CORNELL LAW LIBRARY •'*«M,m«ii'-, KF Olnrn^U ICam Bc\)nn{ Hibratg Cornell University Library KF 1649.N95 1909 A treatise on the law of Intercorporate 3 1924 019 215 775 Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924019215775 A TREATISE LAW OF INTERCORPORATE RELATIONS TREATISE ON THE LAW OF INTERCORPORATE RELATIONS BY WALTER CHADWICK NOYES UNITED STATES CIRCUIT JUDGE FOR THE SECOND CIRCUIT AUTHOR OP " AMERICAN RAILROAD RATES " SECOND EDITION REVISED AND ENLARGED BOSTON LITTLE, BROWN, AND COMPANY 1909 Copyright, 1902, 1909, By WALTER CHADWICK NOYES. 8. J. PARKHIIL & Co., P.08TON, U. S. A. DEDICATED TO THE MEMORY OF THE HONORABLE AUGUSTUS BRANDEGEE ~ AS A TRIfiUTE TO A LAWYER WHO BY HIS LEARNING, BRILLIANCY, HIGH IDEALS AND ACHIEVEMENTS HONORED HIS PROFESSION PREFACE TO SECOND EDITION The development during the past six years of the law upon the subjects examined in this treatise has rendered a new edition necessary. This development has been most marked in the law relating to legislation against combinations, and the last six chapters which embrace this subject have been almost wholly rewritten. Consequently, while the section arrange- ment of the first edition has been elsewhere retained, it has been found necessary to abandon it in those chapters. Refer- ences to the first edition, therefore, apply to this edition in all but the last six chapters. The purpose of this treatise is to examine exhaustively a limited number of important subjects. Only in so far as it may furnish the practitioner adequate information concerning the law existing upon any of the phases of those subjects does it fulfil its purpose. W. C. N. New York, October 28, 1908 VU PREFACE TO FIRST EDITION The modern tendency of business is toward concentration and cooperation instead of competition. The modern instrument of business is the corporation. The development of the tend- ency through the instrument has resulted in the joining together, in varying forms, of corporate entities and properties. Cor- porate conjunction involves intercorporate relations, and the legal questions growing out of these relations furnish the subject- matter of this treatise. The preparation of the first four parts of this work has been a process of amplification; of the last part, a process of reduc- tion. The conjunction of corporate eMities through consoli- dation, of corporate properties through sales and leases, and the concentration of corporate control through holding shares, are outlined in general treatises upon corporation and railroad law. The material for the development of the subjects, in a manner commensurate with their importance, has, however, only been found through a systematic examination of original sources. The law governing combinations of corporations is more accessible, but less adaptable. The value of a mass of ap- parently conflicting decisions appears only when it is reduced to principles. In collecting the cases much assistance has been derived from the general treatises upon monopolies and similar subjects. Especial acknowledgment is due to Mr. Eddy's valuable work upon combinations of labor and capital ("Combinations"), although its underlying theory that a com- bination of capital, to be unlawful, must be a conspiracy, is essentially different from that of the present treatise. The theory of this treatise is that the validity of a combination depends upon considerations of public policy. Rules of pubUc policy are formulated, and an attempt is made to deduce from the cases collected principles of general application. No con- ix PREFACE TO FIRST EDITION sideration is, however, given to labor combinations and other subjects examined in the general treatises. The statutes of all the American States and many English statutes, governing the various relations of corporations, are collected in footnotes; and the cases, where numerous, are arranged under the names of the respective States. By this plan, it is believed that the statute and case law of each State may be readily found. With hardly a single exception, each citation has been care- fully verified with the original report, the date of the opinion inserted, and parallel references added. A treatise of this nature, prepared amid the distractions incident to the performance of other duties, cannot be free from fault. But while the conclusions may not always follow from the premises, and the theories may have no foundation at all, it is hoped that the work will be found accurate in stating and referring to the decisions of the courts. And whatever measure of accuracy it may possess is due, in no inconsiderable degree, to the diligence of Mr. Frank L. McGuire, of the New London (Conn.) bar, who has verified the references and prepared the Table of Cases. W. C. N. Lyme, Connecticut, September 1, 1902. CONTENTS PAGE 1-6. PRELIMINARY 3 PAET I CONSOLIDATION OF CORPORATIONS CHAPTER I NATURE OF CONSOLIDATION § 7. Term "Consolidation" of Uncertain Meaning 11 8. Uses of the Term distinguished 13 9. Consolidation as a Result and as a Process IS 10. An Analogy in the Civil Law 16 11. Merger 16 12. Amalgamation 17 13. Distinction between Consolidation and Sale 18 14. Distinction between Consolidation and Lease 21 15. Distinction between Consolidation and Control 22 16. Distinction between Consolidation and Combination 23 CHAPTER II LEGISLATIVE AUTHORITY FOR CONSOLIDATION I. Necessity for Legislative Authority 17. Consolidation without Legislative Authority ultra vires .... 24 18. Consolidation of Qwasi-public Corporations without Legislative Au- thority against Public Policy 26 II. Conferring and Withdrawal of Legislative Authority 19. Power of Legislature to authorize Consolidation .... .27 19a. Authorization of Consolidation of Interstate Railroads not Regular tion of Interstate Commerce 29 20. Legislative Sanction — How expressed 31 21. Public Policy regarding Consolidation of Non-competing Railroads 32 22. What Railroads may consolidate — Statutory Provisions ... 33 23. What Business Corporations may consolidate — Statutory Provi- sions . . . . 41 24. Power of Legislature to withdraw or limit Right to consolidate — (A) In Absence of Reserved Power 44 25. Power of Legislature to withdraw or limit Right to consolidate — (B) In Exercise of Reserved Power 46 26. Power of Legislature to withdraw or limit Right to consolidate — (C) In Exercise of Police Power 46 xi CONTENTS III. Construction of Statutes authorizing Consolidation page 27. General Rules of Construction 47 28. Construction of Particular Statutory Provisions 50 29. Construction of Statutes authorizing Consolidation of Railroads — Connecting or Continuous Lines 52 30. Construction of Statues authorizing Consolidation of Corporations other than Railroads 56 CHAPTER III CONSTITUTIONAL AND STATUTORY RESTRAINTS UPON CONSOLIDATION 31. Public Policy regarding Consolidation of Competing Railroads . 58 32. Constitutional and Statutory Provisions against Consolidation of Competing Railroads 60 33. Construction of Prohibitions — (A) Meaning of Term "Consolida^ tion" 64 34. Construction of Prohibitions — (B) Whether a Lease amounts to Consolidation 66 35. Construction of Prohibitions — (C) Arrangements amounting to Consolidation 67 36. Construction of Prohibitions — (D) Control of Competing Railroads by Holding Corporation 69 37. Construction of Prohibitions — (E) What are Competing or Parallel Railroads 72 38. Prohibition of Consolidation of Competing Railroads not a Regu- lation of Interstate Commerce 74 39. Constitutional Prohibitions against Consolidation of Competing Carrier Corporations other than Railroads 76 40. Enforcement of Provisions against Consolidation of Competing Lines 77 CHAPTER IV ASSENT OF STOCKHOLDERS 41. Requisite Number of Stockholders — (A) Under Laws in Force at Organization of Consolidating Corporations 78 42. Requisite Number of Stockholders — (B) When Unanimous Con- sent is necessary 80 43. Requisite Number of Stockholders — (C) Under Enactments in Exercise of Reserved Power 84 44. Power of Legislature to compel Consolidation under its Reserved Power 86 45. Assent of Stockholders — How manifested. Acquiescence. Estoppel 88 46. Rights and Remedies of Dissenting Stockholders 90 47. Rights and Remedies of Dissenting Subscribers 92 48. Procedure in Stockholders' Actions 94 49. Laches of Stockholders 95 50. Can a Majority effect Consolidation upon giving Security to Dissent- ing Stockholders? . . 96 51. The Right to condemn Stock 98 xii CONTENTS CHAPTER V METHOD OF CONSOLIDATION PAGE § 52. Formal Statutory Requisites 100 53. When Consolidation is effected 106 54. Construction of Statutes prescribing Mode of Consolidation . . . 106 55. What Statutory Provisions Conditions Precedent 108 56. What Statutory Provisions not Conditions Precedent 109 57. Statutory Provisions for Appraisal of Stock Ill CHAPTER VI EFFECT OF CONSOLIDATION UPON STATUS OF CONSOLIDATING CORPORATIONS AND THEIR STOCKHOLDERS § 58. Effect of Consolidation may be Fusion, Merger, or Continued Existence 113 59. Effect of Consolidation depends upon Terms of Consolidation Act . 114 60. As a General Rule, Effect of Consolidation is Creation of New Cor- poration and Dissolution of Constituents 115 61. Exceptions to the Rule — Merger and Continuance of Corporations 118 62. Construction of Particular Consolidation Acts. Cases showing Creation of Distinct Corporation 120 63. Construction of Particular Consolidation Acts. Cases of Absorption or Merger 122 64. Effect of Valid Consolidation upon Stockholders of Constituent Cor- porations 123 CHAPTER VII RIGHTS AND POWERS OF CONSOLIDATED CORPORATION I. Statutory Transmission of Property, Franchises, and Privileges § 65. General Rule. Legal Presumption 126 66. Real Estate and Rights in Streets 129 67. Choses in Action 131 68. Subscriptions 132 69. Enforcement of Subscriber's Obligations. Conditional Subscrip- tions 133 70. Municipal Aid 135 71. Constitutional Umitations upon Grants of Privileges and Immuni- ties .137 72. Exemptions from Taxation 138 73. Special Privileges and Immunities other than Tax Exemptions . 142 II. Powers 74. Powers of Consolidated Corporation. In General 143 75. Power to issue Mortgage Bonds 144 76. Right of Eminent Domain 145 77. Miscellaneous Powers 146 xiii CONTENTS CHAPTER VIII OBLIGATIONS OF CONSOLIDATED CORPORATION I. Direct Obligations PAGE § 78. Constitutional Limitations 149 78a. Consolidated Corporation liable upon its Own Obligations . . . 150 79. As a General Rule Consolidated Corporation directly assumes all Obligations of Constituents 150 80. Obligation to perform Public Duties of Constituents 154 81. Liability of Consolidated Company to Bondholders and Preferred Stockholders of Constituents. Other Special Contracts . . . 156 82. Liability for Torts of Constituents 159 83. Rule of Liability inapplicable to Consolidation after Foreclosure Sale 161 II. Liens 84. Conventional and Statutory Liens 162 85. Equitable Liens 163 III. Remedies of Creditors of Constituent Corporations 86. Remedy of Creditors against Consolidated Corporation — At Law . 165 87. Remedy of Creditors — In Equity 167 88. Remedy against Constituent Corporation if not dissolved . . . 168 89. Effect of Consolidation upon Pending Suits 170 90. Procedure regarding Pending Suits 171 91. Allegation and Proof of Consolidation 172 CHAPTER IX IRREGULAR AND INVALID CONSOLIDATIONS § 92. Attempted Consolidation — Status of Resulting Organization . . 174 93. Effect of Unlawful Consolidation 176 94. Effect of Irregular Consolidation 177 95. Who may attack Irregular Consolidation 178 96. Estoppel to deny Regularity of Consolidation 180 97. Accounting after Attempted Consolidation 183 98. Fraud in Consolidation Agreement 183 CHAPTER X INTERSTATE CONSOLIDATIONS § 99. Consolidation of Corporations of Different States — How authorized 186 100. Construction of Interstate Consolidation Statutes 186 101. Status of Interstate Consolidated Corporation 187 102. Effect of Interstate Consolidation upon Status of Constituent Cor- porations 192 103. Management of Interstate Consolidated Corporation 193 104. Rights and Powers of Interstate Consolidated Corporation . . . 194 105. Duties of Interstate Consolidated Corporation — Taxation . . . 195 106. Citizenship of Interstate Consolidated Corporation 196 107. Foreclosure of Mortgages after Interstate Consolidation. Juris- diction 199 xiv CONTENTS PART II CORPORATE SALES ARTICLE I SALES OF CORPORATE PROPERTY AND FRANCHISES CHAPTER XI SALES OF CORPORATE PROPERTY I. Sales of Property of Private Corporations PAOO 108. Power to purchase and sell generally 202 109. Sale of Entire Corporate Property by Unanimous Consent . . 203 110. Sale of Entire Property of Prosperous Corporation by Majority Vote 205 111. Sale of Entire Property of Losing Corporation by Majority Vote . 210 112. Sale of Entire Corporate Property by Directors 211 113. Ratification by Stockholders of Sale by Directors 213 114. Remedies of Dissenting Stockholders in Case of Invalid or Unfair Sales 215 115. Procedure in Stockholders' Actions 221 116. Defences to Stockholders' Actions. Estoppel 223 117. Effect of Sale of Entire Corporate Property 226 II. Exchange of Property of One Corporation for Stock of Another 118. Transfer of Entire Corporate Property without Unanimous Con- sent requires Monetary Consideration 227 119. Exchange of Property for Stock idtra vires 227 120. Exchange of Property for Stock Infringement of Rights of Dis- senting Stockholders 229 121. Appraisal of Stock of Dissenting Stockholders 232 122. Stock received upon Exchange belongs primarily to Corporation . 234 122a. Effect of Execution of Ultra Vires Contract for Exchange of Prop- erty for Stock 236 122b. Remedies of Dissenting Stockholders in Case of Exchange of Prop- erty for Stock 237 III. Rights and Remedies of Creditors 123. Liability of Purchasing Corporation for Debts of Vendor Company . 237 124. Fraudulent Sales 243 125. Remedies of Creditors 247 126. Priority of Purchaser's Mortgage over Claims of Vendor's Creditors 251 IV. Sales of Property of Quasi-public Corporations 127. Indispensable Property cannot be alienated or taken on Execution without Statutory Authority 252 128. Test of Indispensability 254 129. Sales of Surplus Property 255 129a. Ultra Vires Sales of Property of Private and Qwosi-public Corpora/- tions 256 XV CONTENTS CHAPTER XII SALES OF CORPORATE FRANCHISES v I. Transferability of Franchises PAGE 130. Nature of a Franchise 261 131. Franchise of Corporate Existence ... . .... 262 132. Transferability of Franchise of Corporate Existence 264 183. Franchises of Corporations .... ... . . 265 134. Transferability of Franchises of Corporations 270 II. Legislative Authority for Sale of Franchises 135. Legislative Authority essential to Alienation of Franchises . . 271 136. Unauthorized Sale of Franchises — Ultra Vires .... 272 137. Unauthorized Sale of Franchises — Against Public Policy . . . 273 138. Unauthorized Sale of Franchises — Unlawful Delegation of Powers 274 139. Legislative Authority essential to Purchase of Franchises . . . 275 139a. Ultra Vires Sales of Franchises 277 ARTICLE II SALES OF RAILROADS CHAPTER XIII CONTRACT OF SALE AND ITS EXECUTION I. Nature of Sale of Railroad 140. Conventional and Judicial Sales of Railroads distinguished . . 278 141. Distinction between Relation of Vendor and Vendee and other Intercorporate Relations . . . . . ... 278 142. Distinction between Sale of Railroad and Sale of Franchises . . 279 II. Grants of Power to sell and purchase Railroads 143. Statutory Authority essential to Sale of Railroad 280 144. Seller must have Authority to sell and Buyer to buy .... 281 145. WhatRailroadsmaybetheSubject of Sale. Statutory Provisions 282 146. Construction of Statutes .... ... 289 147. Constitutional and Statutory Prohibitions of Purchase of Compet- ing or Parallel Lines 291 III. Authorization and Execution of Contract of Sale 148. Statutory Requisites . . 292 149. Assent of Stockholders. Whether Approval of Majority is suffi- cient 293 150. Acquiescence of Stockholders ... 296 151. Rights and Remedies of Dissenting Stockholders 296 CHAPTER XIV EFFECT OF EXECUTION OF CONTRACT OF SALE I. Rights and Liabilities of Vendor Corporation 152. Sale of Railroad and Franchises does not terminate Corporate Existence 299 xvi CONTENTS PAGE 153. Rights of Vendor Corporation after Authorized Sale 300 154. Liabilities of Vendor Corporation in Case of Authorized Sale . . 301 155. Liabilities'bf Vendor Corporation in Case of Unauthorized Sale . 301 156. Qmo TTon-awto and other Proceedings against Vendor Corporation . 302 II. Rights and Liabilities of Vendee Corporation 157. Essential Franchises pass upon Sale of Railroad 302 158. Rights and Powers of Vendee Corporation — In General . . . 303 159. Right of Eminent Domain . 304 160. Exemptions from Taxation . . . . 304 161. Right to fix Rates of Fare. Chartered Rates 306 162. Obligations of Vendee Corporation in respect of Public Duties of Vendor 307 163. Vendee Corporation not liable upon Obligations of Vendor unless assumed or imposed by Law 308 164. Status of Foreign Purchasing Corporation 311 PART III CORPORATE LEASES ARTICLE I CHAPTER XV LEASES OF CORPORATE PROPERTY AND FRANCHISES I. Leases of Property of Private Corporation § 165. Power to lease and take a Lease generally 312 166. Lease of Entire Property of Prosperous Corporation ... . 314 167. Lease of Entire Property of Losing Corporation 316 168. Voidable Leases ... *■ 317 169. Remedies of Objecting Stockholders . . . 319 11. Leases of Property and Franchises of Quasi^public Corporations 170. Distinction between Leases of Private and Qwasi-public Corpora^ tions . 320 171. Leases of Indispensable Property of Quasi-public Corporation . 320 172. Leases of Surplus Property 320 173. Leases of Franchises ... 322 174. Railroad Leases typical of Leases of Quasi-public Corporations . 322 ARTICLE II LEASES OF RAILROADS (INCLUDING TRACKAGE CONTRACTS) CHAPTER XVI NATURE AND AUTHORIZATION OF CONTRACT OF LEASE I. Nature of Lease of Railroad § 175. What constitutes a Lease of a Railroad 323 176. Distinction between Relation of Lessor and Lessee and other Inter- corporate Relations ... 326 xvii CONTENTS II. Legislative Authority for Lease of Railroad 177. Lease of Railroad invalid without Legislative Authority 326 329 329 331 334 335 178. Necessity for Legislative Authority to talie a Lease 179. Legislative Ratification of Unauthorized Lease 180. What Railroads may be leased. Statutory Provisions 181. Rule of Construction of Statutes 182. Construction of Statutes — (A) Provisions authorizing Leases 183. Construction of Statutes — (B) Provisions not authorizing Leases 338 184. Construction of Statutes — (C) Power to lease Unfinished Road . 341 185. Construction of Statutes — (D) Leases of Connecting Lines . . 342 186. Constitutional and Statutory Prohibitions of Leases of Competing or Parallel Lines 343 187. Long Term Leases not prohibited by Statutes against Perpetuities 343 CHAPTER XVII APPROVAL AND EXECUTION OF CONTRACT OF LEASE I. Assent of Stockholders to Railroad Lease 188. Necessity for Consent of Stockholders to Lease of Railroad. Power of Directors 344 189. Whether Unanimous Consent is necessary unless otherwise pro- vided 346 190. Requisite Majority prescribe Terms of Lease . 348 191. Remedies of Dissenting Stockholders 349 192. Acquiescence and Laches of Stockholders 350 II. Method of approving and executing Railroad Leases 193. Statutory Requirements 353 194. Construction of Statutes prescribing Mode of approving and exe- cuting Leases 354 195. Formalities attending Execution of Lease of Railroad .... 356 196. Corporation may be estopped from alleging Irregular Execution of Lease 359 CHAPTER XVIII THE CONTRACT OF LEASE I. Form and Construction of Railroad Leases 197. Form of Lease 360 198. Consideration 361 199. Rules of Construction of Leases 361 200. Construction of Particular Leases 362 201. Lease for Longer Term than Existence of Corporations may be valid 364 202. Partial Invalidity of Leases. Void Restrictions 365 203. Dependent and Independent Contracts 366 203a. Assignments of Leases 367 II. Covenants in Railroad Leases 204. Covenant to pay Rent. Assumption of Interest Payments . . 368 205. Covenant to pay Taxes 370 206. Covenant not to assign 372 207. Covenant to make Repairs 374 xviii CONTENTS PAOB 208. Covenant to pay Damages and defend Suits 375 209. Miscellaneous Covenants 376 CHAPTER XIX RIGHTS AND LIABILITIES OF LESSOR CORPORATION I. Rights and Remedies of Lessor Corporaiion 210. Lessor Corporation retains Prerogative Powers — Right of Emi- nent Domain 377 211. Rights of Lessor when entitled to Share of Earnings — Equitable Lien .... 379 212. Rights of Stockholders when Rent is payable in Form of Dividends 381 213. Mortgage of Rent Charge .... 383 214. Remedies of Lessor Corporation 383 II. Liabilities of Lessor Corporation 215. Obligations of Lessor Corporation to State 385 216. Lessor Corporation cannot avoid Statutory Obligations unless exempted 386 217. Lessor cannot avoid Primary Obligations unless exempted . . 389 218. Liability of Lessor for Negligent Operation of Railroad — ■ (A) Under Unauthorized Lease 392 219. Liability of Lessor for Negligent Operation of Railroad — • (B) Under Authorized Lease . 393 220. Liability of Lessor for Negligent Operation of Railroad — ■ (C) To Employees of Lessee 400 221. Liability of Lessor for Negligent Operation of Railroad — (D) When it shares in Control 403 222. Liability of Lessor upon Contracts of Lessee 404 223. Liability of Lessor for Reconstruction and Repairs 405 224. Taxation of Leased Railroads 406 CHAPTER XX RIGHTS AND LIABILITIES OF LESSEE CORPORATION I. Rights and Remedies of Lessee Corporation 225. Rights of Lessee in General. Incidental Franchises 409 226. Rights of Lessee in Matter of Tolls 410 227. Mortgages of Leases 411 228. Remedies of Lessee Corporation 412 II. Liabilities of Lessee Corporation 229. Obligation of Lessee to perform Lessor's Public Duties .... 412 230. Statutory Liability of Lessee 414 231. Liability of Lessee for Torts in Operation of Road under Author- ized or Unauthorized Lease 417 .232. Joint Liability of Lessor and Lessee 419 233. Liability of Lessee for Debts of Lessor 421 xix CONTENTS CHAPTER XXI RAILROAD LEASES UNDER RECEIVERSHIP PAOS! 234. Receiver not Assignee of the Term. May not abrogate Leases as between Parties 422 235. Receiver may elect within Reasonable Time to assume or renounce Lease 424 236. Obligations of Receiver pending Election 420 237. Obligations of Receiver after Election .... ... 429 238. Lease of Railroad by Receiver 431 CHAPTER XXII ULTRA VIRES AND VOIDABLE RAILROAD LEASES 239. Distinction between Ultra Vires and Irregular Leases .... 432 240. Enforcement of Executory Ultra Vires Leases . ... 434 241. Delivery of Possession under Ultra Virea Lease 43.5 242. Right and Duty of Disaffirmance 437 243. Recovery of Property after Disaffirmanco 438 244. Recovery on Quantum Meruit for Past Use 440 245. Improvements made by Lessee under Ultra Virea Lease . . . 443 240. Effect of Ultra Vires I^ease upon Stock Subscriptions .... 444 247. Guarantee of Ultra Vires Lease void .... 44 1 248. Voidable Railroad Leases ... 445 249. Leases of Railroads for Purpose of suppressing Competition . . 448 2.50. Remedy of State — Quo Warranto 448 251. Remedy of State — Injunction 449 CHAPTER XXIII LEASES TO FOREIGN CORPORATIONS 252. Authority to lea.se must be derived from State where Railroad is located 4.51 253. Authority to lease to Foreign Corporation ...,/.,. 453 254. Status of Foreign Corporation leasing Railroad 454 CHAPTER XXIV TRACKAGE CONTRACTS 255. Nature of a Trackage Contract . 455 256. Express Authority not necessary for Execution of Trackage Contract 457 257. Execution of Truckage Contracts ... 4.59 258. As,signability of Trackage Contracts 460 259. Con.struction of Trackage f'ontracts ... 401 260. Specific Performance of Trackage Contracts . . .... 464 261. Liability of Proprietary Company to Third Persons 466 262. Liability of Licensee Company to Third Persons 408 263. Liability to Employees 470 XX CONTENTS PART IV CORPORATE STOCKHOLDING AND CONTROL CHAPTER XXV POWER OF CORPORATION TO HOLD STOCK IN OTHER CORPORATIONS I. Rvle that Statutory AutJwrity is essential PAGE 264. Necessity for Statutory Authority to purchase Stock. Rule in United States . . 473 265. Necessity for Statutory Authority to purchase Stock. Rule in England ... . . . ... . ... 475 266. Necessity for Statutory Authority to subscribe for Stock . . . 476 267. Subscriptions or Purchases through Trustees or Agents .... 478 268. Similar Nature of Corporations does not affect application of Rule 479 269. Expediency of Purchase of Stock immaterial 481 270. Assumption of Power to hold Stock in Articles of Association . . 482 II. Express Power to acquire Stock 271. Corporations may acquire Stock in other Corporations when authorized. Statutory Provisions 483 272. Power to subscribe for Stock in Foreign Corporations .... 491 273. Construction of Statutes 492 274. Construction of Constitutional Prohibitions 497 III. Inddentdl Power to acquire Stock 275. In General 499 276. Incidental Power to make Investments in Stocks 500 277. Incidental Power to take Stock in Satisfaction of Debt . . . . 501 278. Incidental Power to take Stock as Collateral 504 279. Incidental Power to acquire Stock in Connection with Consolida- tion or Purchase 505 280. Incidental Power to take Stock upon a Reorganization .... 507 281. Incidental Power to take Stock in Exchange for Corporate Assets 507 282. Miscellaneous Instances of Incidental Power to acquire Stock . 508 283. Presumption of Power to hold Stock 510 283a. An Analogous Power 510 CHAPTER XXVI RIGHTS AND OBLIGATIONS OF CORPORATION AS STOCK- HOLDER I. Intra Vires Holdings 284. Status of Corporation holding Stock 516 285. Nature of "Holding Corporations" 517 286. Rights of Foreign Corporation holding Stock 519 287. Incidents of Ownership attach to Intra Vires Holdings .... 523 287a. Collateral Trust Bonds 525 xxi CONTENTS II. Ultra Vires Holdings page 288. What Incidents of Ownership attach to Ultra Vires Holdings . 529 288a. Status of Parties to Ultra Vires Purchases of Stock 530 289. Liability for Assessments upon Ultra Vires Holdings .... 532 290. Ultra Vires Contracts for Purchase of Stock. Who may question Validity of Ultra Vires Purchases. Dependent Contracts . . 535 291. Independent Contracts .... 536 292. Holding Stock to prevent Competition 538 293. Remedies in Case of Ultra Vires Stockholding 539 CHAPTER XXVII CONTROL OF ONE CORPORATION BY ANOTHER 294. Meaning of Term "Control" .542 295. Distinction between Control of Corporation and Control of its Property 543 296. Distinction between Control and Community of Interest . . . 544 297. Distinction between Control and Consolidation 545 298. Power to purchase Stock to obtain Control 545 299. Status of Corporations as Controlling Stockholders 547 300. Trust Relation of Controlling Corporation to Minority Stock- holders 547 301. Remedies of Minority Stockholders of Controlled Corporation . . 550 PART V COMBINATIONS OF CORPORATIONS ARTICLE I COMBINATIONS AS AFFECTED BY, PRINCIPLES OF CORPORATION LAW CHAPTER XXVIII NATURE AND FORMATION OF COMBINATIONS § 302. Definition of Term "Combination" ... ... 552 303. Definition of Term "Association" 553 304. Definition of Term "Trust" 554 305. PopuIarUse'of Word "Trust" -, •. •. 554 306. Definition of Phrase "Corporate Combination" 555 307. Evolution of the Combination . . .... . . 556 308. Formation of Associations . 557 309. Formation of Truirts . 559 310. Formation of Corporate Combinations . 560 311. Analysis of Principles determining Legality of Combinations . . 561 CHAPTER XXIX PRINCIPLES OF CORPORATION LAW AFFECTING ASSOCIATIONS AND TRUSTS 5 312. Legality of Associations not generally a Question of Corporation Law . 562 xxii CONTENTS PAGE § 313. In Formation of Trust, State regards Acts of Stockholders as Acts of Corporation 562 314. Trust invalid as involving Partnership of Corporations .... 564 315. Trust invalid as involving Delegation of Corporate Powers . . 566 316. Trust invalid as involving Practical Consolidation 567 317. Rights and Liabilities growing out of Trusts 569 CHAPTER XXX PRINCIPLES OF CORPORATION LAW AFFECTING CORPORATE COMBINATIONS § 318. Corporate Combinations by means of Purchasing Corporations — In General 570 319. Issue of Stock for Property in Formation of Corporate Combinar- tion . . 571 320. Issue of Stock for Good-will in Formation of Corporate Combina- tion 573 321. Over- valuation of Property acquired by Issue of Stock .... 575 322. Power of Vendor Corporations to sell Properties for Stock of Pur- chasing Corporation 577 323. Corporate Combinations through Formation of Holding Cor- porations .... . . 577 ARTICLE II COMBINATIONS AS AFFECTED BY PRINCIPLES OF COMMON LAW AND PUBLIC POLICY CHAPTER XXXI APPLICATION OF LAW OF CONSPIRACIES § 324. Definition and Classification of Conspiracies 578 325. Criminal and Civil Conspiracies distinguished 580 326. Applicability of Law of Conspiracies to Corporations .... 581 327. What Combinations are Conspiracies 583 327a. Remedies and Procedure in Case of Conspiracies . . ... 587 328. Modern Combinations of Capital seldom Conspiracies . . . 590 CHAPTER XXXII APPLICATION OF LAW OF MONOPOLIES % 329. Primary Meaning of Term " Monopoly " 593 330. Growth of Monopolies — Their Illegality 593 331. No True Monopolies in United States. Patents and other Quasi- , Monopolies . . 595 332. Modern Use of Term "Monopoly" 597 333. Direct Test of Validity of Combination not whether it is a Mo- nopoly .... 601 CHAPTER XXXIII APPLICATION OF LAW OF CONTRACTS IN RESTRAINT OF TRADE § 334. Definition and Nature of "Contract in Restraint of Trade" . . 602 335. Connection between Contracts in Restraint of Trade and Corporate Combinations 603 xxiii CONTENTS PAGS 336. Modem Use of Phrase "Contract in Restraint of Trade" . . . 605 337. Direct Test of Validity of- Combination not whether it is in Restraint of Trade . . 608 CHAPTER XXXIV FORMULATION OF RULES OF PUBLIC POLICY 338. Definition and Nature of Public Policy 609 339. Necessity for Rules of Public Policy 611 340. Difficulty of Formulating Rules of Public Policy concerning Com- binations 612 341. Formulation of Rules. Basis in Judicial Decisions 613 342. Basis of Rules — (A) Case of the Sugar Trust 613 343. Basis of Rules — (B) Case of the Standard Oil Trust . 616 344. Basis of Rules — (C) Whiskey Trust Cases 618 345. Basis of Rules — (D) Case of the Preservers Trust .... 620 346. Basis of Rules — (E) Case of the Chicago Gas Trust .... 621 347. Basis of Rules — (F) Case of the Diamond Match Company . . 623 348. Basis of Rules — (G) Case of the Glucose Combination .... 625 348a. Basis of Rules — (H) Case of the Pocahontas Coke Company . 627 349. Basis of Rules — (I) Miscellaneous Cases 631 CHAPTER XXXV RULES OF PUBLIC POLICY § 350. In General 633 351. Distinction between Rules of Public Policy applicable to Private and Quasi-puhlic Corporations . . 634 352. Rules , 634 353. Rules Conservative Standards 634 354. Analysis of Rule governing Private Corporations — (A) Form of Combination immaterial 635 355. Analysis of Rule — (B) Objects and Tendencies of Combinations 639 356. Analysis of Rule — (C) Control of the Market ... ... 642 357. Analysis of Rule — (D) Extent of Territory 647 358. Analysis of Rule — (E) Useful Commodities .... . . 648 359. Analysis of Rule of Public Policy applicable to QMOsi-publio Corporations .... .... . . .... 653 CHAPTER XXXVI APPLICATION OF RULES OF PUBLIC POLICY TO PARTICULAR CLASSES OF COMBINATIONS § 360. Associations of Manufacturers and Producers . . ... 654 361. Associations of Manufacturers owning Patents . ... 658 362. Associations of Dealers . . 658 363. Associations of Railroad Companies — (A) Traffic Contracts of Connecting Lines ... ... . . . , 659 364. Associations of Railroad Companies — (B) Traffic Contracts of Competing Lines . . . . 661 364a. Associations of Railroad Companies — (C) Pools . . ... 662 365. Associations of Gas Companies and other Qtiasi-public Corpora/- tions 664 xxiv CONTENTS CHAPTER XXXVII RIGHTS AND REMEDIES PAGE § 366. Rights and Remedies of Members of Illegal Combinations. In General 667 367. Rights and Remedies between Combination and its Members . 669 368. Rights of Receivers and Assignees 671 369. Collateral Attack upon Combination. Remedies upon Indepen- dent Contracts . 672 370. Rights of Creditors 676 371. Rights and Remedies of Stockholders of Combining Corporations . 677 372. Remedies of State — (A) Quo Warranto against Corporate Com- bination ; 680 373. Remedies of State — (B) Quo Warranto against Combining Cor- porations 682 374. Remedies of State — (C) Injunction 684 375 Evidence 686 ARTICLE III LEGISLATION AFFECTING COMBINATIONS I FEDERAL ANTI-TRUST STATUTE CHAPTER XXXVIII THE STATUTE AND ITS CONSTITUTIONALITY 376. The Statute 688 377. Analysis of Statute 689 378. Object of Statute 691 379. Constitutionality of Act — (A) Power of Congress under Com- merce Clause to legislate concerning Private Contracts affecting Interstate Commerce .... • . . 692 380. Constitutionality of Act — (B) Power of Congress under Com- merce Clause to legislate concerning Contracts and Combina- tions under State Laws 694 381. Constitutionality of Act — (C) Power of Congress under Com- merce Clause to prohibit Combinations of Competing Railroads 696 382. Constitutionality of Act — (D) Act is Constitutional .... 697 383. Legislation supplementing the Statute — (1) Anti-trust provisions of Wilson Tariff Act 698 384. Legislation supplementing the Statute — (2) The Expedition Act 698 385. Legislation supplementing the Statute — (3) The Immunity Proviso . . 699 CHAPTER XXXIX CONSTRUCTION AND APPLICATION OF FEDERAL STATUTE 386. Title of Statute 700 387. Use of Phrase "Contract in Restraint of Trade." Application of Statute of Ancillary Contracts .... 701 XXV CONTENTS PAGE § 388. Statute not limited to Unreasonable Restraint of Trade . . . 705 389. Use of Terms "Monopolize" and "Monopolies" 709 390. Meaning of Phrase, "Trade or Commerce among the Several States" 714 391. Statute applies only to Restraints upon Interstate or International Commerce . 716 392. Restraint upon Interstate Commerce must be Direct — (A) In General ... 717 393. Restraint upon Interstate Commerce must be Direct — (B) Com- binations relating to Manufacture and of Manufacturers and Producers 719 394. Restraint upon Interstate Commerce must be Direct — (C) Re- straints upon Facilities for Commerce 726 395. Restraint upon Interstate Commerce must be Direct — (D) Ex- change and Similar Associations 728 396. Restraint may. be imposed upon those engaged in Interstate Commerce by those not engaged therein ......... 729 397. Form of Combination immaterial. Illegality of Corporate Device 730 397a. The Northern Securities Case 731 398. Application of Statute of Combinations of Railroads and other carriers. Combinations of Railroad Employees 734 399. Application of Statute of Combinations under Patents . . . . ' 739 400. Application of Statute to Combinations under Copyrights . . . 742 401. Application of Statute to Combinations under Secret Processes . 743 402. Application of Statute to Contracts concerning Market Quotations 745 403. Application of Statute to State's Monopoly and State Regulations 745 404. Statute not Retroactive but applies to Continuing Combinations . 746 CHAPTER XL RIGHTS, REMEDIES AND PROCEDURE UNDER FEDERAL STATUTE § 405. Invalidity under Federal Statute as a Ground of Collateral Attack 746 406. Proceedings in Equity by Government. Injunctive Relief. Parties . .... . 749 407. Criminal Proceedings. Indictments. Parties 751 408. Actions by Government to enforce Forfeiture 753 409. Actions for Treble Damages. Pleadings . ... 754 410. Limitations of Actions . . . . . 758 411. Effect of Voluntary Dissolution of Combination pending proceed- ing 758 412. Proof of Violation of Statute. Evidence 759 413. Interpretation of Immunity Proviso 761 II STATE ANTI-TRUST STATUTES CHAPTER XLI STATE STATUTES AND THEIR CONSTITUTIONALITY § 414. The Statutes. Development of State Legislation 762 415. Sphere of State Legislation. Operation of Commerce Clause of the Constitution .... 783 416. Controlling Propositions in determining Constitutionality of State Statutes ... 784 xxvi CONTENTS PAOE § 417. Power of State to prohibit Combinations of Quasi-public Corpora- tions. Power over Property devoted to Public Uses .... 785 418. Power of State to prohibit Combinations of Corporations in Exer- cise of Reserved Power 787 419. Validity of State Statutes tested by Fourteenth Amendment — (A) Right to Contract 788 420. Validity of State Statutes tested by Fourteenth Amendment — (B) Police Power of the State 791 421. Validity of State Statutes tested by Fourteenth Amendment — (C) Class Legislation 797 422. Validity of State Statutes under State Constitutional Provisions . 802 423. State Courts' Interpretation of State Statute followed by Federal Courts in determining its Constitutionality 805 424. Who may question Constitutionality of Statutes 806 CHAPTER XLII CONSTRUCTION AND APPLICATION OF STATE ANTI-TRUST STATUTES § 425. Definitions 807 426. Statutes not Regulations of Interstate Commerce 809 427. Rule of Construction 810 428. Form of Combination Immaterial. Application of Statutes to Holding and Purchasing Corporations 811 429. Objects and Tendencies of Combination as determining Applica^ tion of Statutes 813 430. Extent of Combination as determining Application of Statutes . 815 431. Application of Statutes to Ancillary Contracts in Restraint of Trade 816 432. Application gf Statutes to Agency and other Exclusive and Restrictive Contracts. Sales and Leases 817 433. Application of Statutes to Particular Associations of Manufac- turers and Dealers 820 434. Application of Statutes to Combinations under Patents and Copyrights 823 435. Application of Statutes to Insurance Combinations 823 436. Application of Statutes to Foreign Corporations doing Local Business 825 437. Statutes have no Extraterritorial Force ... 827 438. Application of Statutes to Agreements of QMOsi-public Corpora- tions 829 439. EiTect of Statutes upon Exercise of Statutory Authority to consolidate or hold Stock 830 440. Statutes inapplicable to Contracts with State 832 441. Statutes inapplicable where other Statutes eliminate Competition 832 442. Statutes do not supersede Common Law ........ 832 443. Statutes not Retroactive but apply to Continuing Combinations 833 444. Construction and Application of Miscellaneous Statutes .... 834 CHAPTER XLIII RIGHTS, REMEDIES AND PROCEDURE UNDER STATE ANTI-TRUST STATUTES § 445. Contracts in. Violation of Statutes unenforceable. Independent Contracts. Invalidity under Statutes as Ground of Collateral Attack 836 xxvii CONTENTS PAGE § 446. Criminal Proceedings. Indictments 840 447. Proceedings to enforce Forfeitures 844 448. Proceedings against Corporations . 846 449. Actions for Damages . 847 450. Evidence. Production of Books 850 451. Statutes of Limitation 851 Index 853 xxvni TABLE OF CASES (References are to pages.) Abbott V. American Hard Rub- ber Co. 212, 216 V. Johnstown, etc. Horse R. Co. 25, 327, 392 V. New York, etc. R. Co. 128, 145, 146, 265 V. Omaha Smelting, etc. Co. 262 Abby V. Billups 313, 376 Abeles v. Cochrane 511 Acker v. Alexandria, etc. R. Co. 301 Ackerman u. Cincinnati, etc. R. Co. 390, 397 Adams v. Yazoo, etc. R. Co. 27, 44 Addyston Pipe, etc. Co. v. United States 606, 642, 643, 693, 697, 702, 715, 716, 717, 720, 722, 723 Adelbert University u. Toledo, etc. R. Co. 181, 187 Adler v. Fenton 581 Admiral, The 162 .iEtna Ins. Co. v. Albany, etc. R. Co. 370, 382 ■u. Commonwealth 824 Africa v. Knoxville 129 Albers, C. H., Commission Co. v. Spencer 822, 850 Alderman v. People 579 Aldnut V. Inglis 787 Alexander v. Railway Co. 80, 83 V. Relte 249 V. Searcy 223, 225, 540, 541, 551 Alford V. Chicago, etc. R. Co. 463 Alger V. Thatcher 604 Altenburgh v. Grant 576 Altoona, etc. R. Co. v. Beech Creek R. Co. 457 American, etc. Co. v. Linn 550 American Biscuit, etc. Co. v. Klotz 569, 607, 631, 650, 670, 711 American Brake Beam Co. v. Fungs 604 American Fire Ins. Co. v. State 824, 852 PAOB American Handle Co. v. Standard Handle Co. 672, 839, 843, 849, 850 American Loan, etc. Co. v. Min- nesota, etc. R. Co. 26, 27, 33, 49, 175, 176, 181, 187 American Preservers Trust v. Taylor Mfg. Co. 565, 566, 620, 651, 670 American Railway-Frog Co. v. Haven 514 American Soda Fountain Co. u. Green 675 American Strawboard Co. v. Peoria Strawboard Co. 657, 667, 838 American Tube, etc. Co. u. Hayes 576 American Water Works Co. v. Venner 537 Ames V. Union Pacific R. Co. 423, 425, 428 Ammant u. New Alexandria Turnpike Co. 254, 255 Anchor, etc. Mfg. Co. v. Hawkes 604 Anderson v. Jett 644 V. Philadelphia Warehouse Co. 525 ■u. Shawnee Compress Co. 606, 656 V. United States 718, 727, 728 V. Union Terminal R. Co. 386 Angier v. East Tennessee, etc. R. Co. 197, 311 Anglo-American Land, etc. Co. V. Lombard 205, 473, 494, 530, 545 Anglo-Italian Bank, In re 112 Anheuser Busch Brew. Ass'n v. Houofe 641, 650, 652, 673 Anthony v. American Glucose Co. 235 V. Campbell 251 Appeal Tax Court v. Western Maryland R. Co. 408 Arbuckle v. lUinois Midland R. Co. 166, 168 xxix TABLE OF CASES Archer v. Terre Haute, etc. R. Co. 15, 22, 32.5 Ardesco Oil Co. v. North Ameri- can Oil, etc. Co. 203, 213, 313 Arkansas Midland R. Co. v. Berry 305 Armstrong v. Karschner 300 V. Toler 674 Amot V. Pittston, etc. Coal Co. 650, 658, 673, 676 Arrowsmith v. Nashville, etc. R. Co. 390, 391, 392, 397, 418 Arthur V. Commercial Railroad Bank 280 Ashbury Carriage, etc. Co. v. Riche 257, 433, 434 Ashhurst's Appeal 226 Ashley v. Ryan 75, 109, 190 Aspinwall v. Ohio, etc. R. Co. 193 Assessors v. Morris, etc. R. Co. 305 Atchison, etc. R. Co. v. Cochran 496 V. Davis 496 V. Denver, etc. R. Co. 51, 659, 660 V. Fletcher 496, 507 V. Phillips County 80, 136 Atkinson v. Marietta, etc. R. Co. 264 Atlanta, etc. R. Co. v. State 121, 362 Atlantic, etc. R. Co. v. Allen 140, 306 V. St. Louis 32 Atlantic, etc. Tel. Co. v. Union Pacific R. Co. 321, 323 Atlantic Ave. R. Co. v, Johnson 152 Attorney General v. A. Booth & Co. 684, 794, 812, 826, 846, 847 i;. Chicago, etc. R. Co. 450 V. Delaware, etc. R. Co. 450 V. Great Eastern R. Co. 450, 458 V. Great Northern R. Co. 450, 685 17. Jamaica Pond Aqueduct 450 V. Mid-Kent R. Co. 450 V. North-Eastem Ry. 144 V. Reynolds 450 V. Tudor Ice Co. 449 V. ITtica Ins. Co. 449 Austin V. Seligman 382 V. Tecumseh National Bank 242 Aycock V. Raleigh, etc. R. Co. 388, 467 Ayles V. South Eastern R. Co. 467 Axline v. Toledo, etc. R. Co. 388 Babcock v. Schuykill, etc. R. Co. 125 Backus V. Detroit, etc. R. Co. 390 PAGE Badische Anilin und Soda Fabrik V. Schott 605 Bagshaw v. Eastern Union R. Co. 216 Bailey v. Citizens Gas Light Co. 183 V. Master Plumbers' Ass'n 791, 795, 822 V. Philadelphia 597 V. Railroad Co. 155 Baker v. Harpter 242 Baldwin v. Canfield 504 Ball Electric Light Co. v. Child 525 Balliet v. Brown 212, 215 Balsley v. St. Louis, etc. R. Co. 388, 394 Baltimore, etc. R. Co. v. Mussel- man 12, 171 V. Paul 402 V. Pausch 408 V. Wabash R. Co. 418 V. Worker 417 Baltimore, etc. Tel. Co. u. West- ern Union Tel. Co. 666 Baltimore v. Baltimore, etc. R. Co. 493 Bancroft & Sons Co. v. Bloede 474 Bank of Augusta v. Earle 261, 262 Bank of Commerce v. Hart 480, 496 V. Tennessee 44 Bank of Hindustan, Bigg's Case, In re 18, 19 Bank of Long Island o. Young 129 Bank of Middlebury v. Edgerton 265 Bank of San Luis Obispo v. Wick- ersham 511 Bank v. Lanier 514 V. Smith 380, 430 Banks v. Georgia, etc. R. Co. 402 V. Judah 225, 247 Barataria Canning Co. v, Joulian 808, 820 Barber v. International, etc. Co. 243, 248 Barbier v. Connolly 790 Barclay v. Quicksilver Min. Co. 249 Barley v. Southern R. Co. 291 Barnard v. Norwich, etc. R. Co. 412 Barnard's Banking Co., In re 475 Bamett u. Philadelphia Market Co. 91, 97, 112 Barr •». Bartram, etc. Mfg. Co. 247 V. New York, etc. R. Co. 220, 446, 547, 572 Barrie v. United Rys. Co. 238, 241, 242, 246 Barrows v. People's Gas Light, etc. Co. 50 Barry v. Merchants Exch. Co. 203 Bartholomew v. City of Austin 597 XXX TABLE OF CASES PAGE Bartholomew v. Derby Rubber Co. 316 Bartlett v. Drew 239 V. Fourton 511, 514 Barto V. Nix 512 Barton v. Enterprise, etc. Ass'n 208 ■V. Mulvane 839 V. Port Jackson Road Co. 512, 514 Bates County v. Winters 136 Bath Gas Light Co. v. Claffy 323, 434, 441, 442 Batterson v. Grand Trunk R. Co. 160 Baxter v. Nashville, etc. Turn- pike Co. 254, 255 V. New York, etc. Co. 402 Beal V. Chase 604 V. Essex Savings Bank 525 Bean v. Atlantic, etc. R. Co. 388 Bear River Orchard Co. v. Hanley 535 Beard v. Denis 604 Bedford R. Co. •;;. Bowser 345 Beebe v. Hatfield 573 V. Richmond Light, etc. Co. 355 Beecher v. Marquette, etc. R. Co. 351 Beechley v. Mulville 669, 824 Beekman v. Hudson River, etc. R. Co. 411 Beggs V. Edison EI. Light, etc. Co. 57 Beling v. American Tobacco Co. 95, 125 Bell, In re 803 Bell V. American Protective League 423, 425, 428 V. Pennsylvania R. Co. 96, 182 Bellerby v. Rowland 511 Beman v. Rufford 216, 222, 274, 458 Bement v. National Harrow Co. 704, 740, 748, 750 Benbow v. Cook 203 Benedict v. Heineberg 255 V. Western Union Tel. Co. 666 Benesh v. Mill Owners Mut., etc. Ins. Co. 242 Berger v. United States Steel Corp'n 513 Berlin Machine Works v. Perry 605 Berry v. Broach 211, 224 V. Kansas City, etc. R. Co. 152, 160, 166 V. Yates 477, 478, 480 Beveridge v. New York Elevated R. Co. 338, 344, 382 Bickley v. Schlag 576 Bienville Water Supply Co. v. City of Mobile 598 Bigbee, etc. Packet Co. u. Moore 530, 537 PAGE Bigelow V. Calumet, etc. Mining Co. 750, 755, 812 Bingham v. Brands 794, 819 Binney's Case 203 Birchfield v. Northern Central R. Co. 415 Bird V. Bird's Patent Deodoriz- ing, etc. Co. 216 Birmingham, etc. Co. v. Freeman 213 Birmingham R., etc. Co. v. Elsen 151, 170 Bish V. Johnson 79, 80, 133 Bishop V. American Preservers Co. 565, 566, 569, 620, 651, 670, 755, 756, 826 V. Brainerd 32, 88, 100, 119, 133, 188, 192 Black V. Delaware, etc. Canal Co. 6, 25, 26, 27, 47, 48, 50, 53, 82, 85, 97, 98, 99, 187, 208, 231, 253, 289, 317, 327, 328, 335, 336, 454 Blair v. City of Chicago 258 ■V. St. Louis, etc. R. Co. 244, 252 Blake v. Domestic Mfg. Co. 243, 528 V. Winona, etc. R. Co. 266 Blalock V. Kernersville Mfg. Co. 513 Blanc V. Paymaster Min. Co. 248 Blanchard Gun Stock, etc. Fac- tory V. Warner 202 Blatchford v. Ross 25, 80, 90, 95, 212, 221 Blindell v. Hagan 750 Block V. Standard Distilling Co. 750 Blodgett V. Lanyon Zinc Co. 203 Bloxham y. Metropolitan R. Co. 223 Blue Rapids Opera House Co. v. Mercantile Bldg., etc. Ass'n 508 Blundell's Case 18 Boardman v. Lake Shore, etc. R. Co. 31, 125, 157 Board of Trade v. Christie Grain, etc. Co. 745 Bobbs-Merrill Co. v. Straus 743 Bohn Mfg. Co. v. HoIIis 580 Bonsack Mach. Co. v. Smith 675 Booe V. Junction R. Co. 92 Boon V. City of Utica 597 Boor V. Tolman 175 Booth V. Clark 422 V. Robinson 476 Boston, etc. Min. Co. v. Montana Ore-Purchasing Co. 210 Boston, etc. R. Co. v. Boston, etc. R. Co. 50, 187, 291, 366, 372, 373, 383, 384, 461 V. Gilmore 255 V. Graham 352 xxxi TABLE OF CASES Boston, etc. R. Co. v. New York, etc. R. Co. 49, 88, 208, 216, 225, 226, 230, 296, 347, 352, 434, 508 Boston, etc. R. Corp. v. Midland R. Co. 128, 146 Botts V. Simp.sonville, etc. Turn- pike Road Co. 81, 8.5, 90, 95 Bouknight v. Charlotte, etc. R. Co. 392 Bowden v. .John.gon 525 Bower v. Burlington, etc. R. Co. 392, 403, 415 Bowman v. Foster, etc. Co. 508 Boynton v. Roe 213 Braceville Coal Co. v. People 788 Bradford v. Frankfort, etc. R. Co. 89, 107, 110, 182 Bramlet v. Commonwealth Land, etc. Co. 244 Branch v. Atlantic, etc. R. Co. 88, 163, 291 ■V. Charleston 141 V. Jesup 51, 178, 256, 270, 280, 303, 571 Brant v. Ehlen 572, 576 Braslin v. Somerville Horse R. Co. 327, 395 Brenham v. Water Co. 596, 597 Brennan v. United Hatters 673 Brett V. Ebel 605, 704 Brewster v. Hartley 514 V. Miller's Sons Co. 586, 848 Brickerhoiif v. Brown 226 Bridgeport v. New York, etc. R. Co. 262, 269, 280 Briscoe v. Southern Kansas R. Co. 253, 337, 340, 392, 4.52, 453 British Nation, etc. Ass'n, Ex parte 532 Brockway Mfg. Co., In re 23'.) Brooklyn, etc. R. Co., In re 36-5 V. Long Island R. Co. 341 Brooklyn Distilling Co. p. Stand- ard Distilling Co. 820, 837 Brooker v. Maysville, etc. R. Co. 33fi, 392 Brooks V. Cooper 610 Brown v. Dibble 134, 173, 179 V. Duluth, etc. R. Co. 225 V. Hannibal, etc. R. Co. 389 V. .Jacobs' Pharmacy Co. .578, 589, .590, 642, 643, 652, 765, 798 V. Toledo, etc. R. Co. 423, 428 V. Winnisimet Co. 321 Brufett V. Great Western R. Co. 161, 226, 238, 299 xxxii PAGE Brum V. Merchants Mut. Ins. Co. 152, 248 Bruner v. Brown 571, 576 Brunswick Gas Light Co. v. United Gas, etc. Co. 255, 271, 323, 434, 437, 440, 441, 442, 443 Buck V. Ross 239 Buck Mountain Coal Co. v. Le- high Coal, etc. Co. 450 Buckley v. Big Muddy Iron Co. 217 Buckner v, Richmond, etc. R. Co. 402 Buckwalter v. Whipple 245, 250 Budd V. New York 786 Buell V. Buckingham 203, 211, 213 Buffalo, etc. R. Co., In re 494 V. Dudley 84 Buffalo Lubricating Oil Co. u. Standard Oil Co. 582 Buford V. Keokuk, etc. Packet Co. 231, 508 Bull V, Baltimore, etc. R. Co. 170 Burden v. Burden 510 Burge V. St. Louis, etc. R. Co. 308 Burger v. Grand Rapids, etc. R. Co. 189, 191, 193 Burke v. Cleveland, etc. R. Co. 53, 107 Burkinshaw v. Nichols 572 Burnes v. Bumes 513 Burr V. Pittsburg, etc. R. Co. 2Z4 Burrows v. Interborough-Metro- politan Co. 831 Butler V. Rahen 365 Button V. Hoffman 616 Byrne v. Schuyler Electric Mfg. Co. 206, 216, 225, 229, 231, 473, 480, 507, 608 Cain V. City of Wyoming 268 V, Syracuse, etc. R. Co. 466 Caledonian, etc. R. Co. v. Magis- trates of Helensburgh 434 Caledonian R. Co. v. North Brit- ish R. Co. 467 California v. Central Pacific R. Co. 262 California Bank v, Kennedy 473, 480, 504, .505, 532, 533, 534 California Central R. Co. v. Hooper 146, 170 Callahan v. DonnoUy 604 Callaway v. Foster 13(; Calumet Paper Co. v. Haskell Show Printing Co. 213 TABLE OP CASES Calumet Paper Co. v. Stotts In- vest. Co. 504, 525 Camden, etc. R. Co. v. May's Landing R. Co. 275, 336, 435, 442 Camden v. Stuart 573 Camden Interstate R. Co. v. Lee 249, 310 Camden Safe Deposit, etc. Co. v. Burlington Carpet Co. 110,145 Cameron v, Havemeyer 569, 570, 614 V. New York, etc. Water Co. 46, 56 Campbell v. Farmers, etc. Bank 238 V. Marietta, etc. R. Co. 150, 290, 307 Canada Life Assur. Co. -u. Pell Mfg. Co. 475 Canal, etc. R. Co. v. St. Charles Street R. Co. 461 Cannon v. Brush Electric Co. 548 Cantlon. v. Eastern R. Co. 416 Canton v. Canton, etc. Co. 409 Capital City Light, etc. Co. v. City of Tallahassee 597 Capital 'traction Co. v. Offut 19, 238, 309 Carey v. Cincinnati, etc. R. Co. 116, 182 Carr v. Le Fevre 576 V. Rochester Tumbler Co. 224 Carrol v. Greenwich Ins. Co. 797, 825, 826 Carson v. Iowa, etc. Co. 216 Carston v. HofLns 242 Carswell u. Farmers Loan, etc. Co. 423, 425, 426, 428 Carter v. Producers, etc. Oil Co. 212, 496 Carter-Crume Co. o. Peurrung 637, 657, 676 Cartwright v. Dickinson 511 Caruthers v. Kansas City, etc. R. Co. 397 Case of the Monopolies 622 Cashman v. Brownlee 129 Cass V, Manchester, etc. R. Co. 314, 345 Castle Bread Co., In re 513, 514 Catawissa R. Co. v. Philadelphia, etc. R. Co. 376 Catskill Bank v. Gray 676 Ceballos v. Munson Steamship Line 708 Central, etc. Co. v. Farmers Loan, etc. Co. 381, 429, 431 Central, etc. R. Co. v. Morris 328, 341, 405 V. Georgia 11, 14, 17, 114, 118, 123, 128, 137, 138, 141 PAGE Central, etc. R. Co. v. Perry 466 V. Pettus 248 V. Phinazee 392, 394 ■u. Smith 566 V. State 116 Central Branch Union Pacific R. Co. V. Western Union Tel. Co. 324 Central Electrical Co. v. Sprague Electrical Co. 243 Central Ohio Salt Co. v. Guthrie 599, 632, 641, 645, 651, 655 Central R. Co. v. Brinson 394 V. Macon 53 V. Pennsylvania R. Co. 477, 478, 479, 519, 520 V. Pettus 421 Central R., etc. Co. v. Collins 59, 94, 216, 473, 479, 481, 538, 539, 677 Central Shade Roller Co. v. Cush- man 559, 651, 654, 686, 742 Central Transportation Co. v. Pullman Car Co. 24, 253, 255, 259, 275, 327, 329, 334, 335, 340, 351, 432, 434, 436, 437, 438, 439, 440, 441, 443, 536 Central Trust Co. o. Continental Trust Co. 423, 425, 430 V. Colo. Midland R. Co. 456, 468 V. Denver, etc. R. Co. 466 V. Kneeland 528 V. Ohio Cent. R. Co. 663 ii. Rochester, etc. R. Co. 197 u. Wabash, etc. R. Co. 423, 430, 431, 465 V. Washington Co. R. Co. 290 V. Western North Carolina R. Co. 263 Central University v. Walter 14, 52, 87 Chamberlain v. Bromberg 213 Chapinu. Brown 599, 648, 650, 658, 667 Chapman v. Douglass County 440, 441 V. Ironclad Rheostat 513 V. Mad River, etc. R. Co. 82, 95 Chappell V. Brockway 602, 645 Charity Hospital v. New Orleans Gas Light Co. 116, 118, 155 Charles E. Wiswall, The 747 Charles River Bridge v. Warren Bridge 269, 334 Charleston v. Branch 141 Charlotte, etc. R. Co. v. Gibbes 116, 143, 155 Charlotte First Nat. Bank v. Charlotte 92 V. National Exch. Bank 502, 503, 504 Charlton v. Newcastle, etc. R. Co. 27, 459 xxxiii TABLE OP CASES PAGE Chase v. Michigan Tel. Co. 19, 22 V. Tuttle 213 V. Vanderbilt 148, 157 Chatham v. Newcastle, etc, R. Co. 663 Chattanooga, etc. R, Co. v. Evans 241, 244, 245, 250 Chattanooga Foundry, etc. Works V. City of Atlanta 757, 758 Chattanooga Terminal R. Co. v. Felton 379 Chemical Nat. Bank v. Have- meyer 534 Cheraw, etc. R. Co. v. Anson 116 Chesapeake, etc. Fuel Co. v. United States 707, 724 Chesapeake, etc. R. Co. v. Griest 238, 308, 309, 310 V. Miller 161, 305, 306 V. Osborne 392 V. Virginia 141 Chester Nat. Bank v. Atlanta, etc. R. Co. 396, 405 Chewaca Lime Works v. Dis- mukes 259 Chicago, etc. Coal Co. v. People 580, 586, 587, 588, 643, 814, 815, 816, 826, 832, 843, 845, 850, 851 Chicago V. Cameron 223 V. Evans 409, 413 Chicago, etc. R. Co. v. Ashling 16, 20, 52, 118, 123, 170, 180 ■i: Auditor General 189, 198 V. Ayres 659 ■u. Boyd 324 V. Butts 171 V. Chicago, etc. Coal Co. 309 V. City of Ottumwa 372 V. Crane 385, 413 V. Denver, etc. R. Co. 361, 362, 461 V. Doaul 394 V. Dunbar 261 V. Ferguson 20, 160 V. Galey ' 152 V. Groves 468, 469 V. Hart 399, 400 V. Ilhnois Central R. Co. 378 V. Lundstrom 242, 311 V. Martin 468, 469 V. Mitchell 468 V. Moffitt 128, 151, 152, 160 V. Northern Pacific R. Co. 464 V. Posten 468, 469 V. Pullman Southern Car Co. 604 V. Schmitz 394 V. Stafford County 136, 179 ■u. State 30 xxxiv PAQC Chicago, etc. R. Co. v. Third National Bank 421 V. Union Pacific R. Co. 322 V. Wabash, etc. R. Co. 26, 653, 663 V. Weber 359, 409 Chicago City R. Co. v. People 267, 268 Chicago Gas Light, etc. Co. v. People's Gas Light, etc. Co. 323, 654, 665 Chicago Hansom Cab Co. v. Yerkes 216, 217, 219, 223 Chicago Mun. Gas Light v. Lake 266 Chicago St. R. Co. u, Marseilles 513 Chicago Wall Paper Mills v. Gen- eral Paper Co. 838, 839 ChoUette v. Omaha, etc. R. Co. 273, 301, 395 Chouteau v. Dean 572 Cilley V. United Shoe Mach. Co. 578 Cincinnati, etc. R. Co. i;. Bunnell 387, 415 V. Indiana, etc. R. Co. 362 ■(/. McKeen 536 ■V. Paskins 468 V. Townsend 468 Cincinnati Packet Co. v. Bay ■ 703, 718 Citizens State Bank v. Hawkins 473, 502, 503, 504, 533, 547 Citizens St. R. Co. v. Memphis 120, 130, 138 City Bank v. Bruce 513 City Fire Ins. Co. v. Carrigi 433 City of Belleville v. Indianapolis, etc. R. Co. 178 City of Danville v. Noone 597 City of Denver v. Hubbard 598 City of Indianapolis v. Con- sumers' Gas Trust Co. 254, 274 City of Kalamazoo v. Power Co. 270 City of Memphis v. Memphis Water Co. 597 City of New York v. Sixth Ave. R. Co. 169 City of Palestine v. Barnes 254 City of Spokane v. Amsterdamsch Trustees Kantoor 237, 258 Clancy v. Onondaga Fine Salt Mfg. Co. 667, 668 Clapp V. Peterson 239, 513, 515 Clark V. Central, etc. R. Co. 77, 520 V. Chicago, etc. R. Co. 470 V. Cyclone Woven Wire Fence Co. 823 Clarke v. Omaha, etc. R. Co. 56, 272, 280, 290, 341 TABLE OF CASES PAGE Clary v. Iowa Midland R. Co. 387, 415, 419 Claw V. Van Loan 281 Clayton v. Ore Knob Co. 572, 576 Clearwater v. Meredith 13, 27, 81, 82, 90, 92, 115 Cleland v. Anderson 796, 800, 815, 821, 849 Clement v. Canfield 415 Clemons v. Meadows 657, 817 Cleveland, etc. R. Co. i). Berry 468 1^. Bender 466, 468 ■u. Closser 653, 661 V. Erie 54 V. Prewitt 160 Cleveland v. Spencer 372 Cleveland City R. Co. v. First National Bank 79, 90, 108 Clinch V. Financial Corpora- tion 25, 221, 233 Clokey v. International, etc. Co. 242 Clyde u. Richmond, etc. R. Co. 429 Coal Creek, etc. Co. ■;;. Tennessee Coal, etc. Co. 313, 321 Coe V. Columbus, etc. R. Co. 254, 255, 267, 272, 280 V. East & West R. Co. 571 Coffin V. Ransdell 571, 576 Coggin V. Central R. Co. 159, 166 Cohen v. Berlin & Jones Env. Co. 559, 645, 655 Coit V. Gold Amalgamating Co. 571, 576, 577 Cole V. Millertou Iron Co. 239, 247, 251 Coleman v. Eastern Counties R. Co. 444 u. Howe 239, 577 Coler V. Tacoma R., etc. Co. 226, 228, 492, 520 Coleson v. Blunton 358 Colgate V. Bacheler 603 ■u. New York, etc. R. Co. 130 V. U.S. Leather Co. 49, 83, 85, 90, 92, 112, 125, 157, 184, 185, 548 Collins V. Chicago, etc. R. Co. 173 Colt V. Barnes 267 Columbia, etc. Co. v. Kentucky Union R. Co. 411 Columbia Carriage Co. v. Hatch 819 Columbia Wire Cloth Co. u. Free- man Wire Cloth Co. 675, 823 Columbus, etc. R. Co. •». Burke 474, 480, 493 ■u. Peimsylvania Co. 463, 464 K. Powell 152 V. Skidmore 152, 156, 166, 174 Columbus R. Co. v. Indianapolis R. Co. 659 Comer v. Burton, etc. Co. 817 Commercial Electric Light, etc. Co. V. City of Tacoma 266 Commercial Fire Ins. Co. v. Montgomery Co. 477, 480, 493 Commercial Nat. Bank v. Burch 513, 515 Commercial Union Ins. Co. v. Shoemaker 581 Commissioners of Tippecanoe Co. ■u. Lafayette, etc. R. Co. 22, 327, 339, 345, 346, 350, 448 Commonwealth v. Alger 791 V. Atlantic, etc. R. Co. 108, 173, 179 V. Bavarian Brewing Co. 805, 823 V. Boston, etc. R. Co. 514 V. Buffalo, etc. R. Co. 194 V. Chesapeake, etc. R. Co. 358 V. Grinstead 818, 843, 844 V. Hemingway 519 V. Hunt 579 V. Judd 580 V. Lowell Gas Light Co. 266 V. Nashville, etc. R. Co. 305, 408 u. New York, etc. R. Co. 520 ■u. Northern El. Light, etc. Co. 57 V. Owensboro, etc. R. Co. 306 V. Pennsylvania R. Co. 175, 414 V. Perry 789 V. Smith 264 V. Standard Oil Co. 522 V. Strauss 792 V. Waterman 579 Compton V. Wabash, etc. R. Co. 16, 20, 165 Conant u. Bellows Falls Canal Co. 356 Concord Nat. Bank v. Hawkins 533 Coney Island, etc. R. Co. v. Brooklyn Cable Co. 456, 460 Conn V. Chicago, etc. R. Co. 197 Coimolly V. Union Sewer Pipe Co. 674, 747, 758, 798, 799 Connor v. City of Marshfield 254 Conro V. Port Henry Iron Co. 314, 344 Consolidated Gas Co., In re 830, 832 Consolidated Gas Co. v. Balti- more County Commrs. 131 Consolidated Traction Co. v. Elizabeth 128 Consolidated Water Power Co. v. Nash 212 Continental Building, etc. Ass'n V. Miller 91 XXXV TABLE or CASES Continental Inw. Co, 1>. Now York, etc, R. Co. 340, ;sr.(l, ;i(l(), '\W, <1'W Continental Trust Co. v. '\'<>U:i\it, etc. 11. Co. 49, 52, r,r,, 170, 178, 181, 187 Continental Wall Paper Co. v. Voinlit 708, 724, 749 Coolt V. Di'troit, etc. U. (Jn. 101 u. Marsliiil! 522 ■u. Milwaukee, etc. 11. Co. 415 Cooper V. Day 358 V. Hhropshiro Union R. Co. 132, 147 Copeland v. CitizcnH Gas IJ^ht Co. 314, .-ni) V. Mernphin, ftc. R. Co. 188 V, Minong Min. Co. 124 Coppin V. (ln;(5iilnH, etc;. Co. 257, 511, 512 Coquard v. National, etc. Co. 057, (17H, 081, (JK2 Cordova Coal (!o. v. Long 158 Cork, etc. R. Co., In re. 4;il) Cork V. Patterson 133 Corning, In re 707, 752 CotzhauHen v. 11. W. Johns Mfg. (!o. 100 Council (Wow., etc. R. Co. v. Ijawrence 171 County (Jourt -v. i'altiinord, ntc. R. Co. 504 County of OloucisHtiir liiirjk v. Rudry Merthyr, i^tu. (>). 303 County of iUobile v. Kimball 7 1 5 CouHf; V. Columbia i^owdf^r Mfg. Co. 244, 246, 240 Covington, etc. Turnpike! Co. v, Sanford 790 Coylc V. Pit,t«i>urgli, fl.c. It,. (!o. 410 ('iiync! V. Warrior Houtlii^ni R. (Jo. 290 (Jox V. Terre iJauti;, titc. it. Co. 42.'i, 441 Craft V. McConoughy 591, 500, 051, 058, (i07 Crandall v. IJnooin 2.39, 511, 512, 515 (JraiH; V. Fry 54.'i Crawford v. IiOngHtri!i;t 3i:i CrawfordHvilli!, r^tc. Turnpike Co. V. l''l<;tclior 144 V. State 27 Crump D. IJ(,. v. Wylie 840 Cull(;ii V. Coal ('n^ek, vXt:. R. (Jo. 541 Cumberland Coal (Jo. v. Sherman 225 Cumberland 'I'd., <;ir,. Co. it. City of Evansvllle 237, 253, 200, 208, 272, 273 xxxvi fiumborlancl Valley R. Co, v. Oil- tysburg, oto, R, Co. 059 CummlngH v. Union HIiki Stono Ass'n 550, 050, 055 (luidclot;. iniei'Hiatti it.. (Jo. 171 Cufilt V. i'ark (!ity Hank 213 Curran v. Aricansus 108 V. Galen 587 (Jiirrior V. (loncofil R. Co, 00, 77 D. J.i'lianon Htate (Jo. 611 C'ltrricH Case 570 Curtis u. Cleveland, iilc, R, (Jo. 397, 899 D Dady v. (Icorgla, etc. R. Co. 09, 80, 185, 347 Dana w. American 'I i>))acco (!o. 05 V. Hank of tlniti^cl Htatcw 203 Daniels u. Ht. i>ouls, c^tc. R. Co. 142, 307 Darcy v. Allien 504 Dar'tirjontli Ccilie^ge v. Wood- ward 81, 473 l)avi(!H, Matter of 833, 834, 844 \)av\» V. A. lioolh & Co. 037, 704, 802, 813, 810 V. (Jong. Hdtli 'I'epliiluH iHra(4 25 •>. Oommoll '^23 V. Massachusetts 700 V, Mompliis, rXr„ R. Co. 200 V. New York 207 V. Old (Jolony II. Co. 351, 433, 430, 440 ■y. I'rovidence, etc. it. (Jo. .'188, 410 V. UniU^d Htatiw lOli^ctric l'ow(!r, etc. (Jo, 470, 524, 547, 551 Day V, New Orleans, etc. It,. (Jo. 100 V. New York, etc. R. (Jo. 140, 170 V. Ogcli^nsbiirg, ftc. R. Co. 187, 270, 3.'i8, 341, 370, 453 V. Postal T(4. (Jo. 424 V. Spiral Springs Rnggy (!o. 257 V. WorccHtrT, i-tc, R, Co, 153, 15(1 IliMidiTJck V, Wilson 80, 212 l)(4)H, In re 714, 730, 750 l)c Caoip V. Aylward 213, 299 l)i' La ViTgiM' Refrigerating Mach. (Jo, V. Oertrian Sav- ings Inst. 473, 490, 535, 545, 540 Delaware^, etc. R. Co. v. Rutter 738 (;. I'' rank 74fj IJclawari! R. Co. v. Tlearp l.'i.'j V. Salmon 4(kj TABLE OF CASES Delaware R. R. Tax 81, 141, 195, 196 De Neufville v. New York, etc. R. Co. 549 Denike v. New York, etc. Cement Co. 313, 316, 319 Dennehy v. McNulta 423, 673 Denny Hotel Co. v. Schram 477, 482, 519, 546 Denver, etc. R. Co. v. Denver City R. Co. 267, 268 Deposit Bank v. Barrett 507 Descombes v. Woods 225 Detroit v. Little 321 Detroit Salt Co. ». National Salt Co. 640, 656, 669, 686, 850, 851 Deviue v. Frankfort Steel, etc. Co. 219 De Witt Wire Cloth Co. v. New Jersey Wire Cloth Co. 559, 599, 632, 643, 649, 651, 655, 668 Dewey v. Toledo, etc. R. Co. 259, 506 Diamond Match Co. v. Roeber 605, 623, 645 Dickerman v. Northern Trust Co. 575, 576 Dickey v. Railway Co. 310 Dickinson v. Cunningham 832 V. Consolidated Traction Co. 337, 347, 348, 350, 447 Dickson v. Chicago, etc. R. Co. 419 Dietrichs v. Lincoln, etc. R. Co. 378 Dillaway v. Boston Gas Light Co. 529 Dimpfel v. Ohio, etc. R. Co. 33, 105, 182, 296 Distilling, etc. Co. v. People 607, 619, 639, 642, 681, 682, 687 Ditchett V. Spuyten Duyvil, etc. R. Co. 387, 391, 398, 415 Dittman v. Distilling Co. 492, 495, 496, 518, 529, 637, 679, 682 Dix V. Shaver 135 Dock V. Schlichter Jute Cordage Co. 513 Dodge V. Wolsey 215 Dolph V. Troy Laundry Mach. Co. 558, 651, 654 Doremus v. Hennessey 581 Dougan's Case 17, 93 Douglass V. Concord, etc. R. Co. 92, 96 Dow V. Biedleman 307 V. Northern R. Co. 327 Downing v. Chicago, etc. R. Co. 387, 415 ■u. Mt. Washington R. Co. 257 V. Lewis 835 Doyle V. Leitelt 211 Drake v. New York Sub. Water Co. 89 Drake v. Siebold DriscoU V. Norwich, etc. R. Co. Dronfield Silkstone Coal Co. R. Dryden v. Grand Trunk R. Co. Dubuque, etc. R. Co. v. Litchfield V. Sioux City Railroad Co. Dudley v. Kentucky High School Dueber Watch Case Mfg. Co. v. Howard Watch, etc. Co. 705, Dunbar v. American Telephone Co. 478, 523, 538, 539, 540, 640, 643, 812, Dupee V. Boston Water Power Co. Du Pont V. Tilden Durf ee v. Old Colony R. Co. 84, 86, E PAGE 650 393, 403 511, 514 414 334 543 86, 216 716, 720 546, 814 513 576 347 Earle v. Seattle, etc. R. Co. 81, 327, 458 East Alabama R. Co. i/. Doe 253 East Anglian R. Co. v. Eastern Counties R. Co. 32, 327, 435 East Boston, etc. R. Co. v. East- ern R. Co. 270, 303 East India Co. v. Sandys 593 East Lincoln v. Davenport 136 East Line, etc. R. Co. v. Culber- son 401, 402 V. Rushing 49, 73, 74, 273, 280, 281, 290, 302 V. State 27, 49, 52, 53, 73, 77, 272, 281, 290, 302, 335, 448, 449 East St. Louis, etc. R. Co. v. Ger- ber 387 V. Jarvia 22, 64, 65, 66, 73 1). Wabash, etc. R. Co. 174 East Tennessee, etc. R. Co. v. Hamblin Co. 305 V. Nashville, etc. R. Co. 443 Eastern Building, etc. Ass'n. u. Williamson 260 Eastern Counties R. Co. v. Hawkes 442 Eastern Plank R. Co. v. Vaughan 482 Eastern Townships Bank i>. St. Johnsbury, etc. R. Co. 369 Eastern Union R. Co. v. Cochrane 131 Easton v. Houston, etc. R. Co. 430 Easun v. Buckeye Brewing Co. 227, 231, 473, 507, 508 Eaton, etc. R. Co. v. Hunt 116, 118, 156, 162, 199 xxxvii TABLE OF CASES Eclipse Tow Boat Co. v. Ponehar- train R. Co. 558, 659 Edison Electric Light Co. v. New Haven El. Co. 119 V. Sawyer-Man Electric Co. 595, 675 -V. U. S. El. Lighting Co. 170 -y. Westinghouse 170 Edwards u. Bringier Sugar Ext. Co. 572 V. People 136 Edwards County v. Jennings 596 Eel River Co. v. State 449 Egerton v. Brownlow 610 Eisel V. Hayes 604 Elbogen v. Gerbereaux-Flynn Co. 219 Eldred v. American Palace Car Co. 216, 218 Elkins a. Camden, etc. R. Co. 216, 459, 474, 506, 538, 539, 545 EUerman v. Chicago Junction R., etc. Co. 538 Ellis V. Inman 708, 724, 755, 757 Elmira Rolling Mill Co. v. Erie R. Co. 462 Elysville Mfg. Co. v. Oskisko Co. 476 Elyton Land Co. v. Dowdell 206, 227 Emery v. Ohio Candle Co. 650, 655, 668 Empire Assurance Corporation, In re 18 Empire Distilling Co. v. McNulta 423, 425, 426 Empire Mills v. Alston Grocery Co. 523 Empire Township v. Darlington 136 Enfield Toll Bridge Co. v. Hart- ford, etc. R. Co. 270 Era Ins. Soc, Re 25 Erie, etc. R. Co. v. Pennsylvania R. Co. 371 Ertz V. Produce Exch. Co. 588, 822 Ervin v. Oregon, R. etc. Co. 180, 205, 208, 217, 218, 222, 223, 548 Espenson v. Kolpe 816 Evans v. Bailey 510 V. Boston Heating Co. 266 V. Interstate Rapid Transit Co. 170 w. Sabine, etc. R. Co. 403 i;. Smallcomb 225 V. Union Pacific R. Co. 222 Evansville, etc. R. Co. v. Com- monwealth 305, 306 Ewing V. Composite Brake Shoe Co. 248 Exchange Bank v. Macon, etc. R. Co. 516 xxxviii Export Lumber Co. v. South Brooklyn Sawmill Co. 820 Factors, etc. Ins. Co. v. New Har- bor Protection Co. 27, 476, 477, 519 Fairbanks v. Leary 591, 658 Fame Hose Co., Appeal of 20 Fanning v. Osborne 281 Farmers, etc. Bank ». Champlain Traction Co. 513 Farmers Loan, etc. Co. v. Chicago, etc. R. Co. 430 V. New York, etc. R. Co. 547, 548, 549 V. Northern Pacific R. Co. 425, 427, 429 V. St. Joseph, etc. R. Co. 345 V. Toledo, etc. R. Co. 178, 180, 181, 230, 297 Famum v. Blackstone Canal Co. 192 Farnsworth v. Western Union Tel. Co. 325 Farrar v. South Western R. Co. 428 Farwell v. Great West. Tel. Co. 571 V. Houghton Copper Work 514 Fayette Land Co. v. Louisville, etc. R. Co. 258 Featherstonhaugh o. Lee Moor Porcelain Clay Co. 313, 317 Fee V. New Orleans Gas Light Co. 107, 116, 120, 124 Feital v. Middlesex R. Co. 417 Feld V. Roanoke Investment Co. 212, 224, 229 Felton, Receiver v. City of Cin- cinnati 406 Female Orphan Asylum, Re 313 Ferd Heim Brewing Co. v. Belinder 586, 605, 814, 819, 838 Femschild v. Yuengling Brew- ing Co. 242, 243 Fidelity Insurance, etc. Co. v. Shenandoah Valley R. Co. 358 Fidelity Insurance Co. v. German Sav. Bank 502, 534 Field V. Barber Asphalt Co. 597, 716, 719 Fietsam v. Hay 261, 262, 263 Financial Corporation, In re 475 Finch u. Schneider Granite Co. 656, 803, 822, 834 Finnegan v. Norrenberg 176 First National Bank v. Chatta- nooga, etc. Co. 248 TABLE OP CASES First National Bank v. Dovetail Body, etc. R. , 241 V. Hawkins 533 V. Louisville, etc. R. Co. 375 v. Nat. Exch. Bank 473 V. North Alabama, etc. Co. 238 V. Salem Capital Flour Mills Co. 513 Fischer v. West Virginia R. Co. 328, 392 Fishbum v. City of Chicago 597 Fisher v. Evansville, etc. R. Co. 31, 80, 81, 89 V. Metropolitan El. R. Co. 398 u. New York Central, etc. R. Co. 147, 338, 409, 411 Fitzgerald v. Missouri Pacific R. Co. 189, 190, 191, 193, 197, 543 Fitzmauriee v. Bailey 366 Flagg V. Manhattan R. Co. 382 Flynn v. Brookljm City R. Co. 447, 448 Fogg V. Blair 238, 252 Fontaine v. Southern Pacific R. Co. 387 Foote V. Emerson 669 Ford V. Chicago Milk Shippers Ass'n 588, 651, 811, 834, 838 Foreman v. Bigelow 571 Forrest v. Manchester, etc. R. Co. 322 Forrester v. Boston, etc. Min Co. 205, 209, 210, 216, 223, 228, 229 Fort Payne Bank «. Alabama Sanitarium 204, 244, 245, 250 Fort Wayne, etc. R. Co. v. Heine- baugh 388 Fort Worth, etc. R. Co. v. State 829, 845 Fort Worth Pub. Co. v. Hitson 225 Foss V. Cummings 667, 668 Foster v. Fowler 253 Fougeray v. Cord 217 Fowie V. Parke 604, 744 Fox, etc. Steel Co. v. Schoen 602, 657 Frank v. New York, etc. R. Co. 367, 368, 423, 428 Franklin Bank v. Commercial Bank 474, 481, 504, 530 Franklin Co. u. Lewiston Savings Inst. 473, 480, 499 Franklin Life Ins. Co. v. Adams 159 V. Hickson 157, 170 Frazier v. Railway Company 273, 280 Freeman v. Minneapolis, etc. R. Co. 327, 392, 454 PAOB Freeman v. Sea View Hotel Co. 202 Freemont Carriage Mfg. Co. v. Thomseu 513 Frenkel v. Hudson 571 Friedenwald Co. v. Asheville To- bacco Works 242 Frisbie v. United States 790 Froelich v. Musicians' Mut. Ben, Ass'n 588 Frothingham v. Barney 230 Fry V. Lexington, etc. R. Co. 83, 133 Fuqua v. Pabst Brewing Co. 810 G Gage V. State 804 Gaither v. Stockbridge 422, 423 Gale V. Troy, etc. R. Co. 169 Galpin v. Abbott 358 Galveston, etc. R. Co. v. Cowdrey 330 V. Daniels. 400, 402 V. Gartesier 392 V. Texas 44 Gamble v. Queens County Water Co. 548, 572 Gamewell Fire Alarm Tel. Co. u. Crane 604 Gardner v. Hamilton Mut. Ins. Co. 124 V. London, etc. R. Co. 458 V. Minneapolis, etc. R. Co. 125 Garst V. Harris 744 Gasquet u. Fidelity Trust, etc. Co. 528 Gates V. Hooper 806, 816 V. Tippecanoe Stone Co. 576 Geer v. Amalgamated Copper Co. 539 General Electric Co. v. Wise 747 George v. Central R., etc. Co. 359, 547, 550 Georgia, etc. Banking Co. u. Smith 785 Georgia, etc. R. Co. v. Friddle 471 V. Wilks 147 Georgia Pacific R. Co. v. Gainet 74, 147 Georgia R. Co. v. Maddox 337, 343, 456 Georgia R., etc. Co. v. Atlantic Postal Tel. Coal Co. 666 V. Haas 273, 294, 396 Gere v. New York Central R. Co. 22, 67, 327, 338, 365 German American, etc. Ass'n v. Droge 509 Germer v. Triple-State Natural Gas, etc. Co. 230, 496 Getz Bros. & Co. v. Federal Salt Co. 668, 708, 749, 819, 837 xxxix TABLE OF CASKS PAGE Gibbons i'. Ogden 75, 76, 715 Gibbs V. Consolidated Gas Co. 47, SS, 653, 665 V. McNeeley 717, 720, 724, 729, 755 Gilbert v. Washington City, etc. R. Co. 431 Gilkie, etc. Co. i. Dawson, etc. Co. 576 Gilliland v. Chicago, etc. R. Co. 313 Giozza V. Tiernan 790 Gladish v. Bridgeford S22 v. Kansas City Live Stock Exch. 588, 658 Glengarry Consol. Min. Co. r. Boehmer 219, 318, 44S, 547 Globe Tobacco Warehouse Co. v. Leach 676 Gloninger v. Pittsburgh, etc. R. Co. 270, 303, 365 Gloucester Ferry Co. i'. Pennsyl- vania 715 Gloucester Isinglass, etc. Co. r. Russia Cement Co. 651, 654 Glymont Imp., etc. Co. v. Toller 88, 224, 229 Goetz V. Knie 213 Goodin v. Cincinnati, etc. Canal Co. 547 V. Evans 572 Goodwin v. Bodcaw Lumber Co. 217, 237 Goodyear Shoe Mach. Co. v. Daucel 242 Gottschalk v. Lincoln, etc. R. Co. 378 Gould V. Head 566, 569 V. Langdon 155 Graham v. Boston, etc. R. Co. 193, 330, 357 V. Chicago, etc. R. Co. 308 V. Macon, etc. R. Co. 203 Grand Trunk R. Co. v. Central Vermont R. Co. 370, 430 Grand Trunk West. R. Co. v. Chicago, etc. R. Co. 364, 465 Gray v. De Castro, etc. Sugar Ref. Co. 614 v., Massachusetts Cent. R. Co. 363 V. National Steamship Co. 238 V. Oxnard Bros. 667, 668, 671 Great Eastern R. Co. v. Turner 476 Great Northern R. Co. v. Eastern Counties R. Co. 274, 328, 476 V. Manchester, etc. R. Co. 459 Great Western R. Co. v. Bristol Port R. Co. 462 ■V. Metropolitan R. Co. 476 Xl PAGB Green v. Coast Line R. Co. 394 V. StoUej- 727 Green Bay, etc. R. Co. v. Union Steamboat Co. 459 Green Countv v. Conness 19, 122, 123, 128 Greene, In re 694, 705, 707, 711, 716, 720, 746, 751, 752, 753 Greenville Compress, etc. Co. r. Planters, etc. Compress Co. 25, 183, 257 Greenwood r. Freight Co. 522 Greer v. Payne 667, 668, 669 ,.. Stoller 749 Gregory r. Patchett 224, 548 Grenell v. Detroit Gas Co. 245, 249 Grice, In re 754, 789, 796, 827 Griffin v. Piper 651, 658 Gross 1'. U. S. Mortgage Co. 330 Guaranty Trust Co. v. Atlantic Coast Electric Co. 528 Gubernator r. City of New Or- leans 314 Gue !'. Tide Water Canal Co. 253, 255 Gulf, etc. R. Co. V. Galveston, etc. R. Co. 463 r. Hewes 305 r. Miami Steamship Co. 660, 661, 738, 750 i: Morris 253, 273, 275, 280, 328 V. Newell 19, 27, 82, 161, 300 !•. State 64, 69, 74. 