockholders. transferred.
James Halsey.
Ernest Jurgens.
Harold M. Gilsey.
Willis M. Ames.
Emmett M. Brown, [l. s.
William Swift. [l. s.
Andrew McBride. [l. s.
[l. s."
So
[l. s.
125
[l. s.
75
[l. S.j
75
Form 14. — Voting Trust Agreement. Colorado Western Rail-
road Company.
WISCONSIN WESTERN RAILROAD COMPANY.
Voting Trust Agreement.
Dated February 1, 1908.
Willis B. Arnold,
Henry M. Ives,
H. H. Ellis, _ '
Voting Trustees.
This Agreement, made and entered into on the first day of February,
1908, by and between the holders of the certificates of the capital stock of
the Wisconsin Western Railroad Company, a corporation organized and
VOTINGJ TRUST AGREEMENTS. 337
existing under the laws of the State of New Jersey, who shall become
parties thereto (hereinafter referred to as the stockholders), parties of the
first part, and Willis B. Arnold, Henry M. Ives and H. H. Ellis (herein-
after referred to as the Trustees), parties of the second part.
Whereas, said stockholders deem it to be advisable and for the best
interests of all of the stockholders of the Company that the control and
supervision of its business shall, for a definite period of time, be vested in
trustees; and
Whereas, the said Trustees have agreed, during the period hereinafter
named, to endeavor to exercise the authority resulting from the control
of the stock transferred to them, pursuant to the terms hereof, to make
effective the desires of the said stockholders as hereinbefore recited.
Now, Therefore, This Agreement Witnesseth that, in consideration
of the premises, and of the agreements hereinafter contained on the part
of the stockholders and of the Trustees, each of the said holders of the
certificates of the capital stock of the Wisconsin Western Railroad Com-
pany who shall deposit the same with the International Trust Company,
of No. 21 Broadway, in the City of New York (hereinafter called the De-
positary), or with such other depositary as shall be appointed as herein-
after provided, agrees for himself and not for the others, but with the
others and with the Trustees, and the Trustees agree with the stock-
holders, as follows:
First — That all certificates of the capital stock of the said Company
deposited as aforesaid shall be properly endorsed for transfer on the books
of the said Company, and the shares represented thereby shall be duly
assigned to the said Trustees, and that the deposit of a certificate of stock
shall constitute the depositor a party hereto with the same force and effect
as though he had personally signed this agreement.
Second — That after said shares shall have been duly transferred to the
said Trustees on the books of the Company, the certificate or certificates
therefor shall be returned to and thereafter remain in the custody of the
depositary (unless said depositary be changed, as hereinafter provided)
for the full term of five years from the first day of June, 1004.
Third — That, during the said period of five years, the legal title and
all rights, powers and privileges in, to and over the stock represented by
the said certificates, including the right to vote thereon, in person or by
proxy, shall be and remain vested in the said Trustees, except as is herein
otherwise provided.
Fourth — Upon receiving on deposit hereunder certificates of stock prop-
erly endorsed for transfer on the books of said Railroad Company, said
depositary, as agent for the Trustees, shall issue to each depositor thereof,
or to his assigns, a certificate or certificates of interest in the stock so
transferred, representing the number of shares deposited by them respec
tively. The certificate of interest to be issued to or upon the direction of
those depositing such stock, shall be substantially in the following form :
Wisconsin Western Railroad Company.
Organized under the laws of the State of New Jersey.
No Shares.
Certificate of interest in stock deposited under agreement of
February 1st, 1908.
Willis B. Arnold, Henry M. Ives and H. H. Ellis, Trustees,
by International Trust Company, their agent, having received on
deposit certificates of stock of Wisconsin Western Railroad Com-
pany, of the par value of one hundred dollars ($100) each, for
shares, which shares are held under the above mentioned agreement,
338 FORMS AND PRECEDENTS.
to the terms of which the holder hereof assents by receiving this
certificate.
Hereby certify that is entitled,
subject to the provisions of said agreement, to an interest in the
stock deposited thereunder, to the extent of the number of shares
hereinabove stated.
This certificate entitles the holder to no voting power.
The interest represented thereby is transferable only on the books
of the undersigned, kept for that purpose at the office of the Inter-
national Trust Company, by the holder thereof, in person or by
proxy, upon surrender of this certificate, properly endorsed.
Dated 190 .
Willis B. Arnold,
Henry M. Ives,
H. H. Ellis,
Trustees.
By
International Trust Company,
Depositary and Transfer Agent,
By
The said certificates shall contain endorsements for the transfer of the
interest represented thereby substantially in the following form:
For Value Received hereby sell,
assign and transfer unto the
interest in the shares of the capital stock of the Wisconsin Western
Railroad Company represented by the within certificate, and do hereby
irrevocably constitute and appoint
attorney to transfer the said interest on the books of the within
named Trustees, with full power of substitution in the premises.