77 Gunn t'. Central R., etc. Co. 566 Gyger v. Philadelphia, etc. R. Co. 72 H Hadley Dean Plate Glass Co. t'. Highland Glass Co. 747, 810 Hafer v. Cincinnati, etc. R. Co. 55, 77 Haff V. Minneapolis, etc. R. Co. 418 Hagan ji. Blindell 750 Hagemann v. Southern Electrical Co. 238, 249, 309 Hale V. Cheshire R. Co. 84, 86 V. Henkel 761 Hall 11. Brown 418 ,■. Herter 243 V. Sullivan R. Co. 265, 270, 330 I'. Tanner, etc. Engine Co. 203 V. White 670 Hamilton v. Clarion, etc. R. Co. 133, 180 V. Menominee Falls Quarry Co. 251 V. Mut. Ins. Co. u. Hobart 83 «/. Savannah, etc. R. Co. 69, 77, 327, 473 TABLE OF CASES PAGE Hamlin v. Jerrard 162, 163 Hammond Packing Co. v. State 805, 845, 851 Hammond i>. Port Royal, etc. R. Co. 309 Hamor v. Taylor Rice Engineer- ing Co. 51 1 Hampe v. Mt. Oliver I. R. Co. S3 V. Traction Co. 342 Hamsher v. Hamsher 258 Hancock v. Holbrook 211, 214, 225 V. Louisville, etc. R. Co. 53, 524 Hand v. Savannah, etc. R. Co. 305 Hanna v. Cincinnati, etc. R. Co. 80, 94, 135, 170 V. Railway Co. 396, 402 Hannibal, etc. R. Co. v. Marion County 136 Hanson v. Power 669 Harbison v. Knoxville Iron Co. 792 Harden v. North Carolina R. Co. 395, 401 Harding v. American Glucose Co. 229, 608, 611, 625, 635, 641, 644, 651, 677, 678, 679, 680, 686, 826 Hare v. London, etc. R. Co. 59, 450, 558, 661, 663 Harkness v. Manhattan El. R. Co. 383 Harmon v. Columbia, etc. R. Co. 328, 393, 395, 404 Harper v. Newport News, etc. R. Co. 395 Harriman v. Northern Securities Co. 518, 732 Harrison v. Arkansas Valley R. Co. 152, 168 V. Glucose Sugar Refin. Co. 604, 673, 747, 838 V. Union Pac. R. Co. 152 Harshman v. Bates County 137 Hart V. Railroad Co. 396 Harter v. Kernochan 136 Hartford, etc. R. Co. v. New York, etc. R. Co. 659 Hartford Fire Ins. Co. v. Chicago, etc. R. Co. 321, 375 V. Raymond 825, 846 Hartman v. John D. Park & Sons Co. 744 Hartwell v. Buffalo, etc. R. Co. 498 Hartz V. Eddy 686, 851 Hastings Industrial Co. v. Baxter 836 Hastings Malting Co. v. Iron Range Brewing Co. 572, 576, 577 Hatch V. American Union Tel. Co. 236 Hatcher v. Toledo, etc. R. Co. 32, 161, 330 FAGB Havemeyer v. Superior Court 683 Hawarden v. Youghiogheny, etc. Coal Co. 583, 586 Hawes v. Oakland 216 Hawkins v. Central of Georgia R. Co. 162, 309 V. Small 143 Hawley v. Gray Bros., etc. Co. 359 Hayden v. Atlanta Cotton Fac- tory 571 V. Official Red Book and Di- rectory Co. 206, 208, 211, 217 Hayes v. Northern Pacific R. Co. 387, 390, 392, 396, 402 V. Ottawa, etc. R. Co. 301, 444 Hays V. Illinois, etc. Co. 273 Hazard v. Vermont, etc. R. Co. 324, 341, 383 Hazlehurst u. Savannah, etc. R. Co. 473, 479, 538 Hearst v. Putnam Min. Co. 203, 222 Heath v. Missouri, etc. R. Co. 300 Heck V. McEven 482 Heims Brewing Co. v. Flannery 437 Heimsbucher v. Goff 656, 708, 818 Hendee v. Pinkerton 256, 365 Hendrie v. Grand Trunk R. Co. 355 Henry v. Pittsburgh, etc. R. Co. 346 Henry County v. Nicolay 136 Heron v. St. Paul, etc. R. Co. 397, 466 Herriman v. Menzies 559, 598, 643, 650, 686 Herring v. Ruskin 511 Hervey v. Illinois Midland R. Co. 54, 296 Hess Mfg. Co., In re 576 Hibernia Ins. Co. c. St. Louis, etc. Transportation Co. 244, 248 Higgins V, Downward 299 Hiles V. Hiles Co. 19 Hill V. Atlantic, etc. R. Co. 337, 351, 352, 356, 364, 383 V. Beach ' 522 V. Fogg 226 V. Gould 219, 220 V. Gruell 249 V. Nisbet 90, 221, 499, 505 V. Rich Hill Coal Min. Co. 535 Hinds County v. Natchez, etc. R. Co. 294 Hitchcock V. Barrett 446 V. Galveston 441 Hoag V. Hannibal, etc. R. Co. 257 Hoard v. Chesapeake, etc. R. Co. 161 Hodder v. Kentucky, etc. R. Co. 357 Hodges 0. New England Screw Co. 216, 231, 500, 501, 502, 508 xli TABLE OF CASES PAGE Hoene v. PoUak 224 Hoffman v. Brooks 646, 648, 651 Hollifield V. WrightsviUe, etc. R. Co. 540 Hollins V. Brieraeld Coal, etc. Co. 241 V. St. Paul, etc. R. Co. 223 Holman v. Johnson 435 Holmes, etc. Mfg. Co. v. Holmes, etc. Metal Co. 204, 258, 502, 508, 537 Hoist V. Sidney, etc. Coal., etc. Co. 235 Home Friendly Soc. v. Tyler 25 Hood V. New York, etc. R. Co. 499 Hoole II. Great Western R. Co. 222 Hooper v. California 715, 790 Hope V. International Financial Soc. 511 Hopkins v. St. Paul, etc. R. Co. 161 V. United States 715, 716, 717, 718, 727, 728 Home V. Boston, etc. R. Co. 190, 191, 193, 198 V. Railroad Co. 193 Homer v. Graves 605 Hospe V. Xorthwestem Mfg., etc. Co. 241 Houck V. Anheuser Busch Brew- ing Ass*n 796 V. Wright 818 Hough V. Cook County Land Co. 258 Houston, etc. R. Co. v. Shirley 19, 21, 161, 166, 167 c. McFadden 325, 398 Howard v. Chesapeake, etc. Co. 392, 452 Howe V. Boston Carpet Co. 502, 503, 508 Howe Grain, etc. Co. v. Jones 513 Howell V. Lansing, etc. Traction Co. 20, 181 Hubbard v. Chappell 173 V. Miller 604 Huck V. CMcago, etc. R. Co. 408 Huggins V. Milwaukee Brewing Co. 238 Hukill V. Maysville, etc. R. Co. 392, 393, 402 Hukle V. Atchison, etc. R. Co. 309 Humphreys v. Mooney 520 V. McKissock 354, 543 u. Pegues 306 V. St. Louis, etc. R. Co. 355, 359, 434 Hunt V. American Grocery Co. 211, 214 V. Hauser Malting Co. 473, 480, 501, 534 v. Riverside Cooperative Club 815, 821 xlii PAGE Hunter v. Columbia, etc. R. Co. 388 Huntting v. Hartford St. R. Co. 335, 342 Hurd V. New York, etc. Laundry Co. 239, 248 Hurd County v. Natchez, etc. R. Co. 517 Hutchins ». Hutching 581 ■B. Weldon 670 Illinois Cent. R. Co. v. Kanouse 415 0. Lucas 395 Illinois, etc. R Co. v. Cook 81 Illinois State Trust Co. „. St. Louis, etc. R. Co. 291 Imperiid Mercantile Credit Ass'n, In re 233 Independent Refiners' Ass'n v. Western New York, etc. R. Co. 664 India Bagging Ass'n v. Koch 607, 650, 658, 667 India Mut. Ins. Co. v. Worcester, etc. R Co. 156 Indiana Mfg. Co. v. J. I. Case Threshing Co. 740, 741, 742 Indianapolis, etc. R. Co. v. Jones 152, 153, 160, 166, 173 V. Solomon 466 V. State 253 Indianapolis Mfg. Union v. Cleve- land, etc. R. Co. 367, 374 Indianola R. Co. v. Fryer 116, 166, 171 Ingersoll u. Stockbridge, etc. R Co. 388 Ingraham v. Nat. Salt Co. 551 Inhabitants of Waldoborough v. Knox, etc. R. Cb. 348 Interborough-MetropoUtan Co., In re 832 International, etc. R, Co. v. Bremond 89, 91, 95 V. Eckford 392 V. Moody 328 v. Thornton 404 International Harvester Co. v. Conunonwealth 818, 828 V. Kentucky 844 Interstate Conunerce Com. v. Texas, etc. R. Co. 188 Iowa Lumber Co. ■». Foster 513, 514 Irrigation Co., In re 233 Irvin V. New Orleans, etc. R, Co. 407, 408 TABLE OF CASES Island City Savings Bank v. Sachtleben 226 V. Schattchen 238 Isom V. Rex Crude Oil Co. 119, 122 Ives V. Smith 664 Jack V. Kansas 793, 805 Jackson v. Brick Ass'n 650, 655 V. Ludeling 180, 548 Jacksonville, etc. R. Co. •;;. Hooper 313, 357, 358, 376 V. Louisville, etc. R. Co. 364 Jayne v. Loder 744 Jefferson v. Chicago, etc. R. Co. 467 Jeffersonville, etc. R. Co. u. Hen- dricks 160 Jemison v. Citizens Savings Bank 434 Jersey Gty Gas Co. v. Dwight 266 Jersey City Gas Light Co. v. United Gas Imp. Co. 322, 323, 371 Jessup V. Illinois Cent. R. Co. 22, 225, 446, 542, 547 John D. Park & Sons Co. v. Nat. Wholesale Druggists Ass'n 607, 704 John Hancock, etc. Ins. Co. v. Worcester, etc. R. Co. 127, 156 Johnson v. Shrewsbury, etc. R. Co. 458 u. State 143, 269 Johnson Co. v. Miller 256 Johnson County v. Thayer 513 Johnson Pub. Co. •». Mills 832 Johnston v. Markle Paper Co. 572 Joint Stock Discount Co. v. Brown 480 Jones V. Arkansas Mechanical and Agricultural Co. 245 „. Brim 790 V. Carter, 600, 806, 811, 814 V. Concord R. Co. 341, 342, 346 V. Georgia Southern R. Co. 403 V. Guaranty, etc. Co. 203 v. Lees 605 V. Missouri-Edison Electric Co. 25, 57, 90, 179, 184 V. Seaboard Air Line R. Co. 160 V. Southern R. Co. 169 V. Whitworth 576 Jones' Case 578 Jordan v. Collins 204 Joseph V. Raff 513 V. Southern R. Co. 161 Joy V. City of St. Louis 465 V, Jackson, etc. Plank Road Co. 203 PAGE Judd V. Harrington 641, 645, 651, 658, 667 Justices, In re Opinion of 793 K Kadish v. Garden City, etc. Ass'n 508 Kann v. Illinois Southern R. Co. 309 Kansas City Hotel Co. v. Sauer 226 Kansas, etc. R. Co. v. Smith 171 Kassler v. Kyle 514 Kaufman o. Pittsburgh, etc. R. Co. 335, 336, 342 Kavanaugh v, Omaha Life Ass'n 25, 50, 176 Kean v. Johnson 82, 208 Kearney v. New Jersey Central R. Co. 419 V. Central R. Co. 390 Keeley Brewing Co. v. Mason 313 Keller v. Kansas City, etc. R. Co. 388 Kellogg V. Larkin 611, 646, 658 V. Lehigh Valley R. Co. 587 Kelly V. Fletcher 576 Kennebec, etc. R. Co. v. Portland, etc. R. Co. 330 Kennedy v, California Savings Bank 504, 533 Kenosha, etc. R. Co. v. Marsh 85, 133 Kent V. City of Binghamton 130, 308 V. Quicksilver Mining Co. 214, 223 Kent Coast, etc. R. Co. v, Lon- don, etc. R. Co. 356 Kentucky, etc. Bridge Co. i;. Louisville, etc. R. Co. 660 Keokuk, etc. R. Co. v. Missouri 12, 114, 116, 121, 128, 139, 306 V. Scotland County 138, 139 Kern v. Day 535 Kersey Oil Co. v. Oil Creek, etc. R. Co. 346, 352 Ketcham v. Madison, etc. R. Co. 177 Kevil V. Standard Oil Co. 816 Key City, The 162 Kidd V. Pearson 719 Killian v. Augusta, etc. R. Co. 470 Kimball v. Atchison, etc. R. Co. 72, 77, 496 V. Harman 581 Kinion v. Kansas City, etc. R. Co. 116, 170, 171, 172 Kinner v. Lake Shore, etc. R. Co. 673 Kinney v. North Carolina R. Co. 395 Kip V. New York, etc. R. Co. 378 Klingel's Pharmacy v. Sharp 578, 586, 588, 607, 643 Klosterman v. Mason County, etc. R. Co. 270 xliii TABLE OF CASES PAGE Knickerbocker v. Conger 235 Knoup V. Piqua Branch of State Bank 263 Knowles v. Sandercock 473, 477, 498 KnoxviUe i^. Knoxville, etc. R. Co. 48, 81, 86, 251, 294 Knoxville Iron Co. v. Harbison 790, 792 Koehler v. Feurbach 610 Kohl V. Lilienthal 204, 234 Koons V. Chicago, etc. R. Co. 173 Kosciusko Oil Mill, etc. Co. v. Wilson Cotton Oil Co. 817 Kroenert v. Johnson 572, 576 Kyle V. Wagner 213 Lafayette Bridge Co. v. City of Streator 673, Lafayette Co. v. Neeley Lagrone v. Zimmerman Lake Shore, etc. R. Co. v. Ohio V. People Lakin v. Railroad Co. Lancashire, etc. R. Co. v. East Lancashire, etc. R. Co. Lancaster v. Amsterdam Impt. Co. Langan v. Franklyn 107, Langdon v. Branch 69, 77, V. Vermont, etc. R. Co. Lange v. Werk Langhorne v. Richmond, etc. R. Co. 151, 160, 166, Langley v. Boston, etc. R. Co. Lanier Lumber Co. u. Rees 477, Lanyon v. Garden City Sand Co. Laredo v. International Bridge, etc. Co. Larocque v. Beauchemin Lasher v. People Latham v. Boston, etc. R. Co. Lathrop v. Commercial Bank V. Middleton Latimer v. Citizens State Bank V. Richmond, etc. R. Co. Lauman v. Lebanon Valley R. Co. 27, 82, 97, 116, 208, 216, Lawrence v. Kidder ■V. Morgan's Steamship Co. 266, ■u. Saratoga Lake R. Co. Lawry v. Williams Lawson v. Illinois Soothern R. Co. Layng v. French Spring Co. xliv 839 222 477 791 196 393 464 258 112 498 383 605 173 405 478, 532 708, 819 600 572 268 177 202 255 496, 505 352 233 605 304 465 358 309 496 PAGE Leather Cloth Co. v. Iiorsont 605 Leathers v. Janney 204, 220 Leavenworth v. Chicago, etc. R. Co. 178 Leavenworth County v. Barnes 182 V. Chicago, etc. R. Co. 110 Lebeck v. Fort Payne Bank 252 Lee V. Atlantic Coast Line R. Co. 14, 123, 198 V. Southern Pacific R. Co. 389, 390, 402 Leedam v. Plymouth R. Co. 254, 255 Leep V. St. Louis, etc. R. Co. 788, 789, 790 Leeper v. State 593, 832 Lehigh, etc. Mining Co. v. Kelly 238 Leonard v. Abner-Drury Brew- ing Co. 589, 590, 681, 754 V. New York Central, etc. R. Co. 468, 469 V. Poole 667, 668 Leslie v. Lorillard 605, 677, 686 Lester v. Bemis Lumber Co. 473, 531 Levering v. Bimel 241 Levin v. Chicago Gas Light Co. 677 Levins v. People's Grocery Co. 247 Lewis V. Clarendon 128, 136, 182 V. Weatherford, etc. R. Co. 818 Lewiston, etc. R. Co. v. Grand Trunk R. Co. 364, 371 Lewright v. Bell 851 Liddle v. Keokuk, etc. R. Co. 416 Liebke v. Knapp 573 Lightner v. Boston, etc. R. Co. 120, 131 Lincoln St. R. Co. v. City of Lincoln 162, 267, 268 Linfield v. Old Colony R. Corp. 417 Lipfield V. Charlotte, etc. R. Co. 338 Little Rock, etc. R. Co. v. Daniels 389, 397 V. McGehee 304 V. St. Louis, etc. R. Co. 659, 660, 661 Liverpool, etc. Ins. Co. v. Clunie 673 Live Stock Ass'n v. Levy 559 Livingston County v. Portsmouth First Nat. Bank 56, 136 Llanelly, etc. R. Co. v. London, etc. R. Co. 461 Lloyd V. Preston 577 Locker v. American Tobacco Co. 656, 819 Lockhart v. Little Rock, etc. R. Co. 470 Loewe v. Lawlor 725, 726, 729, 755 Logan V. Courtown 479 V North Carolina R. Co. 395, 400, 419 TABLE OP CASES PAGE Logan County Bank v. Townsend 504 London, etc. Bank, Re 511, 514 London, etc. Bread Co., In re 233 London, etc. R. Co. v. Good- win 131 V. London, etc. R. Co. 459 V. Southeastern R. Co. 410 Long Acre Electric Light, etc. Co. In Matter of, 270, 274, 276 Long V. Georgia Pacific R. Co. 257, 258 Lord V. Copper Mines Co. 125 Loud V. Pomona, etc. Co. 571 Lough V. Outenbridge 599 Loughlin v. United States School Furniture Co. 187 Louisiana v. Wood 440, 441 Louisville, etc. R. Co. v. Biddell 310, 311 V. Blythe 128 V. Boney 128, 152, 166, 253, 255 V. Breeden's Admx. 392, 466, 469 V. Carson 318 ■u. Chesapeake, etc. R. Co. 464 V. Commonwealth 451 V. Cumberland, etc. R. Co. 363 V. Gaines 306 V. Howard 81 V. Illinois, etc. R. Co. 325 u. Jarvis 294 ■u. Kentucky 30, 48, 50, 75, 77, 275, 329, 451, 473, 538 V. Kentucky, etc. R. Co. 45, 46, 47, 60, 65, 69, 72, 460, 545 V. Literary Society of St. Rose . 499 V. Louisville S. R. Co. 463 V. Louisville Trust Co. 331 V. Mississippi, etc. R. Co. 464 V. Palmes 305 V. Schmidt 374 ■o. Summers 160, 172 V. Utz 172 Louisville Gas Co. v. Kaufman 543 Louisville Trust Co. v. Louisville, etc. R. Co. 32, 181, 182, 505 Louisville Water Co. v. Hamilton 253, 255 Lowe V. Pioneer Threshing Co. 513 Lowenstein v. Evans 745 Lowry v. Tile, etc. Ass'n 729, 755, 756, 758 Lufkin Rule Co. v. Fringeli 653 Lyons-Thomas Hardware Co. v. Perry Stove Mfg. Co. 239, 240 Lytle V. Galveston 830 M MacGinnis v. Boston, etc. Mining Co. 474, 475, 476, 524, 550, 641, 679, 680, 682, 808, 812, 813 Mack V. De Bardeleben, etc. Co. 550 Mackintosh v. Flint, etc. R. Co. 19, 215, 280, 291, 473, 508 Macon, etc. R. Co. v. Mayes 400, 402 Madison, etc. Plank Road Co. v. Watertown, etc. Plank Road Co. 444 Mahaska County R. Co. v. Des Moines Valley R. Co. 212, 290 Mahoney v. Atlantic, etc. R. Co. 389, 397, 418 V. Spring Valley Water Co. 304 Mallett V. Simpson 202, 258 Mallory v. Hanaur Oil Works 437, 565, 566, 671 Manchester, etc. R. Co. v. Con- cord R. Co. 64, 69, 437, 441, 644, 661 Manchester St. R. Co. v. Williams 535 Maimy v. National Surety Co. 152, 158 Mansfield, etc. R. Co. v. Brown 70, 82, 106, 108, 133, 134, 179 V. Drinker 108, 109, 134, 179 V. Pettis 134 V. Stout 134, 135, 179 Manufacturers Sav. Bank v. Big Muddy Iron Co. 212, 220 Marble Co. v. Harvey 474, 478, 480, 523, 536, 538 Marbury v. Kentucky Union Land Co. 22, 499, 505 March v. Eastern R. Co. 221, 341 Marine Bank v. Ogden 566 Market St. R. Co. v. Hellman 28, 84, 86, 105, 106, 111, 118, 121, 123, 482, 495, 524, 547 Markey v. Louisiana, etc. R. Co. 388 Marquette, etc. R. Co. v. Langton 173 Marshall v. Western North Caro- lina R. Co. 248 Marshall Foundry Co. v. Killain 239 Martin v. Continental Passenger R. Co. 295, 296, 346 V. Ohio Stove Co. 473, 477, 478, 492, 545 V. Wilson 535 V. Zellerbaoh 234 Marvin v. Anderson 513, 515 Maryland Trust Co. v. National Mechanics Bank 511, 512 Mason v. Adoue 849 V. Finch 87 V. Pewabic Mining Co. 215, 227, 232, 233 xlv TABLE OF CASES PAOE Matthews v. Murchison 524, 547 Maunsell v. Midland Groat West^ em R. Co. 476 Mayfield v. Alton Ry. Gas & Elec. Co. 79, 91 Mayor, etc. of Colchester v. Law- ton 203 Mayor, etc. of New York a. Miln 792 Mayor, etc. of Worcester u. Nor- wich, etc. R. Co. 304, 378, 386 Mayor, etc. o. Twenty-Third St. R. Co. - 413, 414 MoAlister v. Florence, etc. R. Co. 477, 478, 493 V. Henkel 763 McAlplne v. Union Pac. R. Co. 128 McBlair v. Gibbes 674 McCabe Admx. v. Maysville, etc. R. Co. 327, 337, 394 McCall V. Chamberlain 415 McCampbell v. Fountain Head R. Co. 477, 478, 541 McCandless v. Richmond, etc. R. Co. 411, 455 McCauIey v. Columbus, etc. R. Co. 32 McCluer u. Manchester, etc. R. Co. 418 McClure V. People's Freight R. Co. 106 McConnell v. Camors-McConnell Co. 705, 748 McCoy V. Kansas City, etc. R. Co. 388 V. World Columbian Expos. 535 McCray v. Junction R. Co. 81, 92 McCurdy v. Meyers 208 McCutcheon v. Merz Capsule Co. 229, 473, 480, 491, 501, 508, 538 McDonald v. Williams 241 McGeorge u. Big Stone Gap Imp't Co. 224 McGrath v. New York Central, etc. R. Co. 468, 469 McGregor v. Dover, etc. R. Co. 435 V. Erie R. Co. 411 Mcintosh V. Flint, etc. R. Co. 272 McKee v. Chautauqua Assembly 87 McKusick u. Seymour, Saben & Co. 249 McLeary v. Erie Tel., etc. Co. 319, 382, 448 McMahon v. Morrison 13, 115, 116, 168 McMillan v. Carson Hill Union Min. Co. 477, 480 V. Michigan, etc. R. Co. 410, 414, 418 xlvi PAOB McMinnville, etc. R. Co. o. Hug- gins 431 McVicker v. American Opera Co. 250 V. Ross 97, 233 McWilliams v. City of New York 248 Mead v. New York, etc. R. Co. 32, 143, 195, 199 Mechanics Sav. Bank v. Meriden Agency Co. 477, 509 Medical College Case 482 Meeker v. Winthrop Iron Co. 180, 318, 319, 446, 448, 548 Mellen v. Moline Iron Works 421 Memphis, etc. R. Co. v. Com- missioners 264, 265, 305 u. Grayson 327, 351 V. Wood 539, 550 Memphis Barrel, etc. Co. v. Ward 239 Menasha v. Hazard 136 V. Milwaukee, etc. R. Co. 161 Menier u. Hooper's Telegraph Works 217, 548 Mercantile, etc. Co. u. Southern, etc. R. Co. 428, 430 Mercantile Trust Co. v. Atlantic etc. R. Co. 430 V. Baltimore, etc. R. Co. 430 ■V. Farmers Loan, etc. Co. 425, 426, 427 V. Missouri, etc. R. Co. 431 Merchants, etc. Line v. Waganer 208 Meredith v. Zinc and Iron Co. 644, 651, 655 Merrill v. Railroad Co. 470 Merz Capsule Co. v. U. S. Cap- sule Co. 491, 519, 671, 798 Metcalf v. American School Furniture Co. 209, 214, 221, 230, 237, 497, 637, 675, 750 Methodist, etc. Church v. Pickett 176 Metropolitan City R. Co. v. Chicago West Div. R. Co. 267, 268 Metropolitan Concert Co. v. Ab- bey 312 Metropolitan El. R. Co. v. Man- hattan R. Co. 212, 338, 346, 356 Metropolitan Trust Co. v. Colum- bus, etc. R. Co. 365, 377 Meyer v. Johnston 11, 14, 16, 18, 118, 123, 264, 303 V. Staten Island R. Co. 548 Meyers v. Merillion 668 Michigan Central R. Co. v. Bul- lard 321 V. Pere Marquette R. Co. 325, 363 TABLE OF CASES Michigan Telephone Co. v. City of St. Joseph 274 Middlesex R. Co. v. Boston, etc. R. Co. 327, 443 Midland R. Co. v. Great Western R. Co. 459 V. Manchester, etc. R. Co. 457 V. Neath, etc. R. Co. 457 Midland Great Western R. Co. V. Leech 15, 133 Milbank v. New York, etc. R. Co. 474, 479, 504, 530, 551 Miles, Dr., Medical Co. v. Gold- thwaite 744 V. Jaynes Drug Co. 743, 744 V. Piatt 744 Miles V. New South Building Ass'n 529 Milhau V. Sharp 267 Military Interstate Ass*n v. Sa- vannah, etc. R. Co. 477, 509 Miller v. Consolidated Lake Su- perior Co. 220 V. Green Bay, etc. R. Co. 468 V. Lancaster 116, 128, 131 1). New York, etc. R. Co. 391, 398 V. Rutland, etc. R. Co. 265 V. Wheeler, etc. Co. 188 Mills V. Central R. Co. 21, 27, 82, 96, 97, 99, 327, 328, 336, 347, 350, 352 Miltenberger v. Logansport R. Co. 430 Milwaukee, etc. R. Co. v. Brooks, etc. Works 428 Miner v. Belle Isle Ice Co. 448 Miners Ditch Co. v. Zellerbach 203, 236, 269, 433, 508 Mines v. Scribner 743 Minneapolis, etc. R. Co. v. Gard- ner 116, 125, 138 Minnesota v. Northern Securities Co. 834, 846 Mississippi, etc. R. Co. v. South- em R. Ass'n 422 Mississippi Valley R. Co. v. Chi- cago, etc. R. Co. 163 Missouri, etc. R. Co. v. Carter 159 ■i;. Warner 310 V. Sisson 833 Missouri Pac. R. Co. v. Meeh 188, 189 V. Morrow 416 V. Owens 27, 66, 166, 253, 303 V. Texas, etc. R. Co. 663 V. Watts 398, 402 Mitchell V. Deeds 32, 178, 330 V. Reynolds 605 Mobile, etc. R. Co. v, Gilmer 158 PAGE Mobile, etc. v. State 154 Mogul Steamship Co. v. McGregor 559, 583, 591, 646 Monongahela River Con. Coal Co. V. Jutte 704 Monroe County 111. v. Village of Mt. Gilead 597 Monroe v. Fort Wayne, etc. R. Co. 110 Monsseaux v. Urquhart 514 Montague v. Lowry 707, 716, 718, 724, 726, 729, 754, 755, 756 Montgomery, etc. R. Co. v. Bor- ing 128, 152 V. Branch 167, 168, 248, 311 Montgomery Web Co. v. Dienelt 245, 250 Monument Bank v. Globe Works 433 Moore v. Mining Co. 223 Moorsheads v. United Rys. Co. 324, 338, 363, 397 Moran v. Pittsburg, etc. R. Co. 412 Morgan v. King 220, 503, 507 V. Louisiana 266, 305, 306 Morisette v. Howard 204, 215 Morrell v. Smith County 49, 51, 136, 147, 183 Morrill v. Railroad Co. 64, 69 Morris v. Elyton Land Co. 215, 222, 224, 228, 229, 233 Morris Run Coal Co. v. Barclay Coal Co. 559, 590, 633, 645, 650, 655, 668, 669 Morrison v. American Snuff Co. 152 V. St. Paul, etc. R. Co. 324 Morville v. American Tract Soc. 439 Moss V. Averell 202 Motter V. Kennett Tp. Electric Co. 56 Mowrey v. Indianapolis, etc. R. Co. 81, 85, 88, 89, 90, 97 Moxie Nerve Food Co. v. Baum- bach 519 Mozley v. Alston 94, 222 Mugler V. Kansas 790 Mullen V. Philadelphia Traction Co. 413 Muller V. Dows 188, 197, 199 Mumford v. Ecuador Devel. Co. 217 Munn V. Illinois 786 Mun.son v, Syracuse, etc. R. Co. 90 Muntz V. Algiers, etc. R. Co. 393 Murch V. Concord R. Co. 398, 402, 418 V. Eastern R. Co. 411 Muscatine Western R. Co. v, Hor- ton 299 Myers v. Murray, etc. Co. 188 xlvii TABLE OF CASES N PAGB Naglee v. Alexandria, etc. R. Co. 273, 301 Nantasket Beach S. S. Co.». Shea 258, 313 Nashua, etc. R. Corp. v. Boston, etc. R. Corp. 188, 189, 197, 198, 459, 545, 663 Nashville, etc. R. Co. v. Carroll 420 Nashville, etc. Turnpike Co. v. Davison County 598 Nassau Bank v. Jones 257, 434, 474, 479, 480 Natchez, etc. R. Co. v. Lambert 141 Nathan v. Tompkins 94, 95, 223 National Bank v. Case 504, 505, 525 National Bank of Xenia v. Stewart 514 National Cotton Oil Co. v. Texas 710, 793, 799, 800, 805, 826 National Distilling Co. v. Cream City Importing Co. 673, 675, 616 National Enameling, etc. Co. v. Ha- berman 604 National Fire Proofing Co. u. Mas- ter Builders' Ass'n 587 National Folding Box, etc. Co. v. Robertson 675 National Foundry, etc. Works v. Oconto Water Co. 525 National Harrow Co. v. Bement 651, 656, 834 V. Hench 667, 740, 741, 742 V. Quick 675, 740, 742 National Lead Co. v. Grote Paint Store Co. 582, 631, 637, 826, 838, 840 National Salt Co. v. Ingraham 838 National Tube Works v. Ballou 248 Natusch, V. Irving 98 Naugatuck R. Co. v. Waterbury Button Co. 459 Navigation Co. v. Winsor 604 Nebraska Shirt Co. v. Horton 477 Neeley v. State 269 Nelson, In re 705 Nelson v. Vermont, etc. R. Co. 328, 404 V. Railroad Co. 393 Nester u. Continental Brewing Co. 559, 599, 606, 641, 650, 652, 655, 668, 672 New Bedford R. Co. w. Old Colony R. Co. 167 New Buffalo v. Iron Co. 136 Newcastle Northern R. Co. v. Simpson 440 New England Trust Co. v. Abbott 513 xlviii PAGE New Hampshire Sav. Bank v. Richey 203, 240, 241 New Haven, etc. Co. c. Linden Spring Co. 572 New Jersey Midland R. Co. v. Strait 131, 132 New Jersey Southern R. Co. v. Long Branch Commrs. 269 Newland Hotel Co. v. Lowe Furniture Co. 477, 480 Newman v. Mercantile Trust Co. 537 New Orleans, etc. R. Co. v. Dela/- more 264, 303, 304 V. Harris 82, 92 New Orleans, etc. Steamship Co. V. Ocean Dry Dock Co. 477, 478, 480 New Orleans Gas Light Co. v. Hart 791 ■t>. Louisiana Light, etc. Co. 56, 57, 118, 120, 142, 266, 268 New York, etc. Canal Co. v. Ful- ton Bank 25, 566 New York, etc. R. Co. v. New York, etc. R. Co. 48, 275, 282, 290, 379, 423, 424, 425, 427, 428, 431, 660 V. Offield 598 V. Saratoga, etc. R. Co. 118 New York, etc. R. Co., In Matter of, 410 New York Central, etc. R. Co. v. City of Yonkers 28, 53, 105, 118, 130 Niagara Fire Ins. Co. v. Cornell 796, 801, 826 Niantic Savings Bank v. Douglass 136 Nibbs V. Chicago, etc. R. Co. 409 Nichols V. Boston, etc. R. Co. 417 V. New Haven, etc. R. Co. 306 NicoU V. New York, etc. R. Co. 202 Niles V. New York, etc. R. Co. 549 Nordenfelt v. Maxim-Nordenfelt Co. 603, 605 Norfolk, etc. R. Co. v. Pendle- ton 138, 140, 307 North Carolina, etc. R. Co. v. Carolina Central R. Co. 304 North Carolina R. Co. . Robotham v. Prudential Ins. Co. 474, 492, 494, 546, 547, r,r,i) Rochester, etc. R. Co., Matter of 610 Rochester R. Co. v. City of Rochester 227, 306 lii 1.32 373 Tellurido 100, 110, 118 789, 792 .581 128, 130 514 493, 500 505, 533 720 PAOIll Rodgers v. Wells 133, 134 Rogers v. Nashville, etc. R. Co. 268, 276, 329; 345, 519, 520, 524, 648 Rogersville, etc. R. Co. v. Kylo 300 Rollins V. Shaver Co. 513 Roman v. Dimmick 676 Rome, etc. R. Co. v. Chastoen 302 Roper V. MoWhorter :i'2S Rosonkrans v. Lafayette, etc. R. Co. 160 Rothschild v. Memphis, etc. R. Co. 218 Rothwell V. Robinson 211 Rourke v. Elk Drug (;<>. 580, 8 IS Rouse u. Merchants' Nat. ]Jank 239 Rousillon V. Rousillon 605 Royal Bank of India's Case ."iOI, 505, .V24, 525 Royal British Banlc v. Turquand 433 Rubber 'I'iro Wheel Co. v, Mil- waukee Rubber Works Co. 740, 741 Rubins v. Pressed Steel Ciir Co. 496 Runyan v. Coster's Lessee 451 Russell V. Fuia Gas Co. 219 Rutland R. Co. v. Central Ver- mont R. Co. Rutter V, Union Pacific R, Co. Ryan v, Leavenworth, etc. R. Co 407 162 605, 510 Ryorson Co. Morris Canal, etc. S 385 Safety Insulated Wire, etc. Co. v, Baltimore 434 Sago V. Culver 446, 548 V. Lalco Shore, etc. R. Co. 189, 195 St. Joseph Plank Road Co. v. Klein 608 Kt. .loseph, etc. R. Co. v. Hum- phreys 425, 4'2(1, 428 V, St. Louis, etc. R. Co. 307 St. l.oiiiH, etc. Drayiige Co. v, Louisville, etc. R. Co. 659 St. Louis, etc. R. Co. v. Balslcy 201 V. Berry 44, 121, 138, l.W, 143 V. Cleveland, vtc. R. On. 4,30 V. Curl 387, 390, 391, 397, 418 V. Evans 389 V. Gill 307 V. Indianapolis, etc. R. Co. 197, 198 V. .James 188 V. Marker 160 V. Miller 160, 160 TABLE OF CASES St. Louis, etc. R. Co. v. Paul 788, 790 V. Ritz 404 V. Rowley 468 V. Terra Haute, etc. R. Co. 49, 50, 51, 92, 275, 327, 329, 350, 351, 352, 434, 437, 438, 440, 454 St. Louis Carriage Mfg. Co. i;. Hilbert 511 St. Paul, etc. R. Co., In re 189 St. Paul, etc. R. Co. v. Parcher 305 St. Paul Trust Co. v. Wampach Mfg. Co. 509 Salt Lake City v. HoUister 440, 441 Salt Lake Hardware Co. v. Tintic Mill Co. 576 San Antonio Gas Co. v. State 665, 683, 829 San Antonio Traction Co. v. Alt- gelt 138 Sauford v. People 588, 642, 835 San Francisco, etc. R. Co. v. Bee 244 San Francisco v. Spring Valley Water Works 159 Santa Clara Valley Mill, etc. Co. V. Hayes 559, 644, 648, 651, 655 Sappington v. Little Rock, etc. R. Co. 158, 161, 238, 309 Sargent v. Webster 213 Sartison v. Baltimore, etc. R. Co. 19, 309 Saugatuck Bridge Co. v. Town of Westport 299 Savannah, etc. R. Co. v. Jack- sonville, etc. R. Co. 428 Savings & Trust Co. v. Bear Valley Irr. Co. 237 Savings Bank v. Wulfekuhler 512 Sawyer v. Dubuque Printing Co. 230 Scattergood v. Edge 343 Schaake v. Eagle Automatic Can Co. 234 Schenck v. Andrews 576 Schermerhorn v. Vanderheyden 382 Schleider v. Dielman 248 Schraidtz v. Louisville, etc. R. Co. 368, 373 Schofield V. Goodrich Bros. Bank- ing Co. 474, 534 Schufeldt V. Smith 241 Scotland County v. Thomas 135, 136, 137 Scott V. Farmers, etc. Bank 73 ■u. Hanshear 136 V. Neeley 248 Scribner v. Straus 743, 747 Searight v. Payne 572 Seaton v. Grant 223 PAGE Selkir v. Klein 57 Sellars v. Richmond, etc. R. Co. 467 Sellers v. Union Lumbering Co. 266 Selma, etc. R. Co. v. Harbin 128, 172 Seney v. Wabash Western R.Co. 425, 427 Sewell u. East Cape May Beach Co. 211, 300 Seymour v. Spring Forest Cem. Ass'n 576 Shackleford v. Miss. Cent. R. Co. 170 Shadford v. Detroit, etc. R. Co. 20, 152, 181 Shaffer v. Union Mining Co. 788 Shamokin Valley R. Co. v. Liver- more 256 Shannon v. Stevenson 572 Shapley v. Atlantic, etc. R. Co. 265 Shaw V. City of Covington 142 V. Davis 318, 448 i;. Norfolk County R. Co. 145, 162, 330 V. Quinoy Mining Co. 188 Shawnee Compress Co. v. Ander- son 316, 606, 637, 704, 706 Shelbyville, etc. Turnpike Co. v. Barnes 27, 92 Sheldon, etc. Co. v. Eickeroeyer, etc. Co. 214, 224 Shepley v. Atlantic, etc. R. Co. 330 Shepp V. Schuykill Valley Traction Co. 543 Shield V. Clifton Hill Land Co. 572 Shields v. Ohio 27, 28, 115, 116, 117, 121,138, 143, 150, 522 Shoemaker v. National Mech. Bank 504 0. Washburn Lumber Co. 515 Shores v. Southern R. Co. 391, 419 Shreveport Traction Co. u. Kansas City, etc. R. Co. 78 Shrewsbury, etc. R. Co. -u. Lon- don, etc. R. Co. 663 V. Stour Valley R. Co. 15, 106 Simmons v. Troy Iron Works 257 ■u. Terry 819 Simpson v. Denison 327, 340, 459 V, Westminster, etc. Hotel Co. 313 Sinclair v. Missouri, etc. R. Co. 466, 468, 469 Singer v. Hutchinson 239 Singleton v. Southwestern R. Co. 253, 273, 280, 327, 394, 396, 404 Sioux City Terminal R., etc. Co. V. Trust Co. of North America 303 Skinner v. Smith 211, 316 Skraiuka v. Scharringhausen 559, 654 liii TABLE OF CASES Slack V. Northwestern Nat. Bank 242 Slaughter v. Thatcher Coal, etc. Co. 642, 655 Slaughter House Cases 593, 594 Sliddell V. Grandjean 334 Slossen v. Burlington, etc. R. Co. 416 Small V. Minneapolis, etc. Co. 314, 319, 680 Smalley v. Atlantic, etc. R. Co. 392 Smiley v. Kansas 793, 805, 806, 810 Smith V. Berndt 313 V. Bromley 435 V. Chesapeake, etc. Canal Co. 29 V. Clark County 136, 137 V. Ferries, etc. R. Co. 221 V. Kurd 355 II. Lake Shore, etc. R. Co. 191 V. Los Angeles, etc. R. Co. 153 V. Newark, etc. R. Co. 477, 500, 501, 625 V. New York Consolidated Stage Co. 212 V. People 578 V. Reading City Pass. R. Co. 53 Smith Lumber Co., In re 513 Snell V. City of Chicago 300 Snow V. Boston, etc. R. Co. 225 Society for Savings v. Coite 265 Solomonovich v. Denver Cons. Tramway Co. 120, 122 Solomons v. Laing 539 South, etc. R. Co. v. Highland, etc. R. Co. 465 Southall V. British Mutual Life Assur. Soc. 233 South and North Alabama R. Co. V. Highland Ave., etc. R. Co. 258 South Carolina, etc. R. Co. v. Augusta, etc. R. Co. 325, 362, 363, V. CaroUna, etc. R. Co. 375 South Carolina R. Co. v. Blake 145 V. Wilmington, etc. R. Co. 463 South Carolina Terminal Co. v. South Carolina, etc. R. Co. 325, 460 South Devon R. Co. u. Devon, etc. R. Co. 457 Southern Electric Securities Co. V. State 566, 640, 653, 681, 683, 812, 827, 829, 850 Southern Indiana Exp. Co. v. United States Exp. Co. 660, 738, 749 Southern Kansas R. Co. u. Sage 390, 470 Southern Pacific R. Co. v. Esqui- bel 289 liv PAcn Southern R. Co. v. Allison 197 V. Ensign Mfg. Co. 406 V. Franklin, etc. R. Co. 363, 368, 374, 384 V. Mitchell 276 V. North Carolina R. Co. 412 V. Puckett 309 Southgate v. Atlantic, etc. R. Co. 173 South Side, etc. R. Co. u. Second Ave. R. Co. 378, 460 Southwestern R., etc. Co. v. Georgia 137, 139 South Yorkshire " v. Great Northern R. Co. 458 Spangler v. Atchison, etc. R. Co. 419 Spargo's Case 572, 573 Sparrow u. Evansville; etc. R. Co. 31, 79, 80, 133 Spear v. Crawford 202 Spencer v. Seaboard Air Line R. Co. 96, 98 V. World's Coltimbian Expo- sition 430 Sprague v. Illinois River R. Co. 81, 133 u. National Bank 576 .,. Smith 417, 418 Springer v. Chicago Real Estate, etc. Co. 202 Springfield Fire, etc. Ins. Co. v. Cannon 675 Spring Valley Water Co. v. Schottler 266, 522 Staltz V. Baltimore, etc. R. Co. 419 Standard Oil Co. v. State 583, 809, 810, 811, 814, 815, 835, 844 Stanley v. Cleveland, etc. R. Co. 457 Stanton v. Allen 601, 642, 670 Starke v. J. M. Gaffey Petroleum Co. 313, 315 State V. jEtna Fire Ins. Co. 828, 846 V. American Cotton Oil Trust 569, 685 V. Armour Packing Co. 555, 643, 687, 815, 846, 851 V. Associated Press 790, 811, 828 V. Atchison, etc. R. Co. 22, 53, 59, 64, 65, 66, 77, 327, 335, 448, 449 V. Bailey 27, 92, 97, 116 u. Baltimore, etc. R. Co. 159, 166 ■u. Bank of Maryland 226 ■V. Bartlett 578 V. Beck 27 V. Buckeye Pipe Line Co. 795, 840 V. Butler 474, 480 V. Central Iowa R. Co. 413 TABLE OF CASES State ! V. PAGE I. Central R. etc. Co., 449, 498 Chicago, etc. R. Co. 305, 311 Cincinnati Gas Light Co. 266 Commr. of Railroad Taxa- tion 140 Consolidated Gas Co. 107 Consohdation Coal Co. 272, 280, 290 Continental Tobacco 636, 813, 851 Crawfordsville, etc. Turn- pike Co. * 177 Cudahy Packing Co. 773, 798, 799 Dodge 450 Dreany 587, 588, 844 East 5th St. Co. 264, 267, 268 Firemen's Fund Ins. Co. 555, 583, 667, 794, 808, 823, 826, 832, 850 Gage 804 Glldden 579 Greene County 136 Higby Co. 513 Housatonic R. Co. 324, 408 Huegin 835 International Harvester Co. 803, 836 Jack 794, 803, 833 Jacksonville R. Co. 267, 268 Jacobs 804, 809 Keokuk, etc. R. Co. 116, 121, 143 Lancashire Fire Ins. Co. 810, 828 Laredo Ice Co. 799, 804, 835 Lesuer 150 McDaniel 530, 545 McMinnville, etc. R. Co. 431, 443 Maine Central R. Co. 116, 120, 129, 142 Minnesota Central R. Co. 302 Minnesota Thresher Mfg. Co. 269, 681 Missouri, etc. R. Co. 793, 796, 804, 829, 833, 845, 864 Mobile, etc. R. Co. 412, 413 Montana R. Co. 12, 16, 21, 67, 327 Morgan 304 Mut. Gas Light Co. 266 Nashville, etc. R. Co. 306 Nebraska Distilling Co. 607, 618, 642, 650, 683, 687 Nemaha County Commrs. 136 Newman 524, 530 State V. New Orleans Warehouse Co. 313, 321 ■u. Northern Central R. Co. 138 V. Oberlin Building Ass'n 511, 512 V. Omaha Elevator Co. 774, 820, 847, 851 ■a. Pawtuxet Turnpike Co. 302 ■u. People's United States Bank 541 V. Philadelphia, etc. R. Co. 139, 141 ■u. Phipps 810, 824, 825, 826, 847 V. Portage City Water Co. 266, 268 V. Portland Natural Gas, etc. Co. 642, 644, 665, 683, 684 ■V. Richmond, etc. R. Co. 337 V. Rives 253 V. Robb 598 V. Rohlffs 508, 524 V. St. Paul, etc. R. Co. 449 V. St. Paul Gas Light Co. 829 V. SchUtz Brewing Co. 795, 799, 826, 846, 847, 849 ■II. Sherman 19, 116, 265 V. Shippers Compress Co. 799, 800, 832, 851 V. Simmons Hardware Co. 803 „. Smiley 606, 789, 794, 809, 811, 820 V. Smith 513, 514 V. So. Kansas R. Co. 414 V. Standard Oil Co. 71, 560, 564, 565, 566, 567, 616, 651, 683, 684, 687, 826, 847, 851 ■u. Topeka Water Co. 274 V. U. S. Grant University 227 V. Vanderbilt 21, 53, 54, 55, 59 73, 77, 109, 179 V. Virginia^Carolina Chem- ical Co. 795, 809, 826, 836 V. Waters-Pierce Oil Co. 845, 847 ■V. Western Irrigating Canal Co. 204, 262, 264, 266 V. Wilson 822, 835, 837 V. Witherspoon 795, 799, 844 V. Woodruff 141 State Treasurer v. Auditor Gen- eral 27 Stearns v. Atlantic, etc. R. Co. 388 V. Morse 358 Stephens u. Davenport, etc. R. Co. 415, 419 V. Southern Pacific Co. 375 Sterling Remedy Co. v. Wyckoff 833 Stetler v. Chicago, etc. R. Co. 470 Stevens v. Davison 346 Iv TABLE OF CASES PAGE Stevens v. Missouri, etc. R. Co. 185 V. Rowe 581 V. Rutland, etc. R. Co. 82, 90, 216, 221 Stewart's Appeal 161, 281 Stewart v. Chicago, etc. R. Co. 415 V. Erie, etc. Transportation Co. 612, 659, 677, 678 V. Leliigh Valley R. Co. 454 V. Long Island R. Co. 337 Stickley v. Chesapeake, etc. R. Co. 391, 420 Stikeman's Will, In re 148 Stock Discount Co. v. Brown 475 Stockton V. American Tobacco Co. 681, 685 V. Central R. Co. 327, 450, 451, 454, 685 Stokes V. Detrick 215 Strait V. National Harrow Co. 740 Straus V. American Publishers Ass'n 743, 823 Strickland v. National Salt Co. 496, 577, 675 Sturges V. Knapp 374 Summers v. Glenwood Gold, etc. Min. C6. 230, 245 Sumner ti. Marcy 473, 480 Sunflower Oil Co. v. Wilson 425 Susquehanna Bridge Co. v. Gen- eral Ins. Co. 357 Susquehanna Canal Co. v. Bon- ham 255 Sussex R. Co. v. Morris, etc. R. Co. 659 Swan V. Scott 674 Swan Land Co. v. Frank 247, 299 Swansea, etc. R. Co. v. Swansea, etc. R. Co. 457 Swartwout v. Mich. Air Line R. Co. 135, 170 Sweeney v. Grape Sugar Refining Co. 219, 246 Swice V. Maysville, etc. R. Co. 402 Swift V. United States 713, 716, 724, 725, 720, 727, 729 Swing V. American Glucose Co. 152 Swords V. Edgar 391 Symmes v. Union Trust Co. 222, 224 Syracuse, etc. R. Co., Re 225 Taff Vale R. Co. v. Ryhmney R. Co. 457 Tagart v. Northern Cent. R. Co. 192, 157 Tait V. Bigott Talmage v. Pell 474, 500, 502, Tanner v^ Lindell Railroad Co. 210, 216, 220, 222, 225, Tarpey v. Deseret Salt Co. 129, Taylor v. Blanchard u. Bowker ■u. Chichester, etc. R. Co. V. Earle 230, V. Montreal Harbor Commrs. i;. North Star Gold Mining Co. V. Railroad Co. 225, u Salmon V. Southern Pacific Co. Tecumseh, etc. Bank v. Russell Tecimiseh National Bank v. Best Tennessee v. Whitworth 128, 137, Terhune v. Midland R. Co. Terre Haute, etc. R. Co. u. Co.x 379, V. Earp 1). Peoria, etc. R. Co. 459, Terrill, In re 707, Texas, etc. R. Co. v. Murphy V. Southern Pacific Co. Texas Brewing Co. v. Anderson V. Durram ■u. Meyer ■u. Templeman Texas Cent. R. Co. ?'. Lyons Texas Standard Oil Co. v. Adoue 559, 641, 643, 646, 647, 651, Thayer v. Flint, etc. R. Co. The Elc\'ator Case Thomas v. Cincinnati, etc. R. Co. V. Citizens R. Co. V. Railroad Co. 26, 327, 328, 331, 339, 340, 434, 436, Thompson v. Abbott 128, V. New York, etc. R. Co. V. Waters Thomsen v. Union Castle Mail S.S. Co. Threadgill v. Pumphrey Thrift V. Elizabeth City Thorne v. Ijchigh Valley R. Co. Thorpe v. Rutland, etc. R. Co. Thousand Island Park Ass'n v. Tucker Tillinghast v. Carr Tippecanoe Co. v. Lafayette, etc. R. Co. Ivi PAGE 515 504, 505 96, , 297 , 178 604 248 205 508 597 508 351 221 524 479 242 138, 306 184 330, 380 133 461 752 160 667 796 796 819 819 309 73, 655 308 374 371, 739 351 329, 437 152 269 202 757 303 596 387, 415 791 597 536 51 TABLE OF CASES Tod V. Kentucky Union Land Co. 11, 499, 505, 545 Tode V. Gross 605 Todhunter v. Des Moines, etc. R. Co. 343 Toledo, etc. R. Co. v. Dunlap 146, 194 V. Rumbold 387, 415, 418, 466, 468, 469 Toler V. East Tennessee, etc. R. Co. 527, 529 Tomlinson v. Branch 17, 128, 139, 141, 154 Tompkins v. Augusta Southern R. Co. 152, 158, 160 Topeka Paper Co. v. Oklahoma Pub. Co. 177 Tourtelot V. Whithed 502 Town of Lakeview v. Rose Hill Cemetery Co. Town of Middletown v. Boston, etc. R. Co. Town of Pana v. Lippincott Town of Westbrook's Appeal from Commissioners Townsend v. St. Louis, etc. Min- ing Co. Tracy v. Talmadge V. Troy, etc. R. Co. Traer v. Prospecting Co. V. Lucas Prospecting Co. Trask v. Maguire fl. Peekskill Plow Works Treadgill v. Pumphrey 791 349 136 410 250 434 415 206 209 305 112 273, 303 V. Salisbury Mfg. Co. 207, 208, 211, 216, 231, 538 Trenton Pass. R. Co. v. Wilson 185 Trenton Potteries Co. v. Olyphant 605, 636, 638, 645, 655, 657 Trenton St. Ry. Co., In re 146 Trester v. Missouri, etc. R. Co. 146, 189, 194 Trevor v. Whitworth 511, 512 Trimm v. Marsh 373 Tripp u. North Western Nat. Bank 213 Trisconi v. Winship 208 Troup V. Horbach 572, 576 Troy, etc. R. Co. v, Boston, etc. R. Co. 272, 280, 338 «. Kerr 300, 327, 444 Troy Buggy Works v. Fife 819 Troy V. Rutland R. Co. 274 Trust Co. V. State 498 Trust Co. of North America v. Manhattan Trust Co. 384 Tuckahoe Canal Co. v. Tuckahoe, etc. R. Co. 269, 279 Tulare Irr. Dist. v. Kaweah Ca- nal, etc. R. Co. Turner v. Stip Turnpike Co. v. Illinois Turnpike Road Co. v. Campbell Tuscaloosa Ice Mfg. Co. v. Will- iams Tuttle V. Michigan Air Line Co. Tysen u. Wabash, etc. R. Co. 301 358 334 266, 268 655 82, 179 164 U Underwood v. Barker 605 Union, etc. Ass'n v. Masonic Hall Ass'n 508 Union Bank of Chicago v. Kansas City Bank 423 Union Bridge Co. v. Troy, etc. R. Co. 357, 441 Union Pacific R. Co. v. Chicago, etc. R. Co. 321, 322, 357, 359, 361, 365, 433, 456, 458, 459, 461, 465 V. Gouchenour 131 •«. McAlpine 164, 238 Union Pressed Brick Co. o. Chicago Hydraulic Pressed Brick Co. 589, 850 Union Sewer Pipe Co. v. Con- nolly 718 Union Trust Co. v. Atchison, etc. R. Co. 666 V. Illinois Mid. R. Co. 309 United Lines Tel. Co. v. Boston Safe Deposit Co. 520 United New Jersey R., etc. Co. v. Happock 168 United States v. Addyston Pipe, etc. Co. 602, 604, 728, 753, 759, 760 V. Cassidy 578, 579 V. Chesapeake, etfl. Fuel Co. 712, 718, 728 V. Coal Dealers Ass'n 691, 701, 708, 718, 728, 751 V. Debs 714, 730 V. E. C. Knight Co. 614, 643, 649, 712, 715, 716, 717, 718, 719, 720, 724, 725, 784 ■u. Elliott 739, 750 V. Greenhut 707, 752 V. Hopkins 691, 760 V. Jellico Mountain Coal, etc. Co. 678, 718, 728 V. Joint Traffic Ass'n 693, 696, 697, 703, 708, 716, 718, 735, 788 Ivii TABLE OF CASES United States v. Little Miami, etc. R. Co. 299 V. McAndrew, etc. Co. 752, 753, 760, 761 V. Nelson 752 V. Patterson 712, 739, 752 V. Southern Pac. Co. 32, 120 V. Standard Oil Co. 751 V. Swift 708 V. Trans-Missouri Freight Ass'n 26, 611, 642, 653, 662, 691, 696, 697, 698, 701, 702, 703, 705, 712, 716, 718, 730, 735, 736, 738, 746, 750, 753, 759, 811 V. Union Pacific R. Co. 666 V. Western Union Tel. Co. 450 V. Workingmen's Amalgam mated Council 729, 739, 759, 760 United States Bank v. Dandridge 358 United States Capsules Co. v. Isaacs 152 United States Chem. Co. v. Provident Chem. Co. 604, 657 United States Consolidated Seeded Raisins Co. v. Griffin 740, 742 United States Mortgage Co. u. Gross 330 United States Trust Co. v. Mer- cantile Co. 325, 372 w. Wabash Western R. Co. 423, 425, 427 University of Vermont v. Baxter 131 Utica National Brewing Co., Mat- ter of 154, 169 Vail V. Hamilton 514 Valencia County v. Atchison, etc. R. Co. 408 Valley R. Co. v. Lake Erie Iron Co. '477, 478, 480, 481, 503 Vance v. McNabb Coal; etc. Co. 245, 247 Van Cleve v. Berkey 576 Van Cott V. Van Brunt 572 Vanderpoel v. Gorman .213 Vanderweghe v. American Brew- ing Co. 818 Van Dresser u. Oregon R., etc. Co. 392, 393, 409 Van Horn v. Van Horn 580, 581 Van Steuben v. Central R. Co. 328 Vaughn v. Comet, etc. Co. 250 Venner v. Atchison, etc. R. Co. 56, 291, 540 Iviii PAGE Vermont, etc. R. Co. o. Vermont Central R. Co. 270, 324, 383 Verplank v. Mercantile Ins. Co. 493 Vicksburgh, etc. Telephone Co. v. Citizens Telephone Co. 13, 14, 123, 248 Victor Talking Machine Co. v. The Fair 740 Vilas V. Page 164 Vincennes v. Gas Light Co. 598 Vinegar Co. v. Foehrenbach 645 Virginia, etc. R. Co. v. Washing- ton 398, 402 Visalia Gas, etc. Co. v. Sims 323 Vought V. Eastern Building, etc. Ass'n 260 Vulcan Powder Co. v. Hercules Powder Co. 655, 667, 742 W Wabash, etc. R. Co. ■». Ham 152, 164, 165, 241 V. Keeler 470 V. Payson 327 V. Peyton 418, 468, 469 V. Williams 468 Waco Water, etc. Co. v. City of Waco 597 Wagner v. Marple 508 V. Meety 137 Walburn v. Chevault 572 Waldoborough v, Knox, etc. R. Co. 206, 207, 347 Wall V. Chattanooga Co. 242 V. London Assets Corp. (No. 1) 18, 505 Wallace v. Long Island R. Co. 53, 67, 448 V. Loomis 182 Walsh V. Ass'n of Master Plumb- ers 589, 821, 850 V. Barton 258 V. Dwight 818 Ward V. Byrne 605 Warden v. Railroad Co. 445 Ware v. Grand Junction Water Co. 216 V. Regent's Canal Co. 450 Warfield v. Marshall County Can- ning Co. 238, 247 Warren v. Mobile, etc. R. Co. 152, 160, 166 Warrener v. Kankakee County 49 Washburn v. Cass County 56, 136, 178, 183 V. Donnes 343 TABLE OF CASES PAGBI Washburn v. National Wall Paper Co. 571, 573, 574 Washington v. Northern Securi- ties Co. 70 Washington St., etc. R. Co., Mat- ter of 50 Wasmer v. Delaware, etc. R. Co. 419 Waters-Pierce Oil Co. v. State 795, 796, 799, 810, 826, 828, 845, 847, 850, 852 V. Texas 826, 827 Watson V. Harlem, etc. Nav. Co. 553 V. Richmond, etc. R. Co. 418, 419 Watt's Appeal 509 Weatherby v. Baker 239, 572, 576 Webb V. Portland, etc. R. Co. 468 Wehrhane u. Nashville, etc. R. Co. 506 Weiboldt v. Standard Fashion Co. 817 Welch V. Phelps, etc. Windmill Co. 817 Welden Nat. Bank v. Smith 370, 382, 392 Wells V. Missouri Edison El. Co. 151 V. Rodgers 110, 111, 132 Wells Richardson v. Abraham 744 Welsh u. Old Dominion Min. & R. Co. 264 Wentworth v. Braun 237 Werle v. Northwestern Flint, etc. Co. 209, 211 West End, etc. R. Co. v. Dam- eron 301 West River Bridge v. Dix 269 West Virginia Transportation Co. V. Ohio River Pipe Line Co. 654, 666 v. Standard Oil Co. 579, 582 Western, etc. R. Co. u. Cox 419 V. Johnstown 255 V. Smith 152 Western Pennsylvania R. Co. v, Johnston 254 Western Union R. Co. i;. Smith 156 Western Union Tel. Co. v. Ameri- can Union Tel. Co. 666 V. Burlington, etc. R. Co. 666 V. Chicago, etc. R. Co. 666 ».■ Pennsylvania R. Co. 666 V. Union Pacific R. Co. 323 Western Woodenware Ass'n v. Starkie 655 Whaley v. Bankers Union of the World 175, 189 PAGE Wheeler-Stenzel Co. v. Nat. Glass Jobbers Ass'n 708, 724, 754, 757 Whipple V. Union Pacific R. Co. 166, 169 White, S. S., Dental Mfg. Co. v. Hertzberger 810 White V. Albany R. Co. 375 ■i>. Buss 434 V. Franklin Bank 439 V. Marquardt 503 V. Syracuse, etc. R. Co. 547 White Mountains R. Co. v. White Mountains R. Co. 300 White Star Line v. Star Line 737 White Water, etc. Co. v. Valette 203, 330. Whitman v. Watkin 493 Whitney Arms Co. v. Barlow 259 Whitney v. Atlantic, etc. R. Co. 387 V. Mayo 221 V. Slayton 604 Whittaker v. Howe 605 Whittendon Mills v. Upton 566 Whitwell V. Continental Tobacco Co. 713, 756 Wiggins Ferry Co. v. Ohio, etc. R. Co. 325 Wilbur V. Trenton Pass. R. Co. 128 Wiley V. Nat. Wall Paper Co. 675 Wilkinson v. Banerle 213 Williamson v. New Jersey South- ern R. Co. 105, 163, 181, 528 Williard v. Spartansberg 402 Wills V. Central Ice, etc. Co. 586, 589, 820 Wilmington, etc. R. Co. v. Als- brook 305, 306 Wilmington R. Co. v. Reid 81 Wilmington Water Power Co. u. Evans 262 Wilson V. .^olian Co. 231, 236, 250, 251 V. Central Bridge Co. 208, 220 V. Gaines 305 V. Morse 640, 851 u. Salamanca ' 79, 137 Wilson's Case 508 Winch V. Birkenhead, etc. R. Co. 49, 222, 274, 329, 350 Winchester, etc. R. Co. v. Com- monwealth 413 WindmuUer v. Standard Distil- ling, etc. Co. 524 Winnebago, the 806 Winsor v- Bailey 223 Wisconsin Central R. Co. v. Ross 471 Wittenberg v. MoUyneaux 657 lix TABLE OP CASES Wolf V. Arminus Copper Mine Co. 212 V. PcMiiiHvlvania R. Co. :i7Ci, -MS WoKi'rhampton, etc. R. Co. v, London, etc. R. Co. '165 Wood V. Bedfoiil, etc. R. Co. 2W), 290, :ill V. Dummer 239 o. Maoon, cte. R. Co. 280 ■V. Whitehead 005 Woodberry v. MoClurg HIT Woodcock V. First National Bank 537 Woodruff V. Erie R. Co. 33, V.}, 338, 420, -128, 435, -112 Wood, Walter A., Mowing, ctei. Co. V. Greenwood Hardware Co. 012, 814, 818 Woods V. Lawrence County 2(i2 Woolfolk V. January 572 Wormser u. Metropolitan St. R. Co. 337, 338, 447 Worth Mfg. Co. V. Bingham 220, 223 Worthen v. Griffith 241 Wragg, Re 672, 571i Wright V. Bundy 213 V. Kentucky, etc. R. Co. 357 <^. Lee 173, 5:)7 V. Milwaukee, etc. R. Co. 264, 267, 208 V. Orvillo Mining Co. 548 V. Pipe Line Co. 259, 537 V. Rider 603, 604 Wvlie V. National Wall Paper Co. 839 Wyraan v, Amorioan Powder Vo. 572 Yates V, Van Do Bogert 256 Yazoo, etc. R. Co. v. Adams 17, 4-1, 113, 114, 115, 110, 121, i;t8, 140, 305 V. Soarles 512, 030, 809, 813, 830 V. Southern R. Cu. 202 Ycutcs V. Illinois Cent. R. Co. 307, 399 York, (■t<^ R. Co. v. Winans 253, 273, 274 \'()Ung V. Krie Iron (%>. .'572, ftlii ■0. Railroad Co. 298 ■v. Rondout, etc. (JaH Light Co. 00 1'. 'I'dlcdo, i-U-. H. (Vi. 207 V. WcliHtc^r City, etc. R. Co. 263 Youngman v. Elmira, etc. li. Co. 254, 255 Z Zabriskie v. Cleveland, vU\ R. (Ic). 221, .-Wl, 433 V. Haokonsack R. Co. 85, 90, 208, 347 Zimmor v. State 44, 143 Ix INTEECORPORATE RELATIONS INTERCORPORATE RELATIONS PRELIMINARY § 1. A corporation is an artificial person created by law having, within the limits of its chartered powers, the rights of a natural person in the transaction of business. It is governed by the general rules of law relating to rights of property, con- tracts and torts which apply to individuals. Its relations with other corporations, as persons, are essentially the same as the relations of natural persons. A corporation is something other than a person. It pos- sesses the property of immortality — the capacity of perpetual succession — and may act with certainty in reference to the future. Its possibilities of material development, through the increase and disposition of shares, may be as unlimited as its duration. Its methods of control and management are regu- lated by rules applicable to it alone. While the relations of corporations with each other as persons are like those of indi- viduals, the relations of corporations as corporations are essen- tially different. The welding of several corporations into one, the selling and leasing of corporate franchises, the acquiring of controlling stock interests, the combining of corporate properties — all are governed by principles of law either inapplicable or applying in different degree to the relations of individuals. Intercorporate relations of this character grow out of a variety of processes which may be classified as follows : I. The union of stockholders, properties and franchises of several corporations in a single corporation — consolidation. II. The absolute transfer of the franchises and property of one corporation to another — sale. 3 § 2 INTBncOBPORATE IIBLATIONS III. The transfer for stated payments of the franchises and property of one corfjoration to another in perpetuity or for a term of yoars — Irufse. IV. The H('(|uiHition by one corporation of shares of the capi- tal stock of another — corporate stockholding, which hecomes control when a majority of the sharos is ac(|uired. V. The cooperation of several corporatiotis to accomplish a ^iven purpose — combination. § 2. The consolidation of (corporations is chiefly oxempli- fied by railroad (companies and, to a far less dcgrcH!, liy other (/Masi-public corporations, where the transtnission of the fran- chise is of essential importance, and where the statutory method of GffectinK such transfer must he strictly followed. The consolidation of railroad companies, occasioned by their peculiar nature and use, has been taking place for a long titne. In their early days, the extraordinary powers granted to them — the right to condemn lands, take tolls and exclude all other cars from their tracks' — and th(!ir constantly (levil (OiangiMl IImwo (^arly vii'.WH. Whilii iri- both in lOiinlurid iiuil thiH cuiinl ry UH ili:|)i!iHlcn(, ciirric^rH triiKht poHHihly merely ownerH of roafin upon which liav(! htrcn able to furriinh carH for l.hc railH vif.ri: jAaocil, and upon wliich all tranHporlalion of ii,(<(i(\h upon tlii! rail- piTHoriH had a rlKbt to f)pi'rat(i llicir roadH, it waH fjiiilc. a difforont matter vehiclcH upon payment of toUw. The to obtain the motive pr>wer. I'ew railroad waH (loriHidc^nrd a public, high- earricrH or HhipfjorH re(|uirc(l ar could way for independent carrierH, ThuH aff()rd a locomotive. 'rrniiiH run by the charter of the Ithaea and Ohwcj^o ndent carrierH could not Horvo the aforesaid may, with Huitablo and public with facility nor without dupli- proper carriagCH, uhc and travel upon cation of i^xpenw!. Hftfcty, conven- Haid railroad." Htill it was uHual ience and economy compell(Ml tho to authorize the railroad company to railroad company to excluMively act, with others, as a carrier u[ion its operatic its own road, own road. But it had no such right without Hjjecial autlH)rii!ati\\h\ic Corporations witliout Legislative Au- thority against Public Policy. II. Conferring and Withdrawal of Lrgidnlm Autliority § 19. Power of Lcgi-Hlature to authorize Consolidation. § 19 a. Authorization of Consolidation of Interstate Railroads not regulation of Interstate Commerce. § 20. Legislative Sanction — How expressed. § 21. Public Policy regarding Consolidation of Non-competing Railroads. § 22, What Railroads may consolidate — Statutory Provisions. § 23. What Corporations other than Railroads may consolidate — Statutory Provisions. § 24. Power of Legislature to withdraw or limit Right to consolidate — (A) In Absence of Reserved Power. § 25. Power of Legislature to withdraw or limit Right to consolidate — (B) In Exercise of Reserved Power. § 26. Power of Legislature to withdraw or limit Right to consolidate — (C) In Exercise of Police Power. III. Construction of Statutes authorizing Consolidation § 27. General Rules of Construction. § 28. Construction of Particular Statutory Provisions. § 29. Construction of Statutes authorizing Consolidation of Railroads — Connecting or Continuous LiM(w. § 30. Construction of Statutes authorizing Consolidation of Corporations other than Railroads. I. Necessity for Legislative Authority § 17. Consolidation without Legislative Authority ultra vires. '^— The charter of a corporation, read in connection with the general laws applicable to it, is the measure of its powers. The enumeration therein of the powers conferred implies the exclusion of other powers, and a corporation can exercise no authority not granted to it, expressly or by necessary im- plication, in its charter or other legislative act.' 'Central Transp. Co. v. Pullman "A charter being a contract giving Car Co., 139 U. S. 24 (1891), (11 Sup. a corporation all the powers which it Ct. Rep. 478). can exercise, any alteration which the 24 CHAP. Il] LEGISLATIVE AUTHOEITY FOR CONSOLIDATION §17 There is also said to be an implied contract, as well between the corporation and the State as between the corporation and its" stockholders, that its corporate property and franchises shall only be appropriated to uses authorized by its charter, and any acts of the corporation outside the limits so pre- scribed are ultra vires} Consolidation necessitates the em- barkation of corporate properties upon a new undertaking — a joint adventure instead of an individual enterprise — and is ultra vires unless authorized by legislative authority.^ In so far, also, as consolidation involves the creation of a corporation desires to make therein must in the first place have the sanc- tion of the legislature.'' Green's Brice's Ultra Vires (2d ed.), 632. > Black V. Delaware, etc. Canal Co., 24 N. J. Eq. 465 (1873) ; Abbott v. Johnston, etc. Horse R. Co., 80 N. Y. 27 (1880), (36 Am. Rep. 572). ' In Pearce v. Madison, etc. R. Co., 21 How. (TJ. S.) 442 (1858), Mr. Jus- tice Campbell said: "The rights, duties, and obligations of the de- fendants are defined by the acts of the Legislature of Indiana under which they were organized, and refer- ence must be had to these to ascertain the validity of their contracts. They empower the defendants respectively to do all that was necessary to con- struct and put in operation a rail- road between the cities which are named in the acts of incorporation There was no authority of law to con- solidate these corporations and to place both under the same manage- ment, or to subject the capital of the one to answer for the liabilities of the other." See also New York, etc. Canal Co. V. Fulton Bank, 7 Wend. (N. Y.) 412 (1831) ; Blatchford v. Ross, 54 Barb. (N. Y.) 42 (1869) ; Greenville Com- press, etc. Co. V. Planters' Compress, etc. Co., 70 Miss. 669 (1893), (13 So. Rep. 879; 35 Am. St. Rep. 681); Kavanaugh v. Omaha Life Assn., 84 Fed. 295 (1897) ; Home Friendly Soc. V. Tyler (Com. PL), 9 Pa. Co. Ct. Rep. 617 (1891). Overstreet v. Citizens Bank, 12 Okl. 383 (1903), (72 Pac. Rep. 379) ; Jones v. Missouri Edison Electric Co., 135 Fed. 153 (1905), (reversed on other points 144 Fed. 775 (1906)), Re Era Ins. Soc, 30 Law J. Eq. (N.s.) 137 (1860), (6 Jur. (n.s.) 1334, 9 Wkly. Rep. 67). In Clinch V. Financial Corp., L. R. 4 Ch. App. 117 (1868), it was held that an ar- rangement for amalgamation by which UabiUties were imposed on the stockholders was void as ultra vires and semble that such an arrangement would be void, even if only the share- holders who assented to it were bound by it. Many of the railroad cases cited in note to § 18 post, while illustrat- ing the principle that franchises may not be transferred without legislative sanction upon grounds of public policy, also support the principle stated in the text, appUcable to all corporations, that an unauthorized consohdation is ultra vires. Religious corporations have no common law right to consoUdate, although they may do so under a consolidation statute broad enough to cover them. A single member of the corporation may maintain an action to set aside such an agree- ment as ultra vires. And the ultra vires act cannot be defended upon the ground that it is advantageous. Davis V. Cong. Beth Tephilas Israel, 57 N. Y. Supp. 1015 (1899). 25 § 18 INTERCORPORATE RELATIONS [PABT I new corporation, legislative authority is as essential as it is to the creation of a corporation in the first instance. An attempt at the organization of a consoUdated corporation in the absence of a statutory provision for consoUdation does not even create a corporation de facto, since corporations de facto can only exist when there is a law under which they may be incorporated.' § 18. Consolidation of Quasi-public Corporations without Legislative Authority against Public Policy. — There is another principle, in addition to that of ultra vires, why a railroad company or other quasi-puhlic corporation^ cannot transfer its franchises to another corporation, through the process of consolidation, without the sanction of the legislature which granted them. That principle is, that where such a corpora- tion has had granted to it by its charter franchises and privi- leges to enable it to provide facilities for the benefit of the public, it assumes the due performance of those functions as the consideration of the grant, and any contract or ar- rangement which disables it from performing them — which undertakes, without the consent of the State, to transfer to others the rights and powers conferred by the charter and to relieve the grantee of the burden imposed — is a violation of the contract with the State and against public policy.' An at- ' American Loan, etc. Co. v. Minne- corporation. Being thus at once a sota, etc. R. Co., 157 111. 641 (1895), public corporation existing for pri- (42 N. E. Rep. 153). See" Irregular and vate gain and a private corporation Invalid Consolidations,'' ch. IX, post. owing public duties, » railroad com- ^ It is generally held that a railroad pany is called, with propriety, a quasi- company is a gMosi-public corpora- public corporation. See United tion. The State grants it extraordi- States v. Trans-Missouri Freight nary powers — the right to condemn Aas'n., 166 U. S. 321 (1897), (17 Sup. lands and take tolls for the public Ct. Rep. 540) ; Black v. Delaware, etc. benefit. In accepting its charter it Canal Co., 24 N. J. Eq. 469 (1873) ; assumes obligations to the State and Chicago, etc. R. Co. v. Wabash, etc. to the public, and to that extent is a R. Co., 61 Fed. 997 (1894). In public corporation. (Peoria, etc. R. Pierce v. Commonwealth, 104 Pa. St. Co. i). Coal Valley Mining Co., 68 111. 155 (1883), however, it was denied 489 (1873)). On the other hand the that a railroad company is a quasi- stockholders furnish the means for the public corporation, and it was said construction and equipment of the to be "a private corporation and railroad, and are entitled to the profits nothing more." derived from its operation. To this ' Thomas v. Railroad Co., 101 U. S. extent, a railroad company is a private 71 (1879). 26 CHAP. Il] LEGISLATIVE AUTHOHITT FOR CONSOLIDATION 19 tempted consolidation, therefore, without legislative sanction, is opposed to public policy and void.* An unauthorized consolidation of corporations owing public duties is also invahd as involving a delegation of corporate powers.^ II. Conferring and Withdrawal of Legislative Authority § 19. Power of Legislature to authorize Consolidation. — So far as the pubhc rights are concerned, the power of the legis- lature to authorize a consolidation of corporations is, in the absence of special constitutional restrictions, unquestioned.' The State has the same power to authorize several existing corporations to associate together and organize themselves into a new corporation as it has to incorporate individuals.* It has been held, however, that corporations are not such "persons" as may themselves form corporations.^ As a consolidated corporation becomes a new and distinct state, 75 Tex. 434 (1889), (12 S. W. Rep. 690) ; Gulf, etc. R. Co. v. NeweU, 73 Tex. 334 (1889), (11 S. W. Rep. 342; 15 Am. St. Rep. 788) ; Missouri Pac. R. Co. V. Owens, 1 White & W. Qvil Cas. Ct. App. | 385 (1883). England: Charlton v. Newcastle, etc. R. Co., 5. Jut. (n. s.) 1096 (1859). The principle that the franchises of 5t«wi-public corporations cannot b? transferred by the process of consoli- dation applies equally to any form of transfer — sale or lease — and is sup- ported by cases referring to any form (see post, ch. XII, XVI. An attempt has been made, however, to classify the cases under their distinctively ap- propriate heads. = See post, ch. XII : "Sales of Cm- porate Franchises." ' Clearwater v. Meredith, 1 Wall. (U. S.) 39 (1863) ; Black v. Delaware, etc. Canal Co., 24 N. J. Eq. 455 (1873). * State Treasurer v. Auditor Gen- eral, 46 Mich. 233 (1884), (9 N. W. Rep. 258). " Factors, etc. Ins. Co. i). New. Harbor Protection Co., 37 La. Ann. 233 (1885). See also post, § 266. 27 ' United States: Clearwater v. Meredith, 1 Wall. 39 (1863) ; Shields V. Ohio, 95 U. S. 322 (1877) ; Louis- ville, etc. R. Co. V. Kentucky, 161 U. S. 677 (1896), (16 Sup. Ct. Rep. 714). Illinois: American Loan, etc. Co. V. Minnesota, etc. R. Co., 157 111. 641 (1895), (42 N. E. Rep. 153). Indiana: State v. Bailey, 16 Ind. 46 (1861), (79 Am. Dec. 405) ; Shelby- ville, etc. Tiumpike Co. v. Barnes, 42 Ind. 498 (1873); State v. Beck, 81 Ind. 500 (1882) ; CraWfordsville, etc. Turnpike Co. v. State, 102 Ind. 435 (1885), (1 N. E. Rep. 864). Mississippi : Adams v. Yazoo, etc. R. Co., 77 Miss. 194 (1899), (24 So. Rep. 200, 60 L. R. A. 33n) ; affirmed, 180 U. S. 1 (1901), (21 Sup. Ct. Rep. 240). New Jersey: Black v. Delaware, etc. Canal Co., 24 N. J. Eq. 455 (1873) ; Mills V. Central R. Co., 41 N. J. Eq. 1 (1886), (2 Atl. Rep. 453). Pennsylvania : Lainnan v. Lebanon Valley R. Co., 30 Pa. St. 42 (1858), (72 Am. Dec. 685). Texas: East Line, etc. R. Co. v. §19 INTBHCOEPORATE RELATIONS [PAET I corporation, a special statute authorizing consolidation con- travenes a constitutional provision against the creation of corporations by special act.^ For the same reason a consoU- dated corporation may be organized for the full statutory period irrespective of the terms of existence of the constituent corporations, and it cannot be objected that the consohdation in effect extends the existence of such corporations beyond the period fixed by law.^ The existence of an outstanding contract between a con- stituent corporation and an individual does not prevent the legislature from authorizing a consolidation upon the ground that the obHgation of such contract would be impaired, where the act of consohdation provides that the consoUdated com- > Shields v. Ohio, 95 U. S. 323 (1877): "If the argument of the learned counsel for the plaintiff in error be correct, the constitutional re- strictions can be readily evaded. Laws may be passed at any time, enacting that all the valuable fran- chises of designated corporations antedating the Constitution shall, upon their dissolution, voluntary or otherwise, pass to and vest in certain newly created institutions of the like kind. The claim of the inviolability of such franchises should rest on the same foundation as the alErmation in the present case. The language is broad and clear, and forbids a con- struction which would permit such a result. " A statute entitled "An act in rela- tion to gas companies" and authoriz- ing the consolidation of such com- panies in a certain city is not invalid because the title does not refer to the particular subject of consolidation, that being germane to its general subject. Nor is such a statute un- constitutional as granting a corpora- tion special privileges and franchises — it applying to all companies organized or to be organized in the particvdar territory. Nor is it in violation of a constitutional provision 28 that the charter of no corporation shall be amended or changed except by a general law — the consolidated corporation taking only the powers and privileges of its constituents. People V. People's Gas Light Co. 205 111. 482 (1903), (68 N. E. Rep. 950, 98 Am. St. Rep. 244). The Court said in this case regard- ing the point last stated; "Although the general rule is that the consolida- tion of several corporations into a new one invests the latter with all the rights and privileges of the several constituent companies, such is not the result of consolidation or merger under this statute." ^ The consolidated corporation be- comes a new and distinct corporation which may be organized for the term of fifty years, irrespective of the term of existence of the constituent cor- porations, and it cannot -be objected to the consolidation that it has the effect to extend the existence of the constituent corporations beyond the period of fifty years fixed for each of them. Market St. R. Co. v. HeUman, 109 Cal. 571 (1895), (42 Pac. Rep. 225). See also New York Central etc. R. Co. V. City of Yonkers, lOa N. Y. Supp. 252 (1907). CHAP. Il] LEGISLATIVE AUTHORITY FOR CONSOLIDATION § 19a pany shall assume and discharge the liabilities of the con- stituent corporations. In such a case it was said by the Supreme Court of the United States that "proper care was taken by the legislature to protect the rights of these com- plainants by incorporating into the act uniting the two col- leges a provision that the new corporation should discharge and perform those liabilities without diminution or abate- ment. Such contracts were made with the trustees, and not with the State, and it is a mistake to suppose that the ex- istence of such a contract between the corporation and an individual would inhibit the legislature from altering, modi- fying, or amending the charter of the corporation by virtue of a right reserved to that effect, or with the assent of the corporation, if in view of all the circumstances the legislature should see fit to exercise that power." ^ In a still earlier case it was intimated by the same Court that a consolida- tion might be authorized without special provision being made for the creditors of the constituent companies.^ § 19 a. Authorization of Consolidation of Interstate Railroads not Regulation of Interstate Commerce. — The fact that a railroad company engages in interstate commerce does not affect its status as a State corporation. Its one source of cor- porate power is the State which created it. Authority for its consolidation with domestic or foreign railroad corporations can be obtained from the State alone. While Congress might prevent, it could not authorize such a consolidation.' State ' Pennsylvania College Cases, 13 him in a worse position in regard to Wall. (U. S.) 222 (1871). his demand. The means of payment ' Smith V. Chesapeake, etc. Canal possessed by the old company are Co. 14 Pet. (U. S.) 48 (1840) : "There carefully preserved and, indeed, guar- can be no doubt that the States of anteed by the new corporation. And Virginia and Maryland in granting the if the fact cau bo established, which charter of the Chesapeake and Ohio is denied by the defendants, that Canal Company had the power to some bona fide creditors of the Poto- authorize a surrender of the charter of mac Company were unprovided for in the Potomac Company, with the con- the new charter, and consequently sent of the stockholders ; and to liave no redress against the defendant, make tlie provision which they did it does not follow that they are with- make for the creditors of the com- out remedy." pany. This assignment does not im- 'The authorization of consolidation pair the obligation of the contract of and its prohibition stand upon essen- any creditor of the company, nor place tially different grounds. In the one 29 § 19a INTERCORPORATE RELATIONS [PART I consolidation statutes although applying to interstate railroads are not regulations of interstate commerce in violation of the federal Constitution. They relate rather to the instrumentali- ties of commerce than to commerce itself. In Louisville, etc. R. Co. v. Kentucky,^ the Supreme Court of the United States said: "It has never been supposed that the dominant power of Congress over interstate commerce took from the States the power of legislation with respect to the instruments of such commerce, so far as the legislation was within its ordinary police powers. Nearly all the railways in the country have been constructed under State authority, and it cannot be supposed that they intended to abandon their power over them as soon as they were finished. The power to construct them involves necessarily the power to impose such regulations upon their operation as a sound regard for the interests of the public may seem desirable. In the division of authority with respect to interstate railways Congress reserves to itself the superior right to control their commerce and forbid interference therewith; while to the States remains the power to create and to regulate the instruments of such commerce, so far as necessary to the conservation of the public interests." ^ While the States alone can authorize State corporations to consolidate it does not follow from the decision in the Louisville case that they have exclusive power over corporations as instru- ments of interstate commerce. Congress, undoubtedly, has power to provide that interstate railroads shall be operated solely by federal corporations. Such an enactment while leaving in the State full authority over its corporations would take away their character as instruments of interstate commerce. The power of the State to authorize the consolidation of the case the powers of a State corpora- ^ The fee required for Eiing cer- tion are extended ; in the other, inter- tificates of the consolidation of inter- state commerce is kept free from the state railroad corporations is not effects of combination. See post, § a tax upon the right to engage in 38, "Prohibition of Consolidation of interstate commerce, but upon the Competing Railroads not Regulation of right to incorporate. Interstate Commerce." Chicago, etc. R. Co. v. State, ' Louisville etc. R. Co. v. Ken- 153 Ind. 134 (1899), (51 N. E. Rep. tucky, 161 U. S. 677, 702 (1895), (16 924). Sup. Ct. Rep. 714). 30 CHAP. Il] LEGISLATIVE AUTHORITY FOR CONSOLIDATION §20 corporations would remain but they could not operate interstate railroads. But in absence of adverse federal legislation both the powers of the State corporation and of the State itself are unaffected.^ § 20. Legislative Sanction — How expressed. — Legislative approval of consolidation may be expressed in various ways. A grant of power to consolidate contained in the charters of the constituent corporations or in general laws passed prior to their incorporation furnishes undoubted authority.^ Acts passed subsequent to the incorporation of the companies but prior to their consolidation are, subject to constitutional objections to be hereafter noticed,' sufficient.* It is not essential that authority should be granted before consolidation. The legislature can validate after the fact that which it may authorize in the first instance, and a subsequent act ratifying an informal consolidation has the same effect as ' In Boardman ■». Lake Shore, etc. R. Co., 84 N. Y. 185 (1881) State legislation authorizing the consoli- dation of railroad corporations of adjoining States was held not to be a regulation of interstate commerce in violation of the commerce clause. The ground upon which the decision was placed was that, in the absence of action by Congress, the States have power to enact such legislation — that not the power in Congress, but its exercise, is inconsistent with the exercise of the same power by the State legislatures. The Court said: "There is, we think, no force in the position that the acts of the legislatures of the several States through which the railroads run, so far as they relate to or authorize the consolidation in the adjoining States are in viola- tion of subdivision 3 of section 8 of the first article of the Constitu- tion of the United States which confers upon Congress the power to regulate commerce with foreign na- tions and with the several States. It is not claimed that Congress has legislated in respect to the subject, or assunlfed to exercise the power con- ferred by the Constitution, and it has not yet been decided that the provision cited requires that the power conferred should be exercised by Congress alone and is taken away entirely from the control of the State legislatures. The conclusion, there- fore, is inevitable that in the absence of such legislation by Congress the power exists in the State to legislate upon the subject." This language can only be justified upon the broad ground stated in the text that Congress having the paramount power over the whole subject of interstate railroads may create its own instrumentalities and thereby deprive State statutes of effective force. It cannot be justi- fied upon the ground that Congress has the superior right — or any right whatever — to authorize the consolidation of State corporations. ' Fisher v. Evansville, etc. R. Co., 7 Ind. 407 (1856). 2 Post, § 43. * Sparrow v. Evansville, etc. R. Co., 7 Ind. 369 (1856). 31 §21 INTERCORPOEATE RELATIONS [part 1 a prior grant of power.' Express ratification is not neces- sary. Recognition by tlie legislature of the consolidated cor- poration cures any defect arising from the want of legislative authority to consolidate.^ Legislative recognition amounts to legislative ratification. General statutes authorizing the con- solidation of corporations are, however, not retroactive and do not apply to consolidation agreements made prior to their enactment.' § 21. Public Policy regarding Consolidation of Non-compet- ing Railroads. — Although authority to amalgamate has been granted, by special act, to railroad companies in England, it may be said that the public policy of that nation, as mani- fested by acts of Parliament and by the appointment of parlia- mentary committees to investigate the subject, is opposed to the consolidation of such companies.^ In America, however, the pubhc policy of nearly all the States, as indicated by .the enactment of general consolida- tion acts, is in favor of the consolidation of non-competing ' Mitchell -u. Deeds, 49 111. 416 {1867), (95 Am. Deo. 621) : "The legislature has the same power to ratify and confirm an irregularly organized corporate body that they have to create a new one. And by the act confirming the consolida- tion before then entered into, the corporate body which was organized in accordance with the act of con- solidation, became legal, notwith- standing such organization may have been irregular." See also Racine, etc. R. Co. v. Farmers Loan, etc. Co., 49 111. 331 (1868), (95 Am. Dec. 595). Bishop V. Brainerd, 28 Conn, 289 (1859). ' The passage of a legislative act "whereby the existence of a consoli- dated corporation is expressly recog- nized is a ratification of and legalizes the consolidation. Louisville Trust Co. V. Louisville, etc. R. Co., 75 Fed. 433 (1896). See also United States V. Southern Pac. Co., 45 Fed. 596 (1891); Mead v. New York, etc. R. Co., 45 Conn. 199 (1877) ; Atlantic, 32 etc. R. Co. V. St. Louis, 66 Mo. 228 (1877) ; McCauley v. Columbus, etc. R. Co., 83 111. 352 (1876). ' Hatcher v. Toledo, etc. R. Co., 62 111. 480 (1872) : "The law is not retrospective in terms and cannot be made so by any fair construction. ... It is manifest that this act was intended to apply to companies which might effect a consolidation after its passage.'' * One ground of objection is indi- cated in East Anglian R. Co. v. Eastern Counties R. Co., 11 Com. B. 812 (1851) : "The pubUc also has an interest in the proper administration of the powers conferred by the act. The comfort and safety of the line may be seriously impaired if the money supposed to be necessary and destined by Parliament for the maintenance of the railway, be ex- pended in other undertakings not contemplated when the act was ob- tained and not expressly sanctioned by the legislature." CHAP. Il] LEGISLATIVE AUTHORITY FOR CONSOLIDATION § 22 railroad corporations. The Court of Appeals of New York has said that "whatever may be the rule in other States or in England, the public policy of this State, as manifested by numerous acts of the legislature, has always been not only to afford the fullest scope for the consolidation and reorganiza- tion of non-competing railroads and railroad corporations, but also for the transfer of the use of such roads and their fran- chises by one corporation to another." ' It has, also, been said in regard to the Illinois statutes authorizing consolidation and their construction by the courts of that State that "great encouragement has been given to the union of lines of rail- road for the purpose of having them operated under some general management, the result of which has been the con- solidation of many lines of road which were originally separate and distinct, but which are now operated under a uniform system." ^ The public policy of Illinois has, however, been adverse to the consolidation of domestic railroad companies with those of other States.' § 22. What Railroads may consolidate — Statutory Provi- sions. — Nearly all the States have general railroad consohda- tion statutes, of which an abstract is printed in the subjoined note.* ' Woodmff V. Erie R. Co., 93 N. Y. act shall be so construed as to au- 615 (1883). thorize any corporation acting by or ' Dimpfel v. Ohio, etc. R. Co., organized under the laws of any 9 Biss. (U. S.) 127 (1879), (8 Rep. other State to purchase or otherwise 641, 7 Fed. Cas. 722). become the owner of any railroad ' In American Loan, etc. Co. v. in this State." Minnesota, etc. R. Co., 157 111. 641 * Alabama. Civil Code 1896, oh. (1895), (42 N. E. Rep. 153), the Su- 28, § 1166 (as amended by acts 1900- preme Court of Illinois said: "This 01, p. 237): "Whenever the lines of legislation taken in connection with any two or more railroads, or con- the specific repeal of the act of 1854 templated railroads, chartered under seems to indicate a legislative public the laws of this or any other State policy adverse to the consolidation which, when completed, may admit of railroad companies organized under passage of cars over any two or more the laws of this State with railroad of such roads continuously without companies formed in other States. break or interruption," such com- And the same general policy seems panics may consolidate, to be denoted by the proviso to the Arizona. Rev. Stat. 1901, par. act approved March 30, 1875. . . . 864 : Railroad corporations shall have The proviso is, that nothing in that power "to consolidate with one or 33 §22 INTERCORPORATE RELATIONS [part I These statutes, as a general rule, provide only for the con- solidation of corporations owning connecting or continuous more corporations formed under this title, or under the laws of any other State or Territory." Arkansas. Kirby's Dig. 1904, § 6735: "Any two or more railroad companies in this State . . . owning railroads . . . which . . form one continuous line of railroad, continu- ing and running in the same general direction are hereby authorized to consolidate their stock and make joint stock with any connecting rail- road company whether within or without this State, and form one company, owning and controlling such continuous line of road." Sections 6740 and 6741 provide for the consolidation of domestic cor- porations with those of an adjoining State making a "continuous line." See also *. § 6752. California. Pomeroy's CSvil Code 1901, § 473: "Any railroad com- pany incorporated under the laws of this State miay consolidate with one or more railroad companies incorporated under the laws of this Slate, or under the laws of any other State or Terri- tory of the United States." Colorado. Mill's Anno. Stat., § 604: "Any railroad company . . of this State whose . . road is made . . . to the boundary line of the State, or to any point either in or out of the State" may merge and consolidate with "any railroad company or com- panies ... of any adjoining State or Territory whenever the two or more railroads of the companies or corporations . shall or may form a continuous line of railroad with each other or by means of an inter- vening railroad." Connecticut. Gen. Stat. 1902, § 3674 : "Any railroad corporation incorporated under the laws of this Stat« for the purpose of building and operating railroads within this 34 state extending to or beyond the boundary line of this State may con- solidate . . . with . . . any other incorporated railroad company whose line of road ... is situated wholly outside this State." Delaware. Laws 1903 (Corp. Law), § 91: "Any railroad of this State" may "consolidate with any other rail- road company incorporated under the laws of this State, or any other State of the United States, whose railroads within or without this State shall connect, or form a continuous line, with the railroad of the company so consolidated. " For other railroad consohdation statutes see Laws 1903 (Corp. Law), § 123. Florida. Gen. Stat. 1906, § 2812: "Any railroad . . in this State shall have the power ... to make and enter into contracts with any railroad . . which has constructed or shall hereafter construct any rail- road . . within this State or in another State, as will enable said companies to run their road in con- nection with each other, and to merge their stock, or to consolidate with any company within or without this State. " Georgia. Code 1895, vol. 2, § 2179 : "Any railroad company incorporated under the provisions of this article shall have authority . . to consoli- date the same with those of any other railroad company incorporated under the laws of this or any other State of the United States whose railroad within or without this State shall connect with or form a continuous line with the railroad of the company incorporated under this law upon such terms as may be agreed upon." See also Code, § 2173. Idaho. Code 1901, § 2178: "Anj such railroad corporation [chartered CHAP. Il] LEGISLATIVE AUTHORITY FOR CONSOLIDATION §22 lines of railroad, although a varying phraseology is employed in expressing the legislative intention. The reason for pro- by or organized under the lawa of this State, or of any State or Territory or under the laws of the United States, and authorized to do business in this State], may consolidate its stock with any other railroad corporation whether witWn or without the State, when such other railroad corporation Hoes not own any competing line of railroad. " Illinois. Kurd's Rev. Stat. 1901, p. 1376, § 39 : "Whenever any rail- road which is situated partly in this State, and partly in one or more other States; and heretofore owned by a corporation formed by consolidation of railroad corporations of this or any other States, has been sold pursuant to the decree of any court . . . and the same has been purchased as an entirety, and is now, or . . may be held in the name or as the property of two or more corpo- rations, incorporated respectively under the laws of two or more of the States in which said railroad is situated, it shall be lawful for the corporation so created in this State to consolidate . with the corporation or corporations of such other State or States. . . Pro- vided, that no consolidation shall take place with any railroad owning a par- allel or competing Une." For act ratifying existing consoli- dations and mergers see Laws 1907, p. 473. Indiana. Bums' Anno. Stat. Rev. 1901, § 5215 : "Any railroad com- pany incorporated under the pro- visions of this act shall also have power to consolidate with other railroad corporations in a continuous line either within or without this State upon such terms as may be agreed upon by the corporations owning the same." This act does not permit consolidation with other Indiana railroads equipped and in operation. For statutes permitting consolida- tion generally of steam, or electric railroads see ib. §§ 5257, 5268, 5262. See also § 54681. Iowa. Code 1897, § 2036: "Any corporation organized under the laws of this State for the purpose of con- structing and operating a railway may join, intersect, and unite its railway with that of any other corporation at such point upon the boundary line of this State as may be agreed upon, and . . . may merge and consoli- date the stock, property, franchises, and liabilities of such corporations, making the same one corporation upon such terms as may be agreed upon not in conflict with the law." Kansas. Gen. Stat. 1906, § 6325: ' ' Any two or more rai Iroad compani es in this State, existing under general or .special laws, and owning connect- ing lines of railroad in this State . and any railroad organized as afore- said and any railroad company duly organized and existing under the laws of any other State or Territory, whose lines of railroad shall connect at the State line ' ' may consolidate. Kentucky. Stat. 1903, ch. 32: "Any two or more railroad com- panies . . of this or any other State may . . . consolidate into a single company in the manner provided by article one of this chapter as amended. " Louisiana. Const, and Rev. Laws 1904, p. 1486 : "Any rdilroad com- pany or companies organized under the laws of this State, ..general or special, shall have the right and power to consolidate with any railroad com- pany or companies organized under the laws, general or special, of any other State and form thereby a new corporation. ..." 35 §22 INTEHCORPORATE RELATIONS [part I visions of this character is that the creation of the through line conduces to the public convenience and welfare by in- Lomsiana. Const, and Rev. Laws 1904, p. 1484: "Every railroad cor- poration in this State whether created under a general or special law, or existing by virtue of a charter or law of this or any other State," may consolidate with "any other railroad corporation of this or any other State whose road shall connect with or intersect the road of such railroad corporation or any branch thereof." lb. p. 1487 authorizes the consoli- dation of street railway companies. Maine. Rev. Stat. 1903, § 30, p. 531. No railroad corporation can assign its charter or any rights under it; lease or grant the use or control of its road or any part of it, or divest itself thereof, without the consent of the legislature. But these provi- sions are not to be construed to prevent contracts between corporations allow- ing the trains of one to run over the road of another, both corporations assenting thereto. Maryland. Pub. Gen. Laws, § 265, p. 650 : "Any railroad company . of this State" may "consolidate with any other railroad company incor- porated under the laws of this or any other State, or of the United States, whose railroad within or without this State shall connect with or form a continuous line with the railroad of the company so consolidating." lb. § 278, p. 656: "Any railroad company incorporated under the three preceding sections shall have power to sell, lease, assign or traiLsfer its stock, property and franchises to, or to consolidate the same with those of any other railroad corn- pany ... of this or any other State, or of the United States, whose rail- road within or without this State shall connect with or form a continuous line with the railroad of the Company incorporated under said sections." 36 Massachusetts. Supp. to Rev. Laws, 1902-06, p. 579, § 67: "A lease or purchase and sale of the franchise and property of a railroad corporation, or street railway com- pany, and a consolidation of two or more railroad corporations, or street railway companies, whether author- ized by general laws or a special act shall not be binding until ... ap- proved by board of railroad com- missioners. . . . "Said board shall annoimce its decision within thirty days after the final hearing upon the application . for permission to lease or sell to, consolidate with or purchase the franchise and other property of, any other railroad corporation or street railway company." Michigan. Pub. Acts 1899, p. 450, § 29 : "Any railroad company in this State forming a continuous or con- necting line with any other railroad company, may consolidate with such other company, either in or out of this State, or partly within or partly without this State." Minnesota. Rev. Laws 1905, § 2897 : "Any domestic or foreign rail- road corporation . . . may consoU- date its stock and franchises with any other railroad corporation whose lines of railroad . . within or with- out this State can be lawfully con- nected and operated with such first named corporation, so as to consti- tute one continuous main line, . . . and admit of the passage of trains over them without break or inter- ruption, and may become one cor- poration under any name selected by them." Mississippi. Code 1906, § 4079: "Every railroad corporation organized under the provisions of this chapter shall have and exercise the follow- ing powers: (§ 4089) To consolidate CHAP. U] LEGISLATIVE AUTHORITY FOR CONSOLIDATION 22 creasing facilities for travel and permitting lower rates, while the combination of separate and disconnected roads would with any other railroad company in or out of this State, with the con- sent of the railroad commission, upon such terms as the consolidating com- panies may agree upon; but a con- solidation shall not be made with a parallel or competing road." Missouri. Anno. Stat. 1906, § 1059: "Any two or more railroad companies in this State, existing under either general or special laws, and owning railroads wholly or in part which, when completed and connected, will form in whole or in the main, one continuous line of railroad," are authorized to con- solidate. lb. § 1060 provides for furnishing aid to and consolidating with con- necting railroads. Montana. Civil Code 1895, vol. 2, § 911: "Any two or more railroad corporations whose respective lines, not being parallel or competing lines, are wholly or partly within this State, whether chartered by or organized under the laws of the State or Terri- tory of Montana or of the United States, or of any other State or Ter- ritory, when their respective lines of road, or any branch thereof, so connect within this State that they may operate together as one prop- erty, may consolidate." 75. § 890: "Any railroad cor- poration . . . may consolidate with any road not a parallel or competing Une." lb. § 923 provides for consolida- tion of domestic with domestic or foreign railroads. Nebraska. Comp. Stat. 1905, §2023, p. 528: "Whenever the lines of rail- road of any railroad companies In this State, or any portion of such lines, have been or may be con- structed, so as to admit passage of burden or passenger cars over any two or more of such roads continu- ously, without break of gauge or interruption," such companies may consolidate. Nevada. Comp. Stat. (1861-90, Cutting), § 1011: "Two or more railroad companies" may "amal- gamate and consolidate their capital stock, debts, property, assets, and franchises." New Hampshire. Pub. Stat. 1901, eh. 156, § 22 (p. 503): "If two or more railroad corporations at meet- ings of their respective stockholders . . . have agreed by a two-thirds vote of the stock represented and voting at such meetings, to unite and form a single corporation," a petition is presented to the Supreme Court to see whether the public good will be promoted by such a union, and if the court determine that the public good requires it, the other conditions being complied with, it shall authorize the union to be made. New Jersey. Laws 1906, ch. 141, § 2: "Any railroad company of this State may lease its road, or any part thereof, to any other railroad com- pany of this or any other State, or may take a lease of the road, or any part thereof, of any other railroad company of this or any other State, or may unite and consolidate as well as naerge its stock, .property, fran- chises and road with those of any other company or companies of this or any other State, or may do both, , . . ; such leasing or consolidation may be made where the roads of the said companies connect either directly or over the intervening line of one or more" other railroad com- panies; no such lease, union, con- solidation or merger shall take effect until the parties thereto file in the office oi the Secretary of State an agreement surrendering to the State 37 §22 INTERCORPORATE RELATIONS [part I not only serve no public purpose but might tend to prevent competition. all rights of exemption and contract privileges with respect to taxation, and reserving to the State any exist- ing right to take the property of any of the parties." New Mexico. Comp. Laws 1897, § 3892: "Any railroad company . organized under the law of this Territory or of this Territory and any other Territory or State . . . oper- ating . . either wholly within or partly within and partly without this Territory," may consolidate ' with "any other railroad company or companies organized under the laws of this Territory, or under the laws of this Territory and any other Ter- ritory or State whenever the two or more railroads . . . shall or may form a continuous line of railroad with each other, or by means of an intervening railroad, bridge, or ferry." New York. Birdseye's Rev. Stat. 3d ed., p. 2961 (Railroad Law § 70) : "Any railroad or other corporation, organized under the laws of this State, or of this State and any other State, and owning or operating a railroad . . . either wholly within or partly within and partly without the State, or whose lines or routes of road have been lo- cated but not constructed, may merge and consolidate its capital stock, fran- chises, and property with the capital stock, franchises, and property of any other railroad . . corporation or corporations organized under the laws of this State, or of this and any other State, or under the laws of any other State or States, whenever the two or more railroads of the com- panies or corporations, so to be con- solidated, ... or branches of any part thereof, or the line or routes of their roads if not constructed, shall or may form a continuous or con- nected line of railroad with each other 38 or by means of an intervening rail- road bridge, tunnel, or ferry." 76. (Railroad Law, § 80) p. 2966: "No railroad corporation or corpora- tions owning or operating railroads whose roads run on parallel or com- peting lines, except street surface railway corporations, shall merge or consolidate or enter into any contract for the use of their respective roads or lease the same, the one to the other, unless the board of rail- road commissioners of the State or a majority of such board shall consent thereto." North Dakota. Rev. Codes 1899, § 2954: "Any railroad corporations, organized and existing under the laws of the Territory of Dakota or State of North Dakota or existing by consolidation of different railway companies under the laws of such Territory or State, and of any other Territory or State, may consolidate . . . with any other railroad cor- poration, whether within or with- out the State, when their respective railroads can be lawfully connected and operated together to constitute one continuous main line." Ohio. Bates Anno. Stat. (1787- 1906), § 3379: "When the lines of road of any railroad companies in this State, or any portion of such lines, have been or are being so con- structed as to admit the passage of burthen or passenger cars over any two or more of such roads contin- uously, without break or interruption, such companies may consolidate." Ih. § 3380: "A company organ- ized in this State . . . whose line of road is made or is in process of construction to the boundary line of this State, or to any point either in or out of this State, may consoli- date . . . with . . . any company In an adjoining State . . . whose line CHAP. Il] LEGISLATIVE AUTHORITY FOB CONSOLIDATION §22 With few exceptions these statutes permit corporations of the State to consolidate with corporations of other States own- of road has been projected ... or is in process of construction, to the same points when the several roads so united or constructed will form a continuous line for the passage of cars." lb. 3380a authorizes a corporation formed by consolidation to further consolidate. Oklahoma. Rev. and Anno. Stat. 1903, § 99, p. 360: "Any railroad corporation may consolidate its stock, franchises, and property with any other railroad corporation, whether within or without the Territory, when their respective railroads can be lawfully connected and operated together to constitute one continuous main line with or without branches." Oregon. Bellinger & Cotton's Anno. Codes and Stat. (1902), § 5056: "Any two or more railroad companies whose lines are connected may perfect any arrangement for their common benefit to assist and promote the object for which they were created." Pennsylvania. Bright. Purd. Dig. 1894, § 107, p. 1801: "It shaU be lawful for any railroad company char- tered by this commonwealth to merge its corporate rights . . . into any other railroad company so chartered, connecting therewith." lb. § 114, p. 1803: "Any railroad company or corporation, organized under the laws of this commonwealth, and operating a railroad, either in whole within, or partly within and partly without this State," may "merge and consolidate . . . with any other railroad company or com- panies or corporations organized and operated under the laws of this or any other State, whenever the two or more railroads . . . shall or may form a continuous line of railroad with each other, or by means of an intervening railroad," lb. § 126, p. 1805: "Any rail- road company or corporation duly organized xinder the laws of this State . . . operating a railroad either wholly or partly within and partly without this State," may "consoli- date . . . with any other railroad companies or corporations organized under the laws of this or any other State, whenever the two or more railroads of the companies or corpora- tions . . . shall or may form . . a continuous line of railroad with each other, or \ty means of any inter- vening railroad; and such consolida- tion may be effected in accordance with the laws of this commonwealth, and either under special or general statutes of other States." lb. § 182, p. 1814, authorizes con- solidation of particular railroads. South Carolina. Code 1902, § 2050: "Any railroad company ... of this State, operating a railroad whether wholly within, or partly within and partly without, this State," may "merge and consolidate . . . with any other railroad company or companies organized and operated under the laws of this or any other State, whenever two or more rail- roads of the companies . . . are con- tinuous or are connected with each other or by means of an intervening railroad." lb. § 2034: "Such company [rail- road] shall have full power and au- thority ... to purchase, lease, or consolidate with any other railroad or railroads in or out of this State in such manner and upon such terms as may be agreed between such rail- road companies." South Dakota. Rev. Code, § 494, p. 649: "Any company owning or operating a railroad within this State may extend its road into any other State or Territory, and may build, 39 22 INTERCORPORATE RELATIONS [part I ing connecting roads, as well as with other domestic railroad corporations. buy, lease, or be consolidated with any railroad or railroads in such other State or Territory." Tennessee. Code 1896, § 1522: "Every railroad corporation existing in this State . . or . .of any other State . . and having author- ity to operate and maintain a rail- road in this State, shall have power to consoUdate itself with any other railroad corporation, whose road shall connect with or intersect the road of such existing railroad cor- poration or branch thereof." lb. § 1532 also authorizes consoli- dation. Texas. Sayles' Texas Civil Stat. 1897 (Supp. to 1900), Art. 4531 : "No railroad company organized under the laws of this State shall coosoli- date . . with any railroad com- pany organized under the laws of any other State or of the United States." Utah. Laws 1901. ch. 26, § 6: "Any railroad company organized or existing under the laws of this State" may "merge or . . . con- solidate with any other railroad com- pany or companies organized or exist- ing under the laws of this or any other State or Territory or of the United States; provided that the lines of such companies shall not be compet- ing, but shall be substantially con- tinuous or connective, either by means of actual union of track or through the medium of any bridge, ferry, or line of railroad, leased." Vervmnt. Stat. 1894, § 3975: "When a railroad in this State" is ordered sold by decree or judgment of a court, "any railroad company in this State, whose railroad connects with that ordered to be sold, may purchase the same, and upon acquir- ing title to said railroad, consolidate it with its own railroad and make it a part thereof." 40 Virginia. Code 1904, § 1105b: "A railroad company shall have power: . . . (e) To consolidate or merge itself, purchase or lease the works, property and franchises, of any railroad company incorporated under the laws of this State or another State, or of this State and another, or other States, or under the laws of the United States, and to sell or lease its works, property, and franchises or any part thereof, to any other such corporation ... of this State; provided, however, that nothing in this act shall authorize or be con- strued to permit the purchase, lease, sale, consolidation or merger of the works, property or franchise of rail- roads competitive with it between points, both of which are in this State, or lines between the same ter- minal points, both of which are within this State, whether such lines be operated by the same or different motive power." Washington. Ballinger's Anno. Code 1897, §§ 4303, 4304: "Any railroad corporation chartered by or organized under the laws of the State, or of any State or Territory, or under the laws of the United States . . . may consolidate . . with any other railroad corporation, whether within or without the State, when such other railroad does not own any competing line." West Virginia. Code 1906, § 2346: "No railroad corporation, owning or operating a railroad wholly or in part within this State, shall consolidate its capital stock with any other railroad corporation owning a parallel . . . line, . . but any such railroad cor- poration whose line of railroad is made, or is in process of construc- tion," may consolidate with "any other corporation of this or of an ad- joining State, owning or operating a CHAP. Il] LEGISLATIVE AUTHORITY FOR CONSOLIDATION §23 The statutes, generally, contain provisions against the con- solidation of competing or parallel railroads. § 23. What Corporations other than Railroads may consoli- date — Statutory Provisions. — Statutes authorizing the con- solidation of private corporations and of other public service corporations than railroad companies have been adopted in many of the States. An abstract of them is printed in the footnote.^ line of railroad , . . wholly or partly within this or an adjoining State, and connected directly, or by means of an intervening railroad or railroads, in order to make a continuous line of railroad to be run and operated with- out change of cars, break of bulk or exchange of passengers or freight." "It shall be lawful for any rail- road company created under the laws of this State, or of this and any other State or States, to consolidate with any railroad or railroads in this State or other States." "Where two or more railroad com- panies have been heretofore incor- porated under, and by virtue of the laws of this State, for the construc- tion of two or more lines of railroad, which have been located or surveyed along the same line between any points and places, . . the Boards of Directors of said corporations" may "consolidate the capital stock of their respective companies, or . . . consoli- date different interests in the same road." Wisconsin. Sanborn's Stat. Supp. (1899-1906), vol. 3, § 1833, p. 919: "Any railroad corporation organized and existing under the laws of the Territory or State of Wisconsin, or existing by consolidation of different railway companies under said laws and the laws of any other Territory or Territories, State or States, may consolidate . . . with any other rail- road corporation whether within or without the State, when their respec- tive railroads can be lawfully con- nected and operated together to con- stitute one continuous main line, with or without branches." Wyoming. Rev. Stat. 1899, § 3202: "Whenever a line of railroad of any railroad company in this State, or any portion of said line, has been constructed so as to connect with any two or more of such roads," said companies may consolidate. lb. § 3206: "Any company own- ing or operating a railroad within this State may extend the same into any other State or Territory, and may . . . consolidate with any other railroad or railroads in such other State or Terri- tory, or with any other railroad in this State, and may operate the same." ' Alabama. Gen. Laws 1903, p. 132: "Any two or more existing corporations other than corporations having the right to condemn to their use rights of way and other easements over the property of others whether created by special acts or organized under the general incorporation laws of this State, may consolidate so as to form a single corporation. . . ." California. Stat, and Am'n'dts. to Codes 1905, p. 585, § 587a, author- izes the consolidation of corporations organized for "mining purposes." lb. p. 598, § 653i, authorizes con- solidation of "cooperative business associations." Colorado. Gen. Stat. 1891, § 628: "Any corporations existing for any of the purposes enumerated in this (general) act" may consolidate. 41 23 INTERCORPORATH RELATIONS [part I These statutes vary in their provisions and relate to many different kinds of corporations. As a general rule those relat- Connecticut. Pub. Acta 1903, oh. 194, § 75, provides that corporations "carrying on business of the same or a similar nature may merge or con- solidate." Delaware. Gen. Corp. Law 1903, § 59; "Any two or more corpora- tions organized . . . for the purpose of carrying on any business may consolidate. . ." Laws 1905, ch. 155, § 2, authorizes the consolidation of telegraph and telephone companies. Idaho. Rev. Stat. 1887, § 2804; "Any two or more such cor]>ora- tions (land and building) may unite and become incorporated in one body." Illinois. Starr & Curtis' Anno. Stat. 1903, Sujip. p. 129, providcH that it shall apply only "to corpora- tions of the sami! kind and engaged in the same gcnoral businoH.s and carry- ing on tiioir business in tlio same vicinity and that no more than two corporations now existing sliall be consolidated into one," under its provisions. lb. 1902 Supp. authorizes gas companies to consolidate. lb. vol. 1, p. 618, § 15, authorizes the consolidation of corporations with banking powers. Indiana. Burn's Rev. Stat. 1901, § 4G02. Bridge companies may by a vote of a majf)rity of its dircntorH consolidate with any other bridge companies of any other State having authority to construct a bridge at same point. lb. § 4790'. Plank, macadamized or gravel road companies may con- solidate. lb. § 4836. A hydraulic company may consolidate with any other hydraulic company in any cawe when; the hydraulic works form a continu- ous line. 4'2 lb. § 5423. River navigation com- panii'M may consolidate. Acts 1907, eh. 156, § 2. Eloctrio light and power company may merge with any hydraulic company whore purpose of merger is to u.se the water power, etc. of hydraidic company for generation of electricity. Iowa. Supp. to Vx>de 1902, § 1907b, authorizes the consolidation of build- ing and loan associations. Knv«ii!i. Gen. Stat. 1905, § 1414; "Any telegraph company ... of this State, may . . . unite or consolidate with any other company or compa- nies ... of any State. . . ." lb. § 1492. Any two or more building and loan a.ssooiations may consolidate. lb. § 1510. Bridge company of this State and one of adjoining State may consolidate wheie they have authority to build bridge ut same point. Kentucky. Acts 1902, ch. 58, § 2: "Any two or more corporations or- ganized under this charter, or the laws of this or any other State may con- solidiite into a single corporation." Louisiana. Rev. Laws 1904, p. 246; "Any two business and manu- facturing companies now existing under general or special law, whoso objects and business are, in general, of the same nature" may amalga- mate. Mninc. Uev. Stat. 1903, § 56, p. 443; "No corporation shall sell, lease or in any manner part with its franchises except with the consent of its stockholders at an annual or spe- cial meeting, the call for which shall giv(^ notice of the subject-matter of the proposed sale, lease or consolida- tion. All such sales, leases and con- solidations shall be made subject to the provisions of this and the eleven following sections. . . ." CHAP. Il] LEGISLATIVE AUTHORITY FOR CONSOLIDATION 23 ing to business corporations limit the right of consolidation to corporations of a particular kind, e.g., mining or manufacturing Maryland. Pub. Gen. Laws (1904), p. 552, § 45, authorize consolidation "when the corporators have been originally incorporated in whole or in part for the same purpose." lb. p. 673, § 327, authorizes the consolidation of telegraph companies Michigan. Laws of 1903, Art. 50, authorizes the consolidation of street railway, electric and gas light companies or any two thereof. Missouri. Anno. Stat. 1906, § 1334, provides that "any two cor- porations now existing . . whose ob- jects and business are in general of the same nature may amalgamate," but the statute applies "only to corpora- tions organized or created solely for manufacturing purposes." lb. § 1221 authorizes the consoli- dation of macadam, gravel and "plank road companies. lb. § 1262 authorizes the con- solidation of telegraph companies. lb. § 1353 authorizes the consoli- dation of bridge companies whose bridges connect. lb. § 1376 authorizes consolidation of building and loan associations. lb. § 7889 relates to the consolida- tion of insurance companies. Montana. Civ. Code 1895, § 527 : "It is lawful for two or more com- panies formed for mining pur- poses, which own or possess, mining claims or lands adjoining each other, or lying in the same vicinity, to con- solidate." lb. § 817 authorizes consolidation of building, loan and savings corpora- tion. lb. § 1015 relates to the consolida- tion of mining companies. Nevada. Stat. 1903, ch. 88, § 43: "Any two or more corporations or- ganized under the provisions of this act, or existing under the laws of this State, for the purpose of carrying on any kind of business, may consolidate into a single corporation which may be either one of said consolidating corporations, or » new corporation to be formed by means of such con- solidation." New Jersey. Corp. Act of 1896, § 104-109, provides that "any two or more corporations organized or to be organized under any law or laws of this State for the purpose of carry- ing on any kind of business of the same or a similar nature may merge or consolidate," but the provisions of the act do not apply to railroad, in- surance (except title insurance), banking, turnpike, or canal com- panies nor to savings banks, or other corporations intended to derive prof- its from the loan or use of money." New Mexico. Laws 1905, § 109 : "Any two or more corporations or- ganized under any law or laws of this territory for the purpose of carrying on any kind of business of the same or a similar nature may merge or con- solidate into a single corporation, which may be either one of said merg- ing or consolidating corporations, or a new corporation to be formed by means of such merger and consolida- tion." New York. Business Corp. Law (as amended), § 8 : "Any two or more corporations organized under the laws of this State for the purpose of carrying on any kind of business of the same or similar nature, which a corporation organized under this chapter might carry on, may con- solidate." Texas. Rev. Stat. 1895, Art. 651, subdiv. 9, authorizes the consolida- tion of corporations created for be- nevolent, charitable, educational and similar purposes. Utah. Rev. Stat. 1898, § 340: "Corporations of the same kind en- 43 § 24 INTERCOKPORATE RELATIONS [PART I companies, or to corporations organized for the purpose of carrying on business of the same or similar nature, and a few of the statutes require that such business shall be carried on in the same locality. § 24. Power of Legislature to withdraw or limit Right to con- solidate — (A) In Absence of Reserved Power. — It has been held that a grant of power to consolidate in the charter of a corporation constitutes a contract between the corporation and the State and that, in the absence of a reserved right to amend or repeal the charter, such power cannot be withdrawn or limited by subsequent legislation.' But this is not the correct rule. Provisions of this character in charters fall within the class of grants which, as observed by Mr. Justice Peckham in Bank of Commerce v. Tennessee,^ "do not partake of the nature of a contract, which cannot for that reason be in any respect altered or the power recalled by subsequent legisla- tion. When no act is done under the provision and no vested right is acquired prior to the time when it was repealed, the provision may be validly recalled, without thereby impairing the obligation." ^ The power, therefore, granted to a corporation to consolidate is a mere license, not resting in contract, which may be rendered gaged in the same general business in But in view of the later decision the same vicinity" may consolidate. of the Supreme Court of Arkansas Virginia. Code 1904, § llOSe : in St. Louis, etc. R. Co. v. Berry, 41 "Except as any merger or consolida- Ark. 509 (1883), this language must tion is prohibited by . . this act, be regarded as mere dicta and without any corporation . . of this State authority even in Arkansas. It was may merge or consolidate into a single never good law outside that State, corporation with any other corpora- ^ Bank of Commerce v. Tennessee, tion organized for the purpose of 163 U. S. 425 (1896), (16 Sup. Ct. Rep. carrying on the same or a similar 1113). business under the laws of this or any s Galveston, etc. R. Co. v. Texas, other State of the United States, or 170 U. S. 226 (1898), (18 Sup. Ct. under the laws of the United States." Rep. 603) ; Adams v. Yazoo, etc. R. » Zimmer v. State, 30 Ark. 680 Co., 77 Miss. 194 (1899), (24. So (1875); "The power here given the Rep. 200, 60 L. R. A. 33 n.), affirmed company to form a union or consoli- sub nom. Yazoo, etc. R. Co. v. Adams, dation with any other company was 180 U. S. 1 (1901), (21 Sup. Ct. Rep. a right secured by the inviolability of 240). See also Pearsall v. Great a contract between the State and com- Northern R. Co., 161 U. S. 646 (1896) pany, which could not be withdrawn (16 Sup. Ct. Rep. 705). or to any extent impaired by the State." 44 CHAP. Il] LEGISLATIVE AUTHORITY FOR CONSOLIDATION §24 inoperative by legislation enacted at any time before the cor- poration avails itself of the privilege granted; and such power exists in the legislature independent of any right reserved to amend or repeal the charter or of its police power. If power to consolidate, while unexecuted, is not a contract within the protection of the decision in the Dartmouth Col- lege case, a fortiori it is not, in itself, a vested right which the legislature may not take away or impair. Arrangements for consolidation made and carried into effect create vested rights, but the bare power to consolidate is not of that nature.' General power to consolidate authorizes the consolidation of competing Hnes of railroad, and constitutional and statutory provisions against consolidation in that form furnish the most ' In Pearsall v. Great Northern R. Co., 161 U. S. 672 (1896), (16 Sup. Ct. Rep. 705), Mr. Justice Brown dis- cusses the questions suggested in the text, although in that case the statutes forbidding consolidation expressly protected "vested rights"- "It is possible that, if this arrangement had been actually made and carried into effect, before the acts forbidding the consolidation of parallel or competing lines had been passed, the rights of the parties thereto would have become vested, and could not be impaired by any subsequent act of the legislature. But the real question before us is whether a bare unexecuted power to consolidate with other corporations, a power which, if it exists as claimed by the defendant, would authorize it to absorb by successive and gradual ac- cretions the entire railway system of the country, is not, so long as it re- mains unexecuted, within the control of and subject to revocation by the legislature, at least, so far as it applies to parallel or competing lines. . . As applied to railroad corporations, it may reasonably be contended that the term [vested rights] extends to all rights of property acquired by exe- cuted contracts, as well as to all such rights as are necessary to the full and complete enjoyment of the original grant, or of property legally acquired subsequent to such grant. If, for example, the legislature should au- thorize the construction of a certain railroad, and by a subsequent act should take away the power to raise funds for the construction of the road in the usual manner by a mortgage, or the power to purchase rolling stock or equipment, such acts might per- haps be treated as so far destructive of the original grant as to render it valueless, although there might in neither case be an express repeal of any of its provisions. But where the charter authorizes the company in sweeping terms to do certain things which are unnecessary to the main object of the grant, and not directly or immediately within the contempla- tion of the parties thereto, the power so conferred, so long as it is unexe- cuted, is within the control oi the legislature and may be treated as a license, and may be revoked, if a pos- sible exercise of such power is found to conflict with the interests of the public." See also Louisville, etc. R. Co. v. Kentucky, 161 U. S. 677 (1896), (16 Sup. Ct. Rep. 714). 45 § 26 INTERCORPORATE RELATIONS [PART I common illustration of limitations imposed upon existing rights of consolidation.^ § 25. Power of Legislature to withdraw or limit Right to con- solidate — (B) In Exercise of Reserved Power. — Whatever doubt may exist as to the constitutional authority of the legis- lature to withdraw an existing unexecuted right to consohdate in the absence of a power reserved to amend or repeal the law granting the right, when such reservation has been made legislative authority to hmit or take away the right is unquestionable.^ The reservation of power to alter or amend a charter, how- ever, gives the legislature no power to impair vested rights of property — except, of course, for a public use upon just com- pensation — and a provision in an act forbidding the consoh- dation of competing railroads that it shall not affect vested rights is merely declaratory.^ A stipulation in an act repeal- ing the power to consohdate theretofore granted to certain corporations, that such repeal shall not "affect or impair any act done or right accruing, accrued, or acquired" before a certain date does not affect consolidation proceedings com- menced, but not concluded, before such time, and they may be completed entirely unaffected by the repealing act.* § 26. Power of Legislature to withdraw or limit Right to con- solidate — (C) In Exercise of Police Power. — There is another principle, apphcable to railroad companies and other corpora- tions assuming the performance of pubhc duties, upon which the legislature may withdraw the power of consolidating, if the exercise of such power may conflict with the public in- terests, and that is the principle that the State has the right to guard the welfare of its citizens — the police power. In the exercise of its police power the State may prohibit the ' See post, § 32 : "Constitutional 161 V. S. 672 (1896), (16 Sup. Ct. and Statviory Provisions against Con- Rep. 705). See ante, § 24 : "Power of solidation of Competing Railroads." Legislature to withdraw or limit Right 2 Pearsall v. Great Northern R. Co., to consolidate — In Absence of Re- 161 U. S. 672 (1896), (16 Sup. a. Rep. served Power." 705) ; Louisville, etc. R. Co. v. Ken.- * Cameron v. New York, etc. tucky, 161 U. S. 695 (1896), (16 Sup. Water Co., 133 N. Y. 336 (1892), (31 Ct. Rep. 714). N. E. Rep. 104). ^ Pearsall v. Great Northern R. Co., 46 CHAP. Il] LEGISLATIVE AUTHORITY FOR CONSOLIDATION § 27 consolidation of competing railroads, although their charters authorize consolidation, provided the authority has not been exercised and vested rights acquired. It is also immaterial whether a grant of power to consolidate is a contract or a license or whether a right to amend or repeal is reserved, for the constitutional prohibition of legislation impairing the obligation of contracts does not exempt a corporation from the exercise of the police power of the State. In Louisville, etc. R. Co. v. Kentiicky ' Mr. Justice Brown said: "Under the police power the people, in their sovereign capacity, or the legislature, as their representative, may deal with the charter of a railway corporation, so far as is neces- sary for the protection of the Uves, health, and safety of its passengers or the public, or for the security of property or the conservation of the public interests, provided, of course, that no vested rights are thereby impaired. In other words, the legislature may not destroy vested rights, whether they are expressly prohibited from doing so or not, but otherwise may legislate with respect to corporations, whether expressly per- mitted to do so or not. While the police power has been most frequently exercised with respect to matters which con- cern the public health, safety, or morals, we have frequently held that corporations engaged in public services are subject to legislative control, so far as it becomes necessary for the protection of the public interests." III. Construction of Statutes' authorizing Consolidation § 27. General Rules of Construction. — The Chancellor of New Jersey once intimated ^ that acts authorizing the consoli- dation of corporations relate rather to the transfer of existing ' Louisville, etc. R. Co. v. Ken- quiring strict construction in all such tucky, 161 XJ. S. 695 (1896), (16 Sup. grants. The State here parts with no Ct. Rep. 714). See also Pearsall v. property and creates no new privilege Great Northern R. Co., 161 U. S. 672 or franchise that can affect the pub- (1896), (16 Sup. Ct. Rep. 705); Gibbs lie. It simply permits anew arrange- V, Consolidated Gas Co., 130 U. S. 407 ment or contract aa to privileges (1889), (9 Sup. Ct. Rep. 553). and franchises already granted, ft ' Black V. Delaware, etc. Canal Co., enlarges none." 22 N. J. Eq. 402 (1871) : "This act The contract under consideration can hardly be considered a grant from in this case was a lease, but the the State, or to fall within the rule re- statute also authorized consolidation, 47 § 27 INTERCORPOKATE RELATIONS [pART I rights than to the creation of new ones and are not subject to the strict rules of construction applicable to original grants of corporate powers. But the Supreme Court in reversing the decree of the Chancellor ' laid down the rule that a grant from the State "will not be deduced from the words of a statute, except when it contains language not susceptible of any other rational construction." The correct rule, in deter- mining the existence of authority to consolidate, is that a statute should receive a strict, but not unreasonable, con- struction. The question whether authority to consolidate must be expressly conferred upon each consolidating corporation has occasioned a division of judicial authority. On the one hand, it has been held that where power is given by statute to one corporation to unite with any other, whatever other corpora- tion it selects and agrees with for the union has, by implica- tion, power to unite with it, although such other corporation is not named in the act and has not, otherwise, power to consolidate.^ The reason given for this conclusion is that the power granted to one corporation to consolidate neces- sarily involves the same power in the other company and so operates impliedly as an enlargement of its charter.^ On the other hand, it has been held that all the constituent corpora- tions must have the power to consoUdate in order to effect a valid consolidation — that power to consolidate with any other corporation means, reasonably, any other corporation having power to consolidate.^ The 'latter conclusion is more in ac- ' Black V. Delaware, etc. Canal tion unless it finds another with Co., 24 N. J. Eq. 455 (1873). which to unite and which is capable 2 Matter of Prospect Park, etc. R. of union with it ; hence whatever Co., 67 N. Y. 377 (1876) : " The other company it selects for a union, act . . . gave power to one of the and finds wilhng to join it, that corporations, which now together form other company, though not named the corporation which is the petitioner in the statute, gets power from the in this case, to consolidate with any statute to unite with that company other like corporation. The point of which the statute names." the appellants, that no power to con- = New York, etc. R. Co. o. New solidate is given to the other of those York, etc. R. Co., 52 Conn. 274 (1884). corporations, is without effect. Power See also Knoxville v. Knoxville, etc. is given by statute to one corporation R. Co., 22 Fed. 763 (1884). to form a consolidation with any * In Louisville, etc. R. Co. v. Ken- other. It cannot form a, consolida- tucky, 161 U. S. 691 (1896), (16 Sup. 48 CHAP. Il] LEGISLATIVE AUTHORITY FOB CONSOLIDATION §27 cordance with the rule of strict, yet reasonable, construction. It has also been held, upon a principle which is at least doubtful, that the fact that the right of one company to consolidate is limited under its charter does not deprive it of the right to consolidate under the general laws of the State.' Ct. Rop. 714), Mr. Ju.stico Brown fluid : " liosidoM this, however, in order to support the proposed consolidation of tiiosi) two systems, the parties arc bound to show, not only that the L. . Concord, etc. R. Co., For consideration of this case see 72 N. H. 26 (1903), (54 Atl. Rep. 883) : ante, § 42: "RequisUe Number of "As it is the law of this State that Stockholders — (B) When Unanimous the union of two railroad corpora- Consent is Necessary." tions cannot be effected without the * United States: Nugent v. Super- pajrment of the value of their inter- visors, 19 Wall. 248 (1873); Clear- ests to those who do not assent, and water v. Meredith, 1 Wall. 25 (1863). as the legislative authorization for the Indiana : Shelby ville, etc. Turn- action proposed to be taken expressly pike Co. ». Barnes, 42 Ind. 498 (1873) ; provided for such payment as an Booe v. Junction R. Co., 10 Ind. 93 essential to the validity of such con- (1857); MeCray v. Junction R. Co., tract, she was not legally bound to at- 9 Ind. 358 (1857) ; State v. Bailey, tend the meeting to oppose a contract 16 Ind. 46 (1861), (79 Am. Dec. 405). illegally depriving her of her stock." Mississippi : New Orleans, etc. R. In this case the stockholder was Co. v. Harris, 27 Miss. 517 (1854). permitted to recover her proportionate North Carolina : Charlotte First share of the stock of the consolidated Nat. Bank v. Charlotte, 85 N. C. 433 corporation. (1881), (39 Am. Rep. 708). 92 CHAP. IV] ASSENT OF STOCKHOLDERS § 47 visors,^ thus stated the reason for the rule: " It must be con- ceded, as a general rule, that a subscriber to the stock of a railroad company is released from obligation to pay his sub- scription by a fundamental alteration of the charter. The reason of the rule is evident. A subscription is always pre- sumed to have been made in view of the main design of the corporation, and of the arrangements made for its accomplish- ment. A radical change in the organization or purposes of the company may, therefore, take away the motive which induced the subscription, as well as affect injuriously the con- sideration of the contract. For this reason it is held that such a change exonerates a subscriber from liability for his subscription; or, if the contract has been executed, justifies a stockholder in resorting to a court of equity to restrain the company from applying the funds of the original organization to any project not contemplated by it." A subscriber is, however, entitled to the benefit of his con- tract as made and is neither obliged to withdraw from it nor to embark in a new venture.' This rule that the unconstitutional grant of authority to consolidate operates as a dissolution of the subscription con- tract and as a release of dissenting subscribers, is supported by the highest authorities. It is difficult, however, to justify it upon legal principles. An act unconstitutional as to a dissent- ing subscriber would seem to be void as to him. To say that it dissolves the subscription contract is to give effect to a void act. The distinction drawn between the position of a stock- holder and that of a subscriber — treating the latter as a party to an executory contract only — is inaccurate. The effect of an ordinary subscription is, immediately, to constitute the England : Dougan's Case, 28 L. T. statute existing at the time of his Rep. 60 (1873). subscription, providing for the con- ' Nugent V. Supervisors, 19 Wall. solidation upon a vote less than the 248 (1873). whole, or for the purchase of the ^ "The stockholders in the old cor- interests of dissenting stockholders poration, who do not enter into the in the event of a consolidation, it is new corporation, are, therefore, in conceived that he will neither be the absence of such statutes, entitled bound to consent to the consolidation to withdraw from the venture and nor to surrender his interest in his cease to be liable on their stock sub- original corporation." 1 Thomp. on scriptions. But In the absence of a Corp. § 343. 93 § 48 INTERCORPORATE RELATIONS [PART I subscriber a stockholder, subject to the habiUty to pay his subscription when called. Only a contract to subscribe for stock at a future time can properly be called an executory contract. The general rule stated is inapplicable in a case where it is apparent from the articles of association that consolidation was one of the purposes for which the corporation was organ- ized and that the consolidation in question is only carrying out that purpose. Consolidation, under such conditions, does not discharge a subscriber from the payment of his subscrip- tion, although authority to consolidate was granted after the subscription.' § 48. Procedure in Stockholders' Actions. — When a major- ity has taken steps towards an unauthorized consolidation or when unanimous consent is necessary, a dissenting stock- holder may file a bill for an injunction and it is not necessary that he should first seek relief through the corporation. In Nathan v. Tompkins^ the Supreme Court of Alabama said: "When the injury is to the shareholder individually, or there is a real contest between him and the corporation growing out of the acts of a majority of the stockholders in conven- tion, and in excess of their powers, express or implied, he may maintain a suit to prevent the wrong without the vain and useless ceremony of attempting to induce the same majority to sue themselves. A dissenting stockholder may, under such circumstances, enjoin an unauthorized consolidation." The stockholder is protecting his own rights, and it is imma- terial whether he is acting in good faith for the interests of the corporation.^ The injunction is granted to restrain the officers and managers of the corporation from diverting its funds, but it is necessary to make the corporation a party defendant.^ An inj.unction once issued restraining an at- tempted consolidation will not be dissolved unless it is estab- lished by proof that the consolidation agreement has been ■ Hanna v. Cincinnati, etc. R. Co., ' Central R. Co. v. Collins, 40 Ga. 20 Ind. 30 (1863). 617 (1861). = Nathan v. Tompkins, 82 Ala. 437 * Ridgway Township v. Griswold, (1891), (2 So. Rep. 747). Contra, 1 McCrary (U. S.), 151 (1878). however, Mozley v. Alston, 1 Phil. Ch. 790 (1847). 94 CHAP. IV] ASSENT OF STOCKHOLDERS §49 cancelled. Allegations that the scheme has been abandoned are not sufficient.' An injunction against an attempted consolidation will not be dissolved upon an answer which fails to allege the consent of the plaintiff, where the unanimous consent of the stock- holders is essential to consolidation.^ § 49. Laches of Stockholders. — - Laches in bringing suit wiU preclude a dissenting stockholder from enjoining a con- soHdation. He cannot look to equity, but must content him- self with some other form of remedy.' Reasonable haste is, ' Nathan v. Tompkins, 82 Ala. 446 (1886), (2 So. Rep. 747): "The answers do not aver that the resolu- tions have been rescinded, or any attempt made to rescind them, or any official declaration of the aban- donment. The resolutions remain in force on the minutes, so far as the majority could impart vitality. In view of the character of the resolu- tions, — that the consolidation 'do now take place,' and be fully carried into effect, — a secret, uncommuni- cated intention to abandon, resting in the minds of the majority as in- dividuals, does not meet the require- ments of equity." In Blatchford v. Ross, 54 Barb. (N. Y.) 42 (1869), it was held that an injunction restraining the consum- mation of the. consolidation of two corporations would not be extended to prevent the use by the consolidated company of property delivered before the injunction was applied for, but would be continued to prevent the delivery of any more property and the taking of any steps to enforce consolidation upon unwilling stock- holders. 2 Botts V. Simpsonville, etc. Turn- pike Road Co., 88 Ky. 54 (1888), (10 S. W. Rep. 134, 2 L. R A. 594). ' Chapman v. Mad River, etc. R. Co., 6 Ohio St. 120 (1856); Inter- national, etc. R. Co. V, Bremond, 53 Tex. 96 (1880). In Beling v. Anaerican Tobacco Co. (N. J. 1907), 65 Atl. Rep. 725, where, after a consolidation had been effected, the consolidated corporation carried on the business of the con- stituent companies, sold and ex- changed some of their assets and commingled the proceeds with other funds it was held that a stockholder in a constituent corporation who made no objection for six months* while the business was carried on and whose assignee had received notice of the meeting at which the merger agreement was acted upon, was not entitled to a decree in eq- uity vacating the merger agreement. The Court said (p. 729): "The com- plainant argues with great force that the negligence or laches of his prede- cessor in title cannot, upon any legal or equitable principles, be ex- tended so far as to forfeit his rights. Granting the general proposition to , be as claimed by him, yet the com- plete answer is that the refusal to grant his decree does not work any forfeiture of his rights, but simply has its weight, in connection with other circumstances, in debarring him from the special and extraordinary relief which he is asking." In Dana o. American Tobacco (N. J. 1907), 65 Atl. Rep. 730, the court held another stockholder who complained of the same consolida- tion as in the Beling case, supra, also guilty of laches on account of some 95 50 INTERCORPORATE RELATIONS [part I however, sufficient.^ Acquiescence for an extended period, during which time the interests of third persons have inter- vened, may itself constitute laches and prevent a stockholder from attacking a consolidation even on the ground of fraud.^ § 50. Can a Majority effect Consolidation upon giving Secur- ity to Dissenting Stockholders ? — It was held by the Supreme Court of Pennsylvania in an early case that a consolida- tion might be effected by the action of a majority of the stockholders of the consolidating corporations, provided dis- senting stockholders were secured from loss and their stock eight weeks delay, placing its decision principally upon the ground that "the injury and disturbance to busi- ness affairs is too great and serious as compared to the benefit to be de- rived therefrom by the complainant to justify that extraordinary remedy," See also Tanner v. Lindell R. Co., 180 Mo. 1 (1904), (79 S. W. Rep. 155). It is apparent from the decisions in these recent New Jersey cases that a stockholder who seeks equitable relief in case of an unauthorized consolida- tion must act with extreme prompti- tude in that State. The doctrine, however, that great weight should be given to the fact that the unauthor- ized consolidation has been consum- mated and business commenced is not without danger. It seems to offer an inducement to hurried action when rights are doubtful. • Mills V. Central R. Co., 41 N. J. Eq. 1 (1886), (2 Atl. Rep. 453). 2 Bell V. Pennsylvania R. Co. (N. J. 1887), 10 Atl. Rep. 741 (1887). In this case there was five years delay. When a stockholder fails for two years to bring suit to annul a con- solidation and the rights of third persons have intervened a court of equity will not interfere. Spencer v. Seaboard Air Line R. Co., 137 N. C. 107 (1904), (49 S. E. Rep. 96). This section is quoted with ap- proval in Hill V. Atlantic, etc. R. Co., 96 143 N. C. 562 (1906), (55 S. E. Rep. 854). In Rabe v. Dunlap, 51 N. J. Eq. 40 (1893), (25 Atl. Rep. 959), it was held that where a corporation chartered prior to the passage of the consolida- tion act, consolidated with other corporations for the purpose of carry- ing on a business essentially different from, that for which it was organized, equity might protect the non-assenting stockholders, if application were made promptly; but that equity would not dissolve the consolidated company, and return, free from all liens, the property contributed by the corpora- tion in which complainants were stockholders where for three years they had neglected to ask the aid of equity, and had stood quietly by while the consolidated corporation had incurred liabilities and the rights of third persons had intervened. In Douglass v. Concord, etc. R. Co., 72 N. H. 26 (1903), (54 Atl. Rep. 883), where the certificate for a non- dividend paying stock had, without the owner's knowledge, remained in the name of her agent for twenty- seven years, when she examined it and then learned for the first time that the corporation had been merged with another nine years before, it was hdd that as no one had acquired • rights or changed his position by reasons of her non-action she had not lost her right to relief by laches. CHAP, iv] ASSENT OF STOCKHOLDERS 50 taken at an appraisal, although no statutory provision sanc- tioned such course nor removed the necessity for unanimous consent.' While this decision has been referred to apparently with approval in other cases, it is opposed to the weight of author- ity and contravenes fundamental principles. It is not within the power of courts of law or of equity, in the absence of special statutory authority authorizing the exercise of the power of eminent domain with respect to gwast-public corporations, to decree that the stock of dissenting stockholders shall be taken for the purpose of quieting opposition.^ The language of Lord Eldon in granting an injunction against an unauthorized extension of the business of a voluntary asso- ciation at the suit of a dissenting member, although it was 1 Lauman v. Lebanon Valley R. Co., 30 Pa. St. 42 (1852), (72 Am. Dec. 664). See also State v. Bailey, 16 Ind. 46 (1861), (79 Am. Dec. 410). The decision in the Pennsylvania case seems still to be the law of that State. In Barnett v. Philadelphia Market Co., 218 Pa. 649 (1907), (67 Atl. Rep. 912), the Court said: "The act . authorizes consolidation, but does not take away the right of a stockholder to refuse to surrender his stock for that in a new corporation or to take any- thing less tor it than its actual value, if this company is to be practically dissolved. This is all the decree secures to the appellees, and to it they were entitled. Lauman v, Lebanon Valley R. Co., 30 Pa. 42 (1852). A dissatisfied stockholder voting against consolidation 'may' have his damages and the value of his stock ascertained and payment of the same secured in the mode pointed out in that act, but this remedy is not his only one. He may adopt it if he prefers it, but he is not required to do so.^ The protection given the stockholder in Lauman v. Lebanon R. Co. is still to be found in chancery, assuring him actual pay- ment for his stock, if he is compelled to part with it." In McVicker v. Ross, 55 Barb. (N. Y.) 247 (1869), it was held, in the case of a consolidation of two joint stock companies, that although a dis- senting shareholder was not obliged to surrender his interests to remain- ing associates at an estimated valu- ation, but had the right to have the valuation actually ascertained by a sale, in the ordinary manner of closing up partnerships where there is no express stipulation; yet that where the amount of dissenting stock was inconsiderable in comparison with the stock whose owners had acqui- esced in the agreement of consolida- tion, the court would order the con- solidated company to give a bond conditioned that upon final judgment all the property transferred should, if required, be delivered into the cus- tody of the Court for the protection of all the shareholders. ^ Mills V. Central R. Co., 41 N. J. Eq. 1 (1886), (2 Atl. Rep. 453); Black V. Delaware, etc. Canal Co., 22 N. J. Eq. 406 (1871); Mowrey .;. Indianapolis, etc. R. Co., 4 Biss. (U. S.) 84 (1866). 97 §51 INTERCORPORATE RELATIONS [part I" proposed to indemnify him, is appropriate: " The right of a partner is to hold to the specific purposes his partners while the partnership continues, and not to rest upon indemnities with respect to what he has not proposed to engage in." ' § 51. The Right to condemn Stock. — The legislature has power to authorize the consoUdation of railroad and other gwasi-public corporations, without the unanimous consent of their stockholders, when it makes provision for appraising and paying for the stock of dissenting stockholders. This power is entirely unaffected by the constitutional prohibition against impairing the obligations of contracts and is based upon the sovereign power of eminent domain. Corporate shares, as well as all other property, are subject to the paramount neces- sities of the State for the promotion of pubUc interests.^ Ac- cordingly, in exceptional instances, statutes have been passed,^ ^ Natusch V, Irving, 2 Cooper Ch. 358 (1824). See also Stevens v. Rut- land, etc. R. Co., 29 Vt. 545 (1851). ^ In Spencer v. Seaboard Air Line R. Co., 137 N. C. 107 (1904), (49 S. E. Rep. 96), the Court said (p. 121): "The legislature in the exercise of its power confers upon a majority of the stockholders the power to consoli- date with the other constituent com- panies and accept in consideration therefor such number of shares in the new or consolidated corporation as may be agreed upon. This can be done only with the consent of the legislature. The legislature having decided that such consolidation was promotive of the public welfare, recognized that it had no power to compel a dissenting stockholder to accept stock in the new corporation. Therefore, in the exercise of the right of eminent domain it empowers the corporation to condemn the stock of such dissenting stockholder when it cannot otherwise be acquired." (Cit- ing this work.) (p. 125) "We are of the opinion that the legislature had the power to confer on the corporation the right to condemn the dissenting 98 stock, and that upon a reasonable interpretation of the statute it has done so. We find no valid objection to the mode prescribed for ascertain- ing the value of the stock; it is expressly provided that the value so assessed must be paid before the stock is transferred. It would seem that the mode prescribed is exclusive and must be pursued." In Black o. Delaware, etc. Canal Co., 24 N. J. Eq. 469 (1873), it was held that in the exercise of the right of eminent domain the legislature might authorize shares in corpora- tions and corporate franchise to be taken for public purposes upon just compensation, and that the legisla- ture might, when public necessity required it, grant authority to con- solidate or lease, if it provided just compensation for the shares of such stockholders as dissented, and that the act in question did provide com- pensation for unwilling stockholders, before their property was taken. See also an article entitled "Cor- porate Shares an4 Eminent Domain," by Leonard M. Daggett, published in Yale Law Journal, May, 1896. ' The statute under consideration CHAP. IV] ASSENT OF STOCKHOLDERS §51 for the promotion of railroad and similar consolidations, pro- viding, under varying conditions, that the stock of dissenting minority stockholders may be appraised and condemned, and such statutes have been held to be constitutional.' Stat- utes of this character are, however, strictly construed, and it has been held that authority to- condemn the shares of dis- sentient stockholders for the purposes of consolidation does not warrant the taking of such shares for the purposes of a lease.^ These statutes must be distinguished from the provisions in modern consolidation acts authorizing as a condition of consolidation an appraisal of, and payment for, the stock of objecting stockholders.' It is not the purpose of these pro- visions to authorize the condemnation of stock in order to quiet opposition. Consolidation statutes containing them do not require unanimous stockholders' consent nor can such provisions be made available to obtain the required consent. Their design is to afford the dissenting stockholder an addi- tional remedy, — to give him the privilege of selling out in- stead of embarking in the new enterprise. in Black ». Delaware, etc. Canal Co., 24 N. J. Eq. 469 (1873), was the Nmv Jersey act of March 17, 1870. See also Illinois Stat. 1897, ch. 32, authorizing the exercise of the right of eminent domain in aid of the consolidation of gas companies. Also Connecticut Gen. Stat. (1902) §§ 3694, 3695, providing for the condemnation of minority stock interests in railroad and other corporations where the majority of the stock is held by a railroad com- pany, and a court finds that such action will be for the public interest. ' Mills V. Central R. Co., 41 N. J. Eq. 1 (1886), (2 Atl. Rep. 453). In Offield v. New York, etc. R. Co., 203 U. S. 372 (1906), (27 Sup. Ct. Rep. 72), affirming 78 Conn. 1 (1904), (59 Atl. Rep. 510), the Connecticut statutes referred to in the preceding note were held to be constitutional and valid, — the taking being for a public use. 2 Mills V. Central R. Co., 41 N. J. Eq. 1 (1886), (2 Atl. Rep. 453). ^ See ** StcUiUory Provisions for Ap- praisal of Stock," post, § 57. 99 §52 INTERCORPORATE RELATIONS [part I CHAPTER V METHOD OF CONSOLIDATION § 52. Formal Statutory Requisites. § 53. When Consolidation is efifected. § 54. Construction of Statutes prescribing Mode of Consolidation. § 55. What Statutor3- Provisions Conditions Precedent. § 56. What Statutory Provisions not Conditions Precedent. § 57. Statutory Provisions for Appraisal of Stock. § 52. Formal Statutory Requisites. — Although, as already noted, it has been held that the consohdation of corporations may be effected by the direct act of the legislature, without any antecedent action on the part of the corporations,^ such legislative power, if existent, is seldom exercised. Nearly all the States, however, authorize the consolidation of corpora- tions of their own voUtion and manj^ have enacted general statutes designating the steps necessary to bring about that result.