Dated 190 .
In presence of
In an appropriate place on the back of the said certificates the following
words shall also appear :
Notice. — The signature to this assignment must correspond with
the name as written upon the face of the certificate in every particular,
without alteration or enlargement, or any change whatever.
The Trustees may, in their discretion, procure the said certificates of
interest to be listed upon any stock exchange or broker's board; and they
may make such changes in the forms thereof as may be necessary for them
to conform to the rules of any such exchange or board.
Fifth — The interest represented by any certificate so issued may be
transferred by the holder thereof in person or by attorney thereunto duly
authorized, and a new certificate or certificates issued therefor by the depos-
itary as agent for the Trustees, but only as therein provided.
Sixth — All dividends that may accrue upon the stock so deposited shall
be paid by the Trustees to the said depositary, who shall distribute the
same pro rata among the holders of said certificates of interest, in the pro-
portion in which they shall severally be entitled thereto.
Seventh — In the event of the death, resignation, incapacity or refusal
to act of any of the said Trustees, the surviving or remaining Trustee or
Trustees may designate a successor or successors by certificate in writing,
deposited or filed with the said depositary, and after the appointment of
VOTING TRUST AGREEMENTS. 339
such successor Trustee or Trustees, he or they shall have and exercise all
of the power and authority herein granted to the Trustees herein named
with the same force and effect as though he or they had been originally
named as a Trustee or Trustees herein.
Eighth — The said depositary designated herein, or its successor or
successors, shall be and remain the agent of the Trustees for the transfer
of the said certificates of interest in the capital stock of the said Wisconsin
Western Railroad Company until the expiration of the trust hereby created ;
and in the event of the refusal or inability of the depositary to act, the
Trustees may make such arrangements and agreements as may be advisable
for the cancellation of certificates of interest issued by such depositary,
and shall have full authority to appoint another depositary to act hereunder
in its place, and to authorize and arrange for the delivery by the retiring
depositary to the depositary so appointed of all certificates of stock then
held hereunder by the former. Upon the acceptance of such appointment
the new depositary shall be clothed with all of the power and authofity,
and be subject to all of the duties and obligations^ hereby imposed upon
the depositary herein named. Any depositary acting hereunder, and its
or their successors, shall receive reasonable compensation for its and their
services. Any depositary may resign its trust hereunder by giving thirty
days' notice in writing of its intention so to do, which notice shall be
directed to all and delivered to any one of the Trustees then acting. In the
event of such resignation, a successor may be appointed by the Trustees
as hereinbefore provided.
Ninth — In exercising their rights, powers and privileges hereunder, the
Trustees will use their best judgment from time to time to select suitable
Directors of the said Railroad Company, to the end that the affairs of the
said Company shall be properly managed and conducted in the interests
of all the stockholders of the said Company, and in voting upon all other
matters which may come before them at any stockholders' meeting, will
exercise like judgment, and will from time to time inform the stockholders
regarding the progress and condition of the business of the Company. It
is understood, however, that no Trustee shall incur any personal respon-
sibility by reason of any matter or thing done or omitted to be done by
him in connection with the execution of said trust, except for his individual
malfeasance.
Tenth — The Trustees may make such rules for the transaction of their
business hereunder as to them shall seem proper and as shall be in accord-
ance with the terms of this agreement. They may act by a majority of
their number at any regular or special meeting convened on notice, or by
writing signed by such majority without a formal meeting. The trust
hereby created may be terminated at any time by consent of the Trustees,
which consent shall be in writing, delivered to and lodged with each of the
depositaries which shall then be acting hereunder. Upon such termination,
or upon the expiration of the agreement by lapse of time, all shares of
stock of the said Railroad Company then on deposit hereunder shall be
distributed among the registered holders of the said certificates of interest,
upon the surrender of such certificates, duly endorsed, to the depositaries,
in such manner that each holder of a certificate or certificates of interest
in the said stock shall receive a certificate or certificates for a number of
shares of the said stock equal to the number of shares named in his said
certificate or certificates of interest.
Eleventh — The Trustees shall not sell, pledge, hypothecate, mortgage or
place any lien or charge upon the shares of stock deposited hereunder.
Twelfth — No depositary hereunder shall incur any liability to any of
340
FORMS AND PRECEDENTS.
the parties hereto, except for the exercise of ordinary care in the perform-
ance of its duties as herein prescribed.
Thirteenth — This instrument, or any other writing required by this
instrument to be signed or executed, may be executed in any number of
like instruments of similar tenor, each of which so signed shall be treated
as an original.
Fourteenth — This agreement shall be binding upon and shall inure to
the benefit of the parties hereto, their personal representatives, successors
and assigns.
In Witness Whereof, the said Stockholders have either executed
these presents or become parties hereto by depositing certifi-
cates for their said stock as herein provided, and the said
Trustees have hereunto set their hands on the day and date
first above mentioned.