- These statutes, while varj^ing in detail, are similar ' Bishop V. Brainerd, 28 Conn. 289 (1859). ^Alabama. Code 1896, ch. 28, § 1166 (as amended by acts 1900- 1901, p. 2.37): Directors of railroad companies consolidating enter into an agreement under corporate seal for consolidation, prescribing the terms and conditions thereof, etc. Agree- ment must be submitted to separate stockholders' meetings and must be sanctioned by a \'ote of at least two- thirds in amount of the stockholders present. Gen. Laws 1903, Xo. 117, § 2, prescribe method of consolidating cor- porations other than railroads. Arizona. R. S. 1901, par. 864 : In consolidation of railroad companies agreement " upon such terms as di- rectors of respective companies may agree upon" must be subniitted to stockholders of the respective cor- porations representing three-fourths of 100 the subscribed capital stock and must be ratified and confirmed by such stockholders. Arkansas. Kirby's Digest, 1904, § 6736 : To effect consolidation, con- tract, fijdng terms and conditions, must be assented to by two-thirds in interest of all the issued capital stock of the companies proposing to con- solidate, at a stockholders' meeting regularly called for the purpose. Calif omia. Pom. Code 1901, § 473 : Method of consolidating railroads same as Arizona, ante. Code 1886, § 361 : Consolidation of mining com- panies requires consent of holders of two-thirds of capital stock. Colorado. Mills Anno. Stat. 1891, § 605, authorizes consolidation of rail- road companies under certain con- ditions by majority vote, and § 625 requires a two-thirds vote — appli- cable to consolidation under different statutes. CHAP. V] METHOD OF CONSOLIDATION §52 in their general nature, and the process of consolidation as prescribed in most of them may be outlined as follows: / Consolidation of business corpora- tions requires vote of three-fourths of stoeli, ib. § 628. Connecticut. G. S. 1902, §§ 3675, 3676 : Directors joi railroad com- panies enter into joint agreement prescribing terms and conditions of consolidation. Agreement must be submitted to stockholders of each company at a special meeting thereof, called separately for the purpose, and if two-thirds of all the votes of all the stockholders are for the adoption of the agreement, the companies may consolidate. P. A. 1903, ch. 194, § § 76, 77, prescribes a similar method for consolidation of business corpora^ tions. Delaware. Laws 1899 (Corp. Law), § 54 : Directors, or majority of them, enter into an agreement under the corporate seal of respective corpora- tions prescribing terms and condi- tions. The written consent of the owners of at least two-thirds of the capital stock of each corporation is necessary to the validity and adop- tion of the agreement. Gen. Corp. Law, 1903, § 59 : Directors, or majority of them, enter into an agreement under corpo- rate seals of respective corporations. Agreement submitted to stockholders of each corporation at a meeting called separately for the purpose, and must be ratified by two-thirds in amount of the capital stock. Idaho. Laws 1901, p. 214 : Arti- cles stating terms of consolidation must be approved by each corporation by a vote of the stockholders owning a majority of the stock (Applies to Laws 1901, "Consolidation"). R. S. 1887, § 2673 : No amalgama^ tion or consolidation can take place without the written consent of the holders of three-fourths in value of all the stock in each corporation. Illinois. R. S. 1901, § 39, p. 137?: Terms of consolidation must be ap- proved by stockholders owning not, less than two-thirds in amount of the " capital stock of each corporation. Indiana. R. S. 1901 (Burns'), § 5257 : Consolidation may be upon such terms as corporations may mutually agree Xipon in accordance with the laws of the adjoining State with whose road or roads connections are formed. Iowa. Code 1897, §2036: Consoli- dation must be made with the con- sent of three-fourths in interest of all the stockholders upon such terms as may be agreed upon. Kansas. G. S. 1905, oh. 84, § 6325 : Companies contract, fixing terms, which must be ratified and approved by holders of two-thirds of all the stock of each company, either at a meeting of the stockholders called for the purpose or by approval in writing. Kentucky. Stat. 1903, ch. 32, § 555, Art. 1 : Directors enter into agreement prescribing terms and con- ditions, which must be ratified by the owners of at least two-thirds of the capital stock of each corpora^ tion. Louisiana. R. L. vol. 2, 1904, p. 1485: Terms and conditions are agreed upon in writing by corpora- tions and must be approved by a majority, or such a number as may be required by the original charters of consolidating companies. R. L. vol. 2, 1904, p. 1486: Only formalities required for consolidation are the passage of a resolution to con- solidate by the vote of three-fourths of all the stockholders, at a special meeting called for the purpose. Louisiana statute relating to consoli- dation of business corporations (Act of Dec. 12, 1874) requires the assent 101 52 INTEBCOEPORATE RELATIONS [part I (1) The directors of the corporations proposing to consoli- date enter into an agreement for the consolidation thereof, of the owners of three-fifths of the stock. Maryland. Pub. Gen. Laws 1904, Art. 23, § 45 : Special meeting must be called for the purpose of consider- ing agreement which must be sanc- tioned by the holders of a majority of the stock of the companies. Michigan. Public Acts 1899, p. 450: Directors enter into an agree- ment under corporate seal prescribing terms and conditions and mode of carrying same into effect. Agreement must be submitted to the stock- holders of each corporation separately and sanctioned by votes of majorities in interest. Minnesota. Rev. Laws 1905, ch. 58, § 2897; Certificate stating terms of consolidation must be approved by each corporation by vote of stock- holders owning o, majority of the stock or by the written consent of a majority of the stockholders attached to the certificate. Mississippi. Code 1906, § 4089: Consolidation is had by the consent of the railroad commission and upon such terms as the companies may agree upon. Missouri. Anno. Stat. 1906, § 1059: Railroad companies enter into agreement which must be ratified and approved by a majority in in- terest of all the stock held in each company, either at stockholders' meetings or by a certificate signed by such majority stockholders. Consolidation of business corpora- tions requires assent of three-fifths of stockholders. Anno. Stat. 1906, § 1334. Montana. Civil Code 1895, vol. 2, § 911: Agreement for consolidation of railroad companies, entered into under corporate seals, signed by presi- dent and secretaries, containing terms and conditions, must be approved by 102 stockholders at regular or special meeting by a vote of holders of at least three-fifths in amount of capital stock. Consolidation of mining com- panies requires consent of stock- holders holding three-fifths of stock. Code, § 527. Nebraska. Comp. Stat. 1905, §§ 2023, 2024 : Directors enter into agree- ment stating terms and conditions which is deemed the agreement of the corporations when it has been submitted to the stockholders of each corporation and sanctioned by vote of at least two-thirds in amount of stock represented. Nevada. Cutting's Comp. Stat. (1861-90) § 1011: Manner of con- solidation of railroad companies de- termined by directors. No amalga- mation can take place without the written consent of three-fourths of stockholders in interest of each company. Ih. § 1075: "All and any corpora- tions" may consolidate upon the written consent or request of the holders of three-fourths of the stock upon terms agreed upon by directors or trustees. New Jersey. Gen. Corp. Act 1896, § 105, subdiv. 11: Agreement for consolidation of business corporations must be submitted to stockholders, and vote of two-thirds of stock of each company is necessary for its adoption. New Mexico. Comp. Laws 1897, § 3847: Consolidation agreement must be ratified in writing by stock- holders of respective corporations representing three-fourths of the sub- scribed capital stock. (Applies to consolidation authorized in that section.) lb. § 3893: Stockholders agree >ipon terms and conditions, and sub- mit them to stockholders of each CHAP. V] METHOD OF CONSOLIDATION §52 prescribing the terms and conditions of consolidation, the mode of carrying the same into effect, the name of the new company at a meeting called sepa- rately for that purpose. A vote by ballot taken, and if two-thirds of all the votes of all the stockholders shall be for the adoption of the agreement, companies are consolidated. (Ap- plies to *. § 3892.) New Yorh. Birdseye's Rev. Stat, vol. 3, p. 2962 (Railroad Law, § 71): Form of consolidation substantially that stated in text. Approval of stockholders owning two-thirds of stock of each corporation is necessary. Business Corp. Law, § 9, contains similar provisions. North Dakota. Rev. Codes 1905, f 4273 : Articles stating the terms of consolidation must be approved by each corporation by a vote of the stockholders owning a majority of the stock, at a meeting called for the purpose. Oklahoma. Rev. Stat. 1903, vol. 1, p. 360, § 99: Articles stating the terms of consolidation must be ap- proved by a vote of stockholders holding a majority of the stock at annual or special meeting, or by con- sent of such stockholders in writ- ing. Ohio. Bates' Anno. Stat. 1787- 1902, § 3381: Directors enter into joint agreement under corporate seal prescribing terms, conditions, etc., which must be submitted to stock- holders of each company at meeting called for the purpose; vote by ballot, and if two-thirds of all the votes cast at meeting be for adoption, the companies may consolidate. Pennsylvania. Bright, Pur. Dig., 1894, § 108, p. 1801 : Directors agree jointly under corporate seal of each corporation, and prescribe terms and conditions. Agreement is submitted to stockholders of each corporation at a meeting called separately; vote by ballot, and if a majority of all the votes cast at each of such meetings shall be in favor of the agreement, companies may consolidate. (Ap- plies to p. 1801, § 107, "Consolida- tion.") lb. § 115, p. 1803: Directors agree jointly, prescribe terms, etc. Meet- ing of each corporation called sepa- rately. Agreement submitted to stockholders; vote by ballot. Two- thirds of all votes of stockholders required. (Applies to ib. § 114, p. 1803). See also *. § 126, p. 1805; § 182, p. 1814. South Carolina. Code 1902, vol. 1, § 2051: Directors enter into joint agreement prescribing terms, condi- tions, etc. Agreement is submitted to stockholders of each corporation at a meeting thereof (Called separately for that purpose. Vote by ballot. Majority of votes of all the stock- holders is required. South Dakota. Anno. Stat. 1901, § 3906 ; Terms and conditions agreed upon by directors, but must be ratified and approved by persons holding or representing a majority in amount of the capital stock of each of said companies, at annual or special meet- ing or by approval in writing of majority in interest of the stock- holders of each company. Tennessee. Code 1896, §§ 1523, 1524: Agreement shall be in writing and set forth the terms and condi- tions. Must be approved by a mo- jority of the stockholders of each of the consolidating companies at a regular meeting. (Applies to § 1522, Code 1896, " Consohdation.") § 1533: Agreement must be ap- proved by majority of the stock- holders of each of the consolidating railroads. (Applies to § 1532, Code 1896, "Consolidation.") Utah. Laws 1901, ch. 26, p. 20, 103 52 INTERCORPORATE RELATIONS [part I corporation, the number and names of the directors and other officers, the number and par value of the shares of the capital stock, and the manner of converting the capital stock of the constituent companies into that of the consolidated corpora- tion, with such other details as they may deem necessary to perfect the new organization and the consolidation of the companies. § 6 : Agreement must specify whether there shall be a merger of one or more companies into another with- out creation of new company or a consolidation forming a new consoli- dated corporation. Agreement must be ratified by stockholders of domestic corporation and also by stockholders of any foreign corporation consolidat- ing, in the manner prescribed by the laws of the iurisdictiou where such corporation was organized. Two- thirds vote required for consolidation of business corporations. R. S. 1898, §340. Virginia. Code 1904, Tit, 17, ch. 46a, § 1105e (41): Joint agreement of boards of directors of several cor- porations prescribing the terms and conditions is adopted by a vote of a majority of the stockholders of each merging corporation. The vote and agreement must then be certified to the State Corporation Commission which decides whether certificate of incorporation shall issue. WashiTigton. Ballinger's Anno. Code and Stat. 1897, § 4304: Articles stating terms of consolidation must be approved by each corporation by a vote of the stockholders owning a majority of the stock, at annual or special meeting, or by consent in writing of such stockholders annexed to such articles. West Virginia. Code 1906, § 2346: Where two or more railroad corpora- tions incorporated under laws of this State are located or surveyed along the same line, boards of directors may, with the consent of a majority 104 of the stockholders of each corpora- tion, merge or consolidate. In case of consolidation of foreign and domestic corporation, agreement between the directors of the different companies must be ratified by two- thirds of the votes of stockholders of each company. See also Acts 1901, as amended, p. 236, ch. 108, amending and re- enacting § 53, ch. 54, of Code concern- ing consolidation of railroads. Under this statute approval of majority of stockholders of merging corporations is required. Wisconsin. Sanborn's Stat. Supp. (1899-1906) vol, 3, ch. 87, § 1833: Articles stating the terms of consoli- dation must be approved by each corporation by a vote of the stock- holders holding a majority of the stock at annual or special meetings or by the consent in writing of such stock- holders. Wyoming. R. S. 1899, § 3202: Trustees of corporations enter into agreement under corporate seal of each, prescribing the terms and con- ditions thereof, etc., and all the stock- holders in either of such corporations must ratify. (Applies to (A) in 1899 "Consolidation Act.") § 3206 : Trustees or directors agree upon terms and conditions which must be ratified and approved by a majority in amount of the capital stock of each of companies at annual or special meeting or by approval in writing by a majority in interest of such stockholders. (Applies to (B) in 1899 "Consolidation Act.") CHAP. V] METHOD OF CONSOLIDATION § 52 (2) The agreement of the directors is next submitted to the stockholders of - each of the companies at a meeting thereof called for the purpose of taking the same into consideration, after due notice to the respective stockholders. (3) At the stockholders' meeting the agreement is con- sidered and a vote .by ballot taken for its adoption or rejec- tion. If the prescribed proportion of the stock of each com- pany is voted for the adoption of the agreement, then that fact is duly certified to, and the agreement, or a certified copy thereof, is filed in the office of the Secretary of State, thus completing the consolidation. In some of the States, as will be observed, the written con- sent of a majority or other proportion of the stockholders is required instead of their votes at stockholders' meetings. These statutes treat consolidation as being effected by the act of the directors, which the stockholders may approve by their individual assents as well as by their votes. Where the act authorizing consolidation uses general lan- guage and does not clearly designate the means by which the result is to be obtained, the method of consolidation is to be determined by the contracting corporations.' Statutes of some of the States authorizing the consolidation of corporations provide that they " may consolidate their capital stock" and under such a statute it was said, in a New Jersey case, that the purchase by one corporation of substan- tially the entire capital stock of another for the purpose of consolidation, followed by practical consolidation, would be held in equity to be a consolidation in accordance with the statute.^ As a general rule, the duration of the consolidated corpora- tion may be fixed in the agreement for consolidation, and the ' Dimpfel v. Ohio, etc. R. Co., 9 authority referred to, for the purpose Biss. (U. S.) 127 -(1879), (8 Rep. of consolidation, and the consequent 641). actual, practical and absolute consoli- ' Williamson v. New Jersey South- dation, completely recognized in all em R. Co., 26 N. J. Eq. 401 (1875) : things, will be held in equity to be a " In fact, the consolidation was actual consolidation in accordance with the and complete in all respects. The powers of the Acts. If the proceed- purchase and sale and delivery of ings are lacking it is not in substance the stock (sixteen-seventeenths of the but in form merely ;' the consolidation whole), by virtue of the legislative has been fully acquiesced in." 105 § 54 INTERCORPORATE RELATIONS [pART I period is not restricted by the life of any of the constituent companies.' § 53. When Consolidation is effected. — As the steps pointed out by the consoUdation statute must be taken, in addition to the execution of the agreement, to make a consolidation effectual, an agreement to consolidate does not work a con- solidation. The status of the companies is not affected until the consolidation is completed.^ The precise time when that result takes place is generally prescribed by the statute, and it is usually provided that the corporations shall be consoli- dated upon filing the agreement of consolidation in the office of the Secretary of State. Under such a statute it has been held that corporations, parties to an agreement to consolidate, continue in the full enjoyment of their franchises and may accept subscriptions to their capital stock until the agreement is filed.^ § 54. Construction of Statutes prescribing Mode of Con- solidation. — Under a statute authorizing the consolidation of corporations, upon the written consent of three-fourths in value of the stock of such corporations, the proportion is based upon the number of shares issued and not upon the number authorized; ^ and under the same statute it was held that the fact that trustees coasented as the legal owners of stock did not affect the validity of a consolidation.^ ' New York Central etc. R. Co. v. ' Mansfield, etc. R. Co. v. Brown, City of Yonkers, 103 N. Y. Supp. 252 26 Ohio St. 223 (1875). In McClure (1907). See also Market St. R. Co. v. Peoples Freight R. Co., 90 Pa. St. V. Hellman, 109 gal. 571 (1895), (42 269 (1879), where a subscription was Pac. Rep. 225) ; Rio Grande R. Co. made after the agreement for consoli- V. Telluride Power, etc. Co., 16 Utah dation had been signed, but before it 125 (1897), (51 Pac. Rep. 146). And was filed in the office of the secretary see post, § 60, "As a General Rule, of the Commonwealth, it was held Effect of Consolidation is Creation of that the filing of the agreement in the New Corporation and Dissolution of office of the secretary was not neces- Constituents." sary to validate the subscription. 2 Shrewsbury, etc. R. Co. v. Stour « Market St. R. Co. v. Hellman, 109 Valley R. Co., 21 Eng. L. & Eq. 628 Cal. 571 (1895), (42 Pac. Rep. 225). (1853), 2 De Gex, M. & G. 866. = Market St. R. Co. v. Hellman, 109 A preliminary plan for consolida- Cal. 571 (1895), (42 Pac. Rep. 225). tion cannot vary the terms of the It has also been held in a suit by a certificate of consolidation as filed. stockholder to enjoin an attempted State V. Consolidated Gas Co., 104 consolidation that the record of stock- Md. 364 (1906), (65 Atl. Rep. 40). holders upon the stock book must de- 1G6 CHAP. V] METHOD OF CONSOLIDATION § 54 Railway companies consolidating under the Ohio consolida- tion act, may agree upon the number and amount of shares of the proposed consolidated company, may classify such stock into "common" and "preferred," and may issue a greater or less number of shares than the aggregate of the constituent companies in order to secure a just and equi- table division of property between the shareholders of such corporations.' A statute authorizing the directors, with the assent of three- fifths of the stockholders of the original corporations, to effect a consolidation, does not authorize them to place stock of non-participating stockholders on an inferior footing to their own nor to transfer the rights of such stockholders to a third person without their consent.^ A statute ^ providing that any railroad corporation may consolidate its stock with that of a corporation in an adjoin- ing State " upon such terms as may be agreed upon, in accord- ance with the laws of the adjoining State," does not require that a meeting of the stockholders of a domestic corporation for the purpose of acting upon a proposition to consolidate with a corporation of an adjoining State should be called and conducted in accordance with the laws of such State, but only that the terms of consolidation should not confUct with those laws.*' tennine the persons entitled to vote should be exchanged for the new upon the question of consolidation. stock, the latter would be cancelled, Langan v. Franklyn, 29 Abb. N. C. thus reducing the amount of the 102 (1892), (20 N. Y. Supp. 404). consolidated stock. It was held that ' Burke v. Cleveland, etc. R. Co., as the consolidated corporation issued 22 Weekly Law Bulletin (Ohio), 11 the larger amount of stock it was (1889). obliged to pay the tax upon it, al- A Maryland statute (Code, Art. 81, though provision was made for the § 98) provides that each new corpora- cancellation of part — that it could tion shall pay a State tax based upon not be cancelled unless it were issued, the amount of stock which it is State v. Consolidated Gas Co., 104 "authorized to have." A consolida- Md. 364 (1906), (65 Atl. Rep. 40). tion was effected between two cor- " Fee v. New Orleans Gas Light porations, one of which held a con- Co., 35 La. Ann. 413 (1883). trolling interest in the stock of the ' Indiana Rev. Stat. (1894), § 5257. other. The certificate of consolida- * Bradford v. Frankfort, etc. R. tion provided for an original issue of Co., 142 Ind. 383 (1895), (40 N. E. stock of a certain amount but stated Rep. 741). that when said controlling interest 107 § 55 INTERCORPORATE RELATIONS [PART 1 A statute empowering the directors of corporations con- solidating to enter into an agreement prescribing the terms and conditions of the consolidation, and the manner of con- verting the stock of each company into that of the consolidated company, authorizes the insertion in such agreement of a pro- vision that each constituent company shall come into the con- soUdation free from all indebtedness and the further provision, to accomplish such result, that sufficient of the stock appor- tioned to each company shall be sold to pay its debts and the remainder only distributed among its stockholders/ § 55. What Statutory Provisions Conditions Precedent. — When corporations undertake to consolidate, the preliminarj' steps which the statute points out — in so far as they con- stitute conditions precedent as distinguished from mere direc- tions — must be taken before the consolidation takes effect and the new company comes into existence. Thus, if the statute require the consohdation agreement or a certificate of consolidation to be filed with the Secretary of State, until that is done the new corporation does not exist. "The new corporation, deriving its franchises from the State law, cannot act until the State has the requisite evidence of its claim to corporate existence. The statute is the only source of such existence and its conditions are imperative." ^ Where it appeared, however, that the certificate was deposited wilh the Secretary of State, it was held that the law would presume that it was recorded, and that the Secretary could be com- pelled by mandamus to do any necessary ministerial act in the matter.^ Where the statute provides for the payment of ' Cleveland City R. Co. v. First retary of the Commonwealth the National Bank, 68 Ohio St. 582 (1903), certificate of consolidation of certain (67 N. E. Rep. 1075). railroad companies constituted the ^ Peninsular R. Co. v. Tharp, 28 one company thus created a legal Mich. 507 (1874). See also Common- corporation in 'Pennsylvania, wealth V. Atlantic, etc. R. Co., 53 Pa. (6) In a quo warranto against such St. 9 (1866); Mansfield, etc. R. Co. company "nuZ tiel record" is well re- V. Brown, 26 Ohio St. 223 (1875); pUed to a plea that the defendants Mansfield, etc. R. Co. v. Drinker, 30 became a corporation by contract of Mich. 124 (1874). consohdation under said act. 3 In Commonwealth v. Atlantic, etc. (c) It being proved that the cer- R. Co., 53 Pa. St. 9 (1866), it was held tificate was deposited with the sec- i^^i ■ retary of the Commonwealth in his (a) FiUng in the office of the sec- oflSce, the presumption is that he 108 CHAP. V] METHOD OF CONSOLIDATION 56 fees before the consolidation agreement can be filed or re- corded the payment of such fees is essential to consolidation.' The consolidation agreement must follow the provisions of the statute, and it has been held that a failure to set forth therein the residences of the directors of the consolidated company as required by the statute renders a consolidation invalid when attacked in quo warranto proceedings by the State.^ The election of a new board of directors has also been held, under one statute, to constitute a condition pre- cedent to the acquisition by the consolidated company of the rights and franchises of the constituent companies.' § 56. "What Statutory Provisions not Conditions Precedent. — • A provision in a consolidation act requiring each of the con- solidating corporations to file with the Secretary of State a resolution adopted by the corporation accepting the provisions of the act before they can consolidate, is directory, and a fail- ure to comply therewith does not affect the consolidation, as filed the same of record and that it remains of record there. (d) Under n rejoinder that there is such a record with a prout patet per recordum, upon inspection of the record and sucli proof, judgment will be entered for the defendants. (e) A mandamus will issue, if nec- essary, to the secretary, to add the date of filing and any other necessary act in the premises. ' State V. Chicago, etc. R. Co., 145 Ind. 229 (1896), (43 N. E. Rep. 226). See also Ashley v. Ryan, 49 Ohio St. 504 (1892), (31 N. E. Rep. 721), affirmed 153 V. S. 436 (1894), (14 Sup. Ct. Rep. 865). estate V. Vanderbilt, 37 Ohio St. 645 (1882) : "A fatal defect in the organization of this company is found in the fact that under Rev. Stats, § 3381 (Ohio), the directors of the con- solidating' companies must set forth in their joint agreement the places of residence of the new directors, as well as their number. This provision of the statute has not been complied with. There is no designation of any such place of residence. We are not to speculate as to the propriety of this provision nor as to the manner it became incorporated into the statutes in its present form. It is sufficient to say that the provision is in no sense directory and that a comphance with it is indispensable." ' Mansfield, etc. R. Co. v. Drinker, 30 Mich. 126 (1874) : "By that law it will be seen that the corporations werp not to become merged until the agreement for consolidation was duly filed in the office of the Secretary of State. Tliis was not done until May 23, 1871. Before that time only an inchoate agreement for consolidation existed and no merger ; and it was impossible that any action as a con- solidated corporation could take place. The circuit judge held that the elec- tion of a board of directors was a con- dition precedent to its acquiring the rights and franchises of the respective companies, and in that he is supported by the unambiguous provisions of the statute itself." 109 § 56 INTERCORPORATE RELATIONS [PART I between stockholders of a constituent corporation and bond- holders of the consolidated compan5^' A statute authoriz- ing the consolidation of a domestic corporation with a corpo- ration of an adjoining State " in accordance with the laws of such State " does not require that all the enactments concern- ing consolidation in such other State should be strictly fol- lowed; ^ nor are statutory provisions relating to incorporation applicable to foreign corporations consolidating, under legis- lative authority, with domestic ones.^ The provisions of a general incorporation act requiring directors to be stockholders do not apply to a consolidated corporation formed under a special act containing no such provision.* Where the consolidation act did not require notice to be given to the directors of the meeting of the board to act upon an agreement for consolidation, and it was not shown that the articles of association or by-laws of the company required such notice, the unanimous action of a majority of the directors, being a quorum, at a meeting held without notice to all the directors was held valid.^ The certification upon the agreement of consolidation by the secretaries of the constituent corporations that it has been adopted by their respective companies is not essential." A statutory provision ' In Leavenworth v. Chicago, etc. act were complied with, it does not R. Co., 134 U. S. 688 (1890), (10 Sup. necessarily follow that the whole pro- Ct. Rep. 708), where a provision for eeeding would be void for a. failure filing with the Secretary of State, by to comply with this direction of the each of the consoUdating companies, act." of a resolution accepting the provi- ^ Bradford v. Frankfort, etc. R. Co., sions of the act, passed by a majority 142 Ind. 383 (1895), (40 N. E. Rep. of the stockholders, at a meeting 741). called for the purpose, was not ob- ' Monroe v. Fort Wayne, etc. R. served, it was held that its nonobserv- Co., 28 Mich. 271 (1873). ance did not render the consolida- * Camden Safe Deposit, etc. Co. v. tion void, fhe Court quoted with Burlington Carpet Co. (N. J. 1895), 33 approval the follomng language of Atl. Rep. 479. the Circuit Court: "It is also a pro- 'Wells v. Rodgers, 60 Mich. 527 \'ision wliich may well be held to be (1886), (27 N. W. Rep. 671). directory, and designed to secure ' Phinizy v. Augusta, etc. R. Co., evidence that each of the companies 62 Fed. 684 (1894). intending to consolidate recognized An agreement for the consolida- the statute as the sole authority for tion of two railroad companies which such consoUdation, and their obliga- was duly signed and sealed by the tion to be governed by its provisions. president after the meetings of the If the other essential provisions of the directors of both companies had been 110 CHAP. V] METHOD OF CONSOLIDATION §57 requiring notice of consolidation to be published " one month " was held to be complied with by publication in five consecu- tive issues of a weekly paper and by publication from Octo- ber 18 to November 17, inclusive, in a daily paper.' § 57. Statutory Provisions for Appraisal of Stock. — While a stockholder in a corporation organized while general consoli- dation statutes are upon the statute book takes his stock subject to the possibility that the prescribed majority may effect consolidation without his consent, the change is still of a fundamental nature and may materially affect his interests. Recognizing this position of minority stockholders, the policy of several States, as indicated in their consolidation acts, is to provide, as a part of the process of consolidation, for the ap- praisal of, and payment at the appraisement for, the shares of stockholders who are unwilling to participate in the new enter- prise.^ As said by the Supreme Court of Ohio in Pittsburg, held and the consolidation ordered, was not rendered invalid by the fact that it bore date prior to the meeting of the directors of one company. Wells V. Rodgers, 60 Mich. 555 (1886), (27 N. W. Rep. 671). ' Market St. R. Co. v. Hellman, 109 Cal. 571 (1895), (42 Pac. Rep. 225). ^ The Delaware statute (Laws 1903, p. 782, ch. 394, § 61), applicable in the consolidation of business corpora- tions is illustrative of appraisal stat- utes: "If any stockholder in either corporation consolidating as afore- said, who objected thereto in writ- ing, shall within twenty days after the agreement of consolidation has been filed and recorded as aforesaid, demand in writing from the con- solidated corporation payment of his stock, such corporation shall within three months thereafter pay to him the value of the stock at the date of such consolidation; in case of dis- agreement as to the value thereof, it shall be ascertained by three disin- terested persons, one of whom shall be chosen by the stockholder, one by the directors of the consolidated cor- poration, and the other by the two selected as aforesaid ; and in case the said award is not paid within sixty days from the making thereof and notice thereof given to said stock- holder and consolidated corporation, the amount of the award shall be evidence of the amount due by said corporation and may be collected as other debts are collectible by law ; on receiving payment of the award said stockholder shall transfer his stock to the consolidated corporation to be disposed of by the directors thereof or to be retained for the benefit of the remaining stockholders." See also : Alabama: Acts 1900-1901, p. 237, amending Code 1896, § 1166 (rail- roads). Connecticut: Pub. Acts 1903, ch. 194, § 79. Almost identical with Delaware statute. Nebraska: Comp. Stat. 1907, § 89, p. 535 (railroads). New York : Business Corp. Law as amended to 1907, § 9, is similar to the Connecticut and Delaware stat- utes except that it provides for the appointment of appraisers by the courts instead of by the parties, and 111 §57 INTERCOHPOHATE RELATIONS [part I etc. R. Co. V. Garrett.^ " From the first statute to the present authorizing the consolidation of railroad companies in this State, it has been the poUcy.of the legislature to require pay- ment to be made to the stockholder of the value of his stock when he refuses to convert it into the stock of the new com- pany." that both the stockholder and the consolidated company may apply for their appointment. In Langan v. Frankl5Ti, 20 N. Y. Supp. 404 (1892), it was held that this statute did not afford a dissent- ing stockholder his exclusive remedy but tliat he might seek relief in equity. As to whether stockholder is en- titled to interest on appraised value of stock, see Trask v. Peeskill Plow Works, 6 Hun (N. Y.), 236 (1875). New Jersey: Corp. Act 1896, § 108. This act is similar to that of New York in its form of procedure but ap- plied only to such corporations au- thorized to consolidate as "shall have the right to exercise any franchise for public use." Law 1902, ch. 241 applies to cor- porations "which do not have the right to exercise any franchise for public use," and authorizes appraisal of stock of stockholders not in favor of consolidation. The directors are bound to propose a consolidation agreement which does not unfairly impair the rights of any class of stockholders and in CEise an unfair agreement is proposed, a stock- holder is not bound to exercise an option between joining in the con- solidation and surrendering his stock for appraisal and compensation under the statute just referred to. Colgate V. U. S. Leather Co. (N. J. Ch. 1907), 67 Atl. Rep. 657. Ohio: Anno. Stat, as amended to 1906, § 3388 (railroads). Under this act it is the duty of the railroad com- pany proposing to consolidate to ascertain who, if any, of its stock- holders, refuse to convert their stock into stock of the consolidated corpora- tion and to cause the value of the stock of any who refuse to be ascer- tained and paid "before the consoli- dation takes effect " ; and it was held that a failure to make demand before the proposed consolidated company acquired the statv^ of an incorporated company or a failure to make an at- tempt to agree with the companj' as to the value of the stock, did not defeat the right of a stockholder, refusing to convert his stock, to be paid its full value. Pittsburgh, etc. R. Co. V. Garrett, 50 Ohio St. 405 (1893), (34 N. E. Rep. 493). Pennsylvania: Laws 1901, p. 349- 352, § 5. It is held that a dissenting stock- holder is not bound to pursue his rem- edy under this statute and have the value of his stock determined, but may bring a bill in equity to enforce paj'ment of its value. Barnett v. Philadelphia Market Co. 218 Pa. 649 (1907), (67 Atl. Rep. 912). South Carolina : Code 1902, § 2057 (railroad companies). Wyoming: Rev. Stat. 1899, § 3022, (railroads). England: Companies' Clauses Con- solidated Act (8 & 9 Vict. ch. 16, §§ 128-134), construed in Re Anglo Italian Bank, L. R. 2 Q. B. 452 (1867). ' Pittsburgh, etc. R. Co. v. Garrett, 50 Ohio St. 414 (1893), (34 N. E. Rep. 493). 112 CHAP. Vl] EFFECT OF CONSOLIDATION § 58 CHAPTER VI EFFECT OF CONSOLIDATION UPON STATUS OF CONSOLIDATING CORPORATIONS AND THEIR STOCKHOLDERS § 58. Effect of Consolidation may be Fusion, Merger or Continued Existence. § 59. Effect of Consolidation depends upon Terms of Consolidation Act. § 60. As a General Rule, Effect of Consolidation is Creation of New Cor- poration and Dissolution of Constituents. § 61. Exceptions to the Rule — Merger and Continuance of Corporations. § 62. Construction of Particular Consolidation Acts. Cases showing Crea- tion of Distinct Corporation. § 63. Construction of Particular Consolidation Acts. Cases of Absorption or Merger. § 64. Effect of Valid Consolidation upon Stockholders of Constituent Corpo- rations. § 58. Effect of Consolidation may be Fusion, Merger or Continued Existence. — As already shown, the term " consoli- dation" as used in statutes and charters authorizing the union of corporations has acquired no well-defined meaning but is used to describe three forms of corporate conjunction: ' (1) The dissolution of all the constituent corporations and the creation, at the same instant, in their stead, of a new and distinct corporation, with franchises, privileges and property derived from those passing out of existence. (2) The merging of one corporation in another, by which the former only is dissolved and the latter continues its exist- ence, with the franchises, privileges and property of the merg- ing corporation added to its own. (3) The continuance of all the consolidating corporations, for all purposes, or for formal purposes connected with the winding up of their affairs. Consolidating corporations often possess valuable privileges and immunities which the consolidated corporation is desirous of succeeding to, but which the courts, as a rule, do not favor ,^ so that the question whether the effect of a particular consoli- > See ante, § 8 : " Uses of the Term U. S. 20 (1901), (21 Sup. Ct. Rep. 240) ; distinguished." St. Louis etc. R. Co. v. Berry, 113 U. S. "Yazoo, etc. R. Co. o. Adams, 180 465 (1885), (5 Sup. Ct. Rep. 529). 113 § 59 INTERCOBPOHATE RELATIONS [PAKT I dation is to dissolve the constituent companies is often of much importance. § 59. Effect of Consolidation depends upon Terms of Con- solidation Act. — The word " consoUdation " being applied to different processes producing different results, the effect of a consolidation authorized by statute, upon the existence and status of the constituent corporations, depends entirely upon the terms and provisions of such statute and the acts and agreements of the consolidating corporations pursuant thereto.* In People v. New York, etc. R. Co? the New York Court of Appeals said: "It is perfectly competent for the legislature, in consolidation acts, to declare what shall be the status of domestic corporations which shall avail themselves of their provisions, and also of the consolidated company. Whether the consolidation shall create a mere business union between the constituent companies, leaving them in existence as cor- porations, or whether it shall operate as a surrender of the corporate franchises and the extinguishment of their corpo- rate existences, and a creating a new corporation combining, to the extent permitted by the act, the powers of the corpora- tions out of which it was formed, and vesting in it the property of the constituent companies, depends upon the legislative intention." The Supreme Court of the United States has said that "if in the statutes there be no words of grant of corporate powers it is difficult to see how a new corporation is created. If it is, it must be by implication, and it is an unbending rule that a grant of corporate existence is never implied." ' Notwith- standing this dictum, as controversies concerning the effect of consolidation nearly always arise in cases turning upon the > Keokuk, etc. R. Co. v. Missouri, See also Yazoo, etc. R. Co. v. 152 U. S. 305 (1894), (14 Sup. Ct. Adams, 180 U. S. 1 (1901), (21 Sup. Rep. 592) : "In the numerous cases Ct. Rep. 240); Railroad Co. v. which have arisen in this court as to Georgia, 98 U. S. 362 (1878). the effect of a consolidation upon the 2 People v. New York, etc. R. Co., existence and statiis of the constituent 129 N. Y. 482 (1892), (29 N. E. Rep. corporations it has been held that the 959, 15 L. R. A. 82). question of the dissolution of such cor- 3 Central R., etc. Co. v. Georgia, 92 porations depended upon the lau- TJ. S. 670 (1875). guage of the statute under which the consolidation took place." 114 CHAP. Vl] EFFECT OF CONSOLIDATION § 60 question whether the consohdated corporation has inherited certain exemptions and immunities from the old companies, not favored by the law, in case the consolidation statute speaks of the consolidated corporation as a "new" corporation, or in any way, even in general terms, indicates an intention to create a new corporation, the courts will not be slow in holding that the effect of the consolidation is to dissolve the old corn- panies and extinguish their special exemptions. "Indeed," says Mr. Justice Brown in a recent case, "it is not too much to say that courts are astute to seize upon evidence tending to show either that such exemptions were not really intended, or that they have become inoperative by changes in the original constitution of the companies." ^ It is not necessary that the powers of the new corporation should be specially enumerated nor is its status affected by reference to the charters of the old companies.^ § 60. As a General Rule, Effect of Consolidation is Creation of New Corporation and Dissolution of Constituents. — One of the earliest decisions upon the subject of the consolidation of corporations was rendered by the Supreme Court of Indiana, which held in McMahon v. Morrison ' that the effect of a con- solidation by legislative authority was a dissolution of the original corporations and, at the same instant, the creation of a new corporation with property, liabilities and stockholders derived from those passing out of existence. This decision was approved by the Supreme Court of the United States,* and the conclusion there reached has been adopted as appli- ' Yazoo, etc. R. Co. v. Adams, 180 distinct body. A new corporation TJ. S. 22 (1901), (21 Sup. Ct. Rep. 240). may be as readily created by the ' Railroad Co. v. Maine, 96 U. S. union of two or more corporations 510 (1877): "The Maine Central as by the union of individuals; and Railroad Company was, upon the its powers and privileges may as well consolidation of the original com- be designated by reference to the panics, a new corporation, as distinct charters of other companies as by from them as though it had been special enumeration." created before their existence. The See also Shields v. Ohio, 95 U. S. fact that the powers, privileges, and 319 (1877). immunities which they had pos- ^ McMahon v. Morrison, 16 Ind. 172 sessed were conferred upon the new (1861), (79 Am. Dec. 468). company, so far as they could be * Clearwater v. Meredith, 1 Wall, exercised or enjoyed by it, in no (U. S.), 40 (1863). respect affected its character as a 115 60 INTERCORPORATE RELATIONS [part I cable to different consolidation statutes in a long line of deci- sions from many States.' • United States: Yazoo, etc. R. Co. V. Adams, 180 U. S. 1 (1901), (21 Sup. Ct. Rep.' 240) ; Minneapolis, etc. R. Co. V. Gardner, 177 IT. S. 332 (1900), (20 Sup. Ct. Rep. 656) ; Keokuk, etc. R. Co. V. Missouri, 152 U. S. 301 (1894), (14 Sup. Ct. Rep. 592); Pullman Palace Car Co. v. Missouri Pac. R. Co., 115 U. S. 587 (1885), (6 Sup. Ct. Rep. 194) ; Railroad Co. v. Georgia, 98 U. S. 364 (1878) ; Railroad Co. v. Maine, 96 U. S. 510 (1877) ; Shields v. Ohio, 95 U. S. 320 (1877) ; Ridgway Township v. Griswold, 1 McCrary (U. S.), 151 (1878). Georgia: Central R., etc. Co. v. State, 54 Ga. 401 (1875). Illinois: Ohio, etc. R. Co. v. People, 123 111. 467 (1888), (14 N. E. Rep. 874). Indiana: Eaton, etc. R. Co. v. Hunt, 20 Ind. 457 (1863) ; State v. Bailey, 16 Ind. 46 (1861), (79 Am. Dec. 405). Iowa: Carey v. Cincinnati, etc. R. Co., 5 Iowa 357 (1857). Louisiana: Charity Hospital v. New Orleans Gas Light Co., 40 La. Ann. 382 (1888), (4 So. Rep. 433); Fee V. New Orleans Gas Light Co., 35 La. Ann. 413 (1883). Maine: State v. Maine Central R. Co., 66 Me. 488 (1877), affirmed 96 U. S. 510 (1877). Missouri: State v. Keokuk, etc. R. Co., 99 Mo. 30 (1899)", (12 S. W. Rep. 290, 6 L. R. A. 222) ; Kinion v. Kansas City, etc. R. Co., 39 Mo. App. 382 (1889). North Carolina: Cheraw, etc. R. Co. V. Anson, 88 N. C. 519 (1883). Ohio: Shields v. State, 26 Ohio St. 86 (1875) ; State v. Sherman, 22 Ohio St. 411 (1872). Pennsylvania : Lauman v, Lebanon Valley R. Co., 30 Pa. St. 42 (1858), (72Am. Dec. 664). South Carolina: Charlotte, etc. R. 116 Co. V. Gibbes, 27 S. C. 385 (1887), (4 S. E. Rep. 49). Tennessee: Miller v. Lancaster, 5 Cold. 514 (1868). Texas: Indianola R. Co. v. Fryer, 56 Tex. 609 (1882). Utah : Rio Grande R. Co. v. Tellu- ride Power, etc. Co., 16 Utah 125 (1897), (51 Pac. Rep. 146). The rule is clearly stated in a note to McMahon v. Morrison in 79 Am. Dec. 424: "The effect of consolidation upon former com- panies, except so far as the con- trary may be provided by the statute authorizing consolidation is, as a general rule, to dissolve all the old corporations and to create a new one, assuming the liabilities, and succeeding to the rights of the old companies. " The reasons for the rule are pointed out by the Supreme Court in Keokuk, etc. R. Co. 1/. Missouri, supra: "It is impossible to conceive of a corpora- tion existing without stock, or cer- tificates representing the interests of the corporators in the organization. Now if the act provides that these certificates shall be surrendered and certificates of another company is- sued in their place, what becomes of the prior companies? Who are their stockholders? Who are their offi- cers? If the stock in the new com- pany is sold, what interest in the prior companies passes by the sale ? There can be but one answer to these ques- tions. The property and franchises of the prior companies are gone as much as if they had formally sur- rendered their charters. The new company may doubtless receive by transmission from its constituent com- panies their property, rights, privi- leges and franchises, including any immunity from taxation; but it receives them as one heir receives CHAP. Vl] EFFECT OF CONSOLIDATION § 60 As a general rule, therefore, the effect of consolidation is the creation of a new and distinct corporation and the disso- lution of the constituent companies. " The general current of authority is to the effect that statutes for the consolidation of domestic corporations are to be treated as acts of incorpora- tion, and that, on consolidation being effected under their pro- visions, the constituent companies, unless such an intention is excluded by the language of the statute, are deemed to be. dissolved, and their powers and faculties to the extent author- ized become vested in the consolidated company as a new cor- poration created by the act of consolidation." ^ While the " property, habilities and stockholders " of the new corporation may, in the language of McMahon v. Morri- son, be " derived from those passing out of existence," the proposition that legislative consent to consolidation has the effect of dissolving the old corporations and creating eo iiv- stanti a new corporation in their stead, is based upon the theory that the consolidated corporation derives its poweri from the act authorizing the consolidation and not from the constituent corporations. As said by Mr. Justice Swayne in Shields v. Ohio : ^ " The new organization took the powers and faculties designated in advance in the acts authorizing the consolidation — no more and no less. It did not acquire any- thing by mere transmission. It took everything by creation and grant." From the principle that a consolidated corporation takes its rights and powers by creation and grant and not by trans- mission, it follows that its corporate life is not limited to the the estate of his ancestor, or as the must be kept in mind that the con- grantee receives the estate of his solidation of railroads does not create grantor, by inheritance, succession a new corporation, with powers of its or purchase. The result is not a own, distinct from, greater or less mere union or partnership of two than those enjoyed by the consolidat- companies, nor a merger of the ing companies separately." franchises of one into another, bait ' People v. New York, etc. R. Co., the extinguishment of one and the 129 N. Y. 482 (1892), (29 N. E. Rep. creation of another in its place." 959), (per Andrews, J.), (15 L. R. A. As opposed to these authorities the 82). following extract from the opinion in ' Shields v. Ohio, 95 U. S. 323 Phinizy v. Augusta, etc. R. Co. 62 (1877). Fed. 684 (1894), stands alone: "It 117 §61 INTERCOBPORATE RELATIONS [part I unexpired terms of its constituents but extends for the full period fixed in the consolidation agreement under the statutes existing at the time of its execution.' § 61. Exceptions to the Rule — ^ Merger and Continuance of Corporations. — While, as a general rule, the effect of consoli- dation is the dissolution of the constituent companies, the legislature, by appropriate language, may authorize a consoU- dation by merger or absorption, in which case the existence of only the merging corporation is terminated.^ In Chicago, etc. R. Co. V. Ashling,^ the Supreme Court of Illinois said : ' In New Orleans Gas Light Co. v. Loiiisiana Light, etc. Co., 11 Fed. 277 (1882), Judge Pardee considered it a "very serious question . whether, if the said two companies could and did unite under the said consolidation act, the life of the amalgamated com- pany could be or was any longer than that of the shorter company so amal- gamated. . It seems to be un- disputed law as derived from the authorities and admitted in argument in this case, that where two com- panies consolidated under such a law as that of 1874 the old corporations are dissolved, and a new corporation created. What is the life of this new corporation? The law is silent. It seems impossible for either corpora- tion to grant a longer life than it has itself. Whence it ought to follow that the life of the new corporation would only be that of the shorter- lived amalgamating corporation." The error in this course of reason- ing lies in the assumption that the constituent corporations grant pow- ers to the new corporation. On the contrary, the latter derives its powers wholly from the consolidation statute, and not at all from them. The weight of authority supports the text. New York Central, etc. R. Co. V. City of Yonkers, 103 N. Y. Supp. 252 (1907); Market St. R. Co. V. Hellman, 109 Cal. 571 (1895), (42 Pac. Rep. 225) ; Rio Grande R. 118 Co. V. Telluride Power, etc. Co., 16 Utah 125 (1897), (51 Pac. Rep. 146) ; Charity Hospital v. New Orleans Gas Light Co., 40 La. Ann. 382 (1888), (4 So. Rep. 433). ^ In Central R., etc. Co. v. Georgia, 92 U. S. 673 (1875), the Supreme Court of the United States said : "If then this construction of the act be correct (and we cannot doubt that it is), that act contemplated no such union and consolidation of the two companies as shoxild work a siurender of their charters by both of them, and the creation of a new company. At most, it intended a merger of the Macon and Western Railroad Com- pany into the other, a mode of trans- fer of that company's franchise, and property and payment therefor with stock of the Central Company. It is of no importance to the inquiry whether a new corporation was cre- ated by the union and consolidation, that the Central acquired . under the act new and enlarged powers as well as new stockholders." See also Meyer v. Johnston, 64 Ala. 603 (1879) ; New York Central, etc. R. Co. V. Saratoga, etc. R. Co., 39 Barb. (N. Y.) 289 (1861) ; Eaton v. Hunt, 20 Ind. 457 (1863). Also Philadelphia, etc. R. Co. v. Howard, 13 How. (U. S.) 333 (1851). ' Chicago, etc. R. Co. v. Ashling, 160 111. 382 (1896), (43 N. E. Rep. 373). CHAP. Vl] EFFECT OF CONSOLIDATION 61 " The general rule that the consolidation of two or more cor- porations into one creates a new company and works a dis- solution of the original corporations forming the consolidated company is subject to exceptions and depends upon the statute under which the consolidation is effected. . . . We see no reason why, under the statutes in question, one corporation may not be consolidated with another under the name of such other, which is continued in existence with enlarged powers, franchises and property rights. It is, in substance, so pro- vided, and such consolidations are frequently made." Merger, as so authorized, is illustrated by the ordinary case of the absorption by one railroad company, through the inter- change of stock, of branches and short connecting roads. The legislature may also authorize the consolidation of cor- porations and yet provide for the continued existence of all of them for such formal purposes as may be necessary to wind up their affairs.' Indeed, the constituent corporations ynay 'The California CSvil Code (Sec. 361) authorizing the consolidation of mining companies provides that "no such consolidation shall in anyway reheve such companies or the stock- holders thereof from any and all just liabilities." The CaUfomia Supreme Court held in Isom v. Rex Crude Oil Co., 147 Cal. 663 (1905), (82 Pac. Rep. 319), in view of this provision, that while a consolidated corporation was a distinct entity the consolidation did not dissolve the constituent com- panies but that they were preserved by law by the purpose of enforcing habihties against them. The Court said (p. 666) : " In the case of a railroad corporation section 473 as amended in 1901 makes provision that a de- mand against a constituent company may be enforced against the consoli- dated corporation. No such provi- sion is found in the act relating to mining corporations, and if neither the companies nor their stockholders, by virtue of the consolidation are to be relieved from any just liability, it would seem to require little argu- ment upon the proposition that their corporate entities are preserved, to the end that they may be served with process and called to defend any action arising either from contract or from tort which may be brought against them. " In Edison Electric Light Co. v. New Haven El. Co., 35 Fed. 233 (1888), it was held that, by the consolidation of two corporations, the old corpora- tions did not become extinct, so as not to be unable to wind up their business, but that the assignment of the legal title of a patent in writing to the new corporation, by the presi- dent and secretary of one of the old corporations, after the consolidation, in pursuance of a, vote of its execu- tive committee passed prior thereto, was sufficient to convey such title. Bishop V. Brainerd, 28 Conn. 299 (1859): "No question was there made as to the competency of those legislatures to consolidate these cor- porations into one, or even to extin- guish their original individual exist- ence. In regard to the effect of such 119 § 62 INTERCORPORATE RELATIONS [PART I be continued in existence for all purposes; but this form of consolidation as distinguished from a mere alliance, to which the term "consolidation" is inappropriately appUed, is confined to the consoUdation of corporations of different States.' § 62. Construction of Particular Consolidation Acts — Cases showing Creation of Distinct Corporation. — Where a Louisiana statute authorized the consohdation of two corporations into " one consolidated company holding and enjoying all the rights " belonging to each, it was held that the consolidated corporation was a new corporation, and that the members of the constituent corporations were transmuted into members of the consoUdated company.^ Under a Maine act, providing that, after fiUng the consoli- dation agreement, the corporations making it were "to be consolidated and together to constitute a new corporation," it was held that the consohdated company was a distinct cor- poration and that the old companies were dissolved.' A consohdation effected under a Mississippi charter provid- ing that " all of the companies so consohdating shall be merged into and become one company, and the company so formed shall be deemed and held to be a corporation created by the laws of this State " under which two companies agreed to a consolidation it does not necessarily case of complete and perfect amal- follow that it would extinguish, to all gamation, the effect of which was, intents and purposes, the existence of under American authorities, to ter- those corporations. It is possible for minate the existence of the original them still to subsist for certain pur- corporations, to create a new corpora- poses notwithstanding they should be tion, to transmute the members thus amalgamated." of the former into members of the See also Lightner v. Boston, etc. latter, and to operate a transfer of R. Co., 1 Lowell (U. S.) 338 (1869); the property rights and liabmties of United States v. Southern Pac. Co., each old company to the new one." 46 Fed. 683 (1891). Compare Solo- See also N'ew Orleans Gas Light monovich v. Denver Cons. Tramway Co. v. Louisiana, etc. Co., 11 Fed. 277 Co., 89 Pac. Rep. 60 (Col. 1907). (1882), where the same statute was ' See post, § 102: "Effect of Inter- under consideration. Compare, how- state Consolidation upon Status of Con- ever. Citizens St. R. Co. v. Memphis, atituemt Corporations." 53 Fed. 715 (1893). ' Fee V. New Orleans Gas Light ' State v. Maine Central R. Co., Co., 35 La. Ann. 416 (1883): "The 66 Me. 488 (1877), affirmed sub nom. articles of association and the legis- Railroad Co. v. Maine, 96 U. S. 499 lative act by authority of which they (1877). were executed, evidently present a 120 CHAP. Vl] EFFECT OP CONSOLIDATION § 62 consolidate their stock, take a new name, elect a new board of directors, and that the constituent corporations should cease to do business, created a new corporation.' An Ohio statute spoke of the consolidated company as the " new corporation";^ a Missouri statute spoke of " one com- pany " and provided for the issue of stock in the " new con- sohdated company"; ' a statute of Arkansas provided that all the property of each company should be taken and deemed to be transferred to the consolidated company " as such new corporation" ; ' a Missouri consolidation act spoke of the con- solidation as " making one company of the two "; ^ a Georgia statute gave the consolidated company the same name as one of the old companies, and conferred upon it full corporate powers." In all these cases the Supreme Court of the United States held that new and distinct corporations were created, and that the constituent companies were dissolved. A general law of New York authorized any railroad com- pany " organized under the laws of this State ... to merge and consohdate its capital stock, franchises and property with the capital stock, etc., of any other railroad company, ..." and provided for the conversion of the stock of the consoli- dated companies " into that of the new corporation," and it was held that such consolidation created a new and distinct corporation.' Consolidation under the California Civil Code, which pro- vides that the consolidation of corporations may be made " in such manner as may be agreed upon by their respective direc- tors," has been held to make the consolidated corporation "a distinct entity — a new corporation."' It would seem, ' Yazoo, etc. R. Co. v. Adams, 180 ' Keokuk, etc. R. Co. v. Missouri, U. S. 1 (1901), (21 Sup. Ct. Rep. 240), 152 U. S. 301 (1894), (14 Sup. Ct. Rep. affirming 77 Miss. 194 (1899), (24 592). See State v. Keokuk, etc. R. So. Rep. 200, 60 L. R. A. 33). Co., 99 Mo. 30 (1889), (12 S. W. Rep. 2 Shields v. Ohio, 95 U. S. 319 290). (1877). • Railroad Co. v. Georgia, 98 U. S. ' Pullman Palace Car Co. v. Mis- 359 (1878). See Atlanta, etc. R. souri Pac. R. Co., 115 U. S. 587 (1885), Co. v. State, 63 Ga. 483 (1879). (6 Sup. Ct. Rep. 194). ' People v. New York, etc. R. Co., * St. Louis, etc. R. Co. v. Berry, 113 61 Hun (N. Y.), 66 (1891), (15 N. Y. U. S. 465 (1885), (5 Sup. Ct. Rep. Supp. 635). 529). « Market St. R. Co. v. Hellman, . 121 § 63 INTEECOEPOKATE RELATIONS [PART I however, under such a statute, which involves a legislative delegation of powers, that the effect of a consolidation should depend upon the terms of the agreement actually entered into. A new corporation might or might not be created by such agreement.* A Colorado consolidation statute provides for the transfer of the property of the constituent companies to the consoli- dated corporation, for the surrender and exchange of stock, and for the assumption of the Uabilities of the old companies by the new corporation. It also provides that the stock of the constituent companies, whether exchanged or not, shall represent only an interest in the consolidated corporation. It is held that, upon consolidation, the constituent companies cease to exist, notwithstanding other provisions in the statute that the consolidation shall not affect pending suits or rights of action.^ § 63. Construction of Particular Consolidation Acts — Cases of Absorption or Merger. — Where, under a Georgia statute, two railroad companies were authorized " to unite and consoli- date " their " stocks " and all their " rights, privileges, im- munities, property and franchises," under " the name and charter " of one of the companies through the exchange of shares, it was held by the Supreme Court of the United States 109 Cal. 571 (1895), (42 Pac. Rep. ion, have the effect of keeping alive 225). Compare Isom v. Rex Crude the corporations formed into a new Oil Co., 147 Cal. 663 (1905), (82 Pac. company by consolidation. . . Rep. 319). The new company, as to pending ' See Green County v. Conness, suits, if it does not want judgment 109 U. S. 104 (1883), (3 Sup. Ct. Rep. taken, must defend the action or 69). the suit will not abate. As to causes ^ Solomonovich v. Denver Cona. of action upon which suit has not Tramway Co., 89 Pac. Rep. 57 been brought the new company may (Col. 1907). In this case the Court be made defendant; for if the old said (p. 60): "The provisions . . company is to be made defendant that such consolidation of one cor- it is difficult to see how service could poration with another, or with others, be obtained or how provision could shall not affect suits pending in which be made to depend. There being such corporations may be parties, no stockholders or officers or property nor shall such change affect causes of or effects, there is no corporation, action nor the rights of parties in and the new organization, created any particular, nor shall suits brought by the death of the old companies, against such corporation by its former is the only organization against which name be abated, do not, in our opin- suits can be brought." 122 CHAP. Vl] EFFECT OF CONSOLIDATION § 64 that consolidation under tliis act was not a surrender of the existing charters of the two companies, and did not work the extinction of the absorbing company nor the creation of a new company.^ A consolidation of two railroad companies under a Mis- souri statute giving authority to consolidate " upon such terms as may be deemed just and proper " merges the franchise and privileges of each in the new company, so that they continue to exist with respect to the roads thus consolidated.^ Under an Alabama statute, it was held that neither the adop- tion of a new name, sanctioned by legislative authority, nor the legislative grant of new powers, changed the identity of a corporation nor created a new one, and that, consequently, an act authorizing the consolidation of railroad companies " so as to form one consolidated railway company" under a new name did not create a new corporation.' It has also been held that, under an Illinois consolidation act, one corporation may be consolidated with another under the name of the latter, which is continued in existence with enlarged powers, franchises and property rights.^ A Virginia corporation having power by its charter to " con- solidate with itself " other corporations entered into a con- solidation agreement with a corporation chartered in other States and owning connecting lines, whereby all the stock of the latter corporation was cancelled and stock of the former issued in its place. The Virginia company also took over the property of the other corporation and operated its railroad. It was held that the case was one of absorption or merger.^ § 64. Effect of Valid Consolidation upon Stockholders of Constituent Corporations. — As elsewhere shown, when a con- solidation is invalid for want of the consent of stockholders, ' Central R., etc. Co. v. Georgia, 92 * Chicago, etc. R. Co. v. Ashling, U. S. 665 (1875). 160 111. 373 (1894), (43 N. E. Rep. 2 Green County v. Conness, 109 373). U. S. 104 (1883), (3 Sup. Ct. Rep. 69). " Lee v. Atlantic Coast Line R. Co., Compare Market St. R. Co. v. Hell- 150 Fed. 775 (1906). See also Vicks- man, 109 Cal, 571 (1895), (42 Pac. burg, etc. Telephone Co. v. Citizens' Rep. 225). Telephone Co., 79 Miss. 341 (1901), » Meyer v. Johnston, 64 Ala. 603 (30 So. Rep. 725, 89 Am. St. Rep. (1879). Compare cases cited in note 656). to § 62. 123 § 64 INTERCORPORATE RELATIONS [PART I a dissenting stockholder is released from his subscription; ' may enjoin the consolidation, and may maintain an equitable action against the consolidated corporation for the wrongful appropriation of his interest in the original corporation.^ When, however, the consolidation is valid, either because all the stockholders approve or because the approval of only a part of them is necessary, the rights of stockholders of the consolidating corporations are generally determined by pro- visions in the consolidation act or agreement. It is usually provided that the consolidated corporation shall issue its shares in exchange for the shares of stockholders of the constituent companies and, as already noticed, objecting stockholders sometimes have the right to take the appraised value of their shares in money instead of the new securities.* In the absence of such provisions it is the better view, that, by force of the consolidation proceedings under legislative authority, the stockholders of the constituent corporations are transmuted into stockholders of the consolidated companies.' The holder of stock in a constituent corporation upon so becoming a stockholder of the consolidated company is entitled to the same proportion of stock in the new company as is secured in the consolidation agreement to his fellow-stockholders and may maintain an action against the new company therefor.* 'See ante, § 47: "Bights and 'Fee v. New Orleans Gas Light Remedies of Dissenting Subscribers." Co., 35 La. Ann. 413 (1883). ^ See ante, § 46 ; "Rights and Reme- Where, however, a person had sub- dies of Dissenting Stockholders." scribed for stock in a Pennsylvania ^ See ante, § 57 : "Statutory Pro- corporation, paying ten per cent upon visions for Appraisal of Stock." his subscription, and thereafter the * Fee V. New Orleans Gas Light corporation was consolidated with Co., 35 La. Ann. 413 (1883); Ridg- another company upon an agreement way Township v. Griswold, 1 McCrary that each stockholder of the former (U. S.), 151 (1878); Copland v. company should be entitled to one Minong Min. Co., 33 Mich. 2 (1875). share of the consolidated company It has been held, however, that a for two of the old company, and such stockholder in a constituent company, person then brought an action against not assenting to a consolidation, the consolidated company to compel does not become a member of the the issuance of such new shares to consolidated company. Gardner v. him, it was held that the action Hamilton Mut. Ins. Co., 33 N.Y. 421 should be dismissed ; that the plain- (1865). Also Philadelphia, etc. R. tiff could not maintain an action Co. V. Catawissa R. Co., 53 Pa. St. against the consolidated company 20 (1866). which could not be maintained against 124 CHAP. Vl] EFFECT OF CONSOLIDATION §64 The holder of preferred stock in a constituent corporation has a right of action against the consolidated company, upon a contract of the constituent corporation with its stockholders relating to the payment of dividends upon its preferred stock.' When the effect of consolidation is to create a new corpo- ration, the Uability for the corporate debts of stockholders of the consolidating corporations who become stockholders in the consolidated company, is determined by the laws in force at the time of consolidation, and exemptions from lia- bility theretofore attaching to such stockholders are lost.^ the old company, and that he was not entitled to a certificate of full paid stock upon which he had paid but ten per cent. Babcock v. Schuylkill, etc. R. Co., 133 N. Y. 420 (1892), (31 N. E. Rep. 30). ^ Boardman v. Lake Shore, etc. R. Co., 84 N. Y. 157 (1881). Compare Prouty V. Lake Shore, etc. R. Co., 52 N. Y. 363 (1873). Where a corporation with preferred stock entered into a consolidation agreement with other corporations wherein it was provided that the consolidated company should assume all the obligations of its constituents, and should deliver to the preferred stockholders bonds maturing at the time of the expiration of their cor- poration, returning in interest an amount equal to the preferred stock dividends — the security of the bonds being superior to that of the stock . — it was held that a preferred stock- holder had no ground of complaint, the bonds being the fair equivalent of the stock. Beling u. American Tobacco Co., 65 Atl. Rep. 725 (N. J. 1907). Com- pare Colgate V. U. S. Leather Co., 67 Atl. Rep. 657 (N. J. 1907). Where two railroad companies, in their agreement for consolidation, in- serted an article providing for the completion of the route of one of the companies, and the directors of the consolidated company failed to com- ply with such provisions, it was held that if the duty thus created was owing to all the stockholders, one of the stockholders could not sustain an action against the directors to enforce a compliance therewith; and that if the duty was owing to a class of stockholders having, in respect to the matter, an interest or right distinct from another cla^s, any proceeding to obtain relief for a refusal or neglect on the part of the directors to discharge the duty must bring before the court not only the directors of the com- pany, but the two classes of stock- holders. Port Clinton R. Co. V. Cleve- land, etc. R. Co., 13 Ohio St. 545 (1862). See also Lord v. Copper Mines Co., 1 H. & Tw. 85 (1848). ' The act of Minnesota of March 2, 1881, ch. 113, authorizing the con- solidation of several railroad com- panies created a new corporation, upon which it conferred the fran- chises, exemptions and immunities of the constituent companies; but that did not include an exemption of stockholders in the old companies from the payment of corporate debts, or their liability to pay them. Minneapolis, etc. R. Co. v. Gardner, 177 U. S. 332 (1900), (20 Sup. Ct. Rep. 656), affirming Gardner v. Min- neapolis, etc. R. Co., 73 Minn. 517 (1898), (76 N. W. Rep. 282). 125 § 65 INTERCOHPORATE RELATIONS [PART I CHAPTER VII EIGHTS AND POWERS OF CONSOLIDATED CORPORATION I. Statutory Transmission of Property, Franchises, and Privileges I 65. General Rule — Legal Presumption. § 66. Real Estate and Rights in Streets. § 67. Choses in Action. § 68. Subscriptions. § 69. Enforcement of Subscribers' Obligations — Conditional Subscriptions. § 70. Municipal Aid. § 71. Constitutional Limitations upon Grants of Privileges and Immunities. § 72. Exemptions from Taxation. § 73. Special Privileges and Immunities other than Tax Exemptions. II. Powers § 74. Powers of Consolidated Corporation — In General. § 75. Power to issue Mortgage Bonds. § 76. Right of Eminent Domain. § 77. Miscellaneous Powers. I. Statutory Transmission of Property, Franchises, and Privileges § 65. General Rule — Legal Presumption. — When consoli- datioD proceedings are completed the consoUdated corpora- tion, according to the usual statutory provision, becomes pos- sessed of all the rights, property, privileges and franchises theretofore vested in its constituent companies.' As observed ^ The provisions of the New York vested in such new corporation, with- consolidation statute (Birdseye's Rev. out further act or deed; and all Stat. 3d ed. p. 2963, Railroad Law, claims, demands, property, rights of § 72), are illustrative: "Upon the way and every other interest, shall consummation of said act of consoli- be as effectually the property of the dation as aforesaid, all and singular new corporation as they were of the the rights, privileges, exemptions former corporations, parties to such and franchises of each of the cor- agreement and act; and the title porations, parties to the same, and to all real estate, taken by deed or all the property, real, personal and otherwise, under the laws of this mixed, and all the debts due on State, vested in either of such cor- whatever account to either of them, porations, parties to said agreement as well as all stock and subscriptions and act, shall not be deemed to revert and other things in action belong- or be in any way impaired by reason ing to either of them, shall be taken of this act, or anything done by and deemed to be transferred to and virtue thereof, but shall be vested 126 CHAP. VIl] RIGHTS AND POWERS §65 by Judge Holmes, in John Hancock, etc. Ins. Co. v. Worcester, etc. R. Co. : ' " It is usual for consolidating statutes to intro- duce more or less of the element of succession, or continuity of legal person as to existing rights and duties notwithstand- ing the fact that in other respects the old and new corpora- tions are not the same. It is for the legislature to say how far the new corporation shall be, as it were, the heir, executor or continuer of the old." Where, however, the consolidation statute is silent the in the new corporation by virtue of sucli act of consolidation." Other statutory provisions of a similar nature applying to railroads, except where noted, arc: Alabama: Code 1896, § 1166 (as amended by Acts of 1900-01, p. 237), § 1168. § 1151 applies to busi- ness corporations. Arizona: Rev. Stat. 1901, § 864, par, 3. Arkansas : Kirby's Dig. 1904, § 6735. Colorado : Mills' Anno. Stat. 1891, § 628, p. 688. Connecticut: Gen. Stat. 1902, § 3677; Pub. Acts 1903, p. 173, § 78 (business corporations). Delaware: Laws 1903, § 123, p. 819. Gen. Corp. Law 1899, § 65 applies to business corporations. Idaho: Civ. Code 1901, § 2178. Kansas: Gen. Stat. 1905, § 6325. Kentucky : Stat. 1903, ch. 32, § 556. Stat. 1894, § 656 applies to business corporations. Louisiana : Rev. Laws 1904, pp. 1485, 1486. Maryland: Pub. Gen. Laws 1904, p. 553, § 46. Michigan: Pub. Acts 1899, § 29, p. 451 ; Comp. Laws 1897, § 30. Minnesota: Rev. Laws 1905, § 2898. Missouri: R. S. 1899, §§ 1059, 1060; Stat. 1889, § 2786 (manfg. companies). Montana: Civ. Code 1896, § 911. § 527 applies to mining companies. Nebraska: Comp. Stat. 1907, § 2023. Nevada : Stat. 1903, p. 139, § 44. New Hampshire: Pub. Stat. & Session Laws 1901, ch. 156, § 22, p. 503. New Jersey : Gen. Corp. Law, 1896, § 106. New Mexico: Comp. Laws 1897, §§ 3847, 3895. New York: Business Corp. Law (amended to 1900), § 10. NoHh Dakota: Rev. Codes 1899, § 2964. Ohio: Bates' Anno. Stat. 1902, §§ 3382, 3384. Oklahoma: Stat. 1893, oh. 17, § 16, par. 1016. Pennsylvania: Bright. Purd. Dig. 1894, p. 1801, §§ 109, 110, 113; p. 1803, § 116; p. 1814, § 182. South Carolina : Code 1902, § 2052. South Dakota: Rev. Code 1903, § 494, p. 649. Tennessee: Code 1896, § 1527. Utah: R. S. 1898, § 341 (business corporations). Virginia: Code 1904, § llOSe (40). Washington: Ballinger's Anno. Code 1897, § 4304. Wisconsin: Stat. & Suppl. 