Stockholders.
NAMES.
RESIDENCES.
NO. OF
SHARES.
The undersigned International Trust Company of New York, the
depositary named and referred to in the foregoing instrument, hereby
acknowledges the receipt of a copy of the said instrument, and notice of all
of the terms thereof, and hereby gives its assent to the same and agrees
to act as depositary and transfer agent under the terms and conditions
therein set forth.
In Witness Whereof, it has caused this consent to be executed
by its duly authorized officer and its corporate seal to be
hereunto affixed this ist day of February, 1008.
CHAPTER XLVI.
SUBSCRIPTION LISTS AND CONTRACTS.
The general subject of subscription lists and contracts is
treated very fully in Chapter II. of the present volume. No
general discussion is therefore attempted here.
Form 15. — Subscription List.
SUBSCRIPTION LIST.
The Interlocking Switch Company.
To be Incorporated under the Laws of New York.
Capital Stock $100,000
Shares $100 each.
We, the undersigned, hereby severally subscribe for and agree to take
at their par value the number of shares of the capital stock of the Inter-
locking Switch Company set opposite our respective signatures, said sub-
scriptions to become due so soon as said Company is organized and to
be then payable in cash on demand of the Treasurer of the Company.
New York City, N. Y.,
March 14th, 1908.
NAMES. ADDRESSES.
Harry H. Collins 235 West 23rd St., N. Y.. .
David B. White 975 Willis Ave., N. Y
Willard H. Ellison Brooklyn, N. Y
SHARES.
AMOUNTS.
10
$1,000
8
800
8
800
When subscriptions are solicited widely or from parties at
a distance, an individual subscription blank is usually em-
ployed and is mailed with such statements and prospectuses
as may be necessary. The following is a common form.
341
342 FORMS AND PRECEDENTS.
Form 1 6. — Subscription Blank. Individual.
THE ALL-RUBBER TIRE COMPANY.
175 Montgomery St.
Jersey City, N. J.
To be Incorporated under the Laws of New Jersey
for the Manufacture of Automobile Tires.
Capital Stock $500,000
Shares $10 each.
I hereby subscribe for shares of the capital stock of the
All-Rubber Tire Company at the par value thereof, and agree to pay
twenty-five per cent, of such subscription on demand of the Treasurer
so soon as said Company is incorporated, and twenty-five per cent, on
demand of the Treasurer of the Company at any time after ninety days
from the incorporation of said Company; the remainder of said subscrip-
tion to be paid at such times and in such amounts, not exceeding ten per
cent, of said subscription in any one month, as may be required by the
Board of Directors of said Company.
Dated at ,
The right is reserved to reject or pro-rate any or all subscriptions.
The reservation of the right to reject or pro-rate sub-
scriptions enables the parties in control to exclude undesirable
subscribers and also to scale or reject applications in case of
over-subscriptions.
Form 17. — Subscription to Bank Stock. Individual.
SUBSCRIPTION FOR STOCK.
The Security National Bank.
No. 57 Broadway, New York.
Capital, $1,000,000. Surplus, $1,000,000.
New York, 1908.
The undersigned applies for shares of the Capital Stock
of The Security National Bank of New York, at Two Hundred ($200)
Dollars per share and agrees to accept such portion as may be allotted
and pay for same when called.
No. of Shares,
Name
Address
SUBSCRIPTION LISTS AND CONTRACTS. 343
Stockholders of financial institutions in New York are
liable for debts of the company to an amount equal to the par
value of the stock of the institution owned by them. This
double liability is usually provided for at the time of organiza-
tion by placing the price of the stock at 200, as in the fore-
going application. This, when paid, creates a surplus equal
in amount to the capital stock of the institution and, the stock-
holders having already paid in twice the par value of their
stock, are relieved of any further liability thereon.
The foregoing application was sent out accompanied by a
list of the proposed directors of the company and by the fol-
lowing letter.
Form 18.— Letter Accompanying Blank.
THE SECURITY NATIONAL BANK
OF NEW YORK.
No. 57 Broadway.
Capital $1,000,000. Surplus $1,000,000.
New York, Feb. 28, 1908.
Mr. John Edwards,
New York, N. Y.
Dear Sir —
It is proposed to organize a National Bank with One Million
($1,000,000) Dollars Capital, divided into Ten Thousand (10,000) Shares
at One Hundred ($100) Dollars per Share, and a Surplus of a like
amount. Offices of the Bank will be located at No. 57 Broadway, New
York City. Upwards of One Million Five Hundred Thousand ($1,500,000)
Dollars have already been subscribed towards the proposed Organization
and the gentlemen named on the opposite page will act as Directors.
A form of Subscription is herewith enclosed and you are invited to
become a Subscriber to the Capital Stock.
Subscribers are requested to forward their subscriptions to the under-
signed at the above address.
Truly Yours,
Willis S. Parker,
Chairman of Organization Committee.
N. B. — Subscription books will close on March tenth.
Subscriptions made under the foregoing list or applications
are of the nature of a continuing proposition, and, until the
company is organized and has actually accepted them are
revocable at the will of the subscribers. (See § 10.) To
avoid this element of uncertainty, subscription lists are some-
times drawn as in the following form, with a trustee acting
for the corporation.
344 FORMS AND PRECEDENTS.
Form 19. — Subscription List. Trustee's.
SUBSCRIPTION LIST.
Winona Cement Company.
215 Broad St., Newark, N. J.
To be Incorporated under the Laws of the State of New Jersey for the
Manufacture of Portland Cement.
Capital Stock $1,000,000
Shares $100 each.
We, the undersigned, hereby agree with James J. McLaren as Trustee
for the Winona Cement Company, to subscribe, and do hereby severally
subscribe, for the number of shares of the capital stock of said Company
set opposite our respective signatures, and agree to pay the par value
thereof as follows :
Ten per cent, on demand to James J. McLaren as Trustee for said
Company, such payment, or so much thereof as may be necessary, to be
used for the preliminary and incorporating expenses of said Company;
thirty per cent, to the Treasurer of the Company so soon as said corpora-
tion is organized; twenty-five per cent, on demand of the Treasurer of
the Company at any time after ninety days from the date of incorporation,
and the remainder at such times and in such installments as may be pre-
scribed by the Board of Directors.
Newark, New Jersey,
February 15th, 1908.
NAMES. ADDRESSES. SHAKES. AMOUNTS.
Mr. Alfred H. Braum.. .Paterson, N. J SO $5,000
James H. Allen 25 Wall St., N. Y 75 7,500
William Raymond Brooklyn, N. Y 50 5,000
Subscriptions under this form are held to be a contract
between the subscribers and the trustee. They cannot there-
fore be withdrawn nor revoked but are binding from the date
when made. The subscription list which follows is of a simi-
lar nature.
Form 20. — Subscription List. Agreement with Promoters.
SUBSCRIPTION LIST.
Harrison Cotton Mills.
Capital Stock $500,000
Shares $100 each.
We, the undersigned, hereby agree with William H. Hamilton and
John B. Rawley, both of New York City, New York, as Promoters and
SUBSCRIPTION LISTS AND CONTRACTS. 345
Trustees of the Harrison Cotton Mills, a corporation to be organized under
the laws of the State of North Carolina for the purposes and under the
conditions set forth in the attached statement, to subscribe, and do hereby
severally subscribe for the number of shares of the Treasury Stock of
said Company set opposite our respective signatures at the rate of Seventy-
five Dollars ($75) for each One Hundred Dollar share, and agree to pay
the amounts of our respective subscriptions to the Treasurer of the Har-
rison Cotton Mills as soon as the said Company is incorporated and its
Treasury Stock ready for issue; said stock to be delivered to the respective
subscribers therefor full-paid and non-assessable upon payment of the
said subscription price.
It is mutually agreed between the subscribers hereto and the said
William H. Hamilton and John B. Rawley, Promoters and Trustees of
said proposed corporation, that the subscriptions of this present contract
are conditioned upon bona fide subscriptions for stock to the par value
of Three Hundred Thousand Dollars being secured hereunder within
ninety days from the date hereof, and otherwise are null and void.
New York City, New York,
February 26, 1908.
NAMES. ADDRESSES. SHARES. AMOUNTS.
Samuel H. French Raleigh, N. C So $3,75°
Charles H. Wellbourne. . Raleigh, N. C So 3.75°
H. G. Williamson New York City, N. Y 100 7,500
Such a subscription list is usually circulated with a state-
ment attached giving full details as to the capitalization and
purposes of the company. When signed it forms an irre-
vocable contract between the subscribers and the trustees.
This subscription contract requires the delivery of full paid
treasury stock, notwithstanding the fact that the subscription
price amounts to but seventy-five per cent, of its face value.
This is usually accomplished by the issuance of the stock for
property and the return of a portion of this issued stock to the
company to be sold for operating capital. Full-paid treasury
stock is thus secured which can then be delivered in accord-
ance with the requirements of the contract. (See § 210.)
The subscription agreement which follows is also made
with trustees acting for the company and is irrevocable as
far as its subscribers are concerned, unless some failure of
its conditions voids the subscriptions. This agreement would
usually be accompanied by a prospectus or statement giving
the important details of the proposed incorporation.
346 FORMS AMD PRECEDENTS.
Form 21. — Subscription List. Preferred Stock with Bonus.
SUBSCRIPTION LIST.
Midvale Foundry Company.
To be Incorporated under the Laws of the State of West
Virginia for the Purpose of Acquiring Coal and
Iron Lands, and the Mining, Preparation
and Sale of the Minerals Obtained
Therefrom.