1906, p. 919, § 1833. Wyoming: R. S. 1899, § 3202. England: Railway Clauses Act 1863 (26 and 27 Vict. ch. 92, §§38- 44). ' John Hancock, etc. Ins. Co. v. Worcester, etc. R. Co., 149 Mass. 220 (1889), (21 N. E. Rep. 364). 127 §65 INTERCORPORATE RELATIONS [part I general rule, based upon the presumed intention of the legisla- ture, is the same — that the consolidated corporation succeeds to all the privileges and franchises of each of the constituent corporations with respect to the property acquired from such corporation.' " The presumption is, until the contrary ap- pears, that the united or consolidated company has all the powers and privileges, and is subject to all the restrictions and Uabilities, of those out of which it was created." ^ Generally, the consoUdation act confers upon the consoli- dated corporation all the powers and privileges of its constit- uents,' although it was held under a Maine statute providing ' United States: Keokuk, otc. R, Co. V. Missouri, 152 U. S. 306 (1894), (14 Sup. Ct. Rop. 592) ; Green County V. ConneHH, 109 U. S. 104 (1883), (3 Sup. Ct. Rop. 09); Central R., rU:. Co. V. Georgia, 92 U. H. 066 (1876); Tomlinson v. Brancli, 15 Wall. 400 (1872); Lewis v. Clarendon, Hi'|). 609 (1878); Ridgway Township v. Griswold, 1 MeCrary, 151 (1878); McAlpino V. Union Pac. R. Co. 23 Fed. 108 (1885). Georgia : Montgomery, ete. R. Co. V. Boring, 51 Ga. 582 (1874) ; Solma, etc. R. Co. V. Harbin, 40 Ga. 706 (1870), Illinois : Chicago, etc. R. Co, v. Moffitt, 75 111. 524 (1874); Robertson V. Rockford, 21 111. 451 (1859). Indiana: Louisville, etc. R. Co. v. Boney, 117 Ind. 501 (1888), (20 N. E. Rep. 432, 3 L. R. A. 435) ; Paine v. Lake Erie, etc. R. Co., 31 Ind. 283 (1869). Massachusetts: Abbott v. New York, etc., R. Co. 145 MasH. 453 (1888), (15 N. 10. Rep. 91). Mississippi : Louisville, oU:. R. Co., V. Blytl.f, 09 Miss. 9.39 (1892), (11 He. Rep. HI, 16 L. R. A. ■2r,\,:i() Am. St. Hup. 699). Missouri: Thompson u, Abbott, 61 Mo. 176 (1K75). Tennessee: Millie v. Lancaster, 6 Cold, ,514 (1868), 2 Tennessee v. Whitworth, 117 128 U, 8, 147 (1886), (6 Sup, Ct, Rop, 649), per Waitp, C, J, In Green County v. Connoss, 109 U. S. 100 (1883), (3 Sup. Ct. Riii).09), the Suprenui f!ourt also saiil : "When the compiinioH are authtjrizod to tion- Bolidate their roads, it is U> be pn!- sumod that the privileges of each continue to (ixist in ruHpect to tho several roads so consolidated." Si'ii also Kcdkiik, etc. R. Co, v. Missouri, 152 IJ, H. 305 (1894), (14 Sup. Ct. Rep. 692). Tho consolidation of tho property and franchises of dilToront companies by their own act dooK not enlarge tho franohisofl, powers or privileges of thi^ original companies. Tlu^ now company takes th(! rights an Norfolk, etc. R. Co. v. Pendleton, burgh R. Co., 29 Gratt. (Va.) 773 156 U. S. 673 (189.5), (15 Sup. Ct. Rep. (1878). 413): " We have frequently held that, For consideration of the question in the absence of express statutory of irrepealable contracts with the direction, or of an equivalent impli- State on the subject of taxation pass- cation by necessary construction, ing to consolidated corporation see provisions, in restriction of the right State v. Commr. of Railroad Taxa- of the State to tax the property or tion, 37 N. J. L. 240 (1874). to regulate the affairs of its corpora- 2 Yazoo, etc. R. Co. 0. Adams, 180 tions, do not pass to new corporations U. S. 22 (1901), (21 Sup. Ct. Rep. 240). succeeding, by consolidation or by See also Railroad Co. v. Georgia, 98 purchase under foreclosure, to the U. S. 363 (1878) ; Railroad Co. v. property and ordinary franchises of Maine, 96 U. S. 308 (1877). the first grantee." 'Atlantic, etc. R. Co. v. Allen, 1.5 See also Petersburgh u. Peters- FI. 637 (1876). In this case the act 140 VII ] RIGHTS AND POWERS §72 only to the property to which it adhered when enjoyed by the original company. " Whatever property was subject to taxa- tion would, after the consolidation, remain so." ' Improvements, betterments and repairs made upon the properties by the consolidated company are subject to taxa- tion or exemption according to the rule applied to the respec- tive properties upon which they were made.^ provided that "all the rights, fran- chises and privileges" should pass, and the Court said: "A right of ex- emption from taxation can be passed under the general language 'all the rights' the same as any other right. We can see no difference. . . . The term 'all rights' embraces each right." See, however, post, § 160 : " Ex- emptions from Taxation. " In Natchez, etc. R. Co. v. Lam- bert, 70 Miss. 779 (1893) the Court said: "If the words 'rights, privi- leges, and immunities' do not include its immunity from taxa- tion it would be difficult to pass it except by an express declaration that exemption from taxation should be among the rights, privileges and im- munities to be transferred. " * A railroad corporation, formed under an act of the legislature by the consoUdation of existing companies and "vested with all the rights, •privileges, franchises, and property which may have been vested in either company prior to the act of consoli- dation, " acquires no greater immunity from taxation than they severally enjoyed as to the portions of the road which belonged to them under their respective charters. Whatever prop- erty was subject to taxation would, after the consoUdation, remain so. Chesapeake, etc. R. Co. v. Virginia, 94 U. S. 718 (1876). See also Central, etc. R. Co. v. Georgia, 92 V. S. 665 (1875) ; Branch V. Charleston, 92 U. S. 677 (1875); Tomlinson v. Branch, 15 Wall. 460 (1872) ; Charleston v. Branch, 15 Wall. (U. S.) 470 (1872), note; Dela- ware R. R. Tax., 18 Wall. 206 (1873) ; Philadelphia, etc. R. Co. v. Maryland, 10 How. 377 (1850) ; State v. Wood- ruff, 36 N. J. L. 94 (1872) ; State v. Philadelphia, etc. R. Co., 45 Md. 361 (1876), (24 Am. Rep. 511). 2 Branch v. Charieston, 92 U. S. 682 (1875): "It does not follow, there- fore, that this part of the road, though used 'for the accommodation of both branches, should be regarded as divis- ible into proportional parts, one sub- ject to taxation and the other not. It is to be regarded as simply the road and property of the old company ; in the hands of the new company it is true, but subject to all the liabilities of its original charter. Hence we held that the entire line of road be- tween Branchville and Charleston is subject to taxation; and that prima facie the railroad terminus and depot in Charleston and the property ac- cessory thereto belong to the older portion of the joint property. But inasmuch as the charter right of the present company extended to Charleston, we further held, that if it could be fairly shown that any of the company's property there was ac- quired by the present company for the accommodation . of the business belonging to its original roads, or for the joint accommodation of the en- tire system of roads under its control, such property would, pro tanto and in fair proportion, be exempt from taxa- tion. This was intended to meet the case of such property as the present company might have acquired in 141 I 73 INTERCOEPORATE RELATIONS [PART I A conditional exemption from taxation dependent upon certain returns being made and certain acts performed, which the consoUdated corporation is neither required nor able to make or perform, does not enure to its benefit.* § 73. Special Privileges and Immunities other than Tax Exemptions. — Where a corporation having the exclusive franchise to furnish water to a city is consolidated with another corporation under a statute providing that upon consohda- tion, the separate existence of the constituent corporations shall cease, and that the consolidated corporation shall be subject to existing laws, the exclusive franchise does not pass to the new company if the statutes at the time of the consolidation are opposed to such exclusive privileges.^ The provisions of the consolidation acts may be such, however, that an exclu- sive privilege of this character will pass to the consolidated corporation.' A consolidated railroad corporation may acquire the limited liability of one of its constituents for damages for killing live stock.^ A provision in the charter of a constituent corporation exempting its officers, agents and servants from military and road duty and from serving on juries, has been held not to be a mere personal privilege conferred upon the classes of persons Charleston, either separately or in limited taxation is to be based. But conjunction with the old company, that they are not so enabled or re- had no consolidation taken place, and quired, will be fully seen. Nor is it had the line between Branchville and pretended or alleged that such acts Charleston, used by both, remained have been done." Affirmed svh nom. the property of the old company. Of Railroad Co. v. Maine, 96 U. S. 508 course, in carrying out this principle, (1877). any repairs or improvements made on ^ ghaw v. City of Covington, 194 the old line or the property of the old U. S. 593 (1904), (24 Sup. Ct. B^p. company would become a part thereof, 754) . and be subject to taxation." 3 New Orleans Gas Co. v. Louisiana ' State V. Maine Central R. Co. 66, Light, etc. Co., 115 U. S. 650 (1885), Me. 499 (1877) : "The defendant's (26 Sup. Ct. Rep. 52). In this case claim to immunity from taxation or it was held that upon a consolida- for a limited and conditional taxa- tion of gas light companies the con- tion rests only on the word 'immuni- solidated corporation obtained the ties' in section 4. But to entitle exclusive privilege of a constituent them to immunity they must first of company to supply a city with gas. all be enabled or required to make the * Daniels v. St. Louis, etc. R. Co., several returns, and do and perform 62 Mo. 43 (1876) (sale), the several acts upon which such 142 CHAP. VIl] RIGHTS AND POWERS § 74 described, but a valuable right in the company which passes upon consolidation to the consolidated company.' II. Powers § 74. Powers of Consolidated Corporation. In General. — When consolidation is effected through a process of merger the absorbing corporation continues in existence with its origi- nal powers and with such additional powers, derived from the corporations absorbed, as the consolidation statute may confer. When, however, the original corporations are dissolved and a new and distinct corporation is created, the consolidation act is treated as a grant of a new charter to the consolidated corporation ^ which" acquires and can exercise no powers not granted expressly or by necessary implication therein.' It wiU be implied that the consolidated company takes and may exercise the powers necessary for the use of the property and franchises, and for the transaction of the business acquired. The consolidation statute need not specifically enumerate the corporate powers conferred, but may, and usually does, designate the powers and privileges granted by reference to the powers of the constituent companies. " Powers and privileges may as well be designated by reference to the char- ters of other companies as by special enumeration." * The ' Zimmer u. State, 30 Ark. 677 stroyed, a, new one was created, and (1875). Compare, however, St. Louis, its powers were 'granted' to it, in all etc. R. Co. V. Berry, 41 Ark. 509 respects, in view of the law, as if the (1883). See also Hawkins v. Small, old companies had never existed, and 7 Baxt. (Tenn.) 193 (1874). neither of them had ever enjoyed the Where the employees of a Ten- franchises so conferred." nessee corporation were exempt from See also Charlotte, etc. R. Co. v. road work and the corporation was Gibbes, 27 S. C. 385 (1887), (4 S. E. incorporated in Alabama with the Rep. 49). same privileges it was held that the ^ Shields v. Ohio, 95 U. S. 323 employees were likewise exempt (1877) ; Mead v. New York, etc. R. from such duty in Alabama. John- Co., 45 Conn. 199 (1877). son V. State, 88 Ala. 176 (1889), (7 < State v. Keokuk, etc. R. Co., 99 So. Rep. 253). Mo. 41 (1889), (12 S.W. Rep. 290, 2 In Shields v. Ohio, 95 U. S. 323 6 L. R. A. 222). (1877), Mr. Justice Swayne said : Also Shields v. Ohio, 95 U. S. 323 "When the consolidation was com- (1877): "The language was brief and pleted, the old corporations were de- was made operative by reference. 143 § 7o INTERCORPORATE RELATIONS [part I privileges SO granted by reference, however, while similar to those of the former companies, are not the same. They are, essentially, privileges of the new corporation, to be exercised according to its constitution and for the purposes of its crea- tion.' The amount of capital stock which the consolidated cor- poration is authorized to issue is generally fixed by the con- solidation act with reference to the amounts issued by the companies consolidating; and, in some States, it is provided that the capital stock of the consolidated corporation shall not exceed the total amount of the capital of its constituents.^ § 75. Power to issue Mortgage Bonds. — General consoli- dation statutes often provide that the consolidated company But this did not affect the legal re- sult. A deed inter partes may be made as effectual by referring to a description elsewhere as by reciting it in full in the present instrument." ^ Where a new corporation is formed out of two existing corpora- tions, which, under the terms of the consolidation, cease to exist, the law creating the new corporation controls in determining what are its corporate powers and franchises. Crawfords- ville, etc. Turnpike Co. v. Fletcher, 104 Ind. 97 (1883), (2 N. E. Rep. 243). For references to consolida- tion statutes providing generally that the consolidated company shall pos- sess all the ■powers, rights, franchises, etc. of the consolidating corporations, see note to § 65, ante. Where a railway company and a dock company amalgamated under an English statute providing that the two undertakings should forna one and be the undertaking of the rail- way company, but that no provision of the statutes which related exclu- sively to one of the undertakings should apply to the other, and the railway company supplied their dock undertaking with water derived from land acquired for its railway, it was held that the railway company was not carrying on the business of a 144 water company, and that, there being no statutory prohibition, it was not acting ultra vires. Atty. Gen. v. >forth-Eastern Ry. 2 Ch. 675 (1906), (95 L. T. 512, 76 L. J. Ch. 5, 70 .f. P. 473, 22 T. L. R. 695). 'Connecticut: Gen'l Stat. 1902, § 3807. Idaho: Session Laws 1901, p. 214, §2. New York: Railroad Law, § 71, Birdseye's R. S. Sup. Vol. 4, 1905. North Dakota: Rev. Code, 1905, § 4273. Oklahoma,: Rev. Stat. 1903, p. 360, § 1082. Washington: Ballinger's Anno. Stat. 1897, § 4304, In New Hampshire the capital stock of the consolidated company may not exceed the shares of the constituent corporations "actually issued and paid for at par." (Pub. Stat. 1901, ch. 156, § 26, p. 504.) In Pennsylvania the amount of the capital stock is not Umited to the amount of the issues of the con- solidating companies and is fixed in the consolidation agreement. (Bright, Purd. Dig. 1903, vol. 1, ch. XI, p. 785.) See also as to power to in- crease stock, Alabama Code, § 1150. New Jersey Railroad Law, par. 252-3 (G. S. 1895, p. 2698). CHAP. VIl] RIGHTS AND POWERS §76 may, under prescribed conditions, issue bonds and secure them by mortgage of its property and franchises,' and may exchange the bonds so issued for the bonds of its constituent companies.^ Under authority to issue mortgage bonds, it has been held that a consolidated corporation may do so for the purpose of taking up bonds previously issued by a constituent corpora- tion.' A consolidated company may also purchase and retire the bonds of its constituents.'' Consolidation acts sometimes stipulate that no bonds or other evidences of indebtedness shall be issued as a considera- tion for or in connection with a consolidation.^ § 76. Right of Eminent Domain. — A consolidated corpora- tion acquires, among its powers and privileges, the right to condemn property under the power of eminent domain granted to a constituent corporation." '^ Colorado: Mills' Anno. Stat. 1891, ch. 30, § 607. Connecticvt: Gen. Stat. 1902, § 3807. Georgia: Code 1895, § 2179. New Jersey: Laws 1903, p. 680, § 70. New York: Railroad Law, § 72, Birdseye's R. S. 1905. Ohio: Bates' Anno. Stat. 1906, § 3399 A. Pennsylvania: Bright. Purd. Dig. 1894, §§ 110, 111, p. 1802. Tennessee : Code 1896, § 1528, par. 5; Code 1884, § 1269. "New Jersey: Laws 1903, p. 680, §70. New York: Railroad Law, § 72, Birdseye's R. S. 1905. Pennsylvania: Bright. Purd. Dig. 1894, §§ 110, 111, p. 1802. Consolidation statutes also some- times limit the amount of bonds and their rate of interest and prescribe the method to be followed in issuing them. ' Camden Safe Deposit, etc. Co. v. BurUngton Carpet Co. (N. J. 1895), 33 Atl. Rep. 479. ^ Shaw V. Norfolk County R. Co., 16 Gray (Mass.), 411 (1860) : "Then [upon consolidation] the Boston and New York Railroad Company, having become the owners of the franchises and property of the Norfolk County Railroad Company, subject to the rights of their creditors, could either become purchasers of the outstand- ing bonds, and hold them hke other creditors, or could pay and extinguish them for the relief and discharge of their own property, as they should deem it best for their interest and advantage to do." ' Connecticut: Gen'l Stat. 1902, § 3675. Idaho: Session Laws 1901, p. 214, §2. New York-: R. R. Law, § 71, Birds- eye's R. S. Sup. vol. 4, 1905. North Dakota: Revised Codes 1899, § 2954. Oklahoma: Stat. 1903, p. 360, §99. Washington: Ballinger's Anno. Stat. 1897, § 4304. ° Abbott V. New York, etc. R. Co., 145 Mass. 450 (1888), (15 N. E. Rep. 91). See also South Carolina R. Co. V. Blakfe, 9 Rich. (S. C.) 228 (1856); 145 § 77 INTERCORPORATE RELATIONS [PART I It has been questioned whether it takes this power as a gwasi-successor of the constituent corporation to which it was originally granted or whether the transfer operates as a new grant of the power, upon the same terms, to the consoUdated company. In Abbott v. New York, etc. R. Co} the Supreme Judicial Court of Massachusetts said: "It seems to us equally clear that a corporation, by consent of the legislature, may take this power as gwasi-successor of another corporation to which it was originally granted, and it is not very material whether the legislature be regarded as authorizing a transfer of the old power, or, more strictly, as delegating a new power in the same terms as the old. The substance of the transac- tion is seen in cases of consolidation." Upon the principle, however, that a consolidated corporation takes everything by creation and grant it seems the better view that the consoli- dation statute operates as a new grant of this and other powers. Inchoate rights of a constituent corporation, under pending condemnation proceedings, pass to the consolidated company upon consolidation.^ § 77. Miscellaneous Powers. — It has been held that a cor- poration which by its charter has power to "unite with any Trester v. Missouri, etc. R. Co., 33 ' Proceedings instituted by a rail- Neb. 171 (1891), (49 N.W. Rep. 1110); road company to acquire lands, by Toledo, etc. R. Co. v. Dunlap, 47 condemnation, for its road, in which Mich. 456 (1882), 11 N. "W. Rep. 271, commissioners have made their report 5 Am. & Eng. R. Cas. 378) ; Boston, and award of damages, from which etc. R. Co. V. Midland R. Co., 1 Gray the landowner has appealed, do not (Mass.) 359 (1854). become void ab initio nor abate, by In Re Trenton St. Ry. Co. (N. J. reason of the consohdation and 1900), 47 Atl. Rep. 819, it was held merger of the condemning 'company that even » de facto consolidated cor- with another railroad company, form- poration may exercise the right of ing a new corporation ; but the rights eminent domain if its constituents in the land acquired by the condem- have such right. nation proceedings survive and pass The right to condemn lands is to the new corporation, and it may sometimes expressly conferred upon be lawfully substituted as appellee in the consolidated corporation in the the appellate court and the case then consolidation act. proceed to trial. Day v. New York, Michigan: P. A. 1901, p. 117. etc. R. Co., 58 N. J. L. 677 (1896), (34 New Jersey: R, R. Law, par. 341, Atl. Rep. 1081). § 2. See also California Central R. Co. ' Abbott V. New York, etc. R. Co., v. Hooper, 76 Cal. 404 (1888), (IS 145 Mass. 453 (1888), (15 N. E. Rep. Pac. Rep. 599). 91). 146 CHAP. VIl] EIGHTS AND POWERS '§77 other company" by consolidating with another corporation exhausts the power, and it does not pass, with other powers and privileges, to the consolidated corporation.' The right of further consolidation is, however, sometimes expressly con- ferred in consolidation statutes.^ A consolidated corporation may apply the amount received from' calls upon subscriptions to one constituent company in payment of the debts of another;^ may compromise and settle claims against any constituent company and maintain an action to enforce the settlement ; * may exercise the power of a con- stituent corporation to charge a fixed rate for transportation ^ and, generally, may enjoy and exercise any rights and powers conferred by the consolidation act." ' Morrill V. Siruth County, 89 Tex. 529 (1896), (36 S. W. Rep. 56). 'Idaho: Laws 1901, p. 214. North Dakota: Rev. Codes 1899, § 2954. Washington: Ballinger's Anno. Code & Stat. § 4304. Wisconsin: Stat. 1906, vol. 3, § 1833. ' Cooper V. Shropshire Union R., etc. Co., 13 Jvir. 443 (1849), (6 Eng. Railw. Cases, 136). * Paine v. Lake Erie, etc. R. Co., 31 Ind. 283 (1869). ® Fisher v. New York Central, etc. R. Co., 46 N. Y. 644 (1871), (7 Am. Rep. 397). ° Where a consolidation act pro- vided that the new company should have the powers, rights and fran- chises conferred upon two or more railroad corporations in case they should bear such relation to each other as to admit the passage of cars over their roads continuously, it was held that such corporations having the power to acquire and hold land, might confer that power upon the consoli- dated company if it came within the proviso stated. Georgia, etc. R. Co. V. Wilks, 86 Ala. 478 (1888), (6 So. Rep. 34). Generally as to the right of con- solidated corporations to acquire title to laud see Matter of Prospect Park, etc. R. Co., 67 N. Y. 371 (1876); Georgia Pac. R. Co. v. Gaines, 88 Ala. 377 (1889), (7 So. Rep. 382). Miscellaneous statutory provisions relating to powers and privileges of consolidated corporations are as fol- lows : Consolidated company may take, hold and dispose of stocks and bonds acquired by consolidation (Ohio. Bates' Anno. Stat. 1906, § 3384 A). Corporation formed by consolidation of domestic and foreign railroads may hold and own necessary real estate in adjoining State {Mis- souri. Anno. Stat. 1906, § 1060). Land grants pass to consolidated company {Wisconsin. Laws 1899, p. 291). Consolidated company ac- quires no extraordinary powers not enjoyed by each of constituents {South Carolina. R. S. 1893, § 1624). Consolidated company cannot change location of road which has received municipal aid {Illinois. R. S. 1906, § 39, p. 1572). Consolidated com- pany has no powers and privileges which could not be possessed by cor- poration originally organized under the act {Michigan. P. A. 1899, p. 451, § 29) . Corporate existence of consoU- dated company limited to ninety-nine years {Louisiana. Const. & Rev. Laws 1904, p. 1487). In addition to 147 §77 INTERCORPORATE RELATIONS [part I It has been held that a consoUdated corporation has no power to declare dividends upon its stock out of the earnings, before consolidation, of a corporation absorbed by it, nor to declare dividends upon the stock of the merging corporation out of its own earnings.^ A corporation formed by the merger of a banking corpora- tion with a trust company does not succeed to the right of the former to act as executor of a will where the testator died after the consolidation took place.^ general powers, consolidated com- pany enjoys rights, etc. of each of its constituents (New York. Business Corp. Law (amended to 1907), § 10). 1 Chase v. Vanderbilt, 37 N. Y. Super. Ct. 334 (1874). 2 In re Stikeman's 'Wm, 96 N. Y. Supp. 460 (1905), (48 Misc. Rep. 156) : "The will was made before there was any suggestion of merger between the two companies, and therefore it could not have been in contemplation of the willmaker at the time of the execution of his testamentary instru- ment. It is urged that all that the law permitted a corporation to do must be presumed to be in the mind of the trustmaker, but this, I think, would be straining the rule as to pre- sumption beyond its legitimate pur- pose. We are to gather, if we can, the intention of the testator. We find him appointing a strictly and purely banking corporation as his executor and trustee. This corporation has gone out of existence, its capital stock has been retired, it has become part of the Title Guarantee & Trust Company, and all its assets (what- ever they may have been) are now subject to all the liabilities and obli- gations of the Title Guarantee & Trust Company, whether such obli- gations have arisen under the banking side of their business or under the title and mortgage insurance side. There was no vested or inchoate right ob- tained by the Manufacturers' Trust Company by reason of its having been named as executor in the will. This right to administer became vested and inchoate only upon the death of the testator, and at that time the corporation named was not in exist- ence, had no capital stock, nor any official existence as a distinct corpora- tion." 148 CHAP. VIIl] OBLIGATIONS OF CONSOLIDATED CORPORATION § 78 CHAPTER VIII OBLIGATIONS OF CONSOLIDATED CORPORATION I. Direct Obligations § 78. Constitutional Limitations. § 78a. Consolidated Corporation Liable upon its Own Obligations. § 79. As a General Rule Consolidated Corporation directly assumes all Obligations of Constituents. § 80. Obligation to perform Public Duties of Constituents. § 81. Liability of Consolidated Company to Bondholders and Preferred Stockholders of Constituents. Other Special Contracts. § 82. Liability for Torts of Constituents. § 83. Rule of Liability inapplicable to Consolidation after Foreclosure Sale. II. Liens § 84. Conventional and Statutory Liens. § 85. Equitable Liens. III. Remedies of Creditors of Constituent Corporations § 86. Remedy of Creditors against Consolidated Corporation — At Law. § 87. Remedy of Creditors — ■ In Equity. § 88. Remedy against Constituent Corporation if not dissolved. § 89. Effect of Consolidation upon Pending Suits. § 90. Procedure regarding Pending Suits. § 91. Allegation and Proof of Consolidation. I. Direct Obligations § 78. Constitutional Limitations. — Upon principles else- where considered, the obligations of a consolidated corporation, as a new and distinct corporation, are determined by the con- stitutional provisions and statutes in force at the time of its creation and not by those existing at the time of the creation of its constituent companies.' Thus the Supreme Court of the United States, in a leading case, held that a constitutional provision that " no special privileges shall ever be granted that may not be altered, revoked or repealed by the general assembly," entered into an act under which railroad companies ' See ante, § 71 : "Constitutional Limitations upon Grants of Privileges and Immunities." 149 § 79 INTEECOKPORATE RELATIONS [PART I had consolidated and rendered the consolidated corporation subject to the obligation — imposed by a later statute — of • carrying passengers at a reduced rate of fare, which would not have been binding upon its constituent companies.' § 78a. Consolidated Corporation Liable upon its Own Obli- gations. — When consolidation has been effected two classes of obligations must be met by the consolidated corporation: (1) Its own obligations; (2) The obligations of its constituents. Whatever may be the form in which consolidation takes place the consolidated corporation stands as a distinct cor- porate entity and, like any other corporation, is responsible for its own acts and omissions. And where the effect of the consolidation is the creation of a new corporation it must pay the franchise tax or incorporation fees required by a constitu- tional provision in the case of the organization of a corporation, notwithstanding its constituents may have already paid similar fees.^ § 79. As a General Rule Consolidated Corporation directly assumes All Obligations of Constituents. — Consolidation statutes generally provide that all rights of creditors and all liens upon the property of constituent corporations shall continue unim- paired after consolidation, and that their debts, duties and liabilities shall attach to the consolidated company and be enforceable against it, to the same extent and by the same process as if they had been contracted by it.^ ' Shields v. Ohio, 95 U. S. 319 liens upon the property of, either of (1877). See also Pick v. North- such corporations, parties to such western R. Co., 6 Biss. (U. S.) 177 agreement and act, shall be preserved (1874). unimpaired, and the respective cor- Restrictions as to rate of fare in porations shall be deemed to continue charters of original companies bind in existence to preserve the same, and consoUdated corporation. Campbell all debts and liabilities incurred by V. Marietta, etc. R. Co., 23 Ohio St. either of such corporations shall 168 (1872). thenceforth attach to such new cor- ' State V. Lesuer, 145 Mo. 322 poration, and be enforced against it (1898), (46 S. W. Rep. 1075). and its property to the same extent as 'The provision in the New York if incurred or contracted by it. " railroad consolidation act is as fol- Other similar but less elaborate lows : Railroad Law § 73 (Birdseye 's statutes, relating to railroad consoli- Rev. Stat. 1901, p. 2963) : "The dations (except as noted) are as fol- rights of all the creditors of, and all lows : 150 CHAP. VIIl] OBLIGATIONS OF CONSOLIDATED CORPORATION §79 A statute of this nature applies to successive consolidations and makes the final consolidated corporation liable for the debts of the original consolidating companies.' In the absence of special statutory provision, moreover, when a new corporation is formed by the consolidation, under authority of law, of several distinct corporations and ac- quires their rights and faculties it must, as a necessary con- sequence, be subject to all the conditions and duties imposed by the law of their creation,^ and is answerable for the debts and liabilities of each of such corporations,' — at least to Alabama: Code 1896, § 1168; § 1151 (business corporations). Arizona: R. S. 1901, par. 864, § 3. Arkansas: Kirby's Dig. 1904, § 6735. California: Pom. Civ. Code, 1901, §473. Colorado: Mills' Anno. Stat. 1891, § 607; § 628 (corporations gener- ally). Connecticut: Gen. Stat. 1902, § 3677; Pub. Acts 1903, p. 173, § 78 (business corporations). Delaware: Laws 1903, p. 783, § 65. Illinois: R. S. 1901, p. 1376, § 41. Idaho: Civ. Code 1901, § 2178. Kansas: Gen. Stat. 1905, § 6325. Kentucky: Stat. 1903, oh. 32, § 556. Louisiana: Rev. Laws 1904, pp. 1485, 1486. Maryland: Pub. Gen. Laws 1904, p. 553, § 46. Michigan: Comp. Laws 1897, § 6255. Minnesota: Rev. Laws 1905, § 2898. Missouri: Rev. Stat. 1889, § 2786 (manufacturing companies). See Wells V. Missouri Edison El. Co., 108 Mo. App. 607 (1904), (84 S. W. Rep. 204). Montana: Code & Stat. § 527 (mining companies). Nebraska: Comp. Stat. 1907, § 2023. Nevada: Stat. 1903, p. 139, § 44. New Jersey: Gen. Corp. Act 1896, §§ 106, 107 (business corporations). New Mexico : Comp. Laws 1897, § 3896. New York: Business Corp. Law (amended to 1901), § 12. Ohio: Bates' Anno. Stat. 1902, § 3384. Pennsylvania: Bright. Purd. Dig. 1894, p. 1804, § 117; p. 1801, § 109. South Carolina : Code 1902, § 2052. Tennessee: Code 1896, § 1526. Utah: R. S. .1898, § 341 (corpora- tions generally). West Virginia : Code 1899, ch. 54, § 53 (as amended by Acts 1901, ch. 108). Wyoming: R. S. 1899, § 3204. * Birmingham R., etc. Co. v. En- slen, 144 Ala. 343 (1905), (39 So. Rep. 74) : "Under the provisions of the statute the debts and obligations of the constituent company follow it into the consohdation and become the debts and obligations of the con- solidated company as much as if they had been originally created by it. And this is so as to every successive consolidation. " 2 Chicago, etc. R. Co. u. Moffitt, 75 111. 524 (1874). ' Langhorne v. Richmond, etc. R. Co., 91 Va. 374 (1895), (22 S. E. Rep. 159) : "The corporation which is created by the consolidation of other corporations, or the surviving cor- poration when another or others are 151 §79 INTERCORPORATE RELATIONS [part I the extent of the property received from that particular cor- poration.' merged into it, is ordinarily deemed the same as each of the corporations which formed it for the purpose of answering for the liabilities of the old corporation, and may be sued under its new name, or under the name of the surviving company, for their debts, as if no change had been made in the name, or in the organi- zation of the original corporations." Louisville, etc. R. C!o. v. Boney, 117 Ind. 501 (1888), (20 N. E. Rep. 432, 3 L. R. A. 435) : "The act of con- solidation involves an implied assmnp- tion by the new company of all the valid debts and liabilities of the con- solidating companies." Berry v. Kansas City, etc. R. Co., 52 Kan. 774 (1894), (36 Pac. Rep. 724, 39 Am. St. Rep. 381): "The debts of the original companies follow as an incident of the consolidation and become, by implication (in the ab- sence of express provision), the obli- gations of the new corporation." See also : United States : Pullman Palace Car Co. V. Missouri Pac. R. Co., 115 U. S. 587 (1885), (6 Sup. Ct. Rep. 194); Wabash, etc. R. Co. v. Ham, 114 U. S. 587 (1885), (5 Sup. Ct. Rep. 1081). Alabama: Warren v. Mobile, etc. R. Co., 49 Ala. 582 (1873). Georgia: Atlantic, etc. R. Co. v. Johnson, 127 Ga. 392 (1907), (56 S. E. Rep. 482) ; Hawkins v. Central of Georgia R. Co., 119 Ga. 159 (1903), (46 S. E. Rep. 82) ; Montgomery, etc. R. Co. V. Boring, 51 Ga. 582 (1874). lUinois: Colimibus, etc. R. Co. v, Skidmore, 69 lU. 566 (1873) ; Chicago, etc. R. Co. u. Moffitt, 75 Rl. 524 (1874) ; Western, etc. R. Co. v. Smith, 75 ni. 496 (1874) ; Swing v. American Glucose Co., 123 111. App. 156 (1905). Indiana: Indianapolis, etc. R. Co. V. Jones, 29 Ind. 465 (1868), (95 Am. Dec. 654) ; Colvmibus, etc. R. Co. u. Powell, 40 Ind. 37 (1872). 152 Michigan: Shadford v. Detroit, etc. R. Co., 130 Mich. 300 (1902), (89 N. W. Rep. 960). Missouri: Thompson v. Abbott, 61 Mo. 176 (1875) ; Manny d. National Surety Co., 103 Mo. App. 716 (1904), (78 S. W. Rep. 69). ' Brum V. Merchants Mut. Ins. Co., 16 Fed. 140 (1883) ; Harrison v. Ar- kansas Valley R. Co., 4 McCrary (U. S.) 264 (1882); Harrison v. Union Pac. R. Co., 13 Fed. 522 (1882) ; Chicago, etc. R. Co. V. Galey, 141 Ind. 360 (1895), (39 N. E. Rep. 925) ; Tomp- kins V. Augusta Southern R. Co., 102 Ga. 436 (1897), (30 S. E. Rep. 992) ; United States Capsule Co. v. Isaacs, 23 Ind. App. 533 (1899) ; Morrison v. American Snufli Co., 79 Miss. 330 (1891), (30 So. Rep. 723, 89 Am. St. Rep. 598). The qualification stated in the text, "at least to the extent of the property received from that particular corporation," is based upon the deci- sions in the above cases. But as said in a note to Morrison v. American Snuff Co., 89 Am. St. Rep. 638 (1901) : "The qualification seems to have been employed from an abundance of caution, rather than because of any well-settled rule limiting the liability of the consolidated company for the debts of its constituents to the extent of the property received from them, and is not referred to in. the great majority of cases. " The difficulty of practically apply- ing any such qualification is shown in the very recent decision of Atlantic, etc. R. Co. V. Johnson, 127 Ga. 397 (1907), (56 S. E. Rep. 482) : "Some of the authorities say that when pro- vision has not been made for paying existing debts and liabilities of one of the constituent companies the con- solidated company is liable at least to the extent of the assets of the ab- sorbed corporation. ... It would CHAP. VIIl] OBLIGATIONS OP CONSOLIDATED CORPORATION 79 In Indianapolis, etc. R. Co. v. Jones,^ the Supreme Court of Indiana said: " For the purpose of answering for the liabilities of the constituent corporations, the consolidated company should be deemed to be merely the same as each of its constit- uents; their existence continued in it, under the ne\% form and name, their liabilities still existing as before and capable of enforcement against the new company in the same way as if no change had occurred in its organization or name." ^ The statutory liability of a consolidated corporation for the debts and liabilities of its constituents cannot be impaired, as to outside creditors, by any stipulations in the consolidation agreement. Parties to the agreement, however, holding claims put a, severe burden upon a creditor of a corporation, whose demand, or the extent of whose damages, might amount to only a few dollars, when such corporation and another volun- tarily merge into one and lose their previous identity, to hold that he cannot sue the original corporation because it has passed out of existence, and that he cannot sue the consoli- dated corporation and recover against it without alleging and proving that the consoUdated company had re- ceived assets from the constituent company (or, as contended here, net assets) sufficient to cover any amount that the jury might award him. . . . This can hardly be law." ' Indianapolis, etc. R. Co. v. Jones, 29 Ind. 467 (1868), (95 Am. Dec. 654). 2 In Day v. Worcester, etc. R. Co., 151 Mass. 308 (1890), (23 N. E. Rep. 824), the Supreme Judicial Court of Massachusetts said: "When two cor- porations are consolidated, no doubt for most purposes they cease to exi.st, and the new corporation is a distinct person in the eye of the law, although it is their legal successor. But no fic- tion is necessary so far as the legis- lature sees fit to say that the new corporation shall be regarded as the same with one of the old ones or even alternately as the same with each ; or, more explicitly, that although the new corporation is a, new person for the acquisition of new rights or the making of new contracts, the old cor- porations shall not be altogether ended, but shall continue under the new name so far as to preserve all their existing obligations unchanged. " In Smith v. Los Angeles, etc. R. Co., 98 Cal. 210 (1893), (33 Pac. Rep. 63), the following language is used : "The consolidated corporation may, how- ever, assume and make itself liable for the antecedent liabilities of such consolidating companies, and while such agreement does not without their consent bind creditors, yet suit brought by a creditor upon the de- mand so assumed against the corpora- tion which has agreed to pay is of itself sufficient evidence of acceptance of the new charter in place of the old." While the consolidation statute in this case may have justified the lan- guage used, it is by no means true that a constituent corporation as such is not freed from its obligations without the consent of its creditors. Where the effect of consolidation is the dissolution of the corporations consolidating, creditors may be obliged to look to their successor — the consolidated corporation. 153 80 INTERCOEPORATE RELATIONS [part I against the consolidating corporations may bar themselves from proceeding against the consolidated corporation therefor.^ § 80. Obligation to perform Public Duties of Constituents. — The public duties of corporations, whether imposed by express statutory provisions or assumed as the consideration of the grant of franchises, devolve, upon consolidation, upon the consolidated company.^ They become, essentially, the obli- gations of that company, and the necessity for their continued performance bears no relation to the chartered life of the cor- poration to which they were originally attached. Thus it was held that upon the consolidation of gas-light companies the obUgation imposed by the legislature on a consolidating company to furnish gas free of charge to a charity hospital. ' Matter of Utica National Brewing Co., 154 N. Y. 277 (1897), (48 N. E. Rep. 521) : " In the consolidation of corporations, pursuant to the pro- visions of the statute, the new cor- poration starts upon its existence freighted with the liabilities of the old companies and subject to the terms and conditions of the consolidation agreement, so far as they are not in conflict with the law. While it is not competent to do anything which would impair the rights of outside creditors, there is no reason why the parties to the consolidation agreement may not bind themselves to something deemed for the benefit of the new cor- poration, and that is what seems to have been done in .-this case. The manifest intention of the stockholders of the old companies, who united in making and signing the consolidation agreement, seems to have been to represent that their corporate proper- ties and franchises vested in the new company freed from any burden of indebtedness. As to creditors not assenting to any such arrangement, this was quite unavailing; but as to themselves it should, and would, operate to bar their claims, while the other creditors were seeking payment from the assets of the corporation since become insolvent.'' 154 ' Tomlinson v. Branch, 15 Wall. (U. S.) 465 (1872): "The keeping alive of the rights and privileges of the old company, and transferring them to the new company in con- nection with the property, indicates the legislative intent, that such prop- erty was to be holden in the same manner and subject to the same rights as before. The owners of the property were to lose no rights by the transfer, nor was the public to lose any rights thereby. Of course, these remarks do not apply to those cor- porate rights and franchises of the old company, which appertain to its exist- ence and functions as a corporation. These became merged and extinct. But all its rights and duties, its privi- leges and obligations, as related to the public, or to third persons, remain, and devolve upon, the new com- pany." Where a consolidation of two rail- road companies — one of which had a narrow-gauge road — was author- ized by the railroad commission upon the express condition that the narrow- gauge line should be standardized and made a part of the main line, the consolidated company was bound to fulfil the condition. Mobile, etc. R. Co. v. State (Miss. 1906), 41 So. Rep. 259. CHAP. VIIl] OBLIGATIONS OF CONSOLIDATED CORPORATION 80 adhered to the consolidated company without reference to the duration of the charter of the original company.' An attempt in a consolidation agreement between quasi- public corporations to prevent the devolution of public duties upon the consolidated company and any attempt by the con- solidated company to absolve itself from its obligations to the public, are against public policy. In Peoria, etc. R. Co. v. Coal Valley Mining Co., the Supreme Court of Illinois said:' " When they accept their charters, it is with the implied under- standing that they will fairly perform these duties to the public as common carriers of both persons and property, under the responsibility which that relation imposes. And this is a duty they cannot escape by neglect, refusal, or by agreement with other persons or corporations that they will disregard or refuse to perform them. These are duties they owe the pubhc, and it was in consideration that they would be performed that their charters were granted. They have no power to absolve them- ' Charity Hospital v. New Orleans Gas Light Co., 40 La. Ann. 388 (1888), (2 So. Rep. 433) : "Through the same channel which led the defendant com- pany to the right of ownership of all the property and rights of the former New Orleans Gas Light Company, it must be led and coerced to the dis- charge of the obligations which have been imposed on its author by the law which had created it and which authorized the organization of the new company." A corporation formed by the con- solidation of two boom companies must maintain the separate booms of each company and dehver logs at each as required in the original char- ters. Gould V. Langdon, 43 Pa. St. 365 (1862). Under the federal income tax law a consolidated corporation was held liable for a tax upon "interest cer- tificates," in the nature of dividend scrip issued by a constituent company before consolidation where the con- solidation act preserved all rights of creditors and made the new corpora- tion liable for the debts and obliga- tions of the old companies. Bailey v. Railroad Co., 22 "Wall. (U. S.) 604 (1874). As to liability of a consolidated company in South Carolina to assess- ment for expenses of railroad commis- sioners see Charlotte, etc. R. Co. v. Gibbes, 27 S. C. 385 (1887), (4 S. E. Rep. 49). 2 Peoria, etc. R. Co. v. Coal Valley Min. Co., 68 111. 489 (1873). In this case a consolidation agreement be- tween several railroad corporations contained a reservation to one of the companies of the exclusive right to carry coal over the united railroads until the annual interest payment due said company had been discharged from the tolls, and it was held that such agreement, in restraint of com- petition, was contrary to public policy and not enforceable in equity; that the consolidated company became liable for the performance of the duties of the original companies as comrnon carriers and that no con- tract could absolve it therefrom. 155 § 81 INTERCORPORATE RELATIONS [PART I selves from performing these charter obHgations, and any ef- fort to do so by contract or otherwise is void." § 81. Liability of Consolidated Company to Bondholders and Preferred Stockholders of Constituents. Other Special Contracts. — The rule that a consolidated corporation is liable upon the obligations of its constituents applies to their sealed instruments and special contracts as well as to their simple debts.' Bonds issued by a constituent corporation convertible into stock at the option of the holder confer upon him a valuable privilege, of which he cannot be deprived by consolidation. A holder of such convertible bonds is entitled to a fair oppor- tunity to make his election, and cannot be relegated to the rights conferred by the consoHdation agreement without it.^ He may maintain an action against the consolidated company to recover damages for breach of the contract contained in the bond,' or, if consoHdation has been effected on a basis of equality between the shares of the consolidated and the original company, he has the right to exchange his bonds for stock in the consolidated company.'' A stockholder, however, by par- ticipating as such in a consolidation which renders impossible ' Generally, that a consolidated claims and contracts . . . against coiripany is liable upon the contracts either corporation may bo onforf-nl of its constituents: Western Union by suit or action . . . against the" R. Co. V. Smith, 7.5 111. 496 (1874); consolidated corporation. The con- Katon, etc. R. Co. v. Hunt, 20 Ind. solidation was made on the basis of 457 (1863) ; Columbus, etc. R. Co. v. equality between the shares of tlie Skidmore, 69 111. .566 (1873); St. two corporations. Hdd, that the Louis, etc. R. Co. v. Miller, 43 111. 199 holders of bonds of a constituent com- (1867). Also cases in note to § 79, pany convei-tible into stock were en- nnte. titled to demand stock in the new ' Rosenkrans v. Lafayette, etc. R. corporation, as, for the purposes of Co., 18 Fed. .513 (1883). the contract, the old corporation con- ' John Hancock Mut. Life Ins. Co. tinned under the new name. Day v. V. Worcester, etc. R. Co., 149 Mass. Worcester, etc. R. Co., 1.51 Mass. 302 214 (1889), (21 N. E. Rep. 364). (1890), (23 N. E. Rep. 824); India • A statute authorizing the con- Mut. Ins. Co. v. Worfcster, etc. R. solidation of two railroad companies Co. (Mass. 1890), 2.5 N. E. Rep. 97.5. provided that the consolidated cor- See also .lohn Hancock Mut. Life Ins. poration should "be subject to all Co. v. Worcester, etc. R. Co., 149 the duties, restrictions, obligations. Mass. 214 (1889), (21 >f. E. Rep. 364). debts, and liabiHties to which, at the As to the right of holders of street time of the union, either of said cor- railway bonds to convert them into porations is subject," and that "all stock of consolidated company under 1.36 CHAP. VIIl] OBLIGATIONS OP CONSOLIDATED CORPORATION § 81 the conversion of his bonds, may be held to have elected not to exchange.^ A statute authorizing the consolidation of railroad com- panies and providing that all the liabilities of the constituent companies " except mortgages " shall attach to the consoli- dated company, does not prevent an action by a mortgage bondholder against the consolidated company. The statute confines the lien to the mortgaged property, but does not debar the bondholder from enforcing his demand directly against the consolidated company without availing himself of the mortgage security.^ A consolidated corporation is the representative of all its constituents, and is liable to the stockholders of any one of them upon a contract of such corporation relating to the pay- ment of dividends upon its preferred stock. ^ While a holder of cumulative preferred stock in a corpora- tion upon which dividends have been earned, but not declared and paid because surplus earnings have been expended in the acquisition of property, does not stand, upon the consolidation of such corporation with others, in the position of a technical creditor, his right is in the nature of a claim against the con- stituent company which may be enforced against the consoli- dated corporation. But his right to future dividends may be terminated by the consolidation.^ A corporation created by the consolidation of several insur- ance companies is liable upon their policies of insurance.^ Massachusetts statute of 1879, ch. 151, ^ Polhemus v. Fitchburg R. Co., see Parkinson v. West End St. R. Co., 123 N. Y. 502 (1890), (26 N. E. Rep. 173 Mass. 446 (1899), (55 N. E. Rep. 31), affirming 50 Hun (N. Y.), 397 891). (1888). The statute referred to was ' A person owning both stock and New York Laws 1869, ch. 917, § 5. convertible bonds in a corporation did ^ Boardman v. Lake Shore, etc. R. not exercise his option to have his Co., 84 N. Y. 157 (1881). See also bonds converted into stock when it Chase v. Vanderbilt, 62 N. Y. 307 was practicable, and acquiesced and (1875). Compare Prouty v. Lake participated in a consolidation by Shore R. Co., 52 N. Y. 363 (1873). which it became impossible to secure * Colgate v. U. S. Leather Co. the conversion, and it was held that 67 Atl. Rep. 657 (N. J. Ch. 1907). he was bound by an election not to * Franklin Life Ins. Co. v. Hick- make the conversion. Tagart v. son, 97 111. App. 387 {^ 901), affirmed Northern Cent. R. Co., 29 Md. 557 197 111. 117 (1902), (64 N. E. Rep. (1868). 248). 157 §81 INTERCORPORATE RELATIONS [part I A surety company absorbing another corporation of the same nature is bound to fulfil its bonds and undertakings.' Contracts of carriage embraced in mileage or trip tickets, issued by a constituent corporation, must be carried out by the consolidated company as if made by itself.^ Covenants running with the land acquired from its constituents bind a consolidated company.^ The Uability of a consolidated company upon the contracts of its constituents is precisely the same as that of the original company. Consolidation does not extend it. Thus the opera- tion of a contract to haul cars on all hues owned or controlled by a railroad company is not extended, upon its consolidation, so as to include other roads which the consolidated company afterwards acquires.* Where one life insurance company is consolidated with another, and it appears that the latter has been collecting premiunos upon a poUcy of insurance which it had no power to issue, the amount of such premiums may be recovered from the consoli- dated company. Northwestern Nat. Life Ins. Co. V. Hare, 26 Ohio Qr. Ct. Rep. 197 (1904). ' Manny v. National Surety Co., 103 Mo. App. 716 (1904),(78S. W. Rep. 69). ^ Tompkins v. Augusta Southern R. Co., 102 Ga. 436 (1897), (30 S. E. Rep. 992). ^ Mobile, etc. R. Co. v. Gilmer, 85 Ala. 422 (1888), (5 So. Rep. 138). A constituent company had agreed, in consideration of the grant of a right of way through certain land, to build its road-bed so as to protect the land from overflow, and it was held that the consolidated company was liable for damages caused by a breach of the agreement. Sappington V. Little Rock, etc. R. Co., 37 Ark. 23 (1881). Where a person had contracted to convey lands to a corporation, and afterward at its instance had organ- ized another corporation, of which he 158 held the stock, to which he conveyed the lands, and the latter corporation thereupon consolidated with the former, it was held that notwith- standing the changes of title such person was entitled to the same rights and remedies against the con- solidated company as he would have had against the corporation with which he had the contract. Cordova Coal Co. v. Long, 91 Ala. 538 (1890), (8 So. Rep. 765). * Pullman Palace Car Co. v. Mis- souri Pacific R. Co., 115 U. S. 595 (1885), (6 Sup. Ct. Rep. 194) : "The new company assumed, on the con- sohdation, all the obligations of the old Missouri Pacific. This requires it to haul the Pullman cars, -under the contract, on all roads owned or con- trolled by the old company at the time of the consoUdation, but it does not extend the operation of the con- tract to other roads which the new company may afterward acquire. The power of the old company to get the control of other roads ceased when its corporate existence came to an end, and the new company into which its capital stock was merged by the consolidation undertook only to assume its obligations as they then CHAP. VIIl] OBLIGATIONS OF CONSOLIDATED CORPORATION §82 A consolidated railroad company is bound to fulfil a con- tract of a constituent corporation to build, maintain and operate a switch running to a mill and, conversely, it is entitled to the benefit of an exemption from fire damage contained therein.' § 82. Liability for Torts of Constituents. — The usual con- soUdation statute declares that the consolidated corporation shall be answerable for the obligations of its constituent com- panies and thereby includes obligations arising ex delicto as well as ex contractu. And, without such statutory provision, the general rule is that the consolidated corporation is directly Uable for the torts of its constituents. This liability is broad and includes both wrongful acts and -negligence.^ stood. It did not bind itself to run the cars of the Pullman Company on all the roads it might from time to time itself control, but only on such as were controlled by the old Missouri Pacific. Contracts thereafter made to get the control of other roads would be the contracts of the new coiMolidated company, and not of those on the dissolution of which that company came into existence. It follows that the present Missouri Pacific Company is not required, by the contract of the old company, to haul the Pu llma n cars on the road of the St. Louis, Iron Mountain and Southern Company even if it does now control that road, within the meaning of the contract." In San Francisco v. Spring Valley Water Works, 48 Cal. 493 (1874), a corporation furnished water to a city under a contract providing that, if more favorable terms were granted to any other corporation, they should be granted to it. This company was absorbed by another corporation, to which more favorable terms had been granted. It was held that the latter corporation was not bound to fur- nish water under the contract of the former, but was entitled to the more favorable terms given it before the absorption. That the consolidated corporation takes the property and assumes the liabilities of its constituents in the exact condition in which they exist at the time of the consolidation, see Franklin Life Ins. Co. v. Adams, 90 lU. App. 658 (1900). ' Missouri, etc. R. Co. i>. Carter, 95 Tex. 461 (1902), (68 S. W. Rep. 159). * In Coggin v. Central R. Co., 62 Ga. 685 (1879), (35 Am. Rep. 132), the Supreme Court of Georgia said : "By consolidating with or absorbing the Macon & Western Railroad Com- pany under the consolidation act the Central Railroad Company became liable to answer for a breach of duty by the former company toward a person who was rightfully upon one of its trains, and who, while being carried thereon, sustained a personal injury by reason of such breach." In State v. Baltimore, etc. R. Co., 77 Md. 492 (1893), (26 Atl. Rep. 865), the Court said ; "The new corpora- tion thus created was in reality the embodiment under another name of the two formerly existing," and held that the combining companies could not by any contract between them- selves conclude the rights of third per- sons who had been injured by their torts. A consolidated corporation is liable 1.59 82 INTEECORPORATE RELATIONS [part I Where, however, the consolidation statute provided that all judgments rendered against consolidating corporations either prior or subsequent to the consolidation should con- stitute liens upon the property derived from them, and that such corporations should continue in existence for the preser- vation of liens against them, it was held that the consolida- tion did not impair existing rights of action against such constituents and, consequently, that the consolidated com- in damages to a riparian owner whose land is overflowed and injured in con- sequence of an obstruction of the stream caused by the wrongful man- ner in which a bridge was constructed by a constituent company. Chicago, etc. R. Co. V. Moffitt, 75 111. 524 (1874) ; Penley v. Railroad Co., 92 Me. 59 (1898), (42 Atl. Rep. 233). A consolidated railroad company is liable, without notice or demand for removal, for damages from a nuisance erected by a constituent company. Jones v. Seaboard Air Line R. Co., 67 S. C. 181 (1903), (45 S. E. Rep. 188). After having commenced the con- struction of an improvement on plain- tiff's land, a corporation consolidated \vith another, which completed the improvement, all title thereto being transferred to the new company. It was held that the consolidated com- pany and not the original company was liable for damages caused by the completion of the improvement by the consolidated company,' although the original company still retained a corporate existence. Day v New Orleans, etc. R. Co., 37 La. Ann. 131 (1885). Under a, statute providing that a consolidated corporation shall be liable for all the debts and liabilities of its constituents existing or accrued prior to the consolidation, it has been held that it is liable upon a judg- ment rendered against a constituent corporation after consolidation on a cause of action for negligence arising 160 before that time. Chicago, etc. R. Co. 0. Ferguson, 106 111. App. 356 (1902). But in Cotzhausen v. H. W. Johns Mfg. Co., 100 Wis. 473 (1898), (76 N. W. Rep. 622) it was held — ap- parently without due consideration — that a consolidated corporation does not by assuming all the debts, obligations and contracts of its con- stituents make itself liable for i>. tort theretofore committed by one of them. See also ; Alabama: Warren v. Mobile, etc. R. Co., 49 Ala. 582 (1873). Arkansas: St. Louis, etc. R. Co. v. Marker, 41 Ark. 542 (1883). Georgia: Tompkins v. Augusta Southern R. Co., 102 Ga. 436 (1897), (30 S. E. Rep. 992). Indiana: Indianapolis, etc. R. Co. V. Jones, 29 Ind. 465 (1868), (95 Am. Dec. 654) ; Cleveland, etc. R. Co. v. Prewitt, 134 Ind. 557 (1893), (33 N. E. Rep. 367) ; Jeffersonville, etc. R. Co. V. Hendriclis, 41 Ind. 48 (1872) ; Louisville, etc. R. Co. v. Summers, 131 Ind. 241 (1892), (30 N. E. Rep. 873). Kansas : Berry v. Kansas City, etc. R. Co., 52 Kan. 759 (1893), (34 Pac. Rep. 805, 39 Am. St. Rep. 371). Michigan: Batterson u. Grand Trunk R. Co., 53 Mich. 125 (1884). Texas: Texas, etc. R. Co. v. Murphy 46 Tex. 356 (1876). Virginia : Langhome v. Richmond R. Co., 91 Va. 369 (1895), (22 S. E. Rep. 159). CHAP. VIIl] OBLIGATIONS OP CONSOLIDATED CORPORATION § 83 pany was only liable for torts committed after the consoli- dation.' § 83; Rule of Liability inapplicable to Consolidation after Foreclosure Sale. — -The rule that a consolidated corporation is liable for the debts of its constituents is inapplicable, with reference to the debts of the defunct company, in the case of a consolidation effected after the purchase of corporate property and fmnchises at a foreclosure sale.^ The foreclosure sale has the effect of extinguishing the claims of general creditors. The new company takes the property subject only to the liens against it. A statute providing that a consolidated company shall be liable for the debts of each corporation entering the consolidation is not to be so construed as to revive the debts of a constituent company which have been shut off by fore- closure, and such an act would probably be unconstitutional, if retroactive in terms.' ' Joseph V. Southern R. Co., 127 Fed. 606 (1904). In this case the statute also provided that the con- solidated company should be sub- ject to all the liabilities of the constit- uent companies. The difficulty with the conclusion of the Court is that it gives no effect to this provision. It required no statute to make the con- solidated corporation liable for torts committed after the consolidation. ^ United States: Hoard v. Chesa- peake, etc. R. Co., 123 TJ. S. 222 (1887), (8 Sup. Ct. Rep. 74) ; Chesa- peake, etc. R. Co. V. Miller, 114 U.S. 184 (1885), (5 Sup. Ct. Rep. 813); Hopkins v. St. Paul, etc. R. Co., 3 Dill. (U. S.) 396 (1872). Arkansas: Sappington v. Little Rock, etc. Co., 37 Ark. 23 (1881). Illinois: People v. Louisville, etc. R. Co., 120 111. 48 (1889), (10 N. E. Rep. 657) ; Brufett v. Great Western R. Co., 25 III. 310 (1861). Michigan: Cook v. Detroit, etc. R. Co., 43 Mich. 349 (1880), (5 N. W. Rep. 390). Pennsylvania : Pennsylvania Transp. Co.'s Appeal, 101 Pa. St. 576 (1882) ; Stewart's Appeal, 72 Pa. St. 291 (1872). Texas: Gulf, etc. R. Co. v. Newell, 73 Tex. 334 (1887), (11 S. W. Rep. 342, 15 Am. St. Rep. 788). In con- struing the provisions of the Texas statute relating to the sale of rail- roads and franchises in foreclosure proceedings the Supreme Court of Texas, in Houston, etc. R. Co. v. Shirley, 54 Tex. 139 (1880), said: "The plain intent of the statute is to transfer the road-bed, track, franchise and chartered rights entire to the pur- chaser and associates, upon their adopting the form of organization prescribed in the charter and comply- ing with its other requirements ; and to remit creditors unsecured by lien, to their remedy against such assets as pass to the trustees of the sold-out company. " Wisconsin : Menasha v. Milwaukee, etc. R. Co., 52 Wis. 414 (1881), (9 N. W. Rep. 396). 3 Hatcher v. Toledo, etc. R. Co., 62 111. 477 (1872). 161 §84 INTERCORPORATE RELATIONS [part I II. Liens § 84. Conventional and Statutory Liens. — The consolida- tion of corporations does not affect or in any way impair liens upon their property.' The consolidated corporation takes the property of its constituents burdened with all existing charges. Mortgages,^ maritime Uens,^ and other liens — con- ventional and statutory — remain unaffected by consolidation 'Hamlin v. Jerrard, 72 Me. 80 (1881) : "The consolidated company assumed the debts of its several parts and recognized the prior liens upon them. . . . There can be no loss of identity of the original companies in the consolidation, to the prejudice of the rights of prior creditors or to de- struction of prior liens." See also Eaton, etc. R. Co. v. Hunt, 20 Ind. 457 (1863). 2 A railway company wliich had mortgaged its road, consolidated with two other companies forming a new corporation. The consolidation act provided that the first corporation should not be relieved from any lia- bility; that the several corporations should become one ; and that all the liabilities of the several corporations should appertain to the united cor- porations. Held, that mortgage bonds of the first corporation, bought by the new corporation and afterward issued for its benefit for value, had not been extinguished, but were a claim against the property covered by the mortgage. Shaw V. Norfolk Covmty R. Co., 16 Gray (Mass.) 407 (1860). As to rights of holders of income bonds see Rutter v. Union Pacific R. Co., 17 Fed. 480 (1883). Where special assessments were levied by a municipality against the property of a street railway company and this company consolidated with others — the consolidated company assuming the obligations and burdens of its constituents — it was held, as betj^een the municipality and the consolidated company, that the lien 162 of the assessments attached to the property of the latter corporation as an entirety. But with respect to the holder of a mortgage upon the property of one of the consolidating corporations against which there were no special assessments, it was further held that the Ken of such mortgage could not be impaired by the consolidation, and that the assess- ments could not be made a lien upon the entire property of the consoli- dated company taking priority to such mortgage — that, in this view of the case, the assessment and mortgage - liens attached to the specific properties upon which they were placed and that priorities could only be preserved by treating the properties as if no consolidation had taken place. Lincoln St. R. Co. v. City of Lincoln, 61 Neb. 109 (1901), (84 N. W. Rep. 802) ; S. C. 67 Neb. 469 (1903) (93 N. W. Rep. 766). ^ Where two corporations united their vessels and other property used in navigation, and formed a new cor- poration, and in the contract of con- solidation made arrangements for the payment of the debts of one or both before any dividends should be de- clared on the new stock, it was held that the new corporation could not avail itself of the doctrine applicable to a purchaser without notice, and that a lien, three years and a half old, would be enforced against one of the vessels so transferred to the new cor- poration. The Key aty, 14 Wall. (U. S.) 654 (1871). Compare The Admiral, 18 Law Rep. 91. CHAP. VIIl] OBLIGATIONS OF CONSOLIDATED CORPORATION §85 proceedings, and the rights of hen holders are neither increased nor diminished. A consolidated corporation takes as a purchaser with notice, and cannot aver ignorance of a mortgage executed by one of its constituents, although unrecorded.' Upon the principle that, no change in the identity of corpora- tions through consolidation can prejudice the rights of lien holders, it is held that repairs and improvements made by a consolidated company upon property — real or personal — mortgaged by a constituent before consolidation, are subject to the mortgage.^ The necessity for this rule in the case of mortgaged chattels, e.g., railway rolling stock, is apparent. § 85. Equitable Liens. — A consolidated corporation takes the property of its constituents subject to equitable, as well as other, liens. A vendor's lien upon real estate for the unpaid purchase money is not affected by the consolidation of the purchasing corporation with another.^ An obligation to convey lands ' Where by the consolidation of two railroad companies, another is created which, by the terms of the consolida- tion, acquires all of the property and " franchises and assumes all the debts and liabilities of the two of which it is formed, and which become extinct by its creation, it takes such property subject to the ^ebts of the original companies, and burdened with all liens upon it which were vaUd against those companies, and will not be per- mitted to aver ignorance of an unrecorded mortgage previously exe- cuted by one of the original com- panies. Mississippi Valley Co. v. Chicago, etc. R. Co., 58 Miss. 846 (1881). See also North Carolina R. Co. v. Drew, 3 "Woods (U. S.), 691 (1874). ^ Hamlin a. Jerrard, 72 Me. 80 (1881). Improvements of a permanent nature and repairs made by a, con- solidated corporation upon property acquired from a constituent corpora- tion and subject to » mortgage exe- cuted by that company are covered by the mortgage and the mortgagee may be' entitled to specific perform- ance of a covenant for further assur- ance therein. Williamson v. New Jersey Southern R. Co., 25 N. J. Eq. 13 (1874). ^ North Carolina R. Co. v. Drew, 3 Woods (U. S.) 691 (1879). In this case, where a railroad subject to a vendor's lien was acquired by a con- solidating company, the Court said : "This consolidation, by which the two companies joined their properties to- gether, did not discharge the lien. The property of the Tallahassee Com- pany was brought into the common concern with all preexisting equities attaching thereto. The consolidated company having, as one of its com- ponent parties the Tallahassee qpm- papy which held subject to the lien, cannot be regarded as a bona fide pur- chaser without notice." See also Branch v. Atlantic, etc. R. Co., 3 Woods (U. S.) 481 (1879). 163 §85 INTERCORPORATE RELATIONS [part I comes within the terms of a consolidation agreement transferring property subject to " all liens, charges and equities " and is bind- ing upon the consolidated company. Such an obligation might have been equally binding, without such a provision, upon the principle that the property was charged with a trust to fulfil it and came into the hands of the consolidated company with notice.' While creditors of consolidating corporations may follow the assets of their debtors into the hands of the consolidated corporation they have, in the absence of express provision, no lien thereon as against subsequent mortgagees or purchasers. Such a lien may, however, be created, and whether it exists in a particular case will depend upon the terms of the agree- ment of consolidation and of the statute under which consoli- dation takes place.^ Where several railroad companies were consolidated and the consolidated company agreed to "•pro- tect" certain unsecured equipment bonds of a constituent com- pany, it was held by Judge Gresham, in the Circuit Court of the United States,^ that the holders of the equipment bonds ^ Union Pacific R. Co. v. McAIpine, 129 TJ. S. 314 (1889), (9 Sup. Ct. Rep. 286) : "The obligation of the Kansas Pacific Railway Company to execute the contract by a conveyance of the 25^ acre tract to the McAlpines passed with the property of the defendant, the Union Pacific Railway Company, upon the consolidation of the two companies under the latter name. AVhenever property charged with a trust is conveyed to a third party with notice, he will hold it subject to that trust, which he may be com- pelled to perform equally with the former owner. The vendee in that case stands in the place of such owner. Without reference, therefore, to the articles of union and consolida- tion, the Union Pacific Railway Com- pany would, on general principles, be held to complete the contract made with the Kansas Pacific Company; and the articles in specific terms recog- nize this obligation." See also Vilas v. Page, 106 N.Y. 439 (1887), (13 N. E, Rep. 743). 164 2 Wabash, etc. R. Co. v. Ham, 114 U. S. 595 (1885), (5 Sup. Ct. Rep. 1081) : "But upon the consolidation, under express authority of statute, of two or more solvent corporations, the business of the old corporations is not wound up, nor their property seque.s- trated or disturbed, but the very object of the consolidation, and of the statutes which permit it, is to continue the business of the old cor- porations. Whether the old corpora- tions are dissolved into the new com- pany, or are continued in existence under a new name and with new powers, and whether, in either case, the consolidated company takes the property of each of the old corpora- tions charged with a lien for the pay- ment of the debts of that corpora- tion, depend upon the terms of the agreement of consolidation, and of the statute under whose authority that consolidation is effected." ^ Tysen v. Wabash, etc. R. Co., 15 Fed. 763 (1883), 11 Biss. (U. S.) 510. CHAP. VIIl] OBLIGATIONS OF CONSOLIDATED COEPORATION § 86 acquired an equitable lien upon the property acquired by the consolidated company from such constituent, which took pre- cedence of a mortgage thereof executed by the consolidated company. This decision was, however, reversed by the Su- preme Court of the United States,' which held that the agree- ment to "protect" was merely a promise to pay the bonds as they matured, and that the equipment bondholders had no lien, equitable or otherwise, upon the property of the con- solidated company. In a later decision, in a case brought by another holder of these equipment bonds against the same consolidated company, the Supreme Court of Ohio ^ declined to follow the Supreme Court of the United States but agreed v/ith Judge Gresham, and held that the agreement to "pro- tect " created an equitable lien, upon the principle that " where property is transferred upon condition that the grantee should pay some third person a debt, or sum of money, the latter acquires an equitable lien upon the property to the extent of the debt or sum which is to be paid to him." III. Remedies of Creditors of Constituent Corporations § 86. Remedy of Creditors against Consolidated Corpora- tion — At Law. — A question has been raised whether a con- solidated corporation can be sued in an action at law upon liabilities of its constituent companies or whether resort must ^ Wabash, etc. R. Co. v. Ham, 114 secured by mortgage as well as un- U. S. 596 (1885), (5 Sup. Ct. Rep. secured debts. The agreement 'to 1081) : "It was next contended that protect' referring to the time of pay- the stipulation in the agreement of ment, and 'the true meaning and consolidation that the bonds and effect' of the equipment bonds hav- debts therein specified of the former ing been to create only a personal companies should 'be protected by and unsecured debt of one of the the said consolidated company' former companies, the words 'shall created a lien in their favor. But it be protected' must have the same is only 'as to the principal and in- meaning which they ordinarily have terest as they shall respectively fall in promises of men of business, 'to due,' and 'according to the true protect' drafts or other debts, not meaning and effect' of the instru- made or contracted by themselves, raents or bonds which are the evi» that is to say, a personal obligation to dence of the debts, that it is stipu- sec that they are paid at maturity." lated that the debts shall ' be protected ^ Compton i,. Wabash, etc. R. Co., by the said consolidated company' ; 45 Ohio St. 592 (1887), (16 N. E. Rep. and the stipulation covers debt.g 110). 