Capital Stock $1,000,000
Common Stock $750,000
Preferred Stock $250,000
Shares .... $100 each.
Frederick Baring,
Henry L. Simpson, \- Trustees.
John Cochran,
We, the undersigned, do hereby severally subscribe for the number of
shares of the Preferred Stock of the Midvale Foundry Company set
opposite our respective signatures, at the par value of One Hundred
Dollars per share, and contract and agree with the above-named Trustees
to pay our respective subscriptions as follows :
Fifty per cent, of the amount of said subscription to the Treasurer
of the Company on demand, so soon as said corporation is organized,
and the remainder thereof in monthly instalments of ten per cent, of the
total amount thereof, payable on the first day of each and every month
thereafter until the full amount of same is paid, the conditions of such
subscription being as follows :
That not less than One Hundred Thousand Dollars face value of pre-
ferred stock of the Company shall have been subscribed for in good faith
on the terms herein set forth, on or before the date herein fixed for the
incorporation of said Company, and that the said Midvale Foundry Com-
pany shall be incorporated under the laws of West Virginia not later than
July 1, 1908, with a capital stock of One Million Dollars divided into
Ten Thousand shares of the par value of One Hundred Dollars eachj
Two Thousand, Five Hundred shares of said stock to be six per cent,
cumulative preferred stock, and Seven Thousand, Five Hundred shares of
common stock; and that with each share of Preferred Stock hereby sub-
scribed for and paid for in accordance with the terms of this subscrip-
tion, the subscriber shall receive as a bonus one share of the full-paid and
non-assessable Common Stock of the Company.
And if said conditions shall not be fulfilled in their entirety and as
herein set forth, the subscriptions of the present agreement shall be null,
void and of no effect.
Charleston, West Virginia,
February 10, 1908.
NAMES. ADDRESSES.
Charles H. Morse Norfolk, Virginia
Henry B. Coles Charleston, West Virginia. .
SHARES.
AMOUNTS.
So
$5,000
50
5,000
SUBSCRIPTION LISTS AND CONTRACTS. 347
The conditions of this subscription require the bonus of
common stock to be delivered full-paid and non-assessable.
This would usually be accomplished, as stated under Form 20,
by the issuance of the common stock in payment for the
properties to be secured by the company, with a donation of a
portion of the issued stock to the treasury of the company.
(See § 210.)
The following subscription agreement provides for the pay-
ment of the subscription in stock at an agreed price. The
same form may, of course, be used for a subscription payable
in any other kind of property.
Form 22. — Subscription Agreement. Payable in Stock.
STOCK SUBSCRIPTION.
Whereas, It is proposed to organize a corporation under the laws of
the State of New Jersey, to be known as The Calumet Coal and Coke
Company, for the purposes of mining and dealing in coal and the manu-
facture and sale of coal products, with an authorized capital stock of Five
Hundred Thousand ($500,000) Dollars, divided into One Thousand (1,000)
shares of the par value of One Hundred ($100) Dollars each, of which
Four Hundred (400) shares shall be seven per cent., cumulative preferred
stock, preferential as to both dividends and assets, and Six Hundred
(600) shares shall be common stock with the exclusive power of voting
and participating in the management of the Company.
Now, Therefore, I. Montague Von Helm the undersigned, do prom-
ise and agree to and with Harvey DuBois and Richard McLean, or the
survivor of them, Trustees herein for the securing subscriptions and the
organization of said corporation, that in consideration of the premises
and the advantages to be derived from said organization, I will take stock
in and become a shareholder in such corporation to the amount of Two
Hundred (200) shares of the Common Stock of said Company and Two
Hundred (200) shares of the Preferred Stock of said Company, and will
pay for same at its par value,
But, However, It is understood and agreed that I shall have the
privilege of paying my said subscription by transferring over to the said
Calumet Coal and Coke Company, Two Hundred (200) shares of stock in
The Orchard Grove Coal Company, at the agreed valuation of Two Hun-
dred ($200) Dollars per share; and
Provided, That said Trustees shall secure bona fide subscriptions
to. the capital stock of the said Calumet Coal and Coke Company to the
aggregate amount of Four Hundred Thousand ($400,000) Dollars, which
shall be the minimum amount with which the said Company shall begin
business and that such subscriptions be secured and such incorporation
be effected on or before the 31st day of August, 1908.
Otherwise this subscription to be null and void.
348 FORMS AND PRECEDENTS.
In Testimony Whereof, I have hereunto put my hand and seal this
ioth day of March, A. D. 1908.
Montague Von Helm. [l. s.]
Attest :
Harry MacDougal.
We hereby accept the foregoing subscription and agree to its terms.
Harvey DuBois,
Richard McLean,
Trustees.
Attest :
Henry McGuerin.
CHAPTER XLVII.
RECEIPTS FOR STOCK SUBSCRIPTIONS.