165 §86 INTERCORPORATE RELATIONS [part I be had to equity. It is, however, now well settled that con- soUdation confers all the rights, property and franchises of the old companies upon the consolidated company and subjects it to all their liabilities, and that an action at law may be brought against it and a personal judgment obtained for the debts and torts of its constituent companies.' The right to bring such action is placed upon the ground that, for the purpose of an- swering to their liabilities, the existence of the old companies is continued in the consolidated company;^ and it is also held ' Langhorne «. Richmond R. Co., 91 Va. 369 (1895), (22 S. E. Rep. 159), where the Court also said: "The question is not whether the consolida- tion compels a creditor to accept the defendant corporation as n new debtor against his will, or a person who has been injured to resort to a stranger for satisfaction, but whether it empowers the creditor of the per- son injured to resort, if he desires to do so, in the first instance, to the cor- poration which by the terms of the consolidation is made liable to him. The privity, some cases say, neces- sary to support this action is created by the statute authorizing the con- .solidation and the purchase and con- veyance under it. Other authorities place the right to bring such an action on the ground that the effect of the consolidation is, as to the liabilities of the old company, not to dissolve the corporation which is the immediate debtor, but to continue its existence in the consolidated corpora- tion. . . . Since by authority of law and the act of the parties the consoli- dated corporations are moulded into one with none of their rights impaired, and none of their responsibilities lessened, there is no good reason why the same proceedings may not be had against the new corporation as might have been had against the old to com- pel payment of liabilities. It a\'oids circuity of action. It allows the party with whom the contract was made or to whom the injury was done to pro- 166 ceed directly against the corporation, which, by virtue of the consolidation proceedings, is made liable to it." See also : Alabama: Warren v. Mobile, etc. R. Co., 49 Ala. 582 (1873). Georgia: Coggin v. Central R. Co., 62 Ga. 685 (1879), (35 Am. Rep. 1.32). Illinois: Arbuckle v. Illinois Mid- land R. Co., 81 lU. 429 (1876) ; Colum- bus, etc. R. Co. V. Skidmore, 69 111. 566 (1873) ; St. Louis, etc. R. Co. v. Miller, 43 111. 199 (1867). Indiana: Louisville, etc. R. Co. v. Boney, 117 Ind. 501 (1888), (20 N. E. Rep. 432, 3 L. R. A. 435) ; Indianapo- lis, etc. R. Co. V. Jones, 29 Ind. 465 (1868), (95 Am. Dec. 654). Kansas: Berry v. Kansas City, etc. R. Co., 52 Kan. 774 (1893), (36 Pac. Rep. 724, 39 Am. St. R«p. 371). Maryland: State v. Baltimore, etc. R. Co., 77 Md. 489 (1893), (26 Atl. Rep. 865). Texas: Indianola R. Co. v. Fryer, 56 Tex. 609 (1882) ; Houston, etc. R. Co. V. Shirley, 54 Tex. 125 (1880); Missouri Pac. R. Co. v. Owens, 1 Tex. Civ. Cas. par. 384 (1883). Compare, however, Whipple v. Union Pacific Co., 28 Kan. 474 (1882), where it was held that a consolidated corporation "is not liable for the debt of either constituent company unless it has in terms contracted to become so." ^ Indianapolis, etc. R. Co. v. Jones, 21 Ind. 465 (1868); Langhorne v. Richmond R. Co., 91 Va. 369 (1895), CHAP. VIIl] OBLIGATIONS OF CONSOLIDATED CORPORATION §87 that the statute fixing the liability and the proceedings there- under create the privity between the new company and the creditors of the old, necessary to support the action.' The consolidated company is bound by the admissions of a constituent corporation regarding its obligations made before consolidation, and evidence of the same is admissible in an action brought thereon against the new company.^ § 87. Remedy of Creditors — In Equity. — A corporation holds its property as a trustee, first, to meet its obligations, and, afterwards, for the benefit of its stockholders. It cannot give away its property or enter a consolidation, the effect of which is to transfer its assets and terminate its existence, to the prejudice of its creditors.' A consolidated corporation is (22 S. E. Rep. 159); Houston, etc. R. Co. V. Shirley, 54 Tex. 125 (1880). See also cases cited in preceding note. > New Bedford R. Co. v. Old Colony R. Co., 120 Mass. 397, 400 (1876) (sale): "In the absence of express provision, it cannot be in- ferred that it was the intention of the act to impair claims of third parties for existing liabilities, or to shorten the time within which the remedy must be pursued. The ques- tion is not whether the statute com- pels the creditor to accept the de- fendant corporation as a new debtor against his will, or an injured person to resort to a stranger for satisfaction, but whether it empowers the creditors ■or an injured person to resort, if he chooses, in the first instance, to the corporation which, by the terms of the statute, is made liable to him. And we are of opinion that it does, and that the privity necessary to support this action is created by the statute and the purchase and con- veyance under it." 2 Philadelphia, etc. R. Co. v. Howard, 13 How. (U. S.) 333 (1851) : "It is further objected that the ad- mission was not made by the de- fendants in this action but by the Wilmington and Susquehannah cor- poration. It is true the action in the trial of which the admission was made, being brought before the union of the corporations, was necessarily in the name of the original corpora- tion ; but as, by virtue of the act of union, the Wilmington and Susque- hannah Company, the Baltimore and Port Deposit Company, and the Phila- delphia, Wilmington and Baltimore Company were merged in and consti- tuted one body, under the name of the Philadelphia, Wilmington and Balti- more Railroad Company, it is very clear that at the time the trial took place in Cecil County Court, all acts and admissions of the defendant in that case, though necessarily in the name of the Wilmington and Susque- hannah Company, were done and made by the same corporation which now defends this action. '^ ' Montgomery, etc. R. Co. v. Branch, 59 Ala. 153 (1877): "A private corporation chartered to trans- act business is a trustee of its capital, property and effects — first for the payment of its creditors and after- ward for the benefit of its stockholders. ... If leaving its debts unpaid, its capital, property and effects are dis- tributed among its stockholders, or transferred for their benefit to third persons who are not bona fide pur- 167 § INTEECOEPORATE RELATIONS [part 1 not a purchaser for value without notice, and a court of equity will treat the assets of a consolidating corporation as a trust fund for the benefit of its creditors and, upon its consolidation with unpaid debts, will pursue its assets and lay hold of them in the hands of the consolidated corporation and apply them for the payment of such debts.^ While a creditor has an action at law against the consoli- dated corporation upon the obligations of constituent com- panies, such remedy, as already noted, is not exclusive, and he may when he deems it to his advantage resort to equity and subject the property acquired from his debtor to the payment of the debt. Where, however, the consolidated corporation has sold the property so acquired to a bona fide purchaser for value a creditor cannot follow it.^ § 88. Remedy against Constituent Corporation if not Dis- solved. — Consolidation statutes sometimes provide that the chasers, without notice, — and still more if the corporation be dissolved or become so disorganized that it can- not be made answerable at law, then a court of equity will pursue and lay hold of such property and effects, and apply them for the payment of what it owes to its creditors." ' In Harrison v. Arkansas Valley R. Co., 4 McCrary (U. S.) 264 (1882;, it was held that where several corpora- tions are united in one, and the property of the old companies is vested in the new, the latter is Uable in equity for the debts of the former, at least to the extent of the property received from them, and that if it is also liable at law, the latter remedy is not exclusive. The Court said (p. 267) : "If a creditor of the original corporation sees fit to proceed in equity to subject the property of that corporation in the hands of the con- solidated company, he has a clear right to do so. . . We are of the opinion that, under such circum- stances, the consolidated corporation is liable in equity for the debts of the original corporation, at least to the 168 extent of the value of the property received from it." See also Curran v. Arkansas, 15 How. (U. S.) 304 (1853); Mont- gomery, etc. R. Co. V. Branch, 59 Ala. 139 (1877). Compare, however, Arbuckle v. Illinois Midland R. Co., 81 111. 429 (1876), where it was held that when a consolidated company becomes, by virtue of the consolidation, liable for the debts of the companies composing it, the creditor's remedy is complete and adequate at law, and that a court of equity will not assume jurisdiction to enforce it. In United New Jersey R., etc. Co. V. Happock, 28 N. J. Eq. 261 (1877), it was held that corporations which have become consolidated into a new corporation a,ssuming all their liabili- ties, are suable at law through the consolidated corporation; and that the fact that .service of process can- not be had on them will not justify the resort to equity to enforce a strictly legal demand. ' McMahon v. Morrison, 16 Ind. 172 (1861), (79 Am. Dec. 418). CHAP. VIll] OBLIGATIONS OP CONSOLIDATED CORPORATION 88 consolidating corporations shall not be dissolved but that their existence shall be continued for the purpose of winding up their affairs.* The purpose of these statutes is to preserve the rights of creditors, unchanged and unimpaired. Under such a statute^ it is open to a creditor to enforce his demand either against the corporation whose debt it was or against the new corporation whose debt it becomes by virtue of the con- solidation.^ His remedies are concurrent and the recovery of a judgment against the old company does not affect his rights against the consolidated company. It merely changes the form of liability. When consolidating corporations are continued in existence a creditor may institute insolvency proceedings against such a corporation, if such a remedy is available against corporations generally.* ' In Whipple v. Union Pacific R. Co., 28 Kan. 474 (1882), where a con- solidation statute provided that the consolidated corporation should not be liable for the debts of the consoli- dating corporations, which should continue in existence for the purpose of adjusting all demands against them, but that the consolidation should not prevent the enforcement of valid obli- gations against the property of each constituent in the hands of the con- soHdated company, it was held that a creditor of a constituent corporation could not maintain an action against the consolidated corporation until he had sued the constituent corporation and recovered judgment. A street railway company which owed certain license fees to a mu- nicipality was absorbed by another corporation . which assumed all its obligations. Held that the absorbed company continued to exist as a. corporation so far as its existing creditors were concerned, and was liable for license fees due prior to the merger, but that it could not create liabilities after that time and was not liable for subsequent Ucense fees. City of New York t/. Sixth Ave. R. Co., 77 App. Div. (N. Y.) 367 (1902), (79 N. Y. Supp. 319). Where the statutes authorizing consolidation provided that all judg- ments theretofore or thereafter ob- tained against the constituent cor- porations should be a lien upon the property of the consolidated company derived from them, and that the con- stituent companies should continue in existence to preserve the liens against them, it was held that a constituent corporation was liable for a tort com- mitted prior to the consolidation, not- withstanding the consolidated cor- poration assumed all the liabilities of its constituents. Jones v. Southern R. Co., 127 Fed. 606 (1904). 2 New York: Laws, 1892, ch. 691, §12. ' Matter of TJtica Nat. Brewing Co., 154 N. Y. 268 (1897), (48 N. E. Rep. 521). See also Gale v. Troy, etc. R. Co., 51 Hun (N. Y.) 470 (1889), (4 N. Y. Supp. 295). « Piatt V. New York, etc. R. Co., 26 Conn. 514 (1857). Whether State in- solvency courts would have jurisdic- tion over interstate consolidated cor- poration, qiuere. lb. As to construction of Ohio statute 169 §89 INTEECOBPORATE RELATIONS [part I if 89. Effect of Consolidation upon Pending Suits. — While the effect of consohdation may be the dissolutioa of the con- stituent corporations and the creation of a new company in their stead, it does not destroy them in such a sense as to abate actions brought by or against them and pending at the time of the consolidation, and compel the plaintiff to begin anew.* In Shackleford v. Mississippi Central R. Co? the Supreme Court of Mississippi said: " The new company is the old com- pany; it is each of the old companies. It is simply the on- ward flow of a stream which is formed by the uniting of two precedent streams." As affecting the rights of creditors of the constituent cor- porations, the consolidated corporation should be regarded as (R. S. § 3384), providing that consoli- dating corporations shall be deemed to continue in existence for the preser- vation of the rights of creditors, see BuU V, Baltimore, etc. R. Co., 39 App. Div. (N. Y,) 236 (1899), (57 N. Y. Supp. 111). ' United States: Edison El. Light Co. V. U. S. El. Lighting Co., 52 Fed. 300 (1892); Edison El. Light Co. i;. Westinghouse, 34 Fed. 232 (1888). Alabama: In Birmingham R., etc. Co. V. Enslen, 144 Ala. 343 (1905), (39 So. Rep. 74) a street railway company caused the death of a passenger and subsequently was ab- sorbed by another corporation. Suit was brought against the consolidated corporation and during its pendency the latter corporation consolidated with a third. It was held that the pending suit was not affected by the last consolidation, and would proceed as if it had not taken place. Illinois: Chicago, etc. R. Co. v. Ashling, 160 111. 373 (1896), (43 N. E. Rep. 373). See also Franklin Life Ins. Co. v. Hickson, 197 lU. 117(1902), (64 N. E. Rep. 248), affirming 97 III. App. 387 (1901). Indiana: Hanna v. Cincinnati, etc. R. Co., 20 Ind. 30 (1863). 170 Michigan: Swartwout v. Mich. Air Line R. Co., 24 Mich. 389 (1872). Mississippi: Shackleford v. Miss. Cent. R. Co., 52 Miss. 159 (1876). Missouri: In Evans v. Interstate Rapid Tran.sit Co., 106 Mo. 601 (1891), (17 S. W. Rep. 489), the Court said : "Ordinarily the effect of a con- solidation of two or more corporations into one is a dissolution of aU of them and the creation of a new company. But legal proceedings properly com- menced against a corporation are not affected by the expiration of the char- ter before the determination of such' proceeding. So where one corpora- tion is consolidated with another while a suit is pending against it, the suit does not abate." Kinion v. Kansas City, etc. R. Co., 39 Mo. App. 382 (1899). Tjennessee: Railroad Co. ti. Evans, 6 Heisk. 607 (1871). Com.pare Prouty v. Lake Shore, etc. R. Co., 52 N. Y. 366 (1873). That consolidation does not abate condemnation proceedings, see Cali- fornia Cent. R. Co. v. Hooper, 76 Cal. 404 (1888), (18 Pac. Rep. 599) ; Day V. New York, etc. R. Co., 58 N. J. L. 677 (1896), (34 Atl. Rep. 1081). ' Shackleford v. Miss. Cent. R. Co., 52 Miss. 159 (1876). CHAP. VIIl] OBLIGATIONS OF CONSOLIDATED CORPORATION 90 continuing the existence of the old companies under a new name.' Consolidation statutes generally provide that con- solidation shall not affect pending suits; ^ but, without such provision, a voluntary consolidation would not be considered as equivalent to the death of either of the constituent cor- porations so as to abate pending actions." § 90. Procedure regarding Pending Suits. — It seems the better view that .in a pending action, upon proof of the fact of consolidation being made, it may be proceeded with against the new company by amendment and that new process is not necessary to bring the consolidated company before the court. Technically speaking and for general purposes the consolidated company is a new corporation, but touching the business of the old companies and the rights of their creditors, it ought ' Kinion v. Kansas City, etc. R. Co., 39 Mo. App. 382 (1889). 2 New York. Railroad Law, § 73, (Birdseye's, R. S. 1901, p. 2963) : "No action or proceedings in wliich either of such corporations is a party shall abate or be discontinued by such agreement or act of consolidation, but may be conducted to final judgment in the names of such corporations, or such new corporation may be, by order of the court, on motion, sub- stituted as a party." For other simi- lar provisions, see statutes referred in note to § 79, ante. ' Baltimore, etc. R. Co. v. Mussel- man, 2 Grant's Cas. (Pa.) 352 (1857) : "But without any such provision as the above, in the law authorizing the consolidation, a court of justice would not consider the mere voluntary union of several corporations into one as eqmvalent to the death of either of them ; or attribute to the law-making power an intention of enabling them to discharge their liabilities in such a summary way." In Kansas, however, the excep- tional view is taken that, since upon consolidation a constituent corpora- tion is dissolved and ceases to exist as a corporation, an action brought by or against it before consolidation can- not afterwards be prosecuted by or against it in its original name. Thus in Kansas, etc. R. Co. v. Smith, 40 Kan. 192 (1888), (19 Pac. Rep. 636), the court said: "On May 31, 1886, when the Kansas, Oklahoma and Texas Railway Company consoli- dated with the other companies, it ceased to exist as a corporation. And everything which has since transpired upon the basis of the aforesaid rail- way company's being a corporation ■ — indeed everything which has trans- pired in tins case since May 31, 1886, is void. . This case is where the original party has ceased to exist, has become defunct, is dead, and there- fore not able either to prosecute or defend." Also Cunkle v. Interstate R. Co., 54 Kan. 194 (1894), (40 Pac. Rep. 184) ; Chicago, etc. R. Co. v. Butts, 55 Kan. 660 (1895), (41 Pac. Rep. 948) ; Council Grove, etc. R. Co. v. Lawrence, 3 Kan. App. 274 (1895), (45 Pac. Rep. 125). See also Indianola R. Co. v. Fryer, 56 Tex. 609 (1882), where the court said that a judgment rendered against a constituent corporation after con- solidation was a nullity. 171 § 91 INTERCORPORATE RELATIONS [pART I properly to be regarded as the successor of the old companies under a new name; and to that extent it ought not to be re- garded as a new corporation. If it is the same corporation under a different name, an additional summons is umieces- sary.' On the other hand, however, it was held by the Supreme Court of Georgia that it was error to permit the plaintiff to take judgment against a consolidated company, without taking proper steps to bring the new corporation, as such, before the court ^ including the issue of new process.^ A consolidated corporation having been substituted as defend- ant in place of a constituent company has the right to treat the pleadings filed by the original defendant as its own, and to avail itself of all exceptions to rulings reserved by such defendant prior to the substitution.' § 91. Allegation and Proof of Consolidation. — In order to charge a consolidated company or to enable it to recover in an action pending at the time of consolidation by or against a constituent company, the plaintiff must regularly allege the fact of consolidation and the successorship of the new ^ Kinion v. Kansas City, etc. R. Co., properly substituted the consolidated 39 Mo. App. 386 (1889) : "Under this company as defendant, view it was not necessary to bring the ^ Selma, etc. R. Co. v. Harbin, 40 defendant into court by a new sum- Ga. 706 (1870). mens, and the simple and direct act It has been held that the consoli- of substitution was right. If John dated company should not be sub- Smith is sued, and during the pen- stituted in place of the old company dency of the suit he has his name when the report of the referee has changed to John Jones, a claim that been made before consolidation. It he, as John Jones, must be brought was also held in the same case that into court by additional summons the holder of preferred stock in a would be somewhat novel. Prac- constituent company, in enforcing his tically that is this case." claims thereon, stands in a different In Louisville, etc. R. Co. v. Sum- position from a creditor of such com- mers, 131 Ind. 241 (1892), (30 N. E. pany. Prouty v. Lake Shore, etc. R. Rep. 873), an action against a rail- Co., 52 N. Y. 363 (1873). road company for negligence, it was The substitution of the consoli- shown, after a verdict for plaintiff, that dated company in pending proeeed- the defendant and certain other rail- ings is often provided for in con- road companies had consolidated and sohdation statutes. See statutes formed a new company, which had referred to in note to § 79, ante. succeeded to all the rights and liabili- ^ Louisville, etc. R. Co. v. Utz, 133 ties of the consoUdating companies. Ind. 265 (1892), (32 N. E. Rep. 881). It was held that the trial court 172 CHAP. VIIl] OBLIGATIONS OF CONSOLIDATED CORPORATION §91 company to the rights or liabilities of such constituent com- pany and must prove the same, unless duly admitted. The court cannot take judicial notice of consolidation.' Statutes providing that an allegation of corporate capacity shall be taken as true unless specifically denied do not apply to an allegation in a complaint that the defendant corporation consolidated with another company before the commencement of the suit.^ An allegation in a complaint that certain railroad companies, authorized by law to consolidate, did consolidate and become one corporation under a certain name, is a suffi- cient averment of consolidation mthout setting forth in detail the steps taken by the constituent companies to bring about such result.' The facts concerning the consolidation should, however, be set forth with reasonable certainty,^ although their absence from a petition would not occasion a reversal of judgment.^ Consolidation statutes sometimes provide that a copy of the articles of consolidation on file in the office of the Secretary of State, duly certified and authenticated, shall be prima facie ' Southgate v. Atlantic, etc. R. Co., 61 Mo. 90 (1875). In Brown v. Dibble, 65 Mich. 520 (1887), (32 N. W. Rep. 656) it was held that it would not be presumed that a foreign constituent corporation had power to consolidate. ^ Koons V. Chicago, etc. R. Co., 23 Iowa, 493 (1867). ' Collins V. Chicago, etc. R. Co., 14 Wis. 495 (1861), (80 Am. Dec. 789) : "Now although these allegations in respect to the consolidation of the various companies are quite general we do not see how they could be made more specific, without setting forth in detail all the steps taken by the dif- ferent companies to effect their con- solidation and make it complete. . . . We therefore think the aver- ments of the complaint should be deemed sufficiently explicit, on de- murrer. They must be considered as equivalent to alleging that everjfthing was done, and every step taken by the various companies to render their acts of consolidation complete and effectual." As to pleadings concern- ing consolidation in quo warranto pro- ceedings see Commonwealth v. Atlan- tic, etc. R. Co., 53 Pa. St. 9 (1866). * Hubbard v. Chappell, 14 Ind. 601 (1860) ; Wright v. Bundy, 11 Ind. 398 (1858) ; Marquette, etc. R. Co. v. Langton, 32 Mich. 251 (1875) ; Lang- horne v. Richmond R. Co., 91 Va. 369 (1892), (22 S. E. Rep. 159). In the last case the Court said (p. 375) : "In this case, as the plaintiff had instituted his action to recover damages from the consolidated corporation for the injury alleged to have been done him by the corporation consolidated with it, it was necessary for him to allege generally the authority of the old companies to consolidate, and the fact that they had consolidated, and under what name, in order to show the liability of the new or consolidated company for the injury sued for." ' Indianapolis, etc. R. Co. v. Jones 29 Ind. 465 (1868),(95 Am. Dec. 654). 173 92 INTBBCORPORATE RELATIONS [PABT I evidence of consolidation.* In the absence of such a statutory- provision the existence of a consolidated corporation could, undoubtedly, be proved in the same manner as the existence of any other corporation — by showing the due execution and record of the consolidation agreement in pursuance of statu- tory authority, and acts of user thereunder.^ CHAPTER IX rRREGULAR AND INVALID CONSOLIDATIONS § 92. Attempted Consolidation — Status of Resulting Organization. § 93. Effect of Unlawful Consolidation. § 94. Effect of Irregular Consolidation. § 95. Who may attack Irregular Consolidation. § 96. Estoppel to deny Reg\ilarity of Consolidation. § 97. Accounting after Attempted Consolidation. § 98. Fraud in Consolidation Agreement. § 92. Attempted Consolidation — Status of Resulting Organi- zation. — When a consolidation of corporations has been at- tempted but the result of the proceedings, through some defect or want of power, has not been a corporation de jure, the rights * "A copy of said agreement and act of consolidation, duly certified by the Secretary of the State under his official seal, shall be evidence in all courts and places of the existence of said new company and that the provi- sions of this act have been fully ob- served and complied with." Con- necticut, Rev. Stat. 1888, | 3445. Other States have somewhat similar statutory provisions. A copy of articles of consolidation, duly certified under the seal of the Secretary of State, is prima fade evi- dence of the existence of the consoli- dated corporation. East St. Louis, etc. R. C6. V. Wabash, etc. R. Co., 24 111. App. 279 (1887). See also Columbus, etc. R. Co. v. Skidmore, 69 HI. 566 (1873). 17-4 2 In the trial of an action against an alleged consolidated corporation for the negligence of a ' constituent company a deed from the latter cor- poration to the former conveying all its property and reciting the fact of the consolidation, and an act of the legislature confirming the consolida- tion but not stating when it took place, taken in connection with the admission incident to the plea of the general issue — that the defendant existed as a corporation when it was filed — constitute competent evidence of consolidation and, being in the case, a charge that there is no evi- dence of consolidation is unwarranted. Zealy v. Birmingham R., etc. Co., 99 Ala, 579 (1892), (13 So. Rep. 118). CHAP. IX] IRREGULAR AND INVALID CONSOLIDATIONS 92 and obligations accruing will be determined by ascertaining whether a de facto corporation has been formed. Unless a consolidation statute, in force at the time of the proceedings,' authorized the proposed consolidation, the result was a nullity even if there was an attempt in good faith to consolidate fol- lowed by an assumption of corporate powers.^ An attempt to do that which the law does not permit can produce no result that the law will recognize. A body which cannot be- come a corporation de jure cannot become a corporation de facto. Moreover, the mere user of corporate powers which ' The subsequent passage of a con- solidation statute, not retroactive in terms, does not validate an illegal consolidation nor create a de facto cor- poration. American Loan, etc. Co. v. Minnesota, etc. R. Co., 157 111. 641 (1895), (42 N. E. Rep. 153). ' Whaley ^v. Bankers' Union of the World (Tex. Civ. App., 1905) 88 S. W. Rep. 261: "An attempted consolidation, where no statute au- thorizes consolidation, is a nullity; and the corporate existence of a nominally consolidated corporation formed in the absence of legislative authority for such consolidation may be collaterally attacked, its acts and contracts are void, and it cannot be held liable for the debts of one of the corporations attempting to con- solidate " Citing this section. See also Boor v. Tolman, 113 111. App. 322 (1904). American Loan, etc. Co, v. Minne- sota, etc. R. Co., 157 111. 641 (1895), (42 N. E. Rep. 153): "In order that there should be a de facto corporation two things are essential: First, there must be a law under which the cor- poration might lawfully be created; and second, » user. When the law authorizes a corporation, and there is an attempt, in good faith, to organize, and corporate functions are thereupon exercised, there is a corporation de facto, the legal existence of which cannot ordinarily be questioned col- laterally. . . . Our attention is called to no case in which it is held that, in the absence of any general law or special charter or other law authoriz- ing incorporation or consolidation, as the case may be, and also in the ab- sence of subsequent legislative ratifi- cation, the juristic personality of a corporation or consolidated corpora- tion is complete and conclusive against all the world except the sovereign power. For the reasons we have stated the supposed consoli- dated corporation of the States of Wisconsin, Minnesota and Illinois called the Chicago Freeport and St. Paul Railroad Company, is not, and never was, a corporation either de facto or de jure. The right of way contracts and the trust deed made to the appellant were and are invalid, and this because there was no cor- poration in existence with capacity to either obtain a right of way, or con- tract, or act or be bound," An attempted consolidation of mining and manufacturing corpora- tions under a statute authorizing the consolidation of railroad companies is without warrant of law and of no effect. And this conclusion is not affected by the fact that such cor- porations may have power to build railroads to carry their own products from their lands to near- by lines. Commonwealth v. Pennsylvania etc. R. Co. 17 Phila. (Pa.) 609 (1884). 175 § 93 INTERCOHPOKATB RELATIONS [pART I might have been lawfully acquired, without a bona fide at- tempt to acquire them by forming a consolidation, does not create a consolidated corporation de facto nor does an attempt to organize without user have that effect. All of these elements must unite to form a de facto corpora- tion, — ■ (a) a statute under which the proposed consoli- dation might have been effected, (6) a bona fide attempt to consolidate, and (c) a user of the corporate powers claimed.' § 93. Effect of Unlawful Consolidation. — As already noticed, the result of an attempted consolidation when no statute authorizes consolidation is a nullity, and the same result fol- lows when the other elements, of a de facto corporation are lacking. Accordingly, the corporate existence of a nominally consohdated corporation, formed in the absence of legisla- tive authority for such a consolidation, may be collaterally attacked, its acts and contracts are void,^ and it cannot be held liable for the debts of one of the corporations attempting to consoUdate.' So it was held, where two corporations were consolidated, without legislative authority, that promissory notes executed by the consolidated organization for purposes beyond the powers of the constituent companies were not ' In Metho'dist, etc. Church u. subject to the same objection as that Pickett, 19 N. Y. 482 (1859), it was in Methodist, etc. Church v: Pickett, said that the following elements were supra: "It may be safely stated essential to the existence of a de facto as the rule, that when persons assume corporation: "(1) The existence of a to act as a body, and are permitted charter or some law under which a by acquiescence of the public and of corporation, with the powers assumed, the State to act as if they were legally might lawfully be created; and (2) a particular kind of corporation, for a user by the party to the suit of the the organization, existence and con- rights claimed to be conferred by tinuance of which there is express such charter or law." This state- recognition by general law, such ment has, however, been criticised body of persons is a corporation de as omitting the element of an attempt facto, although the particular per- to organize. Finnegan v. Norrenberg, sons thus exercising the franchise of 52 Minn. 239 (1893), (53 N. W. Rep. being a corporation may have been 1150, 38 Am. St. Rep. 552, 18 ineligible and incapacitated by the L. R. A. 778). In Continental Trust law to do so." Co. V. Toledo, etc. R. Co., 82 Fed. ^ American Loan, etc. Co. v. Min- 653 (1897), Judge Taft, in considering nesota, etc. R. Co., 157 111. 641 (1895), what attempts at consolidation (42 N. E. Rep. 153). created a corporation de facto, stated ' Kavanaugh v. Omaha Life Assn., the following conclusion, which seems 84 Fed. 295 (1897). 176 CHAP. IX] lEREGULAU' AND INVALID CONSOLIDATIONS § 94 binding upon them after such organization had been dissolved.' Where, however, after a valid consolidation of two corpora- tions had been effected, the consolidated corporation thus created attempted to further absorb, without authority, a third corporation and, thereafter, executed a mortgage upon all its property, it was held that the illegality of the latter consolida- tion did not affect the mortgage lien upon the property of the first two corporations.^ A judgment obtained against a consoUdated corporation which is thereafter declared illegal may be enforced against the constituent companies, upon the' theory that they were the real defendants under the assumed name.' A constituent railroad corporation, after an illegal consolidation, is liable for injuries received by a passenger while upon its railroad, caused by the negligent operation of the railroad by the em- ployees of the consolidated company.^ An attempted consolidation, without authority, does not terminate the existence of a corporation, and non-user of its franchises during the existence of the illegal organization does not forfeit them.^ § 94. Effect of Irregular Consolidation. — If, upon the prin- ciples indicated, the result of an attempted consolidation is a ^ Where two separate corporations association has been adjudged to ■were created to build railroads, they have had no legal capacity to exist had no right to unite and conduct as a corporation, it follows, as was their business under one management ; also adjudged, that the individual nor had they a right to establish a entity of the defendant was not steamboat line to run in connection merged in it. Therefore, the de- with the railroads. Notes given for fendant remained as an actor and the purchase of the steamboat can- participator in the association which not be recovered upon. So held in did operate the railway, and thus Pearce v. Madison, etc. R. Co., 21 one of the parties by whose negli- How. (U. S.) 441 (1858). gence was injured. As such it was ' Racine, etc. R. Co. v. Farmers severally liable as one of the wrong- Loan, etc. Co., 49 111. 331 (1868), (95 doers." Am. Dec. 595). " State v. Crawfordsville, etc. Turn- 3 Ketcham v. Madison, etc. R. Co., pike Co., 102 Ind. 283 (1885), (N. E. 20 Ind. 260 (1863). Rep. 395). * Latham v. Boston, etc. R. Co., An attempted consolidation with- 38 Hun (N. Y.), 267 (1885): "The out legislative authority does not defendant was one of the constituent work the dissolution of a corporation, companies out of which the associa- Topeka Paper Co. v. Oklahoma tion was formed which was entitled Pub. Co., 7 Okla. 220 (1898), (54 Pac. to be a new company. As this Rep. 455). 177 §95 INTERCORPORATE RELATIONS [part 1 corporation de facto, the general rule that the existence of such a corporation cannot be made the subject of collateral attack is appUcable.^ As said by the Supreme Court of the United States in the Pacific Railroad Removal Cases. '^ "The organization of the company under the consoUdation proceed- ings makes it, at least, a corporation de facto and the legaUty of its constitution wiU not be inquired into collaterally." Thus, after consolidation has taken place, it is no defence to an action brought upon an obligation given to the consolidated company that prescribed formalities were omitted in the con- soUdation proceedings.' Upon similar principles, it has been held that the existence of a de facto consoUdated corporation cannot be attacked in an action of ejectment in order to dis- prove title in a plaintiff who claims through such corpora- tion.'' § 95. Who may attack Irregular Consolidation. — The State may directly attack the regularity of the organization of a ' Pacific Railroad Removal Cases, 115 U. S. 15 (1885), (5 Sup. Ct. Rep. 1113); Continental Trust Co. v. Toledo, etc. R. Co., 82 Fed. 642 (1897); Fanners Loan, etc. Co. v. Toledo, etc. R. Co., 67 Fed. 49 (1895). Also, Washburn v. Cass County, 3 Dill. (U. S.) 251 (1875); Leaven- worth CJounty V. Chicago, etc. R. Co., 25 Fed. 219 (1885). In City of Belleville v. Indianapolis, etc. R. Co., 49 111. App. 301 (1892) it was held that where it appeared that from the time a certificate of consolidation had been filed with the Secretary of State the corpora- tion purporting to have been created had acted as a consolidated corpora- tion, the effect of the consolidation if regular was to create a new corpora- tion de jure, and if irregular, a* cor- poration de facto. ^ Pacific Railroad Removal Cases, 115 U. S. 15 (1885), (5 Sup. Ct. Rep. 1113). ' Where a party executed and delivered his promissory note to a consolidated organization which was 178 afterwards assigned by it, it was held in an action upon such note by the assignee against the maker, that the defendant, by executing his note to the corporation, thereby admitted its corporate existence, and, in order to avoid a payment for want of a party with whom to contract, he must prove that no such body existed in fact ; and that under a plea of nvl tid corporation where an organization in fact, and a user is shown, the existence of the corporate body is proved. Mitchell v. Deeds, 49 111. 416 (1867), (95 Am. Dec. 621). See also Continental Trust Co. «. Toledo, etc. R. Co., 82 Fed. 642 (1897); Branch v. Jesup, 106 U. S. 468 (1882), (1 Sup. Ct. Rep. 495). * Where title is traced through a consolidated corporation which is not a party to the record and with which the defendant has no privity, proof of its existence as a corporation de facto by the articles of incorporation duly made is sufficient prima fade. Tarpey v. Deseret Salt Co., 5 Utah 494 (1888), (17 Pac. Rep. 631). CHAP. IX] IRREGULAR AND INVALID CONSOLIDATIONS 95 de facto consolidated corporation in quo warranto proceed- ings.i A subscriber to the stock of a constituent corporation, when sued by the consolidated corporation upon his subscription contract, may show the omission of some statutory condition precedent in the consolidation proceedings.^ This is an excep- tion to the rule against the collateral attack of de facto cor- porate existence and is justified by the relation of the parties. The decision of the Supreme Court of Michigan, in Brown V. Dibble,^ which, if well founded, practically nullifies the rule, (cannot, however, be sustained upon the same ground. In that case it was held that when a consolidated corporation seeks to enforce rights against third persons, as the successor of its constituents, the question can be raised whether it has, in fact, been duly organized and has succeeded to the rights claimed. The rule, however, that the existence of a consolidated cor- poration cannot be collaterally attacked is inapplicable when the consolidation is fraudulent.* ' state V. Vanderbilt, 37 Ohio St. 590 (1882); Commonwealth v. At- lantic, etc. R. Co., 53 Pa. St. 9 (1866). ' Thus, where the consolidation act provided for the consolidation of corporations upon the approval of the agreement of consolidation by the constituent corporations, and required the election of a board of directors of the consolidated corpora- tion as a condition to its succession to the rights and privileges of the constituent corporations, it was held that it might be shown by a sub- scriber, in action to enforce his sub- scription, that the consolidated cor- poration had not succeeded to such rights on account of its failure to comply with such condition. Mans- field, etc. R. Co. V. Drinker, 30 Mich. 124 (1874). See also Mansfield, etc. R. Co. v. Stout, 26 Ohio St. 241 (1875); Tuttle V. Michigan Air Line, etc. Co., 35 Mich. 249 (1877); Mansfield, etc. R. Co. V. Brown, 26 Ohio St. 223 (1876). The contrary is, however, held in Kansas. See Chicago, etc. R. Co. V. Stafford County, 36 Kan. 128 (1887), (12 Pac. Rep. 593), (mandamus to enforce subscription), where the Court said: "As the plain- tiff is a de facto corporation, under the decisions of this court its exist- ence as such corporation can only be attacked in a direct proceeding brought for that purpose. Such matter cannot be inquired into col- laterally." 3 Brown v. Dibble, 65 Mich. 523 (1887), (32 N. W. Rep. 656); "Unless the consolidation is shown to be the legally created successor of the old Michigan Company it has no con- cern with its individual contracts with third persons; and if so identified it can only have ... a right to recover by proof that all conditions of recovery have been complied with." * Jones V. Missouri-Edison El. Co., 144 Fed. 775 (1906) ; "Counsel for the defendants argue . . that the existence of the consolidated corporation may not be collaterally 179 §96 INTEECOBPORATE RELATIONS [part I § 96. Estoppel to deny Regularity of Consolidation. — While subscribers to the stock of constituent corporations may ques- tion the regularity of the consolidation, when sued by the consolidated company upon their subscriptions, a different principle may be applicable when creditors of that company seek to reach such subscriptions for the payment of its debts. In such a case subscribers who have acquiesced in the consoli- dation are estopped to question its validity.' A de jajdo consolidated corporation is estopped from deny- ing its corporate existence in order to avoid its obligations.^ assailed and annulled by a private party and that it may be successfully questioned by the State only, and he cites in support of this contention : . . . But not one of these decisions holds that the perpetrator of a fraud or the abuser of a trust or their privies may shield themselves behind the inactivity of the State, quiet the con- science and escape the grasp, of a court of chancery more successfully by appropriating the property of a cestui que trust by means of a consoli- dation of corporations than he may by a decree of foreclosure and sale (Jackson v. Ludeling, 21 Wall. 616 (1874), by a transfer of all the prop- erty of a corporation and its disso- lution (Ervin v. Oregon R, & Nav. Co., 20 Fed. 577 (1884), by a lease (Meeker v. Winthrop Iron Co. 17 Fed. 48 (1883)), or by any other legal device he may happen to adopt. The cases he cited have to do with transactions free from fraud, and while possibly pertinent to the charge in the bill that the consolidation was not authorized by law, they have no relevancy to the cause of action for fraud and breach of trust in the con- ception and execution of the con- solidation. . The rule that the existence of a corporation may not be collaterally assailed by a private indi- vidual constitutes no bar to a suit by a minority stockholder to avoid for fraud or breach of trust a contract and act of consolidation of corpora- 180 tions and to restore the property to_ its former owner." ^ Hamilton v. Clarion, etc. R. Co., 144 Pa. St. 34 (1891), (23 Atl. Rep. S3). ' United States: Farmers Loan, etc. Co. V. Toledo, etc. R. Co., 67 Fed. 49 (1895). Illinois: Racine, etc. R. Co. v. Farmers Loan, etc. Co., 49 111. 347 (1868), (95 Am. Dec. 595) : "Where a company has issued its bonds and mortgage under the circiunstances above detailed, the courts of every civilized country must hold an es- toppel from denying its corporate existence, for such a defence is re- pugnant to every sentiment of justice and good faith. That this doctrine of equitable estoppel, or estoppel in pais, by which a person who has represented to another the existence of a certain state of facts, and thereby induced him to act on the faith of their existence, is concluded from averring against such person and to his injury that such representations were false, is as applicable to cor- porations as to natural persons, will hardly be denied." A corporation which has, in effect, consolidated with another, is estopped to assert that the proceedings for con- solidation were irregular, in an action against it to recover the amount of a judgment against the other corpora- tion binding upon it if there was a consolidation. Chicago, etc. R. Co. CHAP. IX] IRREGULAR AND INVALID CONSOLIDATIONS §96 In Farmers Loan, etc. Co. v. Toledo, etc. R. Co.^ Judge Taft said: " It is too well established to need discussion that both a de facto corporation and the persons exercising the rights of stockholders in such a corporation are estopped to assert its unauthorized existence as a corporation to avoid a debt incurred by it in the actual exercise of corporate franchises and the doing of corporate business." Creditors of a de facto consolidated corporation who have dealt with it as a corporation and whose claims have arisen after the issuance of mortgage bonds, are estopped from at- tacking the regularity of its organization for the purpose of invaUdating the bonds. ^ As creditors they have no better standing than the bondholders. Upon similar principles it would seem that creditors of an illegal consolidated corporation could not attack its validity in order to defeat the holders of prior securities. If the corpora- tion is a nullity its bonds and unsecured debts are equally invalid.^ V. Ashling, 160 111. 373 (1896), (43 N. E. Rep. 373). Michigan: In Shadford v. Detroit etc. R. Co., 130 Mich. 300 (1902), (89 N. W. Rep. 960) it was held that a corporation created by the actual consolidation of several corpo- rations, and which received and held their properties, could not deny its liability upon the obligations of a constituent corporation upon the ground that the consolidation was unlawful. See also Howell v. Lansing, etc. R. Co., 146 Mich. 450 (1906) (109 N. W. Hep. 846). The diffi- culty with this decision is that the corporation in question seems not to have been even a de facto consolidated corporation. There was not only a want of statutory authority to consoli- date but the whole transaction was rather in the form of a sale than of a consolidation. New Jersey: Williamson v. New Jersey Southern R. Co., 26 N. J. Eq. 398 (1875). Ohio: Adelbert University v. Toledo, etc. R. Co., 3 Ohio N. P. 15 (1894). ' Farmers Loan, etc. Co. v. Toledo, etc. R. Co., 67 Fed. 49 (1895). ' Louisville Trust Co. v. Louisville, etc. R. Co., 84 Fed. 539 (1898), re- versed on other grounds, 174 U. S. 674 (1899), (19 Sup. Ct. Rep. 827), distinguishing American Loan, etc. Co. 1). Minnesota, etc. R. Co., 157 111. 641 (1895), (42 N. E. Rep. 153). Also Continental Trust Co. v. Toledo, etc. R. Co., 82 Fed. 648 (1897). ' Continental Trust Co. v. Toledo, etc. R. Co., 82 Fed. 648 (1897) (per Taft J.): "Let us consider first the averment that the Toledo, St. Louis & Kansas City Railroad Company is neither a corporation de jure nor a corporation de facto. Can such a defence be urged by one purporting to be creditor of the pretended cor- poration? If the bonds are null and void because the corporation issuing them was a nullity, clearly the debts of the petitioners and the complain- 181 96 INTERCORPORATE RELATIONS [part I Principles of estoppel may also prevent the stockholders ^ and bondholders ^ of the consolidated corporation, and the constituent corporations ^ and their stockholders ^ from raising any questions as to the regularity of the consolidation. ant are in no better condition and the court has nothing upon which to exercise its jurisdiction." See also Louisville Trust Co. v. Louisville, etc. R. Co., 84 Fed. 539 (1898). ^ It has been held that a subscriber for stock in a consolidated company cannot attack the validity of its or- ganization on the ground that it em- braces parallel roads. Leavenworth County V. Barnes, 94 IT. S. 70 (1876); Lewis V. City of Clarendon, 5 Dill. (U. S.) 329 (1878), (6 Rep. 609). Subscribers for stock in consoli- dating companies, can, however, enjoin a consolidation of parallel roads when prohibited by statute or constitutional provision. See ante, § 40: "Enforcement of Provisions against Consolidation." ^ Wallace v. Loomis, 97 V. S. 155 (1877): "In view of these facts, we think that the appellant is estopped from denying the corporate existence ■of the company whose bonds he thus holds, and by virtue of which he acquires a locus standi in the suit. Irregularities and even fraud com- mitted in making the purchase authorized by the act, and failure to perform strictly all the requisites for changing the company's name, cannot avail the appellant, occupying the position he does in this suit, to deny the corporate existence of the Alabama and Chattanooga Railroad Company. He waived all such ob- jections when he took the bonds, and came into court only as a holder and owner thereof. The irregu- larities on which he relies might, perhaps, have been sufficient cause for a. proceeding on the part of the State to deprive the company of its franchises, or on the part of third persons who may have been injuri- 182 ously affected by the transactions. But neither the State nor any other persons have complained; and it is not competent for the appellant to raise the question in this collateral way, for the purpose of gaining some supposed advantage over other creditors of the same company, who have relied on its corporate existence in the same manner that he has done." ' A corporation which has volun- tarily become consolidated with another, has participated in all the necessary proceedings in such con- solidation, and has permitted the de facto corporation so formed to control its business and property and third parties to acquire rights and interests based on the existence of such de facto corporation, cannot sue to have such consolidation de- clared invalid by reason of irregu- larities in its formation. Bradford V. Frankfort, etc. R. Co., 142 Ind. 383 (1895), (40 N. E. Rep. 471). See also Carey v. Cincinnati, etc. R. Co., 5 Iowa, 357 (1857) ; Dimpfel V. Ohio, etc. R. Co., 9 Biss. (U. S.) 127 (1879). ^ Bell V, Pennsylvania, etc. R. Co. (N. J. 1887), 10 Atl. Rep. 741 ; Lewis V. City of Clarendon, 5 Dill. (U. S.) 329 (1878), (6 Rep. 609). In the latter case the Court said: "By subscribing for stock and issu- ing its bonds under the circumstances to the consolidated company the city is estopped in a suit upon such bonds from showing that the latter com- pany is not a corporation de jure.'' Where the validity of a consoli- dation has not been attacked by the State or a dissenting stockholder, a municipal corporation cannot question it by way of a defence to an action on CHAP. IX] IRREGULAR AND INVALID CONSOLIDATIONS § 98 § 97. Accounting after Attempted Consolidation. — While an attempted consolidation, without statutory authority, is ultra vires and no action will lie upon the agreement of consolida- tion, one corporation which has received under the agreement property of another can be compelled to make restitution thereof or to account for its value.' Thus, where a bill in equity brought to restrain an ultra vires consolidation was dismissed because of the voluntary rescission of the articles of consolidation, a cross bill praying for an accounting was permitted to stand, and the suit remained for the purpose of such accounting. In this case the Supreme Court of Missis- sippi said: " The decided weight of authority in England and America is that no action lies upon the invalid contract, that no decree can be made by a court of equity for its specific per- formance, nor can a recovery be had at law for its breach; but that, by proceeding in the proper court, the plaintiff may recover to the extent of the benefit received by the defendant from the execution of the agreement by the plaintiff." ^ § 98. Fraud in Consolidation Agreement. — Courts of' equity will annul any scheme by which the stockholders of one cor- poration, after agreeing to consolidate their corporation with another, fraudulently seek to gain an advantage over the share- holders of the latter company. Thus, where one corpora- tion after agreeing to a consolidation declared a scrip dividend and issued certificates of indebtedness therefor without the knowledge of the other corporation, which then went into the consolidation, it was held, in a suit in equity brought by the stockholders of the latter company, that the scrip was fraudu- lent and void and should be delivered up to be cancelled.^ bonds issued to a constituent corpora- ject of ultra vires contracts and of the tion. Washburn v. Cass County, 3 rights and duties of the parties thereto Dill. (U. S.) 251 (1875). see post, ch. 22. It has been held, however, that ' Greenville Compress Co. v. Plant- the holder of bonds issued by a county ers Compress, etc. Co., 70 Miss. 676 to a railroad company, two days after (1893), (13 So. Rep. 879, 35 Am. St. an attempted consolidation with Rep. 681). another company, was not estopped, ' Bailey v. Citizens Gas Light Co., as against the county, from asserting 27 N. J. Eq. 196 (1876). the invalidity of such consolidation. Equity, however, cannot dissolve a Morrill v. Smith County, 89 Tex. 529 consolidated corporSition upon the (1896), (36 S. W. Rep. 56). ground, alleged by a stockholder in a ' For full consideration of the sub- constituent corporation, that the 183 98 INTERCOBPOKATB RELATIONS [PAET I The consolidation of a corporation, effected by the majority- stock interests through directors chosen by them against the protests of the minority, with another corporation likewise controlled by such majority interests, by the terms of which the preferred stock held by the minority is deprived of the greater part of its value, to the benefit of the stockholders of the second corporation, is a fraud upon the minority. It con- stitutes an abuse of the trust relation borne by the holders of the majority of the stock to the minority, and a breach of duty upon the part of the directors. The consolidation effected through such fraudulent scheme is voidable in equity at the suit of the minority stockholders and the courts may grant other effective relief.' consolidation was -for a fraudulent purpose, and not legally effected, Terhune v. Midland R. Co., 38 N. J. Eq, 423 (1884). ' Jones V. Missouri-Edison El. Co. 144 Fed. 765 (1906). In this case the United States Circuit Court of Appeals for the Eighth Circuit said (p. 771): "A combination of the holders of a, majority or of three-fifths of the stock of a corporation to elect direct- ors, to dictate their acts and the acts of the corporation for the pur- pose of carrying out a predetermined plan places the holders of such stock in the shoes of the corporation and constitutes them actual, if not tech- nical, trustees for the holders of the minority of the stock. The devo- lution of power imposes correlative duty. The members of such a com- bination become in practical effect the corporation itself because they draw to themselves and use the power of the corporation. In a, sale of its property, in a consolidation of the corporation with another, in every act and contract of the corporation which they cause they make them- selves the tru.stees and agents of the holders of the minority of the stock because it is only through them that the latter may act or contract regard- ing the corporate property or pre- 184 serve or protect their interests in it. Such a majority of the holders of stock owe to the minority the duty to exercise good faith, care, and dili- gence to make the property of the corporation in their charge produce the largest possible amount, to pro- tect the interests of the holders of the minority of the stock and to secure and deliver to them their just pro- portion of the income and of the pro- ceeds of the property. Any sale of the porporate property to themselves, any disposition by them of the cor- poration or of its property to deprive the minority holders of their just- share of it or to get gain for them- selves at the expense of the holders of the minority of the stock, becomes a breach of duty and of trust which invokes plenary relief from a court of chancery." A very different view of the obli- gations of majority stockholders to the minority in case of a consolidation is expressed in Colgate u. United States Leather Co., 67 Atl. Rep. 663 (K J. Ch. 1907): "The general rule under our decisions is that the indi- vidual stockholders are not trustees for each other, but each may, as a member of the general corporate body exercise his individual right and vote equally with the stockholders on the CHAP. IX] IRREGULAR AND INVALID CONSOLIDATIONS 98 A secret agreement between the promoters of a consolida- tion that the money advanced for the purchase of certain stock, necessary to effect the consolidation, should be a debt of the consolidated company, and be repaid by an issue of its bonds, is not binding upon the consolidated company and the proceeds of bonds so applied may be recovered.' An arrangement for consolidation between two corporations having directors in common is not necessarily void; but the burden is upon such directors of showing that it is fair to all stockholders. If it is in any respect unfair to minority interests it may "he set aside in equity.^ ratification of a contract in which he is interested, and ratification or adop- tion of the contract is valid, even if carried by his vote. . . . This right of the majority (statutory or other) either to originally direct or to affirm contracts or other proceedings in which the directors or the majority stockholders are interested is not, ' however, absolute but is subject to the necessary qualification that the majority, although they may deal with the assets of the company, can- not so deal with them as to divide those assets, more or less, between themselves, to the exclusion of the minority. . . . By this rule full practical protection, and all the pro- tection they are entitled to, is given to the minority stockholders without resort to any principle of supposed trust relationship of one individual stockholder, or any combination of such individual stockholders, who constitute a majority, towards those who do not act with them and con- stitute a minority. To make the majority of the stockholders either directly or through their directors trustees of the minority, and obliged because they are in the majority to conduct the business or affairs of the company, as in any respect the spe- cial trustees of the minority seems to me to be a misconception of trust relations." For case of alleged fraudulent and idtra vires consolidation effected by majority stockholders in violation of right of minority, see Stevens v. Missouri, etc. R. Co., 106 Fed. 771. (1901). ' Trenton Pass. R. Co. v. Wilson, 55 N. J. Eq. 273 (1897), (37 Atl. Rep. 476). 2 Dady v. Georgia, etc. R. Co., 112 Fed. 838 (1900). See also post, § 114, " Voidable Sales." An agreement for the consolida- tions of two corporations has, how- ever, been held neither void nor voidable at the option of a minority stockholder because the directors executing it were the common di- rectors of both corporations. This decision was placed upon the ground that consolidation required the act of the stockholders, to which the directors' agreement was merely preliminary. Colgate V. U. S. Leather Co. (N. J. Ch, 1907), 67 Atl. Rep. 657. 185 100 INTERCOHPORATE RELATIONS [PART I CHAPTER X INTERSTATE CONSOLIDATIONS § 99. Consolidation of Corporations of Different States — How authorized. § 100. Construction of Interstate Consolidation Statutes. § 101. Statiis of Interstate Consolidated Corporation. § 102. Effect of Interstate Consolidation upon Status of Constituent Corpora- tions. § 103. Management of Interstate Consolidated Corporation. § 104. Rights and Powers of Interstate ConsoUdated Corporation. § 105. Duties of Interstate Consolidated Corporation — Taxation. § 106. Citizenship of Interstate Consolidated Corporation. § 107. Foreclosure of Mortgages after Interstate Consolidation. Jurisdic- tion. § 99. Consolidation of Corporations of Different States — How authorized. — Consolidation statutes generally provide for the consolidation of domestic railroad and other carrier corporations with those of an adjoining State where the works of the several corporations, when united, will form a continu- ous or connected line. The connection between the railroads may in some States be by a bridge, in others by a ferry and in another by a tunnel.' One State, at least, has no general act permitting the consolidation of domestic railroad companies but authorizes the consolidation of any railroad company in- corporated under its laws with any other corporation whose line of railroad " is situated wholly outside this State." ^ As already shown, State legislation authorizing the consolidation of such corporations is not a regulation of interstate commerce.' The consohdation of domestic and foreign business corpora- tions is not, as a rule, permitted by consolidation statutes applicable to that class of corporations. § 100. Construction of Interstate Consolidation Statutes. — Express legislative authority from each of the States creating the several corporations proposing to consoHdate must be ' See OTjfe, § 22: "What Railroads 'See anle,% 19a: " Aviharization may consolidate — Statutory Provi- of Consolidation of Interstate RaH- sions." roads not regulation of Interstate 'Connecticut: Gen. Stat. 1902, Commerce." I 3674. 186 CHAP. X] INTERSTATE CONSOLIDATIONS § 101 granted before a valid consolidation can take place. Any ambiguity in the terms of the grant will operate against the corporation and in favor of the public. A legislative grant of authority to consolidate does not authorize consolidation with a foreign corporation unless such power is clearly expressed.' It has, however, been held that an act authorizing a domestic 'railroad corporation to consoli- date with corporations operating roads in an adjoining State, authorizes a consolidation with a company operating, in an adjoining State, a road which extends into a third State.^ Power to purchase stock in " any other connecting railroad " authorizes the purchase of the stock of a foreign connecting railroad,^ and legislative consent to a purchase by " any rail- road company " includes foreign as well as domestic railroad corporations.^ § 101. Status of Interstate Consolidated Corporation. — A State may grant to a corporation of another State power to lease or purchase a railroad within its territory, and to main- tain and operate it, without making such corporation a do- mestic corporation or a citizen of such State.' ' American Loan, etc. Co. v. Min- R. Co., 65 N. H. 393 (1888), (23 Atl. nesota, etc. R. Co., 157 111. 641 Rep. 529): " Express consent is given (1895), (42 N. E. Rep. 153). See to a purchase by 'any railroad com- also Loughlin v. United States School pany.' Taken without qualification. Furniture Co., 118 111. App. 36 (1905); this clause includes foreign as well as Continental Trust Co. v. Toledo, etc. domestic railroad corporations. The R. Co., 82 Fed. 642 (1897). In words 'any railroad' might be used Black V. Delaware, etc. Canal Co., 24 in a connection and for a purpose N. J. Eq. 456 (1873), it was held, in which would show a restricted sense the analogous case of a lease, that not including foreign companies, power to lease to "any other corpora- Here is no evidence of a purpose to tion or otherwise" did not authorize exclude them." a lease to a foreign corporation. ' I. It is competent for a railroad ^ Adelbert College v. Toledo, etc. company, when authorized by the R. Co., 3 Ohio N. P. 15 (1894). See State creating it, to accept a grant of also Racine, etc. R. Co. v. Farmers authority from another State to ex- Loan, etc. Co., 49 111. 331 (1868), tend its railroad into such State, and (95 Am. Dec. 595). to receive a grant of powers to own ' Pittsburgh, etc. R. Co. v. Keokuk, or control, by lease or purchase, etc. Bridge Co., 131 U. S. 371 (1889), railroads of other corporations therein, (9 Sup. Ct. Rep. 770) ; Day v. Ogdens- and it may subject itself to such rules burgh, etc. R. Co., 107 N. Y. 129 and regulations as may be prescribed (1887), (13 N. E. Rep. 765). by the second State. Such legisla- * Boston, etc. R. Co. v, Boston, etc. tion is not regarded as within the 187 § 101 INTERCOEPORATE RELATIONS [part I When corporations of different States desire to consolidate, and to acquire the rights and privileges of that relation, the consolidated corporation created by the necessary cooperative legislation is essentially different from a corporation created by the consohdation of domestic corporations. A corpora- tion formed by the consolidation of corporations of different States, although it has the same shareholders, is designed to accomphsh the same purpose, and has the same powers, in each State, is a separate and distinct corporation in each State and exists in each State as a domestic corporation.' In constitutional inhibition against com- pacts between States. St. Louis, etc. R. Co. V. James, 161 U. S. 562 (1896), (16 Sup. Ct. Rep. 621); Rail- road Ck). V. Harris, 12 WaU. (U. S.) 82 (1870) ; Cbpeland v. Memphis, etc. R. Ck)., 3 Woods (U. S.) 651 (1878). II. The conclusive presumption for jurisdictional purposes, appli- cable to all corporations, that a cor- poration is composed of citizens of the State which created it, accom- panies the corporation when transact- ing business in another State, and it may sue and be sued in the federal courts of such other State as a citizen of the State of its original creation. St. Lotiis, etc. R. Co. v, James, 161 U. S. 562 (1896), (16 Sup. Ct. Rep. 621) ; Shaw v. Qiiincy Mining Co., 145 U. S. 444 (1892), (12 Sup. Ct. Rep. 935) ; Interstate Commerce Com. v. Texas, etc. R. Co., 57 Fed. 948 (1893) ; Myers v. Murray, etc. Co., 43 Fed. 695 (1890) ; Miller v. Wheeler, etc. Co., 46 Fed. 882 (1891) ; Copeland v. Mem- phis, etc. R. Co., 3 Woods (tJ. S.) 657 (1878). This doctrine of indispu- table citizenship does not, however, extend so far as to make such a cor- poration a citizen of the second State even though it be there endowed with all the powers and privileges usually granted to domestic corpora- tions. St. Louis, etc. R. Co. ». James, 161 U. S. 562 (1896), (16 Sup. Ct. Rep. 621). Compare Southern R. 188 Co., Allison 190 U. S. 326 (1902), (23' Sup. Ct. Rep. 713) ; Patch v. Wabash R. Co., 207 U. S. 277 (1907), (28 Sup. Ct. Rep. 80). III. The second State may create a corporation of the same name as the corporation of the other State, and may declare that the same legal entity shall be a corporation of that State and shall be entitled to exercise within its borders, by the same officers, all its corporate functions. The decided weight of authority supports the view that the result of such legislation is not the creation of a single corporation, but two corpora- tions of the same name having a dif- ferent paternity and being citizens, re- spectively, of the States creating them. Ohio, etc. R. Co. v. Wheeler, 1 Black (U. S.) 286 (1861). See also Muller v. Dows, 94 U. S. 444 (1876) ; Pennsyl- vania R. Co. i7. St. Louis, etc. R. Co., 118 U. S. 290 (1885), (6 Sup. a. Rep. 1094); Nashua, etc. R. Corp. v. Bos- ton, etc. R. Corp., 136 U. S. 356 (1889), (10 Sup. Ct. Rep. 1004); Racine v. Farmers Loan, etc. Co., 49 111. 348 (1868), (95 Am. Dec. 595) ; Missouri Pac. R. Co. v. Meeh, 69 Fed. 755 (1895), (30 L. R. A. 250). Contra, Railroad Co. v. Harris, 12 WaU. (U. S.) 82 (1870) ; Copeland v. Memphis, etc. R. Co., 3 Woods (U. S.) 651 (1878); Bishop v. Brainerd, 28 Conn. 289 (1859). ' United States : In Muller v. Dows, CHAP. X] INTERSTATE CONSOLIDATIONS §101 Quincy Railroad Bridge Co. v. Adams County,'^ the Supreme Court of Illinois said: " The only possible status of a company acting under charters from two States is that it is an associa- tion incorporated in and by each of the States, and, when acting as a corporation in either of the States, it acts under the au- thority of the charter of the State in which it is then acting and 94 U. S. 447 (1876), where a Missouri and an Iowa corporation had consoli- dated, the Supreme Court of the United States said; "The two com- panies became one. But in the State of Iowa it was an Iowa corporation, existing under the laws of that State alone. The laws of Missouri had no operation in Iowa." Also Nashua, etc. R. Corp. v. Boston, etc. R. Corp., 136 XJ. S. 381 (1890), (10 Sup. Ct. Rep. 1004); Peik V. Chicago, etc. R. Co., 94 U. S. 177 (1876); Delaware R. R. Tax Cases, 18 Wall. (U. S.) 206 (1873) ; Railroad Co. V. Whitton, 13 Wall. (U. S.) 271 (1871) ; Missouri Pacific R. Co. v. Meeh, 69 Fed. 755 (1895), (30 L. R. A. 250) ; Fitzgerald v. Missouri Pacific R. Co., 45 Fed. 812 (1891); Burger v. Grand Rapids, etc. R. Co., 22 Fed. 561 (1884). Illinois: Ohio, etc. R. Co. v. People, 123 111. 467 (1888), (14 N. E. Rep. 874) ; Quincy Railroad Bridge Co. V. Adams County, 88 111. 615 (1878); Racine, etc. R. Co. v. Farm- ers Loan, etc. Co., 49 111. 331 (1868), (95 Am. Dec. 595). Michigan: Chicago, etc. R. Co. v. Auditor General, 53 Mich. 91 (1884), (18 N. W. Rep. 586), {per Cooley, C. J.): "It is impossible to conceive of one joint act performed simul- taneously by two sovereign States which shall bring a single corporation into being except it be by compact or treaty. There may be separate con- sent given for the consolidation of corporations separately created; but where the two unite, they severally bring to the new entity the powers and privileges already possessed, and the consolidated company simply exercises in each jurisdiction the powers the company there chartered had possessed." Minnesota: In re St. Paul, etc. R. Co., 36 Minn. 85 (1886), (30 N. W. Rep. 432). Nebraska : Trester v. Missouri Pac. R. Co., 33 Neb. 171 (1891), (49 N. W. Rep. 1110). New York: People v. New York, etc. R. Co., 129 N. Y. 474 (1892), (29 N. E. Rep. 361, 15 L. R. A. 82); Sage V. Lake Shore, etc. R. Co., 70 N. Y. 220 (1877). Pennsylvania: Appeal of Pitts- burgh, etc. R. Co., 4 Atl. Rep. 385 (1886). Texas : Whaley v. Bankers' Union of the World (Tex. Civ. App. 1905), 88 S. W. Rep. 259: "Corporations have no power to consolidate unless the power is expressly conferred by their charters, or by the charter of one of them, or by some other stat- ute, and the consolidation must be effected in compliance with the terms of the statute. And when corpora- tions are created by different States, as were those involved in this case, they can only consolidate under con- current legislation of each State; but in such a case, since the laws of the State have no extraterritorial effect, they cannot create or aid in creating a corporation in another State ; and there is, in law, a separate and distinct corporation in each State when corporations are consolidated by virtue of concurrent legislation." ' Quincy Railroad Bridge Co. v. Adams County, 88 111. 615 (1878). 189 § 101 INTERCORPOHATE RELATIONS [pART I that only, the legislation of the other State having no operation beyond its territorial limits." And in Fitzgerald v. Missouri Pacific R. Co.,^ Judge Caldwell said: "By the consolidation, the corporation of one State did not become a corporation of another, nor was either merged in the other. The corpora- tion of each State had a distinct legislative paternity, and the separate identity of each as a corporation of the State by which it was created, and as a citizen of that State, was not lost by the consolidation. Nor could the consolidated company be- come a corporation of three States without being a corporation of each, or of either. While the consolidated corporation is a unit, and acts as a whole in the transaction of its corporate business, it is not a corporation at large, nor is it a joint cor- poration of the three States. Like all ('orporations, it must have a legal dwelling-place. I'^very corporation, not created by act of Congress, dwells in a State. This consolidated cor- poration dwells in three States, and is a separate and single entity in each." This principle that an interstate consolidated corporation is a separate and distinct entity in each State is clearly estab- lished, and is, perhaps, necessary in order to give each State its legitimate control over the charters which it grants. It is, however, founded, in a measure, upon a legal fiction, for it makes several corporations out of that which is, in fact, one, and ignores the essential element of union.'' That the consolidated corporation, itself, has an existence apart from its constituents may be recognized without affecting the principles already considered. Thus in Ashley v. Ryan," the Supreme Court of Ohio said: " There has been some diver- sity of opinion as to the status of a corporation formed by the consolidation of companies under the laws of different States. But it seems pretty well settled, upon principle at least, that when formed under cooperative legislation of the different States, it becomes a corporation in each State where its road is located. It is a legal entity residing and doing business ' Fitzgerald v. MisBouri Pacific R. ' Ashley v. Ryan, 49 Ohio St. 629 Co., 46 J'od. 615 (1891). (1892;, affirmed 16.3 U. S, 436 (1894J, ' Horno v. Boston, etc. R. Co., 18 (14 Sup. Ct. Rep. 86.0;. Fed. 50 (1883). 