After incorporation, payments of stock subscriptions are
made to the treasurer of the company and receipts are issued by
him. If payments are to be made before incorporation, a
trustee or trustees must necessarily be appointed to act for the
company. Such trustees are usually selected by those having
charge of the subscription and are named in and made parties
to the subscription list.
Form 23. — Trustee's Receipt.
No. 1. 15 Shares.
LANSFORD MANUFACTURING CORPORATION.
Trustee's Certificate.
$150.00.
I hereby certify that Henry H. McGill, a subscriber for Fifteen
Shares of the Capital Stock of the Lansford Manufacturing Corporation
at its par value of One Hundred Dollars per share, has paid to me as
Trustee for said Corporation, on account of said subscription and in
accordance with its terms, the sum of One Hundred and Fifty Dollars.
This receipt will upon the organization of the said Lansford Manu-
facturing Corporation be received and "credited by the Treasurer thereof
to its full amount as a payment upon said subscription.
New York, Gerald H. McNell,
March 10th, 1908. Trustee.
This receipt is usually printed and bound in book form
with stub attached, perforations separating the two so that
the receipt may be easily torn out and given to the party
making the payment. The stub is the trustee's record of the
transaction. It should show the number of the receipt, the
amount paid in, the name of the payee, the number of shares
subscribed for, the percentage or other details of the instal-
ment, and the date.
When instalments are paid after incorporation, a simple
form of treasurer's receipt may be given for each payment.
349
350 FORMS AND PRECEDENTS.
Form 24. — Treasurer's Receipt for Instalment Payment.
a
3
No. 5. $150. S Shares.
THE WILCOX RADIATOR COMPANY.
30 Broad Street,
New York.
g I Received of Edward H. Williamson the sum of One Hundred
g : Dollars, instalment payment No. 5, of Ten Per Cent, upon his
« : subscription for Five Shares of the Capital Stock of The Wilcox
m ■ Radiator Company.
H : New York City, J. H. Wilcox,
• March 14th, 1908.
This receipt should also have its stub upon which the im-
portant items are entered.
When payment is made in full of a stock subscription, and
the stock certificates are ready for delivery, they are in them-
selves a sufficient receipt. If not ready for delivery, temporary
certificates are frequently issued and are exchanged for the
permanent certificates of the company as soon as the latter are
ready for delivery. These temporary certificates are in the
form of the regular stock certificate, but are usually hastily
prepared at no greater expense than is justified by their tem-
porary nature.
When permanent stock certificates are not ready for deliv-
ery at the time payments are made, and temporary certificates
are not issued, the treasurer's receipt must bridge over the
interim. This is usually more formal than the ordinary re-
ceipt.
Form 25. — Treasurer's Receipt for Stock Subscription.
No. 50. $1,000. 10 Shares.
HOWARD PUBLISHING COMPANY.
No. 225 Atlantic Avenue,
Brooklyn, N. Y.
This is to certify that Harry H. Wilson has paid into the
Treasury of the Howard Publishing Company the sum of One
Thousand Dollars, payment in full of his subscription for Ten
Shares of its Capital Stock, duly executed Certificates for which
will, upon surrender of this Receipt, be issued to his order so soon
as said Certificates are ready for delivery.
March 14th, 1908. Frank J. Ardwald,
Treasurer.
RECEIPTS FOR STOCK SUBSCRIPTIONS.
351
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FORMS AND PRECEDENTS.
At times when payment of stock subscriptions has been
made 'and neither permanent nor temporary certificates are
ready for delivery, the president will join with the treasurer
in the signature of the treasurer's receipt shown in Form
25, which then becomes in effect a stock scrip. The usual
form of stock scrip is, however, as shown in Form 26.
This scrip might or might not be sealed. Ordinarily the
corporate seal is affixed and the stock scrip then becomes
practically a temporary certificate.
Stock scrip is sometimes employed when subscription
payments are made in instalments. The face of the scrip
evidences the first instalment, and subsequent instalments
are either endorsed on the back of the scrip or, if personal
payment is impossible, are evidenced by separate receipts.
Where the conditions are such as to make payment in per-
son of the further instalments possible or desirable, the stock
scrip is ruled on the back to permit of the endorsement of
these payments as they are made, the treasurer's signature
verifying each payment.
Form 27. — Endorsement Form for Stock Scrip.
Date.
Number of
Instalment.
Amount
Paid.
Signature of Treasurer.
2
3
$500 00
150 00
William H. Hansford
William H. Hansford
When this plan is followed, the stub should also have
rulings to permit the entry of payments and their date, so
that both the scrip and its stub will show a complete record
of the transaction.
A subscription to stock and payments thereon are assign-
able. A general form of assignment to be endorsed upon the
back of a receipt for subscription payments, is as follows :
Form 28. — Assignment of Subscription and Payments.
For Value Received, I hereby sell, assign and transfer unto John H.
Wardwell of New York City my subscription to Fifteen Shares of the
Capital Stock of the Lansford Manufacturing Corporation, together with
RECEIPTS FOR STOCK SUBSCRIPTIONS. 353
the payments made thereon, all as evidenced by the within certificate,
and I do hereby authorize and instruct the proper officials of said Com-
pany upon completion of the conditions of my said subscription, to issue
said stock to the order of my said assignee.
New York, Henry H. McGill.
May 4th, 1908.
In the presence of
Samuel H. Kennard.
CHAPTER XLVIII.
STOCK CERTIFICATES AND STOCK BOOKS.
The regular forms for stock certificates are usually pre-
pared in quantity. The body and general design of the cer-
tificate are lithographed, blanks being left for the variable data
such as the name of corporation, capital stock, etc., etc. These
are filled in by local printers at the time the certificates are to
be used. For this reason any variation of the ordinary form
involves the preparation of a special certificate at a consider-
ably increased cost. As the wording of the regular forms
is fairly good, the cost of a special certificate merely to se-
cure better wording is but seldom justified.
The certificates which follow are correct as to wording.
Two forms of stub are given. The one presented in connec-
tion with Form 30, " Preferred Stock," is the clearer and
better, but the stub given in connection with Form 29, " Com-
mon Stock," is so frequently supplied with the regular stock
certificates that it is also presented.
From the legal standpoint the style of a stock certificate
does not bear in any way upon its effectiveness. From the
business standpoint, however, the certificate should at least
be neat and attractive. Whether the highly-colored and em-
bellished stock certificates so frequently seen are desirable, will
depend upon the conditions.
When the item of cost is not important or when stock ex-
change requirements are to be complied with, the finest bond
paper is employed for stock certificates and the design and
wording is engraved on steel. The cost then runs up into
the hundreds of dollars according to the style and number of
certificates. On the other hand, if the issue is but temporary
or the incorporators indifferent, the certificates are frequently
printed or even written on ordinary paper and in plainest de-
sign. Usually, however, a good quality of bond paper is em-
354
STOCK CERTIFICATES AND STOCK BOOKS.
355
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358 FORMS AND PRECEDENTS.
lowed by the conditions under which the preferred stock is
issued.
Preferred stock certificates are numbered independently of
the common stock certificates. That is, the first certificate of
preferred stock is numbered " i " regardless of the fact that
the first certificate of common stock is also numbered " I,"
the two series being sufficiently distinguished by the fact that
they are respectively common and preferred stock.
Sometimes stock is held by trustees under the terms of a
voting trust agreement. (See Forms 13, 14.) When the trust
is formed the certificates of stock to be held under it are
duly assigned and are turned in to the trustees, who surrender
them for cancellation and take out certificates in their own
names as voting trustees.
Voting trustees' certificates are then usually prepared in
the general style of the ordinary stock certificate and are de-
livered to the parties to whom the stock belongs to evidence
its real ownership. These trustees' certificates pass by assign-
ment, the equitable ownership of the stock being thereby vest-
ed in the assignee. The following form gives the general
wording of a voting trustees' certificate.
Form 31. — Voting Trustees' Certificate.
Organized under the Laws of the State of Maine.
TELEPOST COMPANY.
Capital Stock, $18,000,000.
Number Shares.
TELEPOST COMPANY.
Certificate for Stock Deposited
Under Voting Trust Agreement of April 12, 1907.
John W. Goff, S. S. McClure, H. D. Critchfield, F. W. Shumaker and
H. Lee Sellers, Trustees, by the Lincoln Trust Company, their agent,
having received on deposit the entire capital stock of the Telepost Com-
pany, full paid and non-assessable, all being held under the above-named
agreement, to the terms of which the holder hereof assents by receiving
this certificate, Certify that is entitled,
subject to the provisions of said Agreement, to
shares of the stock deposited thereunder. This Cer-
tificate entitles the holder to all rights, dividends and privileges belonging
to the actual stock, excepting only the right to vote. The Trusteeship
herein agreed to may be terminated after three years upon terms set forth
in the above-named agreement and is ended by limitation in ten years from
date of agreement.
STOCK CERTIFICATES AND STOCK BOOKS. 359
Transferable only on the books of the undersigned at the office of the
Lincoln Trust Company, New York City, by the holder hereof in person
or by duly authorized attorney, upon surrender of this certificate properly
endorsed.
Dated, , 19.
John W. Goff,
H. D. Critchfield,
H. Lee Sellers,
S. S. McClure,
F. W. Shumaker,
Trustees.
By Lincoln Trust Company,
Depositary and Agent.
By
Secretary
Treasurer.
The form of assignment on the back of this certificate is
as follows :
Form 32. — Assignment of Voting Trustees' Certificate.