190 CHAP. X] INTERSTATE CONSOLIDATIONS §101 in different States, with a status in each, derived from and determined by the laws of that State." It has also been held that a consolidated railroad corpora- tion, chartered and operated in two States and made subject to the laws of one State as if wholly located therein, is a single entity so far as the power of the courts of that State to fix rates is concerned.' It is also held that the acts and neglects of an interstate consolidated corporation are its acts and neglects as a whole.^ Constitutional provisions in several States define the status of interstate consolidated corporations.' • Providence Coal Co. v. Provi- dence, etc. R. Co., 15 R. I. 303 (1886), (4 Atl. Rep. 394). ^Home V. Boston, etc. R. Co., 18 Fed. 50 (1883). See also Burger v. Grand Rapids, etc. R. Co., 22 Fed. 561 (1884); Fitzgerald v. Missouri Pac. R. Co., 45 Fed. 812 (1891). An interstate consolidated cor- poration is a "new" corporation whose charter, under Mich. Const. Art, 15, § 1, is subject to amendment, alteration or repeal. Smith v. Lake Shore, etc. R. Co., 114 Mich. 460 (1897), (72 N. W. Rep. 328). 'Idaho: Const. Art. XI. § 14: "If any railroad, telegraph, express, or other corporation, organized under any of the laws of this State, shall consolidate, by sale or otherwise, with any railroad, telegraph, express, or other corporation organized under any of the laws of any other State or Ter- ritory, or of the United States, the same shall not thereby become a foreign corporation; but the courts of this State shall retain jurisdiction over that part of the corporate prop- erty within the limits of the State in all matters that may arise, as if said consolidation had not taken place." Kentucky. Const. § 200: "If any railroad, telegraph, express, or other corporation, organized under the laws of this Commonwealth, shall consoli- date, by sale or otherwise, with any railroad, telegraph, express, or other corporation organized under the laws of any other State, the same shall not thereby become a foreign corporation, but the courts of this Conmionwealth shall retain jurisdiction over that part of the corporate property within the limits of this State in ail matters which may arise, as if said consolida- tion had not taken place." Louisiana. Const. Art. CCXLVI. : "If any railroad company, organized under the laws of this State, shall consolidate, by sale or otherwise, with any railroad company organized under the laws of any other State or of the United States, the same shall not thereby become a foreign cor- poration, but the courts of this State shall retain jurisdiction in all matters which may arise, as if said consoli- dation had not taken place. In no case shall any consolidation take place except upon public notice of at least sixty days to_ all stockholders, in such manner as may be provided by law." Missouri. Const. Art. XII. § 18. Same as Louisiana, supra. Montana. Const. Art. XV. § 15: "If any railroad, telegraph, telephone, express, or other corporation or com- pany organized under any of the laws of this State shall consolidate, by sale or otherwise, with any railroad, tele- graph, telephone, express, or other 191 § 102 INTERCORPORATE RELATIONS [part I § 102. Effect of Interstate Consolidation upon Status of Con- stituent Corporations. — Upon the creation of an interstate consolidated corporation the constituent corporations of the different States do not cease to exist, although they may lie dormant and their property, rights, powers and franchises be vested in and exercised by the consolidated corporation.' In Racine, etc. R. Co. v. Farmers Loan, etc. Co.' the Supreme Court of Illinois said: " Our view of the effect of the consoli- dation between the [corporations of different States] which we hold to have been legally made, is briefly this: While it created a community of stock and of interest between the two companies, it did not convert them into one company, in the same way, and to the same degree, that might follow a consoli- dation of two companies within the same State. Neither Illinois nor Wisconsin, in authorizing the consolidation, can have intended to abandon all jurisdiction over its own corpo- ration created by itself. Indeed, neither State could take jurisdiction over the property or proceedings of the corpora-' tion beyond its own limits and a corporation can have no corporation organized under any of the laws of any otlier State or Terri- tory^ or of the United States, the same shall not thereby become a foreign corporation; but the courts of this State shall retain jurisdiction over that part of the corporate property within the limits of the State, in all matters that may arise, as if said consolidation had not taken place." 'Ohio, etc. R. Co. v. People, 123 111. 467 (1888), (14 N. E. Rep. 874); Tagart v. Northern Central R. Co., 29 Md. 557 (1868); Bishop v. Brain- erd, 28 Conn. 289 (1859). Where two corporations are created by ad- jacent States, with the same name, to construct a canal in each of the States and afterwards their interests are united by legislative acts of the States respectively, this does not merge the separate corporate exist- ence of such corporations. Farnum V. Blackstone Canal Co., 1 Sumn. (U. S.) 62 (1830). In Nashua, etc. 192 R. Co. V. Boston, etc. R. Co., 136 U. S. 382 (1890), (10 Sup. Ct. Rep. 1004), the Supreme Court of the United States said: "It is evident that, by the -general law, railroad corporations created by two or more States, though joined in their inter- ests, in the operation of their roads, in the issue of their stock, and in the division of their profits, so as prac- tically to be a single corporation, do not lose their identity ; and that each one has its existence and its standing in the courts of the country, only by virtue of the legislation of the State by which it is created. The union of name, of officers, of business and of property, does not change their dis- tinctive character as separate cor- porations." See also Paul v. Baltimore, etc. R. Co., 44 Fed. 513 (1890). " Racine, etc. R. Co. v. Farmers Loan, etc. Co., 49 111. 348 (1868), (95 Am. Dec. 595). CHAP. X] INTERSTATE CONSOLIDATIONS § 103 existence beyond the limits of the State sovereignty which brings it into life and endows it with faculties and powers." '■ § 103. Management of Interstate Consolidated Corporation. — While a corporation created by the consolidation of corpora- tions of different States is a domestic corporation of each State and derives its powers, in each State, from local laws, yet, in the conduct of its business, it acts as a unit, — -as one cor- poration and not as several, — " and, in the absence of a statutory provision to the contrary, it may transact its corporate business in one State for all, and the contracts it enters into and the liabilities it incurs in one State are binding upon it in all the States and may be enforced against it in any one of them when the action is transitory." ^ A meeting in one of several States of the stockholders of a corporation created by the consolidation of corporations of those States is valid with respect .to the property of the cor- poration in all of them, without the necessity of a repetition of such meeting in the other States.^ The affairs of an interstate consolidated corporation may be — and uniformly are — administered by a single board of directors which may control, manage and dispose of its prop- erty situated in the different States. In the case quoted from in the last section — Racine, etc. R. Co. v. Farmers Loan, etc. Co.* — ^the Supreme Court of Illinois also said: " When con- tinuous lines of road, passing through different States, are consolidated by legislative authority . . . although the con- solidated company must, from the very nature of a corpora- tion, be regarded as a distinct entity in each State, yet the objects of consolidation would be very liable to be defeated, unless the entire line should be placed under one board of 1 See Ohio, etc. R. Co. v. Wheeler, 561 (1884) ; Home v. Boston, etc. R. 1 Black (U. S.) 297 (1861). Co. 18 Fed. 50 (1883). 2 Fitzgerald v. Missouri Pacific R. ' Graham v. Boston, etc. R. Co., Co., 45 Fed. 816 (1891), (per Caldwell, 118 U. S. 161 (1886), (6 Sup. Ct. J). Also Graham v. Boston, etc. R. Rep. 1009). Compare Aspinwall v. Co., 118 U. S. 169 (1886), (6 Sup. Ct. Ohio, etc. R. Co., 20 Ind. 492 (1863), Rep. 1009); Home v. Railroad Co., (83 Am. Dec. 329). 62 N. H. 454 (1883) ; Providence Coal * Racine, etc. R. Co. v. Farmers Co. V. Providence, etc. R. Co., 15 R. I. Loan, etc. Co., 49 111. 331 (1868), (95 303 (1886), (4 Atl. Rep. 394) ; Biirger Am. Deo. 595). «. Grand Rapids, etc. R. Co., 22 Fed. 193 § 104 INTERCOEPOKATE RELATIONS [PABT I directors. . . . When the consolidated hnes are placed under a common board, with a common name and seal, such board will, naturally, act as if the consolidated lines made but one company, and when their contracts assume that form, the courts must, for the protection of the pubhc, and to enforce good faith, hold, as we have done in this case, that the contract is to be construed as made by the corporation of each State in which the subject matter of the contract hes: ut res magis valeat quam pereat." § 104. Rights and Powers of Interstate Consolidated Corpo- ration. — An interstate consohdated corporation may exercise all the powers and privileges conferred upon it — expressly or by reference — in the acts authorizing the consoUdation and, as a general rule, stands in each State in the position of its constituent corporation in that State.^ An interstate consolidated corporation is a domestic corpo- ration within a State and entitled to exercise the power of eminent domain granted by a State to its corporations.^ It has been held, however, that an act authorizing the consoUda- tion of a domestic railroad company with corporations of other States and granting the consohdated company " all the facul- ties, powers, authorities, privileges and franchises conferred upon it by any of said States," relates simply to the faculties necessary for the general objects of its business and does not affect the local law in regard to the method of obtaining title to the right of way.^ ' DelawareR. R.TaxCas., ISWaU. 33 Neb. 171 (1891), (49 N. W. Rep. (U. S.) 206 (1873). 1110). A railroad corporation formed The power of a railroad company under a Pennsylvania statute by the to be^n proceedings for the condem- consolidation of a corporation of that nation of lands within the State is not State with a New York corporation lost by its consolidation with another has all the rights and franchises of raih"oad company into anew organiza- the consolidating corporations includ- tion, so as to constitute a corporation ing the right of the Pennsylvania subject to the laws of the same State corporation to increase its capital, up as the original company. Toledo, etc. to a stated amount per mile, without R. Co. v. Dunlap, 47 Mich. 456 (1882), payment of bonus. (11 N. W. Rep. 271). Commonwealth v. Buffalo, etc. R. ^ Pittsburgh, etc. R. Co. v. Reich, Co., 207 Pa. 160 (1903), (56 Atl. Rep. 101 111. 174 (1887) : "It [the act] re- 412). lates to the corporation itself, and is 2 Trester v. Missouri Pacific R. Co., designed to make it a unit in each and 194 CHAP, x] INTERSTATE CONSOLIDATIONS §105 An interstate consolidated corporation acquires in each State, among other rights and powers, the right therein of its constituent corporation to issue bonds secured by mortgage ; * and may issue them to take up bonds previously issued by such constituent.^ § 105. Duties of Interstate Consolidated Corporation — . Taxation. — A corporation formed by the consolidation of corporations of different States stands in relation to each State as a separate domestic corporation, governed by the laws of that State with respect to its property and franchises therein and subject to taxation in conformity with the laws, and to the exercise of the police power, of such State.' The property of each constituent corporation remains subject to taxation in the same manner as before the consoUdation.'' Each State, all of the States in which its line is located, but it does not assume to affect the local law in regard to ac- quiring title to right of way." ' Mead v. New Yorlc, etc. R. Co., 4.5 (ionn. 221 (1877) : "That these laws gave to the original New York, Housa- tonic and Northern Railroad Com- pany full power and authority to mortgage its property and franchises in this State as well as in the State of New York, to secure the payment of such sum or sums of money bor- rowed as might be necessary for com- pleting and finisUng and operating its railroad, counsel for the plaintiffs in error admit. But they deny that the consolidated company had any such power. It has, however, been shown that the effect of the consoli- dation was to confer upon, and give to, the consolidated company in this State, all the rights, powers, privi- leges, exemptions, franchises and property possessed by the original New York, Housatonio and Northern Railroad Company in this State . . . and this, of course, included the power of borrowing money and mortgaging the property and franchises of a cor- poration in this State to secure its payment. The mortgage was, there- fore, a valid security for the purposes for which it was executed, and oper- ated as a lien upon the franchises as well as upon the real and personal property which became vested in the consolidated cotporation by the agree- ment and act of consolidation." See also Racine v. Farmers Loan, etc. Co., 49 111. 331 (1868), (95 Am. Dec. 595). 2 Mead v. New York, etc. R. Co., 45 Conn. 221 (1877). ^ Ohio, etc. R. Co. v. People, 123 III. 467 (1888), (14 N. E. Rep. 874). A corporation formed by the con- solidation of various foreign and. domestic railroad companies is a domestic, not a foreign corporation, and, therefore, the provisions of a New York statute compelHng transfer agents of foreign corporations to ex- hibit lists of their stockholders, have no application to it. Sage v. Lake Shore, etc. R. Co., 70 N. Y. 220 (1877). ' Delaware R. R. Tax. Cas., 18 Wall. (U. S.) 206 (1873); Philadel- phia, etc. R. Co. V. Maryland, 10 How. (U. S.) 377 (1850) ; Ohio, etc. R. Co. V. Weber, 96 111. 443 (1880) ; Quincy R., etc. Co. V. Adams County, 88 111. 615 (1878). 195 § 106 INTERCORPORATE RELATIONS [PABT I participating in the creation of an interstate consolidated cor- poration, may legislate for such corporation just as it would for its original companies, if no consolidation had taken place. Corporations and stockholders from other States having availed themselves of the advantages of an interstate consolidation cannot repudiate the corresponding obligations.^ An interstate consolidated corporation is " incorporated under the laws of this State " within the meaning of a statute taxing corporations so incorporated.^ A provision in an act authorizing the consolidation of cor- porations of different States that the new consolidated company shall be entitled to all the rights, privileges and immunities which each and all of its constituents enjoyed under their respective charters, in no respect changes the position of the consohdated company in any State, with reference to taxation, from that of the original corporation in such State.^ § 106. Citizenship of Interstate Consolidated Corporation. — Upon principles already indicated, an interstate consohdated corporation is, for the purpose of determining the jurisdiction of -the federal courts and for securing to the judicial tribunals of each State due control over corporations and corporate property therein, conclusively presumed to be a citizen of each State concurring in its creation. " It enjoys in each State all the powers and privileges the corporations there chartered had and must answer in the courts and is amenable to the The Michigan general railroad law as to its business in Wisconsin as in permitting the consolidation of private persons. The Illinois com- railroad companies within the State panies might have stayed out. But with others beyond its boundaries, they chose to come in and must now contemplates leaving the domestic abide the consequences. Thus, Wis- company in its original position as cousin is permitted to legislate for the to stock and loans and annexing to consolidated company in that State its capital and loans (for purposes of precisely the same as it would for its taxation) additions which are made own original companies, if no consoli- proportional to the original amounts. dation had taken place.'' Lake Shore, etc. R. Co. v. People, 46 2 Ohio, etc. R. Co. v. Weber, 96 111. Mich. 193 (1881), (9 N. W. Rep. 249). 443 (1880). - Compare People v. New ' Peik V. Chicago, etc. R. Co., 94 York, etc. R. Co., 129 N. Y. 474 XJ. S. 177 (1876) : "Upon these terms (1892), (29 N. K. Rep. 959, 15 L. R. the consolidation was finally perfected A. 82). and the consolidated company now ' Delaware R. R. Tax Cas., 18 exists under the two jurisdictions, but Wall. (U. S.) 228 (1873). See ante, subject to the same legislative control § 72 : " Exemptions from Taxation. " 196 CHAP. X] INTERSTATE CONSOLIDATIONS 10^ laws of each State, respectively, as a corporation of that State." » An interstate consolidated corporation, therefore; . being a citizen of each of the States of its constituent companies, cannot^ when sued in one of those States, claim the right of removal to the federal courts upon the ground that it is a citizen of another State.^ The true underlying principle seems to be that the consoh- dated corporation, by the concurrent legislation, is, itself, created a citizen of each State. In many decisions of unques- tioned authority, however, it is reasoned that each constituent corporation retains its identity and citizenship and that it. ' Fitzgerald v. Missouri Pacific R. Co., 45 Fed. 812 (1891). In Railroad Co. V. Harris, 12 Wall. (U. S.) 82 (1870), the Supreme Court said: "The jurisdictional effect of the exist- ence of such a [consolidated] corpo- ration as regards the federal courts, is the same as that of » copartnership of individual citizens residing in dif- ferent States." ^ United States; Nashua, etc. R. Corp. V. Boston, etc. R. Corp., 136 U. S. 382 (1890), (10 Sup. Ct. Rep. 1004); Pennsylvania R. Co. v. St. Louis, etc. R. Co., 118 U. S. 290 (1886), (6 Sup. Ct. Rep. 1094), affirm- ing s. c. sub nom. St. Louis, etc. R. Co. V: Indianapolis, etc. R. Co., 9 Biss. (U. S.) 144 (1879); MuUer ,,. Dows, 94 U. S. 444 (1876) ; Railway Co. V. Wbitton, 13 Wall. (U. S.) 270 (1871) ; Fitzgerald v. Missouri Pacific R. Co., 45 Fed. 812 (1891) ; Paul v. Baltimore, etc. R. Co., 44 Fed. 513 (1890) ; Central Trust Co. v. Roches- ter, etc. R. Co., 29 Fed. 609 (1886). Compare Conn v. Chicago, etc. R. Co., 48 Fed. 177 (1891). Notwithstanding the provision of a statute that a foreign railroad com- pany desiring to do business or exer- cise any corporate franchise within the State, must comply with certain conditions and that upon complying therewith it shall become a domestic corporation, the character of the original corporation is not changed and it does not become a citizen of the State so far as to affect the juris- diction of the federal courts based upon diverse citizenship. Southern R. Co. v, Allison, 190 U. S. 326 (1902), (23 Sup. Ct. Rep. 713). A corporation simultaneously and voluntarily organized in several States exists in pach State by virtue of the laws thereof, and when it incurs liability in any such State and is sued therein it cannot remove the case to the federal court upon the ground that it is also incorporated in an- other State. Southern R. Co. v. Allison, supra, distinguished upon the ground that in that case the corpo- ration was compelled to become a cor- poration of another State. Patch V. Wabash R. Co., 207 U. S. 277 (1907), (28 Sup. Ct. Rep. 80). The last two cases, although not dealing with consolidated corporar tions as such, should be examined as being the latest decisions of the Su- preme Court upon the general sub- ject. Georgia: Angier !>. East Tennessee, etc. R. Co., 74 Ga. 634 (1885). Illinois: Racine, etc. R. Co. v. Farmers Loan, etc. Co.) 49 111. 331 (1868), (95 Am. Dec. 595). 197 106 INTEBCORPORATE RELATIONS [part I in reality, .is the corporation sued.* The distinction is that between an association of different citizens and one person possessing different attributes of citizenship. An interstate consolidated corporation, upon similar prin- ciples, may institute a suit in a federal court as a citizen of a State concurring in its creation.^ Upon principle it would seem, however, that it could not maintain such a suit in a State also concurring in its creation. Michigan: Chicago, etc. R. Co. v. Auditor General, 53 Mich. 92 (1884), (18 N. W. Rep. 586). New Hampshire : Home v. Boston, etc. R. Co., 62 N. H. 454 (1883). 1 Nashua, etc. R. Corp. v. Boston, etc. R. Corp., 136 IT. S. 356 (1890), (10 Sup. Ct. Rep. 1004); Pennsyl- vania R. Co. V. St. Louis, etc. R. Co., 118 U. S. 297 (1886), (6 Sup. Ct. Rep. 1094) ; s. c. sub nom. St. Louis, etc. R. Co. V. Indianapolis, etc. R. Co., 9 Biss. (U. S.) 144 (1879). Notwithstanding the consolidation o.f two railroad corporations of dif- ferent States, each retains its identity as a corporation of the State in which it was originally created ; and in a suit against the consolidated corpora- tion brought in one of such States it cannot obtain a removal to the federal courts on the ground that it is a citizen of the other State, though the consolidation was had under the laws of the latter State. Paul v. Baltimore, etc. R. Co., 44 Fed. 514 (1890). Under a statute authorizing the consolidation of a railroad company of the State or with a foreign railroad company when domesticated within the State and, upon consolidation, the issuance of a charter to the con- solidated company, it has been held that where the consohdation takes the form of an absorption by the foreign company of all the property and franchises of the domestic cor- poration, the former does not by obtaining a charter of consolidation 198 become a citizen of the State with respect to the jurisdiction of the federal courts but remains a citizen of the State of its creation, although by obtaining the charter it becomes a domestic corporation for other purposes. Lee V. Atlantic Coast Line R. Co., 150 Fed. 775 (1906). ' In St. Louis, etc. R. Co. v. Indian- apohs, etc. R. Co., 9 Biss. (U. S.) 144 (1879), {affirmed sub nom. Pennsyl- vania R. Co. V. St. Louis, etc. R. Co., 118 tr. S. 297 (1886), (6 Sup. Ct. Rep. 1094), Judge Drummond said: "If the defendant corporation, though consolidated with another of a dif- ferent State, can be sued in the federal court in the State of its crea- tion as a citizen thereof, why can it not sue as a citizen of the State which created it? I can see no difference in the principle. It seems to me that when the plaintiff comes into the federal court, if a corporation of an- other State, it is clothed with all the attributes of citizenship which the laws of that State confer, and the shareholders of that corporation mast be conclusively regarded as citizens of the State which created the corpora- tion precisely the same as if it were a defendant." Quoted with approval by Mr. Justice Field in Nashua, etc. R. Corp. V. Boston, etc. R. Corp., 136 U. S. 378 (1890), (10 Sup. Ct. Rep. 1004). The conclusion was reached in this case that one consolidating corporation, as a citizen of one State, might sue another consolidating cor- CHAP. X] INTERSTATE CONSOLIDATIONS § 107 § 107. Foreclosure of Mortgages after Interstate Consolida- tion. Jurisdiction. — A State is not presumed to waive its jurisdiction. Such waiver must be clearly expressed. Upon these principles it has been- held that an action cannot be maintained in one State to foreclose a mortgage, existing at the time of the consolidation, upon property of a constituent corporation situated in another State, which has never granted permission to maintain such action.* A court of equity of one State, however, acting in personam, may entertain jurisdiction of a suit to foreclose a mortgage executed by an interstate consolidated corporation covering as an entirety property situated in several States; and may require the defendant to convey to a receiver the property outside its jurisdiction.^ In Muller v. Dows,^ Mr. Justice Strong said: "A vast number of railroads partly in one State and partly in an adjoining State, forming continuous lines, have been constructed by consolidated companies, and mort- gaged as entireties. It would be safe to say that more than one hundred millions of dollars have been invested on the faith of such mortgages. In many cases these investments are sufficiently insecure at the best. But if the railroad, under legal process, can be sold only in fragments; if, as in this case, where the mortgage is upon the whole line, and includes the franchises of the corporation which made the mortgage, the decree of foreclosure and sale can reach only the part of the road which is within the State, — it is plain that the property must be comparatively worthless at the sale. A part of a railroad may be of little value when its ownership is severed from the ownership of another part. And the franchise of the company is not capable of division. In view of this, before we can set aside the decree which was made it ought to be made clearly to appear beyond the power of the court. With- poration in a federal court, as a Co. v. Rothschild, 4 Cent. Rep. 107 citizen of another State. Manifestly, (1886). however, an interstate consolidated ' MuUer v. Dows, 94 U. S. 449 corporation — as an entity — cannot (1876) ; Mead v. New York, etc. R. sue itself, although it possesses dif- Co., 45 Conn. 199 (1877). ferent attributes in different States. ' Muller v. Dows, 94 U. S. 449 ' Eaton, etc. R. Co. v. Hunt, 20 (1876). Ind. 464 (1863) ; Pittsburgh, etc. R. 199 § 107 INTERCOEPORATB RELATIONS [pART I out reference to the English chancery decisions, where this objection to the decree would be quite untenable, we think the power of courts of chancery in this country is sufficient to authorize such a decree as was here made. It is here un- doubtedly a recognized doctrine that a court of equity sitting in a State and having jurisdiction of the person, may decree a conveyance by him of land in another State, and may enforce the decree by process against the defendant." 200 CHAP. Xl] SALES OF CORPORATE PROPERTY § 108! PART II CORPORATE SALES Article I SALES OF CORPORATE PROPERTY AND FRANCHISES CHAPTER XI SALES OF CORPORATE PROPERTY I. Scdes of Property of Private Corporations § 108. Power to purchase and sell generally. § 109. Sale of Entire Corporate Property by Unanimous Consent. § 110. Sale of Entire Property of Prosperous Corporation by Majority Vote. § 111. Sale of Entire Property of Losing Corporation by Majority Vote. § 112. Sale of Entire Corporate Property by Directors. § 113. Ratification by Stockholders of Sale by Directors. § 114. Remedies of Dissenting Stockholders in Case of Invalid or Unfair Sales. Voidable Sales. § 115. Procedure in Stockholders' Actions. § 116. Defences to Stockholders' Actions. Estoppel. Laches. § 117. Effect of Sale of Entire Corporate Property. II. Exchange of Property of One Corporation for Stock of Another § 118. Transfer of Entire Corporate Property without Unanimous Consent requires Monetary Consideration. I 119. Exchange of Property for Stock ultra vires. § 120. Exchange of Property for Stock Infringement of Rights of Dissenting Stockholders. § 121. Appraisal of Stock of Dissenting Stockholders. § 122. Stock received upon Exchange belongs primarily to Corporation. § 122 a. Effect of Execution of ultra vires Contract for Exchange of Prop- erty for Stock. § 122 b. Remedies of Dissenting Stockholders in Case of Exchange of Prop- erty for Stock. 201 § 108 INTEECORPOHATE RELATIONS [PABT 11 III. Rights and Remedies of Creditors § 123. Liability of Purchasing Corporation for Debts of Vendor Company. § 124. Fraudulent Sales. § 125. Remedies of Creditors. § 126. Priority of Purchaser's Mortgage over Claims of Vendor's Cireditors. IV. Scdes of Property of Qrmsi-public Corporations § 127. Indispensable Property cannot be alienated or taken on Execution without Statutory Authority. § 128. Test of Indispensability. § 129. Sales of Surplus Property. § 129a. Ultra vires Sales of Property of Private and Q«osi-publie Corpora- tions. I. Sales of Property of Private Corporations § 108. Power to purchase and sell generally. It is an elementarj'' principle of corporation law that a corporation, subject to the limitations of its charter and constitutional and statutory prohibitions, has inherent power to acquire and hold any property, real or personal, reasonably useful or convenient in carrying on the business for which it was organized.' The right to acquire property carries with it the corre- sponding power of disposition, subject likewise to any restric- tions in the charter of the corporation and considerations of ^ Lathrop v. Commercial Bank, 8 conveyance is a question which can Dana (Ky.) 114 (1839), (33 Am. Deci only be raised by the State. " Springer 481) : "No doctrine of the common v. Chicago Real Estate, etc. Co., 102 law is more clearly and undeniably 111. App. 294 (1902). established than that which concedes Massachusetts: Old Colony R. Co. to corporations an inherent or result- v. Evans, 6 Gray, 38 (1856). ing right to acquire and hold title to Michigan: Thompson v. Waters, land by contract, except so far only 25 Mich. 227 (1872), (12 Am. Rep. as they may be restricted by the 243). objects of their creation, or the limita- New Jersey: Freeman v. Sea View tions of their charters." Hotel Co., 57 N. J. Eq. 68 (1898). See also : New York : NicoU v. New York, United States: Blanchard Gun etc. R. Co., 12 N. Y. 121 (1854); Stock, etc. Factory v. Warner, 1 Moss v. Averell, 10 N. Y. 449 (1853) ; Blatch. 277 (1848), (Fed. Cas. No. Spear v. Crawford, 14 Wend. 23 1521). ^ (1835), (28 Am. Dec. 513). Illinois: "If a corporation has North Carolina: Mallett v. Simp- power to hold real estate for any son, 94 N. C. 37 (1886), (55 Am. Rep. purpose, a deed to it passes the title 594). of the grantor, and whether it has Vermont: Page v. Heineberg, 40 exceeded its powers in accepting the Vt. 81 (1868), (94 Am. Dec. 378). 202 CHAP. Xl] SALES OF CORPORATE PROPERTY 109 public policy.' As said by Mr. Justice Campbell, in White Water, etc. Co.\. Valette:^ " It is well settled that a corpora- tion, without special authority, may dispose of lands, goods and chattels, or any interest in the same." A private corpora- tion, therefore, by proper corporate action — generally by its directors and always by vote of a majority of its stock- holders — may sell any portion of its property not sufficient to constitute an abandonment of its business.' § 109. Sale of Entire Corporate Property by Unanimous Consent. — A corporation which, in consideration of the grant of franchises, has assumed the performance of public duties — a quasi-puhlic corporation — cannot dispose of all its prop- ' United States : Jones v. Guaranty, etc. Co., 101 U. S. 625 (1879): "At the common law, every corporation had, as incident to its existence, the power to acquire, hold, and convey real estate, except so far as it was restrained by its charter or by act of Parliament. This comprehensive ca- pacity included also personal effects of every kind." Also White Water, etc, Co. V. Yalette, 21 How. 424 (1858). A corporation, while solvent and a going concern, has the same do- minion over its property as an individual and may dispose of it as it deems best, subject to the pro- visions of its charter and those other restraints upon conveyances which apply alike to corporations and indi- viduals. New Hampshire Sav. Bank V. Richey, 121 Fed. 956 (1903). Alabama: Hall v. Tanner, etc. En- gine Co., 91 Ala. 363 (1890), (8 So. Rep. 348). California: Miner's Ditch Co. v. Zellerbach, 37 Cal. 543 (1869), (99 Am. Dec. 300) ; People v. California CoUege, 38 Cal. 166 (1869). Georgia: Railroad companies under the code of this State may purchase and operate steamboats in connection with their lines of road. Graham v. Macon, etc. R. Co., 120 Ga. 757 (1904), (49 S. E. Rep. 75). Iowa: Buell v. Buckingham, 16 Iowa, 284 (1864), (85 Am. Dec. 516). Maryland: Binney's Case, 2 Bland. 142 (1840). Michigan: Joy v. Jackson, etc. Plank Road Co., 11 Mich. 165 (1863). New Hampshire: Pierce D.Emery, 32 N. H. 484 (1856). New York: Barry v. Merchants Exch. Co., 1 Sandf. Ch. 280 (1844). North Carolina: Benbow v. Cook, 115 N. C. 324 (1894), (20 S. E. Rep. 453, 44 Am. St. Rep. 454). Ohio: Reynolds v. Stark County Comm'rs, 5 Ohio, 204 (1831). Pennsylvania: Ardesco Oil Co. v. North American Oil, etc. Co., 66 Pa. St. 382 (1870); Dana v. Bank of United States, 5 W. & G. 243 (1843). Utah: Hearst v. Putnam Min. Co., 28 Utah, 184 (1904), (77 Pac. Rep. 753). England: Mayor, etc. of Colchester V. Lawton, 1 V. & B. 244 (1813). 2 White Water, etc. Co. v. Valette, 21 How. (U. S.) 424 (1858). ^ In the absence of statutory pro- hibition, a corporation may purchase, hold and convey real estate as fully in a foreign State as in the State where it is chartered. Blodgett V. Lanyon Zinc Co., 120 Fed. 893 (1903). 203 §109 INTERCORPORATE RELATIONS [part II erty and disable itself from fulfilling its obligations without the consent of the State — the other party to the contract. It is immaterial that all the stockholders approve of the sale. A private corporation on the other hand, with the unani- mous consent of its stockholders, may sell and dispose of its entire property without other restriction or qualification than that the purpose must be lawful and free from fraud — actual or constructive.' It may make such terms as it may deem expedient, and, if intra vires, may accept stock in other cor- porations in payment for property sold.^ But a corporation by the sale of all its property, even with the consent of all its stockholders, and by the winding up of its ' Holmes, etc. Mfg. Co. v. Holmes, etc. Metal Co., 127 N. Y. 252 (1891), (27 N. E. Rep. 841, 24 Am. St. Rep. 448), (per Haight, J.) ; "The plaintiff was a private manufacturing corpora- tion. It exercises no power of a pub- lic nature and has attempted no com- bination by which the public may in any manner be prejuiliccd. There are consequently no questions of pub- lic policy to be considered. . The plaintiff had the right, with the con- sent of its stockholders, to sell its plant and retire from business; and it appears from the evidence in this case that the consent of all the stock- holders was given to the sale that was made." Leathers v. .Janney, 41 La. Ann. 1123 (1889), (6 So. Rep. 884, 6 L. H. A. 661) : [It is maintained] "that the sale was the whole property of the selling corporation and was, there- fore, ultra vires and void. The in- ference does not follow from the predi- cate. There is no law iirohibiting a corporation from selling all or any of its property provided its charter con- tains no restraint thereof and it acts under proper authority." A private corporation — a mer- cantile company — owing no public duties has the same dominion an an individual over its property, and may, with the consent of all its stockholders, 204 discontinue business and dispose of its entire assets with a view of winding up its affairs and paying its debts. And it may for such purpose accept real estate in part payment for its stock of merchandise. Morisette v. Howard, 62 Kan. 463 (1901), (63 Pae. Rep. 756). See also .Jordan v. Collins, 107 Ala. 572 (1894), (18 So. Rep. 137) ; State V. Western Irrigating Canal Co., 40 Kan. 96 (1888), (19 Pac. Rep. 340, 10 Am. St. Rep. 166). When all the stockholders have authorized a conveyance of the en- tire assets of a corporation any modi- fication of such conveyance requires similar action. Pinchback v. Mining Co., 137 N. C. 171 (1904), (49 8. E. Rep. 106). 2 Kohl V. Lilienthal, 81 Cal. 378 (1889), (20 Pac. Rep. 401, 6 L. R. A. 520). See also pout, §§ 118-122. A corporation has the same right as an individual to sell its property upon credit. Consequently when a corporation sells all its property to another corporation and receives in payment therefor mortgage bonds upon the property conveyed, the sale is not without consideration and, if free from fraud, is valid. Fort Payrje Hank v. Alabama Sanitarium, 103 Ala. 358 (1893), (16 So. Rep. 618;. CHAP. Xl] SALES OF CORPORATE PROPERTY §110 affairs cannot clothe another corporation with the right to maintain its corporate life or exercise its corporate powers.^ § 110. Sale of Entire Property of Prosperous Corporation by Majority Vote. — The imphed contract — the contract of asso- ciation — between stockholders in forming a corporation is that a majority shall bind the whole body as to all transactions within the scope of the corporate powers. The authority carries with it a corresponding obligation. The powers of a corporation must be exercised in furtherance of the objects for which it was created and with due regard to the rights of minority stockholders.^ A majority of the stockholders of a prosperous corporation have no authority to sell its entire property in order to engage in a new enterprise; for purposes of speculation, or when no reasons of expediency require the sale.' But when, in the ' Anglo-American Land, etc. Ck). v. Lombard, 132 Fed. 721 (1904). 2 Ervin v. Oregon R., etc. Co., 27 Fed. 631 (1886), (Wallace, J.): "Tt cannot be denied that minority stock- holders are bound hand and foot to the majority in all matters of legiti- mate administration of the corporate affairs; and the courts are powerless to redress many forms of oppression practised upon the minority under the guise of legal sanction which fall short of actual fraud. This is a consequence of the implied contract of association, by which it is agreed in advance that a majority shall bind the whole body as to all matters within the scope of the corporate powers. But it is also of the essence of the contract that the corporate ■powers shall only be exercised to accomplish the objects for which they were called into existence, and that the majority shall not control those powers to prevent or destroy the original purposes of the corporators." Taylor v. Chichester, etc. R. Co., L. R. 2 Exch. 379 (1867), (Black- burn, J.) : "As the shareholders are, in substance, partners in a trading corporation, the management of which is intrusted to the body cor- porate, a trust is, by implication, created in favor of the shareholders that the corporation will manage the corporate affairs, and apply the corporate fimds, for the purpose of carrying out the original specula- tion." ^ Forrester v. Boston, etc. Min. Co., 21 Mont. S44, 553 (1898), (55 Pac- Rep. "229, 353): "At common law, neither the directors nor a majority of the stockholders have power to sell or otherwise transfer all the property of a going, prosperous cor- poration, able to achieve the objects of its creation, as against the dissent of a single stockholder. This doc- trine is firmly established by the authority of adjudged cases, and rests upon the soundest principles." Price V. Holcomb, 89 Iowa, 135 (1893), (56 N. W. Rep. 407) : "It is unquestionably true that a private corporation holds its property as a trust fund for the stockholders and that, when a majority of the stock- holders act together, they are in a sense the corporation and must act with due regard to the right of the minority. If the majority decide 205 § no INTEECORPORATE RELATIONS [part U opinion of a majority, the interests of the stockholders as a whole require that the affairs of a corporation should be wound up, a majority may authorize the sale of the entire assets of a corporation, for a pecuniary consideration, as a stej) towards liquidation} arbitrarily, and without just cause, to sell the property of the corpora- tion to the prejudice of the minority, and thereby compel the winding up of the business of the corporation, it is a fraud upon the minority and courts of equity will interfere. If, however, just cause exists for selling the property, as when the corporation is insolvent, and the sale is necessary to pay debts, or when, from any cause, the business is a failure and an un- profitable one, and the best interests of all require it, the majority have clearly power to order the sale, and in such case their acts are not ultra vires." The conclusion reached in this case that the courts may deter- mine whether "just cause" exists for winding up the affairs of a cor- poration is opposed to sound prin- ciple. They may properly determine whether fraud or oppression towards the minority exists, but the inquiry cannot go further without encroach- ing upon the rights of the ma- jority. The decision in Price v. Holcombf supra, should be compared with that of the same court in the later case of Traer v. Prospecting Co. 124 Iowa 107 (1904), (99 N. W. Rep. 290). The rule that a majority cannot sell the entire corporate assets has been stated very broadly by, courts of high authority. Thus in Byrne V. Schuyler Electric Mfg. Co., 65 Conn. 3.51 (1895), (31 Atl. Rep. 833, 28 L. R. A. 304), the Supreme Court of Errors of Connecticut said : " It results that neither the directors nor a majority of the stockholders can sell the corporate property against the dissent of any stockholder. This 206 is entirely clear in case of a solvent corporation." And in People v. Ballard, 134 N. Y. 294 (1892), (32 N. E. Rep. 84, 17 L. R. A. 737), the New York Court of Appeals said: "While a corporation may sell its property to pay its debts or to carry on its business, it cannot sell its property in order to deprive itself of existence." An examination of these cases, however, clearly indicates that the courts merely intended to state the general rule that a majority cannot sell the entire corporate assets of a solvent corporation and did not in- tend to negative the exception stated in the text that, for the bona fide purpose of winding up the affairs of the corporation, such power exists. In the New York cases the sales were to foreign corporations for the pur- pose of escaping State control over domestic companies. ' United States : Hayden v. Official Red Book and Directory Co., 42 Fed. 876 (1890) : "The right of the ma- jority stockholders of a corporation established for manufacturing or trading purposes to wind up its affairs, and dispose of its assets, even against the objections of the minority stockholders, whenever it appears that the business can be no longer advantageously carried on, is well recognized." Alabama: Elyton Land Co. v. Dowdell, 113 Ala. 186 (1896), (20 So. Rep. 981, 59 Am. St. Rep. 105) semble. Louisiana: Pringle v. Eltringham Construction Co., 49 La. Ann. 303 (1897), (21 So. Rep. 615). Maine: Inhabitants of Waldo- CHAP. Xl] SALES OP CORPORATE PROPERTY § 110 In Pringle v. Eltringham Construction Co} Judge McEnery said; " It is a fundamental principle that, in a corporation organized for the exclusive benefit of the corporators or share- holders, the majority of its members may, in their discretion, wind up its business whenever they deem this step to be in the interests of the whole association. The majority may, without the consent of the minority, sell the whole of the com- pany's property, close up its business and distribute its assets, provided this is done in good faith and not for the purpose of speculation and the intention of starting the company's busi- ness anew at a subsequent time." The power to sell the entire corporate assets follows, there- fore, as an incident to the power to wind up the affairs of the borough V. Knox, etc. R. Co., 84 Me. 469 (1892), (24 Atl. Rep. 942). Massachusetts: In Treadwell v. Salisbury Mfg. Co., 7 Gray, 404 (1856), (66 Am. Dec. 490), Judge Bigelow said : "At common law, the right of corporations, acting by a majority of their stockholders, to sell their property is absolute, and is not limited as to objects, circumstances or quantity. ... To this general rule there are many exceptions, arising from the nature of particular corporations, the purposes for which they were created, and the duties and liabilities imposed on them by their charters. Corporations estab- lished for objects gtiost-public, such as railway, canal and turnpike cor- porations, to which the right of eminent domain and other large privileges are granted in order to enable them to accommodate the public, may fall within the exception ; as also charitable and religious bodies, in the administration of whose affairs the community or some portion of it has an interest to see that their corporate duties are properly dis- charged. Such corporations may, perhaps, be restrained from alienat- ing their property, and compelled to appropriate it to specific uses, by mandamus or other proper process. But it is not so with corporations of a private character, established solely for trading and manufacturing pur- poses. Neither the public nor the legislature have any direct interest in their business or its management. These were committed solely to the stockholders, who have a pecuniary stake in the proper conduct of their affairs. By accepting a charter, they do not undertake to carry on the business for which they are incor- porated, indefinitely, and without any regard to the condition of their corporate property. Public policy does not require them to go on at a loss. On the contrary, it would seem very clearly for the public welfare, as well as for the interest of the stock- holders, that they should cease to transact business as soon as, in the exercise of a sound judgment, it is found that it cannot be prudently continued." Rhode Island: Peabody v. West- erly Water Works, 20 R. I. 176 (1897), (37 Atl. Rep. 807). ' Pringle v. Eltringham Construc- tion Co., 49 La. Ann! 303 (1897), (21 So. Rep. 515), citing 1 Morawetz on Priv. Corp. § 413. 207 §110 INTEECORPOHATE RELATIONS [part II corporation. Corporate action towards dissolution is essentially within the powers of a corporation and, consequently, may be exercised by a majority of the stockholders.* It has been urged that the power of a majority to wind up a corporation, and to dispose of its assets for such purpose, exists only in the case of failing concerns.^ The distinction is not well drawn. Where no time is fixed for its duration in the charter of a corporation or in some general or special law,^ there is no contract between the stockholders that it shall go on forever or until it becomes embarrassed. The very best time to wind up the affairs of a corporation may be — in view of future uncertainties — when it is most pros- perous and has accumulated a large surplus. The determina- tion of the question when this action shall be taken, must rest in the discretion of the majority. If unanimous consent were necessary a single stockholder might prevent action and thus, negatively, control the corporation. The courts cannot pass upon the question whether a corpo- ration should be wound up, further than to determine whether ' United Stales : Hayden v. Official Red Book, etc. Co., 42 Fed. 876 (1890). Compare Ervin v. Oregon R., etc. Co., 27 Fed. 625 (1886). Alabama: Merchants, etc. Line v. Waganer, 71 Ala. 581 (1882). Louisiana : Pringle v. Eltringham, etc. Co., 49 La. Ann, 301 (1897), (21 So. Rep. 515) ; Trisconi v. Winship, 4.3 La. Ann. 45 (1891), (9 So. Rep. 29, 26 Am. St. Rep. 175). Massachusetts : Treadwell v. Salis- bury Mfg. Co., 7 Gray, 393 (1856), (66 Am. Dec. 490). New Jersey: Black v. Delaware, etc. Canal Co., 22 N. J. Eq. 415 (1871). Pennsylvania: McCurdy v. Myers, 44 Pa. St. 535 (1863); Lauman v. Lebanon Valley R. Co., 30 Pa. St. 42 (1858), (72 Am. Dec. 685). Rhode Island: Wilson v. Central Bridge Co., 9 R. I. 590 (1870). Com- pare, however, Boston, etc. R. Co. v. New York, etc. R. Co., 13 R. I. 260 (1881). 208 2 Kean v. Johnson, 9 N. J. Eq. 401 (1853), dictum of Parker, Master. See also Price v. Holcomb, 89 Iowa, 135 (1893), (56 N. W. Rep. 407), 2 Cook on Corp. § 670. ^ When the term of existence of a corporation is of fixed duration, the implied contract of the stockholders refers to such period, and the dis- solution of a prosperous corporation before its expiration would require unanimous action. Barton v. Enter- prise, etc. Ass'n, 114 Ind. 226 (1887), (16 N. E. Rep. 486, 5 Am. St. Rep. 608). Compare Black v. Delaware, etc. Canal Co., 22 N. J. Eq. 130 (1871) ; Zabriskie v. Hackensack, etc. R. Co., 18 N. J. Eq. 178 (1867), (90 Am. Dec. 617) ; Kean v. Johnson, 9 N. J. Eq., 401 (1853). Where a, corporation, even with such a charter, is in a failing condi- tion, however, the majority are jus- tified in acting ex necessitate. CHAP. Xl] SALES OP CORPOBATE PROPERTY §110 the majority act in good faith and without oppression towards the minority. Questions of expediency in corporate man- agement cannot properly be brought before the courts for review.^ Where the charter of a corporation, or the statutes under which it is organized, prescribe the vote of a majority of the stockholders as the proper corporate action for the sale of its property and discontinuance of its business, the majority have the absolute right to execute the power conferred.^ But in such a case the power is express, rather than incidental, and must be strictly followed. Authority to make a sale of corporate assets will not justify an exchange thereof for stock in another corporation.^ ' Compare, however, Price v. Hol- comb, 89 Iowa, 135 (1893), (56 N. W. Rep. 407). ' Metcalf V. American School Fur- niture Co., 122 Fed. 119 (1903) : "The trend of the decisions is to the effect that where the charter and by-laws of a corporation, and the statute under which it was created, vest in the stockholders a right of sale of the ■corporate properties and discontin- uance of corporate existence, such power may be exercised by them pursuant to the laws of the State to which the corporation owes life. . . The general rule under the common law undoubtedly prohibited a, pros- perous corporation from dissolving unless all the stockholders assented. A dissenting stockholder was enabled to prevent such a sale. . . . Where, however, the statute of the State under Tvhich the corporation was organized prescribes the manner in which a corporation may be dissolved, a minority stockholder must abide by the statutory provision and the cor- porate by-laws. Theoretically the law appears to be founded upon the ■contract between the corporation and its stockholders. A shareholder presumptively knows the power and authority conferred upon directors and majority stockholders. When such majority undertake to exercise their legal powers, a minority stock- holder cannot be heard to complain, in the absence of fraiid or attempts to exceed their legal authority." See also Werle v. Northwestern Flint, etc. Co. 125 Wis. 534 (1905), (104 N. W. 743); Pitcher v. Lone Pine, etc. Min. Co., 39 Wash. 608 (1905), (81 Pac. Rep. 1047). ' In Forrester v. Boston, etc. Mining Co., 21 Mont. 544 (1898), (55 Pac. Rep. 229, 353) it was held that a statute authorizing the holders of a majority of the shares of a mining corporation to abandon its business, sell its assets and, by amending its charter, embark in a new enterprise did not authorize the exchange of the property of a corporation for stock in a foreign corporation. In Traer v. Lucas Prospecting Co., 124 Iowa 107 (1904), (99. N. W. Rep. 290), however, it was held that where the charter of a corporation author- ized it to sell all its property, and also to deal in the stock of other corporations, it had the right to sell all its property for stock in another corporation. The Court said: "The controlling purpose of the corpora- tion, as thus expressed, was not to 209 §111 INTEECOEPORATE RELATIONS [part 11 A sale of the property of a prosperous corporation pursuant to the unauthorized action of a majority of the stockholders is voidable and not void. As will be shown, it may be enjoined or set aside at the suit of a minority stockholder but, in the absence of such action, it will stand.' § 111. Sale of Entire Property of Losing Corporation by Majority Vote. — The general rule that a majority cannot sell the entire assets of a prosperous corporation is based upon the principle that a majority cannot control corporate powers to defeat corporate purposes. It is subject to the exception — noted in the last section — that such sale may be made as a step towards dissolution. The power of a majority to dispose of all the property of a conduct mining operations itself, but to secure mineral or supposed mineral lands, and to prospect them. The power to sell and convey any rights thus acquired is expressly given. . The express power here given, construed in connection with the declared object and business of the corporation, and the general power to sell given by the terms of article 2 clearly conferred the power to sell all of the property of the cor- poration notwithstanding the dissent of any individual stockholder. . . . It is, undoubtedly, the general rule that a corporation may not sell any part or all of its property for other than a cash consideration, unless authorized to do so by its charter. . . . But the articles of incorpora- tion expressly gave the Lucas com- pany the right to purchase, sell and deal in the corporate stocks of cor- porations authorized to conduct mining operations. It had mining rights and property to sell, but no power to mine; hence, we think the power to exchange or sell its prop- erties for the stock of a corporation which would engage in the business is implied." See also post, § 120: "Exchange of Property for Stock Infringement of Rights of Dissenting Stockholders." 210 1 In Tanner v. Lindell R. Co., 180 Mo. 17 (1904), (79 S. W. Rep. 155) the Court said : " None of the authorities cited says that a sale of all the property of a corporation pursuant to a resolution of a majority of its members is void. They all recognize that the majority in in- terest have the right to rule within reasonable bounds and that whilst they have no right, arbitrarily or oppressively, to close out a corpora- tion for their own advantage yet they are not compelled to continue an unprofitable business or to pay the minority more than their stock is worth for the privilege of closing it up. The principle invoked by the plaintiffs is wise and ju.st, but, since it is liable to abuse, its wisdom and justice are seen only in its applica- tion to the facts of the given ^ase. It is, as before said, designed for the protection of the minority, but like some other equitable principles it is to be used as a shield, not as a sword . " See also Boston, etc. Min Co. v. Montana Ore-Purchasing Co., 89 Fed. 629 (1903). Compare, however, Forrester v. Boston, etc. Min. Co., 29 Mont. 397 (1903), (76 Pac. Rep. 211). CHAP. Xl] SALES OP CORPORATE PROPERTY §112 losing corporation, however, is in furtherance of the purposes of the corporation and arises ex necessitate. When the further prosecution of the business of the corpora- tion would be unprofitable, it is the duty, as well as the right, of the majority to dispose of its property and take action towards the liquidation of its affairs/ § 112. Sale of Entire Corporate Property by Directors. — The directors of a corporation are appointed to manage its affairs. They have implied authority to acquire and dispose of its property in the usual course of business. They have no right to take any action which will thwart the purpose for which the corporation was created. The powers of directors are defined by the charter and by- laws of the corporation. The extraordinary power of dis- posing of the entire corporate assets might be conferred upon ' United States: Hayden v. Of- ficial Hotel Red Book, etc. Co., 42 Fed. 875 (1890); Hancock v. Hol- brook, 9 Fed. 353 (1881). Compare Hunt V. American Grocery Co., 81 Fed. 532 (1897). Iowa : Price v. Holcomb, 89 Iowa, 123 (1893), (56 N. W. Rep. 407). Compare Buell v. Buckingham, 16 Iowa. 284 (1864), (85 Am. Dec. 516). Louisiana: Hancock v. Holbrook, 40 La. Ann. 53 (1883), (3 So. Rep. 351). Massachusetts: Treadwell v. Salis- bury Mfg. Co., 7 Gray, 393, 404 (1856), (66 Am. Dec. 490); Sargent V. Webster, 13 Met. 497 (1847), (46 Am. Dec. 743). Michigan : Doyle v. Leitelt, (Mich. 1893), 56 N. W. Rep. 553. Minnesota : Rothwell v. Robinson, 44 Minn. 538 (1890), (47 N. W. Rep. 255). Mississippi: Berry v. Broach, 65 Miss. 453 (1888), (4 So, Rep. 117). New Jersey: Sewell v. East Cape May Beach Co., 50 N. J. Eq. 717 (1892), (25 Atl. Rep. 929). New York: Skinner v. Smith, 134 N. Y. 240 (1892), (31 N. E. Rep. 911). Quaere People v. Ballard, 136 N. Y. 639 (1892), (32 N. E. Rep. 611, 17 L. R. A. 737), motion for reargu- ment of s. c. 134 N. Y. 269 (1892), (32 N. E. Rep. 54). Rhode Island: Phillips v. Provi- dence Steam Engine Co., 21 R. I. 304 (1899), (43 Atl. Rep. 598, 45 L. R. A. 560) : "There is a difference of opinion as to the power of a cor- poration to sell its entire property and thus practically retire from busi- ness. Some courts hold that it may be done by the consent of all the stockholders and others that it may be done by a majority. . . . We think this the correct rule [that majority may authorize sale when the corporation is no longer able to profitably continue its business.] It has been recognized in this State. . . . The principle upon which these cases rests is that a corporation may dispose of its property by a majority vote in cases which are free from unfairness, oppression and fraud. Against wrongs of this kind equity will interfere." Wisconsin : Werle v. Northwestern Flint, etc. Co., 125' Wis. 534 (1905), (104 N. W. Rep. 743). 211 §112 INTERCOEPOHATE RELATIONS [part m them.' But, unless expressly conferred, the directors of a prosperous corporation have no power to sell out its entire property and deprive it of the means of continuing business. And the directors of a losing, but not insolvent, corporation are equally without implied authority to wind up its affairs and dispose of its assets.^ The distinction between a losing corporation able to pay its debts and an insolvent corporation must be observed. The transfer of the entire property of the one involves primarily the relations between a corporation and its stockholders; of ' Mahaska County R. Co. v. Des Moines Valley R. Co., 28 Iowa, 451 (1870). 2 In the leading case of Abbott v. American Hard Rubber Co., 33 Barb. (N. Y.) 578 (1861), a majority of the trustees of a business corporation transferred all its personal property, which was especially adapted to its business, to two persons, who forth- with caused another corporation to be formed, and transferred such property to it. It was held, that as puch transfer practically terminated the corporation by taking from it the power to fulfil the object of its organi- zation, it was a, violation of that object, was not within the power of the trustees, and was ultra vires and void. Compare Wolf v. Arminus Copper Mine Co., 6 Misc. (N. Y.) 562 (27 N. Y. Supp. 642) (1894), distinguishing Abbott V. American Hard Rubber Co., supra. For other cases holding that the directors of a corporation have no im- plied authority to dispose of its prop- erty so as to prevent it from carrying on the business for which it was created, see : Missouri : Feld v. Roanoke Invest- ment Co., 123 Mo. 613 (1894), (27 S. W. Rep. 635) : "The officers of a cor- poration cannot, against the wishes of its stockholders or any one of them, sell and transfer the entire property from which it derives its emoluments 212 or which forms the basis of its busi- ness operations. To do so would be to commit a breach, if not of the express terms of the contract, of its implied terms, by which the general objects defined in its charter would be diverted and, in effect, de- stroyed." New York; People v. Ballard, 134 N. Y. 269 (1892), (32 N. E. Rep. 54, 17 L. R. A. 737) ; Blatchford v. Ross, 54 Barb. 42 (1869); Met- ropolitan El. R. Co. V. Manhattan R. Co., 14 Abb. N. C. 103 (1882); Smith V. New York Consolidated Stage Co., 18 Abb. Pr. 419 (1864). Pennsylvania : Carter v. Producers Oil Co., 164 Pa. St. 463 (1894), (30 Atl. Rep. 391); BalUet u. Brown, 103 Pa. St. 554 (1883). Tennessee: Deaderick v. Wilson, 8 Baxt. 108 (1874). In Manufacturers' Sav. Bank v. Big Muddy Iron Co., 97 Mo. 38 (1888), (10 S. W. Rep. 865), however, it was held that the directors of a corpora- tion are justified in disposing of all its property it it is necessary to do so to obtain the means of meeting its obligations. That the officers of a going cor- poration have no power to convey its entire manufacturing plant is manifest without authority, and is held in Consolidated Water Power Co.- V. Nash, 109 Wis. 490 (1901), (85 N. W. Rep. 485). CHAP. Xl] SALES OF CORPORATE PROPERTY §113 the other, the relations between a corporation and its creditors. As said by Judge Peckham in Vanderpoel v. Gorman ; ' " The assignment of property by an insolvent corporation to pay its debts is a very different action from so disposing of its prop- erty when solvent, as to make its continued exercise of its franchises impossible." In the absence of a controlling statute or by-law of the cor- poration, the directors have power to authorize an assignment of the property of an insolvent corporation for the benefit of its creditors.^ § 113. Ratification by Stockholders of Sale by Directors. — While directors have no implied authority to sell the entire ' Vanderpoel v. Gorman, 140 N. Y. 563 (1894), (35 N. E. Rep. 932, 37 Am. St. Rep. 596). 2 Vanderpoel v. Gorman, 140 N. Y. 563 (1894), (35 N. E. Rep. 932, 37 Am. St. Rep. 596). "The corpo- ration had the power to make an assignment. It was a corporate act and neither the statute nor any by- law provided that it should be other- wise done than by the president and secretary and treasurer, under the authority of the board of directors. This sufficiently appears to have been so done and that is enough." See also : Alabama: Chamberlain v. Brom- berg, 83 Ala. 576 (1887), (3 So. Rep. 434). Connecticut: Chase v. Tuttle, 55 Conn. 455 (1887), (12 Atl. Rep. 874, 3 Am. St. Rep. 64). Illinois : Reichwald v. Commercial Hotel Co., 106 111. 439 (1883). Indiana: De Camp v. Aylward, 52 Ind. 468 (1876). Iowa: Buell v. Buckingham, 16 Iowa 284 (1864), (85 Am. Dec. 516). Massachusetts: Sargent v. Web- ster, 13 Mete. 497 (1847), (46 Am. Dec. 543). Michigan: Boynton v. Roe, 114 Mich. 401 (1897)", (72 N. W. Rep. 257). Minnesota : Tripp v. Northwestern Nat. Bank, 41 Minn. 400 (1889), (43 N. W. Rep. 60). Missouri: Calumet Paper Co. v. Haskell Show Printing Co., 144 Mo. 331 (1898), (45 S. W. Rep. 1115, 66 Am. St. Rep. 425). New Jersey : Wilkinson v. Banerle, 41 N. J. Eq. 635 (1886), (7 Atl. Rep. 514). Pennsylvania: Ardesco Oil Co. V. North American Oil, etc. Co., 66 Pa. St. 375 (1870). South Dakota: Wright v. Lee, 2 S. D. 596 (1892), (57 N. W. Rep. 706). Texas: Birmingham, etc. Co. v. Freeman, 15 Tex. Civ. App. 451 (1897), (39 S. W. Rep. 626). Utah: Cupit v. Park City Bank, 20 Utah 292 (1899), (58 Pac. Rep. 839). Wisconsin: Goetz v. Knie, 103 Wis. 366 (1899), (79 N. W. Rep. 401). Most of these decisions are based upon State insolvency statutes. In West Virginia, however, a vote of the stockholders is necessary to au- thorize an assignment for the benefit of creditors. Action by the directors is insufficient. Kyle V. Wagner, 45 W. Va. 349 (1898), (32 S. E. Rep. 213). • 213 §113 INTEUCORPOnATE KKLATIONS [PART II assets of a corporation, a sale made by them may be validated by the subsequent ratification of the stockholders.' Ratification and authorization are governed by the same principles. A sale of corporate property which, in the first instance, requires unanimous consent, can only be made good by the approval of all the stockholders. A sale requiring the vote of a majority may be ratified by a majority.^ ' In Sheldon, etc. Co. v. Eioke- meyer, etc. Co., 90 N. Y. 613 (1882), the Court of Appeals said : "In trans- ferring the property of the corporation to [lay its debts the trustees believed that they were acting within tlie scope of their authority, and the defendant accepted the transfer and received the property in satisfaction of its claim against the plaintiff, in the honest belief that it acquired good title thereto. If the trustees had no power, as the agents of the corpora- tion, to transfer all its property, thus depriving it of the means of carrying on the buniness for which it was organized, it is but the case of an agent making a contract in cxcohh of his authority. The act is voidable, not void. The principal may, never- theless, affirm the act, and a ratifica- tion is equivalent to a prior authoriza^ tion. If all the stockholders of this corporation had, with full knowledge, subsequently ratified the transfer and affirmed the settlement, the act — though beyond the powers given the trustees by the charter — couhl not be suVjHoquently avoided by the stock- holders, or by the corporation." The conveyance under the authority of the directors, who.se action is rati- fied subsequently by a majority of the stockholders, of the total assets of a private corporation in payment of its debts, operates as a valid conveyance of the property, as against other stock- holdors, in the absence of fraud, and when a longer continuance of the busi- ness would be prejudicial to all parties. Hancock v. Holbrook, 9 Fed. 353 (1881). 214 . See also Metcalf v. American School Furniture Co., 122 I'ed. 116 (1903); Hancock v, Holbrook, 40 La. Ann. 63 (1888), (3 So. Rep. .351); Kent v. Quicksilver Mining Co., 78 N. Y. 169 (1879). Where the directors of a mercan- tile corporation called a stockholders' meeting to consider the propriety of a sale of its business, at which less than one-third of the stock was represented, but a resolution was adopted instruct- ing the directors to dispose of the business upon such terms as they should deem best, it was held that as the statutes fully provided for winding up the corporation in case its business was unprofitable, or in case it was obliged to suspend for want of funds, the directors should be enjoined, at the suit of a stockholder, from diH[josing of the assets, so as to jirevi'iit the corijf>ration from carrying out the objects of its incorporation. Hunt V. American Grocery Co., 81 Fed. 532 (1897). A purchaser of stock after the ratification at a stockholders' meeting of a sale of the property of a corpora^ tion by its trustees cannot ordinarily maintain an action to set aside the sale, although the stock purchased was not voted at such meeting. Pitcher v. Lone Pine-Surprise Con- sol. Co., 39 Wash. 608 (1905), (81 Pac. Hep. 1047). ' Irregular action of the board of directors of a corporation in dispos- ing of its property but which was within the corporate power may be validated by the ratification of the stockholders. CHAP. Xl] SALES OF CORPORATE PROPERTY § 114 The approval by the stockholders of a sale made by the directors may also be inferred from their failure to object within a reasonable time.' In Stokes v. Detrick ' the Supreme Court of Maryland said: " While it is well settled that the directors of a corporation cannot, ordinarily, alone sell and convey the whole of its property, yet it is equally true that, if such an unauthorized transfer is made, it may be ratified by the assent of the stockholders, and such assent may be inferred from their failure to protest against and promptly condemn the unauthorized acts of the officers of the corporation.'' § 114. Remedies of Dissenting Stockholders in Case of In- valid or Unfair Sales. Voidable Sales.' — A sale of the entire property of a prosperous corporation for purposes other than the winding up of its affairs, or an exchange of corporate assets for property entailing outside obligations, requires, for reasons elsewhere indicated, the unanimous consent of the stockholders.^ Any such sale or exchange is ultra vires the majority and an infringement upon the rights of minority stockholders. A dissenting stockholder has a right to stand upon the contract of association as made, and equity will afford him a remedy — preventive or annulling — against any acts of the majority beyond their powers.' It is entirely immaterial that Morrisette v. Howard, 62 Kan. other corporations. See post, §§ 118, 463 (1901), (63 Pac. Rep. 756). 119, 120, 121 and 122. 1 Balliet v. Brown, 103 Pa. St. 554 'See ante, § 109: "Sale of Entire (1883) ; Stokes v. Detrick, 75 Md. 256 Corporate Property by Unanimous Con- (1892), (23 Atl. Rep. 846). sent;" ante, § 110: " Sale of Entire Ratification of an unauthorized Property of Prosperous Corporation by act by acquiescence to be binding Majority Vote;" post, ^ 118: "Trans- must be shown to have been with fer of Entire Corporate Property vnth- knowledge of all the material facts out Unanimous Consent requires Mone- connected with the transaction. tary Consideration." Morris v. Ely ton Land Co., 125 ^ United States : Mason u. Pewabic Ala. 263 (1899), (28 So. Rep. Mining Co., 133 U. S. 50 (1890), (10 518). Sup. Ct. jiep. 224); Mackintosh v. 2 Stokes V. Detrick, 75 Md. 263 Flint, etc. R. Co., 34 Fed. 582 (1888). (1892), (23 Atl. Rep. 846). In Dodge v. Woolsey, 18 How. ' In this section the rights and (U. S.) 331 (1855), Justice Wayne remedies of dissenting stockholders clearly states the general principles are considered, not only with respect governing the application of preven- to invalid, unfair and voidable sales, tive remedies by injunctionj at the but with respect to invalid exchanges Instance of stockholders, to restrain of corporate property for stock in those administering the affairs of a 215 §114 INTEECOHPOHATE RELATIONS [PABT n a proposed purchase or sale may, in the opinion of the court, be advantageous to such stockholder.' He alone can deter- mine that. So his motive in bringing suit is of no importance.* Where a majority of the stockholders of a corporation have power to dispose of its entire assets, they must act with fairness towards minority stockholders. A sale wherein the majority obtain, directly or indirectly, more favorable terms than the corporation from doing acts amount- ing to a violation of its charter or from monopolizing its funds. And in the later leading case of Hawes v. Oakland, 104 U. S. 450 (1881), Jus- tice Miller formally states the rules governing the grant of eqiaitable relief to stockholders of corporations. See also Mumford v. Ecuador Devel. Co., Ill Fed. 639 (1901); Eldred v. American Palace Car Co., 96 Fed. 59 (1899). Connecticut: Byrne v. Schuyler Electric Mfg. Co., 65 Conn. 336 (1896), (31 Atl. Rep. 833, 28 L. R. A. 304). Georgia: Central R., etc. Co. V. CoUms, 40 Ga. 582 (1869). lUinms: Chicago Hansom Cab Co. V. Yerkes, 141 111. 320 (1892), (30 N. E. Rep. 667, 33 Am. St. Rep. 315). Missouri: Tanner v. Lindell R. Co., 180 Mo. 1 (1904), (79 S. W. Rep. 155). Montana : Forrester v. Boston, etc. Min. Co. 21 Mont. 544 (1898), (55 Pac. Rep. 229, 353). New York: Abbott u. American Hard Rubber Co., 33 Barb. 578 (1861). Pennsylvania: Lauman u. Lebanon Valley R. Co., 30 Pa. St. 42 (1858), (72 Am. Dec. 664). Rhode Island: Boston, etc. R. Co. I). New York, etc. R. Co., 13 R. I. 260 (1881). England: Beman v. Rufford, 1 Sim. (N. s.) 550 (1851); Ware v. Grand Junction Water Co., 2 Russ. & Myl. 470 (1831); Bagshaw v. Eastern Union R. Co., 7 Hare, 114 216 (1849). See also Bird v. Bird's Patent Deodorizing, etc. Co. 9 L. R, Ch. App. 358 (1874). Compare Treadwell v. Salisbury Mfg. Co., 7 Gray (Mass.), 393 (1856), (66 Am. Dec. 490); Hodges v. New England Screw Co., 1 R. I. 312 (1850), (53 Am. Dee. 624); Dudley V. Kentucky High School, 9 Bush (Ky.), 576 (1873). » Central R., etc. Co. v. Collins, 40 Ga. 617 (1869): "We do not think the profitableness of this contract to the stockholders of the Central Rail- road Co., . . . has anything to do with the matter. These stockholders have the right, at their pleasure, to stand on their contract. If the char- ters do not give to these companies the right to go into this new enter- prise, any one stockholder has the right to object. He is not to be forced into an enterprise not included in the charter. That it will be to his interest is no excuse; that is for him to judge." See also Byrne v. Schuyler Electric Mfg. Co., 65 Conn. 336 (1895), (31 Atl. Rep. 833, 28 L. R. A. 304); Stevens V. Rutland, etc. R. Co., 29 Vt. 545 (1851); Beman v. Rufford, 1 Sim. (N. s.) 550 (1851). 2 Central R., etc. Co. u. Collins, 40 Ga. 582 (1869); Carson v. Iowa, etc. Co., 80 Iowa, 638 (1890), (45 N. W. Rep. 1068) ; Elkins v. Camden, etc. R. Co., 36 N. J. Eq. 5 (1882) ; Ramsey V. Gould, 57 Barb. (N. Y.), 398 (1870) ; Pender v. Lushington, L. R. 6 Ch. 70 (1877). CHAP. Xl] SALES OF COBPORATE PROPERTY §114 minority may be avoided by the latter, or the majority may be compelled to account.' Upon similar principles, the courts will closely scrutinize a sale of corporate property effected by majority stockholders to another corporation, which they con- trol or are interested in. Such a sale is not void nor con- structively fraudulent. But if it is unfair to the minority, or if any unconscionable advantage of their position has been taken by the majority, the courts will not hesitate, at the suit of the minority, to set the sale aside. Regardless of the means em- ployed, when it appears that " the majority have put something in their pockets at the expense of the minority " a court of equity will grant relief.