For Value Received hereby sell, assign and
transfer to the interest in the stock of the
Telepost Company represented by the within certificate, and do hereby
irrevocably constitute and appoint attorney to
transfer the said interest on the books of the within named Trustees with
full powers of substitution in the premises.
Dated, , 19 . . .
Stock is transferred by a similar assignment, the form
being placed upon the back of the certificate. There is but
one form of this assignment in common use, which, though
rather informal and incomplete in some respects, is almost
invariably employed. When this assignment is duly executed
by the owner of record of the certificate, the certificate and
the stock represented thereby become the property of the party
named in the assignment form. If this party wishes to assign
the certificate again, he might execute another similar assign-
ment, either written on the back of the certificate, or prepared
as a separate document and attached to the certificate, but,
as is usually done, would probably surrender the certificate
and take out a new one in his own name, or in the name of
the party to whom he wishes the stock to be transferred.
Or, the assignment might be duly executed, but the blanks
not be filled in at all. The certificate is then said to be assigned
in blank and may be passed from hand to hand without fur-
360 FORMS AND PRECEDENTS.
ther formality, the ownership of the stock following the cer-
tificate. Any owner who wishes to make himself a stockholder
of record, i. c, appear upon the stock books of the company as
the owner of the stock, may then fill out the blanks in the
assignment, turn the certificate in to the secretary of the com-
pany for cancellation, and receive a new certificate in his own
name.
'The following assignment is complete, the parts which
have been filled in being indicated by parentheses :
Form 33. — Assignment of Stock Certificate.
For Value Received, (I) hereby sell and transfer unto (John J. Mc-
Millan of New York City, Twenty-five) Shares of the Capital Stock
represented by the within Certificate, and do hereby irrevocably constitute
and appoint (Harry S. Gunnison) my Attorney to transfer the said stock
on the books of the within named Company with full power of substitu-
tion in the premises.
Dated (March 2nd, 1908.) (Howard S. Allen.)
In presence of
(Anna H. McClelland.)
Usually the name of the secretary of the company is in-
serted as the attorney who is to make the transfer on the Ixioks
of the company, though any other suitable person might be
named instead.
STOCK BOOKS.
The usual stock books are the transfer book and the stock
ledger, this latter being also frequently referred to as the stock
book. (See § 136.)
Form 34. — Stock Transfer Book.
Ledger Folio 27. Transfer No. 556.
ALLIANCE AUTOMOBILE COMPANY.
For Value Received, I hereby sell, assign and transfer to John H.
Lansing of Newark, New Jersey, Seventy-six Shares of the Capital Stock
of the above-mentioned Company now standing in my name on the Com-
pany books and represented by surrendered Certificates Nos. 32, 37 and 44.
Witness my hand and seal this 28th day of February, 1908.
George B. Goldman. [l. s.]
By George Gale, Attorney,
New Certificate No. 224
Issued to John H. Lansing
Ledger Folio 84.
STOCK CERTIFICATES AND STOCK BOOKS. 361
The transfer book is practically a duplication of the as-
sign tnent appearing upon the stock certificates, and in many
corporations is not kept at all, the duly executed assignment
on the back of the certificate being regarded as all sufficient
authorization for the transfer .of the assigned stock.
The transfer books supplied by stationers usually have a
stub attached to the transfer. As the transfer itself remains
in the book, this stub is merely an unnecessary repetition of
matter already shown on the transfer.
The signature to the assignment of the stock transfer book
is sometimes witnessed. This signature is, however, usually
that of the secretary or the transfer agent, or is affixed in
their presence, and, as the assignment is at the most but sup-
plementary to the duly witnessed assignment on the back of
the surrendered certificate, a witness to its signature is gen-
erally regarded as superfluous.
In many states of the Union a stock book or stock ledger
— the two being practically synonymous — is required by the
state statutes. Whether required by the statutes or not, some
book of the kind must necessarily be kept in order to provide
an accurate record of the issued and outstanding stock of
the company. The form of stock book or stock ledger shown
in Form 29 will bq found convenient and will probably meet
the requirements of the statutes in every state of the Union.
The leaves of this book are indexed, usually as a matter
of convenience, but in the State of New York to secure the
alphabetical arrangement required by statute. The name and
address of the stockholder with whom the particular account
is kept appears at the head of the page as in an ordinary
ledger. On the right-hand side of the page the party is
credited with the stock he purchases or otherwise acquires,
and on the left-hand side is debited with any stock disposed
of. The difference between the two sides shows at any time
the amount of stock standing to his credit.
On the debit or sale side of the account, the first column
gives the date of the transaction ; the second the name of the
party to whom the stock is transferred ; the third the number
of the surrendered certificate; the fourth the number of the
certificate reissued to the transferrer when but a portion of the
stock represented by the surrendered certificate is sold, and the
fifth column shows the number of shares sold.
362 FORMS AND PRECEDENTS.
Form 35. — Stock Book or Stock Ledger.
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