^ So where the directors of the vendor ' In Ervin v. Oregon R., etc. Co., 27 Fed. 625 (1886), where a majority of the stockholders of a corporation merged its business and property with businesses and properties be- longing to themselves and embarked the whole in a joint venture, Judge Wallace said (p. 632): "Applying these principles to the case in hand, although the minority of stockholders cannot complain merely because the majority have dissolved the corpora- tion and sold its property, they may justly complain because the majority, while occupying a fiduciary relation towards the minority, have exercised their powers in a way to buy the property for themselves, and exclude the minority from a fair participa- tion in the fruits of the sale. In the language of Mellish, L. J., in Menier V. Hooper's Telegraph Works, L. R. 9 Ch. App. 354 (1874) : 'The majority cannot sell the assets of the company, and keep the consideration, but must allow the minority to have their share of any consideration which may come to them.'" For other somewhat similar cases where the courts have protected the interests of minority stockholders see Buckley v. Big Muddy Iron Co., 7 Mo. App. 589 (1879); Fougeray v. Cord, 50 N. J. Eq. 185 (1899), (24 Atl. Rep. 499). See also Hayden v. Official Red Book, etc. Co., 42 Fed, 875 (1890). Compare Goodwin v Bodcaw Lumber Co., 109 La. 1050 (1902), (34 So. Rep. 74). 2 In Mumford v. Ecuador Devel. Co., Ill Fed. 643, (1901) Judge Co^e said : "Although a majority may law- fully make a contract with the com- pany such contract will be scrutinized with much greater care than if made with a third party, and unless it appears that it was made honestly and for an adequate consideration ;«, court of equity will interpose to pre- vent such contract from being used oppressively and in violation of the rights of the minority. It matters not in what form these rights are invaded; it is the business of equity to penetrate through subterfuges and discover the actual transaction stripped of its disguises. If then it shall appear, no matter what may be the machinery employed, that the majority have sold the corporate property to themselves for a wholly inadequate consideration a court of equity will grant relief to the minority who have thus been despoiled of their property." In Chicago Hansom Cab Co. v. Yerkes, 141 111. 335 (1892), (30 N. E. Rep. 667), (33 Am. St. Rep. 315) the Supreme Court of Illinois said: "The right of a majority of the 217 §114 INTERCORPOHATE RELATIONS [part II corporation are substantially interested in the vendee corpora- tion, a sale of corporate assets will be annulled if unfair, and stockholders to sell the corporate property can by no reasonable con- struction be held to involve the right to seize the property to their own use. A sale conducted, as it may be, fairly and openly, cannot, theo- retically, operate to the prejudice of one stockholder more than to an- other. There is in such case no pre- sumptive antagonism between the different stockholders. But where, under pretence of a sale to themselves, the majority seize the property and undertake to invest themselves with title, their interests are wholly hostile, for the gain of the one is the loss of the other." WheT-e a majority of the stock- holders sell the corporate a.ssets to another corporation owned by them- selves, in violation of the rights of the minority the latter have an equitable lien upon the property sold to the extent of their interests. Ervin v. Oregon R., etc. Co., 27 Fed. 625 (1886). In Rothschild v. Memphis, etc. R. Co., 113 Fed. 476 (1902), where a majority stockholder of a corporation did not have the actual control of its affairs it was held that he did not occupy a trust relation toward the minority and, in the absence of fraud, might purchase the property of the corporation at a judicial sale. The Court said (p. 479): "Stock- holders are not tenants in common of the property of the corpora- tion, and a stockholder, as such, even though he owns a majority of the stock, does not occupy a trust relation toward the other stock- holders, and he may deal with them or with the corporation in good faith. In order to establish a trust relation, t he majority stockholder must actually control the affairs of the company for his own benefit and to the prejudice 218 of the minority stockholders. If he is not in control of the property, and does not mismanage it to the prejudice of the minority stockholders, he may purchase, if there is no actual fraud, the property of the corporation at a judicial sale for his own benefit, and he is not accountable to any other stockholder for the property so pur- cha.sed. . . ." (p. 481) "It is true that every transaction of a majority stockholder with the corporation will be viewed by the courts with jealousy, and set aside on slight grounds; but it is not void, and, if the relations of the majority stockholder are fair and open, there is no rule which forbids his dealing with the corporation, and no presumption that such dealing is fraudulent. The actual control of the property, which is the basis in all of the cases of the trust relation, not existing, and the sale not having been brought about by the fraudu- lent action of the defendant, it did not, by its purchase, become a trustee for the complainant and other stockholders of the . . . company." Where the majority of the stock- holders of a corporation entered into an agreement for the sale of all its assets to another corporation in con- sideration of the payment of the debts of the selling company and an exchange of its shares for those of the purchasing company upon an agreed basis, and the latter com- pany, although receiving a. transfer of the property, failed to perform its part of the agreement and attempted to dispose of the stock it was entitled to under the agreement, it was held that there was sufficient evidence of fraud to warrant the issuance of a preliminary injunction. Eldred v. American Palace Car Co., 96 Fed. 59 (1899). Where a corporation is prosperous CHAP. Xl] SALES OF CORPORATE PROPERTY §114 the burden is upon the directors to show its fairness.' And if the directors of the vendor corporation are likewise directors of the vendee corporation and thus control the action of both, a sale is voidable and will be set aside at the instance of a stockholder, regardless of its fairness.^ and no reason appears why it should be voluntarily dissolved and its assets sold, a court of equity will, at the in- stance of minority stocldiolders who allege that the dissolution and pro- posed sale constitute a scheme by the majority to "freeze out" the minority, restrain the same. Elbogen v. Gerbereux-Flynn Co., 30 Misc. (N. Y.) 264 (1900), (62 N. Y. Supp. 287). See also Russell v. Fuel Gas Co., 184 Pa. 102 (1898), (39 Atl. Rep. 21) ; Devine v. Frankford Steel, etc. 'Co., 205 Pa. 114 (1903), (54 Atl. Rep. 578) ; Glengarry Consol. Min. Co. v. Boehmer, 28 Colo. 1 (1900), (62 Pac. Rep. 839). ^ Directors of a corporation stand in a fiduciary relation to the stock- holders, and will not be permitted to manage the corporation's affairs so as to give them an advantage over other stockholders. The courts will carefully scrutinize transactions be- tween two corporations where the directors of one are largely interested in the stock of the other, although they are not necessarily fraudulent. "The law required of them the ut- most good faith in their manage- ment and control of the corporate property." Hill V. Gould, 129 Mo. 106, 112 (1895), (30 S. W. Rep. 181). If a conveyance of corporate property is, in whole or part, for the benefit of one or more of the directors who acted in the board and voted for the resolution authorizing the con- veyance, the same will, in a court of equity, be regarded as prima fade fraudulent and will be so declared unless it should be shown to be fair. reasonable and wholly free from fraud. Sweeny v. Grape Sugar Refining Co., 30 W. Va. 443 (1887), (4 S. E. Rep. 431, 8 Am. St. Rep. 88). ^ In Chicago Hansom Cab Co. v. Yerkes, 141 111. 335 (1892), (30 N. E. Rep. 667, 33 Am. St. Rep. 315), the Court said: "It is a general rule, ad- ministered by courts of equity, that where one person has the power of disposition of the property of another without the consent of that other, he shall not be allowed to become per- sonally interested in it himself — and this without regard to any question of fairness in the immediate transaction, — for he shall not be allowed to occupy a position where self-interest would tempt a betrayal of duty." In O'Connor Mining, etc. Co. v. Coosa Furnace Co., 95 Ala. 614, 618 (1891), (10 So. Rep. 290, 36 Am. St. Rep. 251), it was said: " The duty which disqualifies the directors from binding the corporation by a transac- tion in which they have an adverse interest, is one owing to the corpora- tion which they represent, and to the stockholders thereof. A principal may consent to be bound by a contract made for him by an agent who, at the same time, represented an interest ad- verse to that of the principal. A ces- tui que trust may elect to confirm a transaction which he could have re- pudiated on the ground that the trus- tee had an interest in the matter not consistent with his trust relation. In like manner, dealings between cor- porations, represented by the same persons as directors, may be accepted as binding by each corporation and the stockholders thereof. The general 219 §114 INTEHCORPORATE RELATIONS [part n Where the majority stockholders, in violation of the rights of the minority, have sold all the assets of a corporation the minority are not bound to accept a pro rata share of the pro- ceeds of the sale, nor shares of the vendee corporation in lieu thereof, but may insist upon the market value of their shares at the time of the sale ; may follow the property and share in the profits arising from its use, or may, under some circum- stances, have the sale set aside. Where, however, the sale has been carried into effect and the rights of innocent persons have intervened, the court may decline to annul the sale and leave the dissenting minority to their remedies at law.* It has rule is, that such dealings are not absolutely void, but are voidable at the election of the respective cor- porations, or of the stockholders thereof. They become binding, if acquiesced in by the corporations and their stockholders." The mere fact that directors sell the assets of a corporation to another corporation in which they are direct- ors and stockholders does not render the transaction absolutely void. Manufacturers' Sav. Bank v. Big Muddy Iron Co. 97 Mo. 38 (1888), (10 S. W. Rep. 965). See also : United States: Worth Mfg. Co. v. Bingham, 116 Fed. 791 (1902); Miller v. Consolidated Lake Superior Co., 110 Fed. 480 (1901). Colorado : Morgans. King, 27 Colo. 539 (1900). Louisiana: Leathers v. .lanney, 41 La. Ann. 1120 (1889), (6 So. Rep. 884, 6 L. R. A. 661). Missouri: Hill v. Gould, 129 Mo. 106 (1895), (30 S. W. 181). New Hampshire : Pearson o. Con- cord R. Co., 62 N. H. 537 (1883), (13 Am. St. Rep. 590). New York: Barr v. New York, etc. R. Co., 125 N. Y. 263 (1891), (26 N. E. Rep. 145). Oregon: Patterson v. Portland Smelting Works, 35 Or. 96 (1899), (56 Pac. Rep. 407). 220 Rhode Island: Wilson o. Central Bridge Props., 9 R. I. 590 (1870). Washington: Pitcher v. Lone Pine- Surprise, etc. Min. Co., 39 Wash. 608 (1905), (81 Pac. Rep. 1047). > In Tanner v. Lindell R. Co., 180 Mo. 1 (1904), (79 S. W. Rep. 155), the Court said (p. 21): "When the majority of stockholders against the will of the minority sell all the property of the corporation and thereby work a practical dissolu- tion of it, the minority stockholders are not bound to take in payment for their stock a pro-rata share of the proceeds of the sale, or, in sub- .stitution therefor, the stock of an- other corporation, but, at their elec- tion, may have out of the proceeds of the sale, whether it be money or other property, the market value of their stock at the date of the sale of their proportional share of the pro- ceeds, or they may follow the property into the hands of the purcha.ser and share in the profits arising from its use in the same ratio that they would have shared if the sale had not been made, and, if the transac- tion be made with bad faith, they may, under some circumstances, have the sale set aaide and a rehabitation. of the corporation, or, if equity re- quires it, and the application is timely, they may have an injunction to arrest the transaction." CHAP. Xl] SALES OF CORPORATE PROPERTY §115 also been held that a court of equity will not set aside, at the instance of a minority stockholder, a sale which is voidable by reason of common directors in both corporations, unless such stockholder shows that he has sustained damages.' § 115. Procedure in Stockholders' Actions. — All the minor- ity stockholders may join in a suit to enjoin the execution of a contract of sale, proposed by the majority and requiring unanimous consent — ^or for its cancellation if executed; or any less number of such stockholders may maintain the suit. In the latter case, in order to prevent a multiplicity of suits and that all parties interested shall, theoretically, be before the court, it is necessary that the stockholder — in case an individual stockholder acts — should institute the suit in be- half of himself and of other stockholders similarly situated.^ In this case, however, the Court, ■while stating the different remedies, held that although the sale in ques- tion infringed the rights of minority stockholders yet that, as a court of equity, it would not decree its re- scission because, on account of inter- vening rights, such rescission would be productive of more injury than the refusal of it; that the dissenting stockholders had an adequate remedy at law for damages for the injury sustained and would be left to such remedy. ^ Smith V. Ferries, etc. R. Co. . (1892), (30 N. E. Rep. 847, 28 Am. ' Where a transfer by a corpora- St. Rep. 615). tion to another company, with the Where a sale is set aside as vifra same stockholders, of all its property vires a mortgage by the vendee is was without consideration, except void. Knoxville v. Knoxville, etc. R. the assumption of debts, and the Co., 22 Fed. 758 (1884). transferee inunediately executed a 251 §127 INTERCORPORATE RELATIONS [part II a present consideration and the mortgagee acts in good faith, the mortgage takes precedence of claims of creditors who have not acquired a statutory hen, by judgment or attachment, prior to its execution.' This conclusion is not inequitable. It merely gives the same priority to a bona fide mortgage made by a purchaser that such a mortgage would have had if made by the debtor, the selling corporation. Questions as to follow- ing the avails of a mortgage do not affect its validity. Notice of the existence of a creditor's claim does not, stand- ing alone, alter the position of a mortgagee.^ Knowledge of the fraudulent character of the transfer, as well as of the claim, must be shown. IV. Sales of Property of Quasi-public Corporations. § 127. Indispensable Property cannot be alienated or taken on Execution without Statutory Authority. — Private cor- ' In Fogg V. Blair, 133 U. S. 538 (1890), (10 Sup. Ct. Rep. 338), Jus- tice Field said: '*The property of a railroad company is not held under any such trust to apply it to the pay- ment of its debts as to restrict its use for any other lawful purpose, it matters not how meritorious the demand of the creditor may be. He must obtain a lien upon the property of the company, or security in some other form, or he will have to take his chances with %11 other creditors to obtain payment in the ordinary course of legal proceedings for the collection of debts." See also Lebeck v. Fort Payne Bank, 115 Ala. 447 (1897), (22 So. Rep. 75, 67 Am. St. Rep. 51). ^ In Fogg V. Blair, supra, Justice Field also said (p. 540): "There is no evidence in the record before us that the parties who took the bonds issued by the St. Louis, Hannibal and Keokuk Railroad Co. had any notice, actual or constructive, of the demand of the complainant. But if they had, it would not have affected their rights. That demand was not then reduced to judgment 252 and created no lien upon the property of the company, nor any restriction upon the companies' right to use it for any lawful purpose. The bonds were given to raise the necessary funds to complete the road of the company and the mortgage was executed to secure their pa3anent. They were negotiable instruments, and, in the hands of the purchasers, cannot be impeached for any neglect of the company issuing them to pay the demands of other creditors. We are unable to perceive any ground upon which their priority over the claim of the appellant can be, in any way, impaired. We do not r|uestion the general doctrine, invoked by the appellant, that the property of a. railroad company is a trust fund for the payment of its debts, but do not perceive any place for its application here." Compare this opinion with those of the circuit judges in the same case sub nom. Blair v. St. Louis, etc. R. Co., 27 Fed. 176 (1886) (Brewer, J.), 25 Fed. 084 (1885) (Brewer, J.), 24 Fed. 148 (1885) (Treat, J.), and 22 Fed. 36 (1884) (Treat, J.). CHAP. Xl] SALES OF CORPORATE PROPERTY §127 porations, owing no public duties, have power, as already shown, to sell all their property.' Limitations, for the protec- tion of creditors and minority stockholders, may be placed upon the exercise of the power, but its existence as between the corporation and the State is unquestionable. Quasi-public corporations — railroad, canal, telegraph, gas and other public utility companies — stand in an essentially different position. These companies enjoy franchises granted by the State, in consideration of the assumption of obUgations to the public. As a corollary to the conclusion elsewhere shown to be established that corporate franchises cannot be transferred without authority from the State, it follows that corporate property necessary for the performance of public duties or, as sometimes stated, essential to the exercise of corporate franchises, cannot be sold or disposed of without such authority.^ Upon the same principle, it also follows that such essential property is not subject to sale on execution, unless the levy is authorized by statute.^ The underlying ' Ante, § 108: "Power to purchase and sell Generally,*' " United States: Central Transp. Co. V. Pullman Car Co., 139 U. S. 24 (1891), (11 Sup. Ct. Rep. 478); York, etc. R. Co. V. Winans, 17 How. (U. S.) 30 (1854). See also Briscoe v. South- em, etc. R. Co., 40 Fed. 280 (1889). In Cumberland Telephone, etc. Co. V. City of Evansville 127 Fed. 194 (1903) the Court said: "The Evansville Telephone Exchange was authorized and empowered to estab- lish and maintain its telephone system, not to sell it; to accomplish the object of its incorporation, not to defeat it; to acquire the means to enable it to perform its duties to the public as a corporation, not to disable itself from performing those duties. The attempted sale of all its property and franchises was idtra vires, and contrary to public policy, and, therefore, null and void." Georgia: Singleton v. South- western R. Co., 70 Ga. 464 (1883), (48 Am. Rep. 574). New Hampshire: Richards v. Merrimack, etc. R. Co., 44 N. H. 127 (1862). New Jersey : Black v. Delaware, etc. Canal Co., 22 N. J. Eq. 399 (1871). Pennsylvania: Foster v. Fowler, 60 Pa. St. 27 (1868). Texas: Missouri Pac. R. Co. v. Owens, 1 Tex. Civ. Cas. App. § 385 (1883) ; Gulf, etc. R. Co. v. Morris, 67 Tex. 692 (1887), (4 S. W. Rep. 156). See also cases cited in the following note which illustrate the same prin- ciple. ' United States : East Alabama R. Co. V. Doe, 114 U. S. 340, (1885), (5 Sup. Ct. Rep. 869) ; Gue v. Tide Water Canal Co., 24 How. 257 (1860). Indiana: Louisville, etc. R. Co. v. Honey, 117 Ind. 501 (1888), (20 N. E. Rep. 432, 3 L. R. A. 435) ; Indian- apolis R. Co. V. State, 105 Ind. 37 (1885), (4 N. E. Rep. 316). Kentucky : Louisville Water Co. v. Hamilton, 81 Ky. 517 (1883). North Carolina: State v. Rives, 5 Ired. 297 (1844). 253 § 128 INTERCORPOHATE RELATIONS [part 11 principle is that property, necessary to enable a corporation to fulfil its obligations to the State, is impressed with a trust in favor of the public.^ But this underlying principle is inapplicable to a sale by a quasi-public corporation of all its property to a municipal corporation, for municipal service, provided the latter have authority to purchase. The trust in favor of the public is not broken by a transfer to the public.^ § 128. Test of Indispensability. — In applying the rule that the property of a ^wast'-public corporation, necessary for the performance of its public duties, cannot, in the absence of statutory authority, be alienated or taken on execution, the courts have sometimes drawn the line of indispensability be- tween the real and the personal property of the corporation — holding that the latter can, and that the former cannot, be sold or taken. Thus, in Coe v. Columbus, etc. R. Co} the Ohio: Coe v. Columbus, etc. R. Co., 10 Ohio St. 372 (1859), (75 Am. Dec. 518). Pennsylvania: Youngman v. El- mira, etc. R. Co., 65 Pa. St. 278, 286 (1870); Western Pennsylvania R. Co. V. Johnston, 59 Pa. St. 290 (1869) ; Plymouth R. Co. v. Culwell, 39 Pa. St. 337 (1861); Ammant v. New Alexandria Turnpike Co., 13 Serg. & R. 210 (1825), (15 Am. Dec. 593); Leedam v. Plymouth R. Co., 5 W. & S. 265 (1843). Tennessee: Baxter v. Nashville, etc. Turnpike Co., 10 Lea, 488 (1882). Texas : City of Palestine v. Barnes, 50 Tex. 538 (1878). ' 2 Morawetz Priv. Corp. § 1125. 2 Cit3' of Indianapolis v. Con- sumers' Gas Trust Co., 144 Fed. 643 (1906): "In none of the citations. State or general, are there any reasons stated that seem inconsistent with the proposition that a corpora- tion, engaged in a service of public utility, may contract for a sale to the municipality of all the property therein, either through a condition accepted in the franchise from the city, or through subsequent arrange- 2.54 ment. The question whether mu- nicipal ownership is favorable to the public interest, is neither involved in, nor open to, judicial inquiry. Assuming that such ownership is authorized, and is contemplated or demanded by the municipality, we are convinced that this proviso, treated alone as a contract of sale on the part of 'the gas company, is not within the inhibition of the rule — not ultra vires. The public policy which is mentioned in the cases cited, as opposed to an implication of charter power to turn over its property to another and * abnegate the perform- ance of its duties to the public,' has no application to the transfer to the public . — the municipality — - of property used in public service." A statute authorizing a city to purchase a water or lighting plant authorizes as well the corporation owning such plant to sell, although it is thereby rendered unable to perform its public duties. Connor v. City of Marshfield, 128 Wis. 280 (1906),(107 N. W. Rep. 6.39). " Coe K." Columbus, etc. R. Co., 10 Ohio St. 379 (18.59), (75 Am. De';, CHAP. Xl] SALES OF CORPORATE PROPERTY § 129 Supreme Court of Ohio said: " The Hne can be clearly drawn between the interest in real estate and the franchise connected therewith, and the movable things employed in' the use of the franchise." Upon this principle, it has been held that the road-bed and fixtures of a railroad company,' the road of a turnpike company,^ the canal and locks of a canal company ' and the plant of a water company * cannot be seized upon execution; while, on the other hand, it has been held that the rolling stock of a railroad ^ and the ferry boat of a ferry com- pany ' can be taken. This test of indispensability is illogical. The rolling 'stock of a railroad is as essential to its use and operation as the road-bed, and neither is more necessary than the other. The foundation of the rule- being the indispensability of the prop- erty, the assumption that real estate is more jjecessary than personal property begs the question. The true test should be whether the property, real or personal, is necessary, in a rea- sonable sense, for the performance of the public duties of the corporation.' This subject is, however, at the present time, a matter of statutory regulation in nearly all the States. § 129. Sales of Surplus Property. — Indispensable property, in the absence of statutoiy authority, cannot be sold. Con- versely, surplus property — property which is not indispens- 518). Compare, however, Central ' Gue v. Tide Water Canal Co., 24 Transp. Co. v. Pullman Car Co., 139 How. (U. S.) 257 (1860) ; Susque- U. S. 24 (1891), (11 Sup. Ct. Rep. hanna Canal Co. v. Bonham, 9 W. 478). & S. (Pa.) 27 (1845). ' Coe V. Columbus, etc. R. Co., 10 ' Louisville Water Co. v. Ham- Ohio St. 372 (1859), (75 Am. Dec. ilton, 81 Ky. 517 (1883). 518) ; Youngman v. Elmira, etc. R. ' Louisville, etc. R. Co. v. Boney, Co., 65 Pa. St. 278, 286 (1870); West- 117 Ind. 501 (1888), (20 N. E. Rep. em, etc. R. Co. v. Johnstown, 59 Pa. 432, 3 L. R. A. 435); Boston, etc. St. 290 (1869); Leedam d. Plymouth R. Co. v. Gilmore, 37 N. H. 410 R. Co., S W. &. S. (Pa.) 265 (1843). (1858), (72 Am. Dec. 336); Coe v. A portion of a railroad which has Columbus, etc. R. Co., 10 Ohio St. been abandoned is subject to levy of 372 (1859), (75 Am. Dec. 518). execution. Benedict v. Heineberg, '^ Lathrop v. Middleton, 23 Cal. 43 Vt. 231 (1870). 257 (1863), (83 Am. Dec. 112). ^ Ammant v. New Alexandria ' See an able and comprehensive Turnpike Co., 13 Serg. & R. 210 note to Brunswick, etc. Co. v. United (1825), (15 Am. Dec. 593); Baxter States Gas Co., 35 Am. St. Rep. 390. ?'. Nashville, etc. Turnpike Co., 10 Also Short's Railway Bonds & Mort^ Lea (Tenn.), 488 (1882). gages, p. 165. 25; § 129a JNTERCORPORATE RELATIONS [pART II able — in the absence of statutory prohibition, may be sold. A quasi-public corporation is vested with full jus disponendi over all its property, real and personal, which is not necessary to enable it to carry on the business for which it was chartered or to fulfil its pubhc obligations.' In Hendee v. Pinkerton^ Judge Foster said: " We entertain no doubt that the . . . Company could lawfully sell and con- vey the lands embraced in this bill. They were not acquired to enable the corporation to carry on the business ^^•hich it was chartered to do for the benefit of the public, nor needed or used for that purpose. Their alienation in no wise impaired or affected the usefulness of the company as a railroad, or its ability to exercise any of its corporate franchises. In the absence of any express or implied legislative prohibition, this corporation possessed all the ordinary rights of ownership over these lands, and could convey them away absolutely or mortgage them to secure any valid indebtedness." § 129a. Ultra vires Sales of Property of Private and Quasi- Public Corporations. — The question of the want of power of corporations to enter into intercorporate relations has generally arisen in the case of railroad leases, in the examination of which the underlying principles are full}- considered.' It is, therefore ' Branch v. Jesup, 106 XJ. S. 468 essential to the exercise of its fran- (1882), (1 Sup. Ct. Kep. 495). chises cannot be sold is inapplicable ■ Town lots, held by a railroad com- to property which has not become pany, do not pass by a sale of a rail- a part of the corporation's structure road "with its corporate privileges and for which it has no immediate use. and appurtenances" unless directly Johnson Co. v. Miller, 174 Pa. St. appurtenant to the railroad and in- 605 (1896), (34 Atl. Rep. 316, 52 Am. dispensably necessary to the enjoy- St. Rep. 833). ment of its franchises. Shamokin In tliis case steel rails not required Valley R. Co. v. Livermore, 47 Pa. St. for construction work were levied 465 (1864), (86 Am. Dec. 552). Com- upon by creditors of a railway com- pare Piatt V. Union Pacific R, Co., 99 pany. U. S. 48 (1878). Where a railroad company sells See also Yates v. Van De Bogert, a terminal switch to the owner of 56 N. Y. .530 (1874): "The company the land upon which it is laid, it acquired title in fee under that deed. violates no public duty. Oman 7,. When the land was no longer neces- Bedford-Bowling Green Stone Co. sary for the purposes of the corpora- 134 Fed. 64 (1905). tion it had a right to sell and convey ' Hendee v. Pinkerton, 14 Allen the same." (Mass.), 386 (1867). The rule that the property of a = See pos«, Ch. XXII : "Ultra vires guasi-public corporation reasonably and Voidable Railroad Leases." 256 CHAP. Xl] SALES OF CORPORATE PROPERTY § 129a only necessary here to apply those principles to the subject of corporate sales. These propositions may be regarded as established: (1) An ultra vires contract unexecuted by either party is void, and affords no right of action at law for damages, nor in equity for specific performance. (2) An ultra vires contract executed on both sides cannot be questioned in the courts, and the parties will be left in the possession of money or property acquired thereunder. It follows then that an ultra vires contract of sale while execu- tory is wholly unenforceable. ' But when the contract has ^ AlabaTna : Simmons v. Troy Iron Works, 92 Ala. 427 (1890), (9 So. Rep. 160) ; Long v. Georgia Pacific R. Co. 91 Ala. 519 (1890), (8 So. Rep. 706, 24 Am. St. Rep. 931). Michigan: Day v. Spiral Springs Buggy Co., 57 Mich. 146 (1885), (23 N. W. Rep. 628, 58 Am. Rep. 352). Mississippi: Greenville Compress, etc. Co. V. Planters Compress, etc. Co., 70 Miss. 669 (1893) (13 So. Rep. 879, 35 Am. St. Rep. 681). Missouri: Hoagland v. Hannibal, etc. R. Co. .39 Mo. 451 (1867). New Hampshire: Downing v. Mt. Washington R. Co., 40 N. H. 234 (1860): "The power of buying and selling real and personal property for the legitimate purposes of the corporation, and the power of con- tracting generally for the same pur- poses, within the limits prescribed by the charter, being granted, we understand the principle to be, that their purchases, sales, and contracts generally, will be presumed to be made within the legitimate scope and purpose of the corporation, until the contrary appears, and that the burden of showing that any contract of a corporation is beyond its legiti- mate powers, rests on the party who objects to it. If a corporation at- tempt to enforce a contract made with them in a case beyond the legit- imate limits of their corporate power, that fact being shown, will ordinarily constitute a perfect defence. And if a suit is brought upon a contract alleged to be made by the corporation, but which is shown to be beyond its corporate power to enter into, the contract will be regarded as void, and the corporation may avail them- selves of that defence." New York : Nassau Bank v. .Tones, 95 N. Y. 123 (1884), (47 Am. Rep. 14) : "While executed contracts made by corporations in excess of their legal powers have, in some cases, been upheld by the courts and the parties have been precluded from setting up as a defence to actions brought by corporations their want of power to enter into such contracts, this doc- trine has never been applied to a mere executory contract, which is sought to be made the foundation of an action either for or against such corporation." Ohio: Coppin v. Greenles, etc. Co. 38 Ohio St. 275 (1882), (43 Am. Rep. 425). Wisconsin : Northwestern Union Packet Co. v. Shaw, 37 Wis. 655 (1875), (19 Am. Rep. 781). England: Ashbury Railway Cai^ riage, etc. Co. v. Riche, L. R. 7 H. L. 653. In this case it was also held that an ultra vires contract made by directors could not be ratified by the stockholders — that the ratification was as void as the contract. 257 § 129a INTERCOEPORATB RELATIONS [part II been executed by the conveyance of the corporate property and the payment of the purchase price, the title vests in the purchaser and the corporation cannot disaffirm and recover back the property.' And, conversely, a conveyance to a cor- poration of property beyond its power to acquire, but for which it has fully paid the price, passes the title to the corporation and it can hold the property and sell it and give good title. Only the State, in direct proceedings, can question the validity of the transaction.^ But while the decisions are uniform with respect to ultra vires contracts which have been executed by both parties and by neither party, they are widely at variance regarding such contracts when executed upon one side only. Thus, where a ' The question whether a corpora- tion in Belling its profifrty acted ultra virea will not be considered when it has received the purchase price. Especially is this true whon the pur- chaser has mortgaged the firopcrty. City of Spokane v. Amstenlamsch Trustees Kantoor, 22 Wash, 172 (1900), (60 Pac. Rep. 141). When an lUtra vire» contract ' of sale has been executed by the deliv- ery of the deed and full payment of the purchase money, a court of equity will not annul the sale or grant other relief. Long V. Georgia Pacific R, Co., 91 Ala. .519 (1890), (8 Ho. I{.-p. 706, 24 Am. St. Rep. 931). See also Lancaster v, Amsterdam Impt. Co., 140 N. Y. .576 (1894), (3.5 N. E. Rep. 967); Mallett v. Sinjpson, 94 N. C. 37 (1886), (65 Am. Rep. .594). And see cases cited in next note. '^ Rogers v. Nashville etc. R. Co., 91 Fed. .317 (1898): "If the contract was in fieri, it might be opin U> a stockholder upon a Vjilj properly framed to restrain his company's officers from completing such an alleged transaction. But that is not this case. This is an fxffuted transaction. The title has vrstcd. Until the Stale shall institute 258 proceedings for the forfeiture of the charter or for the purpose of defeating the title, it is a sound legal title." See also: United States: Blair v. City of Chicago, 201 U. S. 400 (1906), (26 Sup. Ct. Rep. 427). Alabama: South and North Ala- bama R. Co. V, Highland Ave., etc. R. Co., 119 Ala. 105 (1898), (24 Ho. Rep. 114); Long v. Georgia Pacific R. Co., 91 Ala. 519, 522 (1890), (8 So. Rep. 706, 24 Am. St. Rep. 931). Illinoia: Jfamsher v. IIamshf;r, 132 111. 273 (1890), (23 N. E. Hip. 1123, 8 L. R. A. r,r,>;); Hough v. Cook County Land Co., 73 III. 23 (1874). Maatachuaetln : Nantaskct Beach S. S. Co. V. Shea, 182 Mass. 147 (1902), (66 N. E. Rep. 67). New York: Holmes, etc. Mfg. Co. V. Holmes, etc. Metal Co., 127 N. Y. 252 (1891), (27 N. E. Rep. 831, 24 Am. St. Rep. 448). North Carolina: Mallett v. Simp- son, 94 N. C. .37 (1886), (.55 Am. Rep. 694), Ohio: Walsh v. Barton, 24 Ohio St, 28 (1S73). Virginia: I'ayette Land Co. v. Louisville, etc. R. Co. 93 Va. 274 (1890), (24 S. E. Rep. 1016). CHAP. Xl] SALES OF COEPORATE PROPERTY § 129a corporation acting beyond its powers has received a conveyance of property without paying the price, or has conveyed its prop- erty without receiving the consideration, justice manifestly requires that relief in some form should be granted. The theory upon which rehef should be granted and its form present the difficult questions. Upon the one hand, it is said that as the corporation is in- capable of making the contract and it is wholly void, execution upon one side cannot give it validity, and that the corporation cannot be estopped from pleading its want of power because all persons deaUng with it are bound to know the limitations of its charter. Consequently, it is held that no action can be maintained upon the void contract, and that the party who has performed can only obtain relief by disaffirming the sale and suing to recover back the price paid or the propert}' or its value.' On the other hand, many courts hold that where a contract is merely ultra vires and not otherwise illegal, the corporation is estopped to set up the defence of ultra vires to a suit for the recovery of the agreed price, and that such defence cannot be pleaded against it.^ This conclusion while just is illogical. It makes the measure of the power of a corporation, not its charter, but that which it attempts to do. The strict doctrine that an ultra vires contract of sale is abso- > See extract from decision of the 655 (1875), (19 Am. Rep. 781); Supreme Court of the United States Chewaca Lime Works v. Dismukes, in Central Transp. fo. v. Pullmau 87 Ala. 344 (1889), (6 So. Rep. 122, Car Co., 139 XJ. S. 59 (1891), (11 5 L. R. A. 100). Sup. Ct. Rep. 478) printed in note ' See cases cited in notes to § to § 239, post: '^ Distinction between 244, poift. Ultra Vires and Irregular Leases." The New York Court of Appeals See also post, § 241 : "Delivery has led in stating the more liberal of Possession under Ultra Vires doctrine. It has been followed by Lease*' ; post, § 242 : "Right and the courts of New .Jersey, Michigan, Duty of Disaffirmance" ; post, § 423: Pennsylvania, and other States. For "Recovery of Property after Dis- cases of sales see Dewey u. Toledo, etc. affi.rmance." R. Co., 91 Mich. 351 (1892), (51 N. W. The strict doctrine stated in the Rep. 1063) ; Wright v. Pipe Line Co., text is also that of the English courts 101 Pa. St. 204 (1882), (47 Am. Rep. and those of Alabama, Maine, Ohio, 701) ; Whitney Arms Co. v. Barlo^\ , Tennessee, and several other States. 63 N. Y. 02 (1875), (20 Am. Rep. For oases of sales see Northwestern 504). Union Packet Co. v. Shaw, 37 Wis. 259 § 129a IXTERCORPORATE RELATIONS [PART II lutely unenforceable is undoubtedly applicable in the case of sales by gwosi-public corporations because these sales are not only beyond the power of the corporation but are contrary to public policy. In the. case of strictly private corporations, however, it is beUeved that the weight of authority at the present time supports the more liberal doctrine. In a recent case ' the Supreme Court of the United States quoted as " in- trinsically sound " the following language of the New York Court of Appeals ': " It is now well settled that a corporation cannot avail itself of the defence of ultra vires when the con- tract has been in good faith fully performed by the other party and the corporation has had the benefit of the performance and of the contract. As has been said, corporations, like natural persons, have power and capacity to do wrong. They ma}' in their contracts and dealings break over the restraints imposed upon them by their charters; and when they do so their exemption from liability cannot be claimed upon the mere ground that they have no attributes nor faculties which render it possible for them thus to act. While they have no right to violate their charters, yet they have capacity to do so, and are bound by their acts where a repudiation of them would result in manifest wrong to innocent parties, and especially where the offender alleges its own wrong to avoid a just responsibility. It may be that while a contract remains unexecuted upon both sides, a corporation is not estopped to say in its defence that it had not the power to make the contract sought to be enforced, j^et when it becomes executed by the other party, it is estopped from asserting its own wrong and cannot be excused from payment upon the plea that the contract was beyond its power." 'Eastern Building, etc. ..\ss'n v. sound" would indicate that it ap- AVilliamson, 180 U. S. 122, 129 (1902), proved the doctrine stated, although (23 Sup. Ct. Rep. 527). While the it is not in line with some of its Supreme Court, in this ca.se, was con- own earlier decisions, sidering the law of New York upon ^ Vought v. Eastern Building, etc. the subject, its reference to the Ass'n, 172 N. Y. 508 (1902), (65 N. E. language quoted as "intrinsically Rep. 496, 92 Am. St. Rep. 761). 260. CHAP. XIlJ SALES OF CORPORATE FRANCHISES § 130 CHAPTER XII SALES OF CORPORATE FRANCHISES I. Transferability of Franchises § 130. Nature of a Franchise. § 131. Franchise of Corporate Existence. § 132. Transferability of Franchise of Corporate Existence. § 133. Franchises of Corporations. § 134. Transferability of Franchises of Corporations. II. Legislative Authority for Sale of Franchises § 135. Legislative Authority essential to Alienation of Franchises. § 136. Unauthorized Sale of Franchises — Ultra vires. § 137. Unauthorized Sale of Franchises — Against Public Policy. § 138. Unauthorized Sale of Franchises — Unlawful Delegation of Powers. § 139. Legislative Authority essential to Purchase of Franchises. § 139 a. Ultra Vires Sales of Franchises. I. Transferability of Franchises § 130. Nature of a Franchise. — In Bank of Augusta v. Earle * Chief Justice Taney defined franchises as " special privileges conferred by government upon individuals and which do not belong to citizens of the country generally, of common right." ^ This definition is unexceptionable. The essential prerequisites to the existence of a franchise are, therefore : ' Bank of Augusta v. Earle, 13 Pet. grantee, as the consideration therefor, (U. S.) 595 (1839). a duty to the public to see that they 2 Fietsam v. Hay, 122 111. 294 are properly used." (1887), (13 N. E. Rep. 501, 3 Am. St. Chancellor Kent says that "fran- Rep. 493) : "The word franchise is chises are privileges conferred by often used in the sense of privileges grants from the government and generally, but in its more appropriate vested in private individuals." 3 and legal sense the term is confined Kent's Com. 468. See also Bouvicr's, to such rights and privileges as are Law Diet. " P'ranchise. '' Chicago, conferred upon corporate bodies by etc. R. Co. v. Dunbar, 95 111. 571 legislative grant." (ISSO'), (1 Am. & Eng. R. Cas. 214). St. Louis, etc. R. Co. v. Bal.sley, 18 Franchises are "branches of the king's 111. App. 82 (1885): "Franchises are prerogative, subsisting in a subject rights and privileges acquired only by by grant from the crown." 3 Cruise special grant from the public through Dig. 278. the legislature, which impose upon the 261 §131 INTERCORPORATE RELATIONS [part II 1. A grant from the sovereign authority: for there can be no franchise which is not derived from a law of the State.' 2. A special privilege: for that which belongs to citizens generally can never be a franchise.^ 3. A right conferred upon private individuals (or corpo- rations) : for privileges granted to public bodies are not fran- chises.' Franchises relating to corporations are of two kinds: * 1. The franchise to be a corporation, conferred upon the corporators. 2. The franchises of the corporation, conferred upon the corporation. § 131. Franchise of Corporate Existence. — The legislature in granting a special charter of incorporation confers upon the persons named therein — the corporators — the privilege of forming and being a corporation. This privilege may be termed the franchise of corporate existence.^ It is true that the State, ' Woods V. Lawrence County, 1 Black (U. S.), 409 (1861) : "A fran- chise is a privilege conferred, in the United States, by the immediate or antecedent legislation of an act of in- corporation, with conditions ex- pressed, or necessarily inferential from its language, as to the manner of its existence and for its enjoyment." Bank of Augusta v. Earle, 13 Pet. U. S. 595 (1839) : "It is essential to the character of a franchise that it should be a grant from the sovereign authority, and in this country no franchise can be held which is not derived from a law of the State." See also Wilmington Water Power Co. V. Evans, 166 111. 556 (1897), (46 N. E. Rep. 1083). 2 In California v. Central Pac. R. Co., 127 U. S. 40 (1888), (8 Sup. Ct. Rep. 1073), it was said : "Generalized, and divested of the special form which it assumes under a monarchical government based on feudal tradi- tions, a franchise is a right, priNalege, or power of public concern, which ought not to be exercised by private 262 individuals at their mere will and pleasure, but should be reserved for public control and administration, either by the government directly, or by public agents acting under such conditions and regulations as the goverimient may impose in the public interest and for the public security." See also Abbott v. Omaha Smelt- ing, etc. Co., 4 Neb. 420 (1876); Bridgeport v. New York, etc. R. Co., 36 Conn. 255 (1869). « 3 Kent's Com. 458. *In Fietsam v. Hay, 122 111. 293 (1887), (13 N. E. Rep. 501, 3 Am. St. Rep. 493), the word "franchise" was said to include "the right or privilege of being a corporation, and of doing such things, and such things only, as are authorized by the corporation's charter." = Paul V. Virginia, 8 Wall. (U. S.) 168 (1868). See also State v. Western Irrigating Canal Co., 40 Kan. 99 (1888), (19 Pac. Rep. 349, 10 Am. St. Rep. 166), where the Supreme Court of Kansas, following 2 Morawetz Priv. Corp. § 923, said: "The word 'fran- CHAP. XIl] SALES OF CORPORATE FRANCHISES § 131 in enacting general incorporation laws, confers a similar privi- lege upon those who comply with the provisions of such laws, but this privilege can hardly be termed a franchise. It is not a special privilege. The franchise to be a corporation belongs to the stockholders and not to the corporation. The grantees of the charter are, primarily, the corporators, and the franchise is vested in them, their associates and successors. The corporation when formed may itself take, under the charter, special rights and privileges — also termed franchises — necessary to carry into effect the objects for which it was formed, but the franchise to be a corporation remains in the stockholders.' " A corporation is itself a franchise belonging to the members of the corpora- tion: and a corporation being itself a franchise may hold other franchises, as rights and franchises of the corporation." ^ Mr. chise' is generally used to designate a right, or privilege, conferred by law. What is called the franchise of form- ing a corporation is really but an ex- emption from the general rule Of the common law prohibiting the forma- tion of corporations. All persons in this State have now the right of form- ing corporate associations upon com- plying with the simple formalities prescribed by the statute. The right of forming a corporation and of act- ing in a corporate capacity, under the general incorporation laws, can be called a franchise only in the sense in which the right of forming a limited partnership, or of executing a con- veyance of land by deed, is » fran- chise." In Young v. Webster CJity, etc. R. Co., 75 Iowa, 143 (1888), (39 N. W. Rep. 234), it was said ; "The corpora- tion itself is not a franchise but it is the attributes of the corporation which comprise the franchises thereof, — its special powers and rights. " Compare Knoup V. Piqua Branch of State Bank, 1 Ohio St. 614 (1853). ' Fietsam v. Hay, 122 111. 293 (1887), (13 N. E. Rep. 501, 3 Am. St. Rep. 449) : "A franchise or the right to be and act as an artificial body is vested in the individuals who com- pose the corporation and not in the corporation itself." In Central Trust Co. v. Western North CaroUna R. Co., 89 Fed. 24 (1898), Judge Simonton said: "This new person, creature of the law, and existing through the grace of and at the will of the sovereign, was then clothed with certain powers, and granted certain privileges. These are its franchises. First, the franchise of existence as a corporation, — its life and its being. This is inseparable from it. When it parts with this franchise, it parts with its life. But, with respect to the other franchises with which it has been clothed, — the right and privilege to act as a common carrier, to carry passengers and goods, to charge tolls, to operate a railroad, — ■ these it enjoys as an individual could, and they are not inseparable from its existence. They are its property. A franchise to be a cor- poration is distinct from a francliise, as a corporation, to maintain and operate a railroad." 2 Pierce v. Emery, 32 N. H. 507 (1856). 263 § 132 INTERCORPORATE RELATIONS [part II Justice Matthews, in Memphis, etc. R. Co. v. Commissioners,^ pointed out the distinction between the franchise to be a cor- poration and the franchises of the corporation: " The essential properties of corporate existence are quite distinct from the franchises of the corporation. The franchise of being a cor- poration belongs to the corporators, while the powers and privileges, vested in and to be exercised by the corporate body, as such, are the franchises of the corporation." ^ § 132. Transferability of Franchise of Corporate Existence. — As the franchise of corporate existence belongs to the stock- holders of a corporation, they may, practically, transfer it by the sale of their shares of stock; and, in a sense, the sale of a single share amounts pro lanto to a transfer of an interest in this primary franchise. The purchasers, however, merely become stockholders in the same corporation in place of the vendors — the corporate identity remains unchanged. The franchise to be a corporation, as a franchise, in its nature is incommunicable by act of the parties.^ Neither the corpo- * Memphis, etc. R. Co. v. Commis- sioners, 112 U. S. 619 (1884), (5 Sup. Ct. Rep. 299). See also New Orleans, etc. R. Co. V. Delamore, 114 U. S. 501 (1885), (5 Sup. Ct. Rep. 1009). ^ Wright V, Milwaukee, etc. R. Co., 25 Wis. 53 (1869) : "The distinction between the franchise of constructing and operating a railroad, and the fran- chise of being a corporation, and of contracting, suing and being sued as such, is well established." The franchise to be a corporation is not, strictly, a corporate franchise at all. Meyer v. Johnston, 53 Ala. 237 (1875). For consideration of the distinc- tion between the franchise of cor- porate existence and the franchises of the corporation see State v. East Fifth St. R, Co., 140 Mo. 539 (1897), (41 S. W. Rep. 955, 62 Am. St. Rep. 742, 38 L. R. A. 218). ^ Memphis, etc. R. Co. v. Commis- sioners, 112 U. S. 619 (1884), (5 Sup. Ct. Rep. 299) : " The franchise of be- coming and being a corporation, in its 264 nature, is incommunicable by the act of the parties and incapable of passing by assignment. " Commonwealth v. Smith, 10 Allen (Mass.), 455 (1865), (87 Am. Dec. 672) per Hoar, J. . "The franchise to be a corporation clearly cannot be trans- ferred by any corporate body, of its own will. Such a franchise is not, in its own nature, transmissible." A corporation cannot "sell or con- vey its corporate name, or its right to maintain and defend judicial proceed- ings or to make and use a common seal." State v. Western Irrigating Canal Co., 40 Kan. 96 (1888), (19 Pac. Rep. 349, 10 Am. St. Rep. 166). See also New Orleans, etc. R. Co. v. Delamore, 114 U. S. 501 (1885), (5 Sup. Ct. Rep. 1009); Welsh v. Old Dominion Mining, etc. Co., 56 Hun (N. Y.), 650 (1890), (10 N. Y. Supp. 174) ; Ragan v. Aiken, 9 Lea (Tenn.), 609 (1882), (42 Am. Rep. 684, 9 Am. & Eng. R. Cas. 201) ; Atkinson v. Marietta, etc. R. Co., 17 Ohio St. 21 (1864). CHAP. XIl] SALES OF CORPORATE FRANCHISES § 133 ration nor the stockholders can usurp the functions of the legislature and confer upon others the privilege of forming a corporation. As said by Mr. Justice Curtis, at circuit, in Hall V. Sullivan R. Co.: '■ " The franchise to be a corporation is, therefore, not a subject of sale and transfer, unless the law, by some positive provision, has made it so, and pointed out the modes in which such sale and transfer may be effected." Even where a positive statutory provision appears authoriz- ing a corporation to transfer its charter or franchise to be a corporation, the real transaction is in no sense a sale or con- veyance. The so-called transferee takes nothing from the deed of transfer and everything from the legislative grant of power. The act of the corporators or stockholders in trans- ferring — in form — their corporate franchise, in legal effect is a surrender of their charter. The legislative authorization amounts to a grant of a new charter — in similar terms — to the transferees, taking effect upon the abandonment of the old. " The vital part of the transaction, and that without which it would be a nullity, is the law under which the transfer is made." ^ § 133. Franchises of Corporations. — The legislature, in conferring a charter of incorporation upon persons about to engage in an enterprise involving the assumption of obliga- tions to the public, generally grants such special rights as may be necessary to enable the corporation, so created, to carry into effect the objects of its creation. These special privileges constitute the franchises of the corporation.^ Thus, in years Compare Miller v. Rutland, etc. R. ' In Society for Savings v. Coite, Co., 36 Vt. 452 (1863) ; Bank of Mid- 6 Wall. (U. S.) 606 (1867). Mr. Jus- dlebury v. Edgerton, 30 Vt. 182 tice Clifford said : "Corporate fran- (1858) ; Shapley v. Atlantic, etc. R. chises are legal estates vested in the Co., 55 Me. 395 (1868). corporation itself as soon as it is in ' Hall V. Sullivan R. Co., 21 Law esse. They are not mere naked Rep. 138 (1857), (1 Brimncr Coll. powers granted to the corporation, Cas. 613, 11 Fed. Cas. 257). but powers coupled with an interest, ' State V. Sherman, 22 Ohio St. 428 which vest in the corporation upon the (1872), approved in Memphis, etc. R. possession of its franchises, and what- Co. V. Commissioners, 112 U. S. 609, ever may be thought of the corpora- 619 (1884), (5 Sup. Ct. Rep. 299). tors, it cannot be denied that the Compare Abbott v. New York, etc. R. corporation itself has a legal interest Co., 145 Mass. 453 (1888), (15 N. E. in such franchises." Rep. 91). A franchise of a corporation may 265 §133 INTERCORPORATE RELATIONS [part H past, legislatures have granted to innumerable corporations franchises to build bridges, construct turnpike roads, dig and operate canals, maintain ferries, and collect tolls thereon; ' and, in the present, franchises are granted in constantly in- creasing numbers for the occupancy of the public streets and highways by the various public utility corporations.^ A railroad company is also an example — the most con- spicuous — of a corporation exercising corporate franchises. " The franchises of a railroad corporation," said Mr. Justice Field in Morgan v. Louisiana,^ " are rights or privileges which are essential to the operations of the corporation, and without which its roads and works would be of little value; such as be defined as a right of a corporation to exercise powers and privileges vested in it by its charter. Spring Valley Water Works v. Schottler, 62 Call. 69 (1882). * That the right to collect tolls upon bridges, turnpike roads, etc., is a franchise, see Turnpike Road Co. v. Campbell, 44 Cal. 89 (1872) ; Blake v. Winona, etc. R. Co., 19 Minn. 418 (1872), (18 Am. Rep. 345) ; Sellers v. Union Lumbering Co., 39 Wis. 525 (1876). ' That the right to lay gas pipes in the streets of a city is a franchise derivable from the State, see New Orleans Gas Light Co. v. Louisiana Light, etc. Co., 115 U. S. 650 (1885), (6 Sup. Ct. Rep. 252) ; Jersey City Gas Co. V. Dwight, 29 N. J. Eq. 242 (1878) ; State v. Cincinnati Gas Light, etc. Co., 18 Ohio St. 262 (1868). See also Chicago Mun. Gas Light Co. v. Lake, 130 III. 42 (1889), (22 N. E. Rep. 616. Compare, howe\'er, State V. Mut. Gas Light Co., 38 Mich. 154 (1878) ; Commonwealth i>. Lowell Gas Light Co., 12 Allen (Mass.), 7n (1866). The right to lay water-pipes and collect water-rates is a franchise. Spring Valley Water Works v. Schottler, 62 Cal. 69 (1882) ; State f. Portage City Water Co., 107 Wis. 441 (1900), (83 N. W. Rep. 697). 266 The right to occupy city streets with wires and appliances for the transmission of electricity for tele- phone or electric light service is a franchise. Cumberland Telephone, etc. Co. v. City of Evansville, 127 Fed. 186 (1903) : Purnell v. McLane, 98 Md. 589 (1903), (56 Atl. Rep. 543). Com- pare Commercial Electric Light, etc. Co. V. City of Tacoma, 17 Wash. 661 (1897), (50 Pac. Rep. 592). It seems that corporations organ- ized to furnish heat to buildings, through pipes laid in city streets, are not quasi-puhUc corporations to the extent that they are subject to the general principles of law applicable to that class of corporations in the dis- position of their privileges and property. Evans v, Boston Heating Co., 157 Mass. 37 (1892), (31 N. E. Rep. 698). See also as to irrigating companies, State v. W^estem Irrigat- ing Canal Co., 40 Kan. 96 (1888), (19 Pac. Rep. 349, 10 Am. St. Rep. 166). •■' Morgan v. Louisiana, 93 U. S. 223 (1876). See also Lawrence v. Mor- gan's, etc. Steamship Co., 39 La. Ann. 427 (1887), (2 So. Rep. 69, 4 Am. St. Rep. 265), where railroad companies were said to have the right to appro- priate land for several purposes other than those stated in Morgan v. Louisiana, supra. CHAP. XIl] SALES OF CORPORATE FRANCHISES § 133 the franchise to run cars, to take tolls, to appropriate earth and gravel for the bed of its road, or water for its engines, and the like." The franchise of a railroad company may also be defined as the right, by virtue of the power of eminent domain, to con- struct, maintain, and operate a railroad upon the route desig- nated in its charter, and to take tolls for the transportation of persons and property thereon.' The franchise of a street railway or other public utility- cor- poration to occupy the streets of a city must proceed primarily from the sovereign power — the State. If the legislature authorize municipal corporations to grant the privilege, it is held in a series of decisions that the effect of the legislation is to confer the franchise upon the municipality which may issue a license, or make a contract, for its exercise. These de- cisions are based upon the theory that there can be no delega- tion of the power to grant franchises — a part of the power to make laws. On the other hand it is held, upon the more convincing reasoning, that the State may grant a franchise acting through the agency of a municipal corporation — that whether granted directly or indirectly the right emanates from the same source, the sovereign power. ^ " An act done by the ' Colt V. Barnes, 64 Ala. 108 (1879) ; L. R. A. 218) ; Lincoln St. R. Co. v. Coe V. Columbus, etc. R. Co., 10 Ohio City of Lincoln, 61 Neb. 109 (1901), St. 372 (1859), (75 Am. Dec. 518). (84 N. W. Rep. 802) ; Milhau v. 2 Delegation of power to grant Sharp, 27 N. Y. 611 (1863), (84 Am. franchises. Dec. 314) ; Davis v. New York, 14 (a) The right to construct and N. Y. 506 (1856), (67 Am. Dec. 186) ; operate a street railway in » city People v. Kerr, 37 Barb. 357 (1862) ; and to take tolls from persons travel- Wright v. Milwaukee Electric R. Co., ling thereon, is a franchise which the 95 Wis. 29 (1897), (69 N. W. 791, 60 sovereign power alone can grant. Am. St. Rep. 74, 36 L. R. A. 47). People's Pass. R. Co. v. Memphis For cases holding that rights con- City R. Co., 10 Wall (U. S.) 38 (1869). ferred upon corporations to occupy Denver etc. K. Co. v. Denver City R. city streets with gas and water-pipes, Co. 2 Colo. 673 (1875) ; State v. and telephone and electric light wires, Jacksonville R. Co., 29 Fla. 590 conduits and appliances are franchises (1892), (10 So. Rep. 590); Metro- derivable from the State alone, see politan City R. Co. v. Chicago West preceding notes to this section. Division R. Co. 87 III. 317 (1877); (h) In People's Pass. R. Co. v. Chicago aty R. Co. r. People, 73 111. Memphis City R. Co. 10 WaU. (U. S.) 541(1874); State ti. East Fifth St. R. 38 (1869), the Supreme Court said: -Co., 140 Mo. 539 (1897), (41 S. W. "Power to make laws is vested in Rep. 955, 62 Am. St. Rep. 742, 38 the legislature under the constitution 267 §133 INTERCORPOBATE RELATIONS [part It State through its duly authorized agent is an act done by the State itself." ' Where, however, the right granted by the municipality amounts to a valid contract, as distinguished from a revocable license, the distinction, if any, between it and a franchise is of little practical importance. A franchise of a corporation is to be distinguished from a privilege — in the nature of an exemption — granted to its members or employees. The grant of the former constitutes of the State, and it is very doubtful whether the legislative department tan delegate to any body or authority the power to grant such a franchise, as the exercise of that power involves a high trust created and conferred for the benefit of those who granted it, and as the trust is confided to the legislature it must remain where it is vested until the constitution of the State is changed." Following this decision it has been held in several important cases that where municipalities are authorized to grant to pubUc service corporations the right to occupy their streets, the right so granted is a license, or if irrevocable a contract, and not a franchise. Metropolitan City R. Co. v. Chicago West Division R. Co., 87 111. 317 (1877); Chicago City R. Co. v. People, 73 111. 541 (1874); Cain v. City of Wyoming, 104 III. App. 538 (1902) ; Lincoln St. R. Co. v. City of IJucobi, 61 Neb. 109 (1901), (84 N. W. Rep. 802) ; Denver City, etc. R. Co. V. Denver City R. Co., 2 Colo. 673 (1875). See also Lasher v. People, 183 111. 226, 233 (1899), (55 N. E. Rep. 663, 75 Am. St. Rep. 10.3, 47 L. R. A. 802) ; State v. Jackson- ville R. Co., 29 ria. 590 (1892), (10 So. Rep. 590). (c) Notwithstanding the intima- tion in People's Pass. R. Co. v. Mem- phis City R. Co., supra, that the State could not delegate its power to grant franchises, the Supreme Court in a later case (New Orleans Gas Co. v. 268 Louisiana Light Co., 115 U. S., 659 (1885), (6 Sup. Ct. Rep. 252)), said : "The right to dig up the streets and other public ways and place therein pipes and mains for the distribution of gas for public and private use is a franchise, the privilege of exercising which could only be granted by the State or by the municipal govern- ment of that city acting under legis- lative authority." In line with this decision are a series of cases holding that a franchise may be granted to a public utility corporation through the instrumen- tality of a municipality — that such a privilege though passing indirectly to the corporation is still strictly a legislative grant. State V. East Fifth St. R. Co., 140 Mo. 539 (1897), (41 S. W. Rep. 955, 62 Am. St. Rep. 742, 38 L. R. A. 218) ; Purnell v. McLane, 98 Md. 589 (1903), (.56 Atl. Rep. 830); Wright v. Mil- waukee Electric R., etc. Co., 95 Wis. 29 (1897), (69 N. W. Rep. 791, 60 Am. St. Rep. 74, 36 L. R. A. 47) ; State v. Portage City Water Co., 107 Wis. 441 (1900), (83 N. W. Rep. 697); Port of Mobile v. Louisville, etc. R. Co., 84 Ala. 115 (1887), (4 So. Rep. 106, 5 Am. St. Rep. 342) ; Turnpike Road Co. V. Campbell, 44 Cal. 89 (1872). See also Cumberland Telephone, etc. Co. V. City of EvansviUe, 127 Fed. 187 (1903). ' Port of Mobile v. Louisville, etc. R. Co., 84 Ala. 115 (1887), (4 So. Rep. 106, 5 Am. St. Rep. 342). CHAP. XIl] SALES OP CORPORATE FRANCHISES 133 a contract with the State within the protection of the consti- tutional provision, while the latter may be revoked at any time.' The grant of a franchise, unless expressly so stated, is not a contract on the part of the State that it will grant no similar franchises to other corporations. That charters do not con- fer exclusive privileges, unless so expressed, was definitely settled by the Supreme Court of the United States in the cele- brated Charles River Bridge case.^ The franchises of a corporation are also to be distinguished from its powers. The former are special privileges; the latter are rights possessed by natural persons generally, and are acquired by a corporation in order to transact business.' ' It is the better view that statutes exempting employees of corpora- tions from militia duty, jury duty, road duty, etc., confer personal privileges upon the employees and may be repealed by the legislature at any time without regard to the existence of a reserved power to repeal. Neeley v. State, 4 Lea (Tenn.), 316 (1880). The contrary is, however, held in Johnson v. State, 88 Ala. 176 (1889), (7 So. Rep. 253). 2 Charles River Bridge v. Warren Bridge, 11 Pet. (U. S.) 420 (1837). See also Thompson v. New York, etc. R. Co., 3 Sandf. Ch. (N. Y.) 62 (1846). CoTnpare New Jersey Southern R. Co. V. Long Branch Commrs., 39 N. J. L. 28 (1876). That the franchises of a corpora- tion may be taken by the exercise of the power of eminent domain, see West River Bridge Co. v. Dix, 6 How. (U. S.) 507 (1848). ' State 0. Minnesota Thresher Mfg. Co., 40 Minn. 213 (1889), (41 N. W. Rep. 1020, 3 L. R. A. 510), where the Court said; "The kinds of business which corporations organ- ized either under title 2, c. 34 (of Gen. Stat. 1878), or under the Act of 1873, are authorized to carry on, are powers, but not franchises, be- cause it is a right possessed by all citizens who choose to engage in it, without any legislative grant. The only franchise which such corpora- tions possess is the general franchise to be or exist as a corporate entity. Hence, if they engage in any business not authorized by the statute, it is idtra vires, or in excess of their powers, but not a usurpation of franchises not granted, nor necessarily a mis- user of those granted." For discussion of the distinction between the property of a corporation and its franchises, see Tuckahoe Canal Co. v. Tuckahoe, etc. R. Co., 11 Leigh (Va.), 42 (1840), (36 Am. Dec. 374) ; Bridgeport v. New York, etc. R. Co., 36 Conn. 255 (1869), (4 Am. Rep. 63) ; Miners' Ditch Co. v. Zellerbach, 37 Cal. 543 (1869), (99 Am. Dec. 300). Where a corporation proposed to purchase all the real estate and assets, including the franchises, of another corporation and this proposition was accepted by a vote of the stockholders of the latter who authorized the directors to carry out the arrange- ment, and a deed of the real estate and appurtenances was delivered and the purchaser was put into pos- session of all the property, it was held that there was a valid transfer of the franchises. 269 §134 INTERCORPORATE RELATIONS [part n § 134. Transferability of Franchises of Corporations. — Con- versely to the proposition, considered in another section, that a transfer of corporate franchises without legislative author- ity is void,^ it follows that such a transfer with such authority is valid. When the State which grants the franchises of a corporation consents to their alienation, they become com- municable, in whole or in part, in accordance with the consent so given.^ While franchises are generally considered to be incorporeal hereditaments and, therefore, property,' it seems, upon prin- ciple, that corporate franchises cannot pass directly from vendor to purchaser in the manner of corporate property. A franchise, in its essence, is a privilege conferred by grant to City of Kalamazoo v. Power Co.. 124 Mich. 74 (1900), (82 N. W. Rep. 811). A deed purporting to convey the property and franchises of a corpora- tion may be valid as to the former although invalid as to the latter. Klosterman v. Mason County, etc. R. Co., 8 Wash. 281, 286 (1894), (.36 Pac. Rep. 136); Gloninger v. Pittsburgh, etc. R. Co., 139 Pa. St. 13 (1890), (21 Atl. Rep. 2H). ^ See next section. 2 East Boston, etc. R. Co. v. Eastern R. Co., 13 Allen (Mass.), 422 (1866), per Wells, J.: "The doctrine that a railroad corporation cannot alienate its franchise is not founded upon any technical theory nor arbitrary rule, but upon the rea- sonable implication that such aliena- tion would be contrary to the inten- tion of the legislature and subversive of the purpose for which the franchise was granted. The same considera- tions apply, only perhaps with greater force, to the subdivision of the fran- chise by the transfer of a part. . . . But an alienation of the franchise, either in whole or in part, may, un- doubtedly be made, whenever there is legislative authority for it, either in express terms or by reasonable implication." 270 See also Vermont, etc. R. Co. o. Vermont Central R. Co., 34 Vt. 1 (1861); Day v. Ogdensburg, etc. R. Co., 107 N. Y. 129 (1887), (13 N. E. Rep. 765). In Matter of Long Acre Electric Light, etc. Co., 51 Misc. (N. Y.) 407 (1906), (101 N. Y. Supp. 460), af- firmed 188 N. Y. 361 (1907), (80 N. E. Rep. 1101) it was held that special franchises are transferable as prop- erty independently of the life of the corporation to which they were orig- inally granted. ' In Enfield Toll Bridge Co. v. Hartford, etc. R. Co., 17 Conn. 60 (1845), (42 Am. Dec. 716), Chief Justice Williams said in reference to a bridge franchise; "What are the rights of the plaintiffs? They are derived from the grant of the legislature, and are what in law is known to be a franchise; and a franchise is an incorporeal heredita- ment, known as a species of property, as well as any estate in lands. It is property, which may be bought and sold, which will descend to heirs, and may be devised." See also Hall v. Sullivan R. Co., 21 Law Rep. 138 (1857), (1 Brunner Coll. Cas. 613, 11 Fed. Cas. 257). These cases are merely indicative of a long line of decisions. CHAP. XIl] SALES OF CORPORATE FRANCHISES § 135 exercise extraordinary powers. A corporation cannot transfer this right any more than a person can transfer an ofHce which he holds; but in the same manner that the office-holder, when authorized, might appoint another to hold the office, the cor- poration by the form of sale may delegate to another corpo- ration the right to exercise the special privileges conferred upon it.' This principle is somewhat analogous to the principle, already considered, that the " transfer " of a charter in reality means its surrender and the grant anew of a similar charter to the " transferee." ^ But there is this fundamental distinc- tion: The exercise of a power of appointment in relation to the franchises of a corporation confers upon the appointee the same franchises, while the grant of a new charter confers similar franchises. This distinction is of importance where constitutional restrictions have intervened between the grant of the old and the grant of the new charter. II. Legislative Authority for Sale of Franchises § 135. Legislative Authority essential to Alienation of Fran- chises. — It is a rule applicable to all corporations exercising public franchises that such franchises can be transferred only by and with the consent of the State which granted them — that corporate franchises are incommunicable without legis- lative authority. The courts have assigned various reasons for the existence of the rule,' of which the following are based upon principles fundamentally sound: ' Compare 2 Morawetz Priv. Corp. in order to avoid a cumbersome form § 924. of expression. The words "transfer," "sale" and 'Ante, § 132: "Transferability of "lease" are, upon the principles Franchise of Corporate Existence." stated in the text, technically incor- ' It has sometimes been said, as an rect when used in connection with additional reason to those stated in corporate franchises. They are, how- the text, that a franchise is deemed ever, in general use and express the a personal trust and, therefore, that idea of the passing of franchises — the State has the right to determine absolutely or for limited terms — who shall be the recipients of it. But from one corporation to another as pointed out in an editorial note to with sufficient accuracy. They will, Brunswick Gas Light Co. v. United therefore, be employed in this treatise Gas, etc. Co., 35 Am St. Rep. 39'i 271 § 136 INTERCOHPORATE RELATIONS [part II 1. The charter of a corporation is the measure of its powers. Unless authority to transfer its franchises is expressly granted, such an act is ultra vires. 2. The transfer by a corporation of its franchises — dis- abling it from the performance of its public duties — is against public policy. 3. A corporation exercising public franchises is an agent of the State and, without the consent of the State, cannot dele- gate its powers. § 136. Unauthorized Sale of Franchises — Ultra Vires. — The power to sell its franchises is not to be implied from the usual grant of powers to a gwost-public corporation but must be expressly conferred. Any exercise of the power without the sanction of the legislature is ultra vires.^ The principle has thus been stated by the Supreme Court of Pennsylvania: " A corporation, unless specially restricted by its charter or some (1893) : "The theory of a personal confidence reposed in the original corporators rests on a purely arbi- trary foundation, . . . and the legis- lation which has in most, if not all, the States of the Union pro^dded for a free transfer of franchises, as the result of the mortgage thereof, and even for the incorporation of the entirely uncertain body of persons who may purchase at the foreclosure sale, shows very conclusively that, in the opinion of the people of this country, the grounds of public policy upon which this restriction of the power o£ transfer is to be sustained must be sought in other directions." Transfers of franchises have also, under certain conditions, been held illegal as tending to create monopo- lies. See Part V., post: "Combina- tions of Corporations." ' United States: Branch v. Jesup, 106 U. S. 468 (1882), (1 Sup. Ct. Rep. 495) ; Cumberland Telephone, etc. Co. V. City of Evansville, 127 Fed. 186 (1903) ; Mackintosh v. Flint, etc. R. Co., 34 Fed. 582 (1888). Maryland: State v. Consolidation Coal Co., 46 Md. 1 (1876). 272 Nebraska: Clarke v. Omaha, etc. R. Co., 4 Neb. 458 (1876). New York: Troy, etc. R. Co. v. Boston, etc. R. Co., 86 N. Y. 107 (1881). Ohio : Coe v. Columbus, etc. R. Co., 10 Ohio St. 372 (1859), (75 Am. Dec. 518). Pennsylvania: Pittsburgh, etc. R. Co. V. Bedford R. Co., 81J Pa. St. 104 (1871). Texas: East Line, etc. R. Co. v. State, 75 Tex. 434 (1889), (12 S. W. Rep. 690). The general rule that any transfer of corporate franchises, without legis- lative authority, is vZtra vires is sup- ported by numerous decisions. Those especially relating to sales of franchises are cited in the above note and are .further considered in § 143, post: "StatiUory Authority essential to Sale of Railroad." Cases Illustrating the same principle as applied to leases of railroads are collected in note to § 177, post; as applied to a transfer through consolidation, in § 17, ante; as applied to mortgages of franchises in note to § 149, "Short's Railway Bonds and Mortgages." CHAP. XIl] SALES or CORPORATE FRANCHISES §137 statute has general power to dispose of its property, the whole or part, but it has no right to sell or assign its franchises, either in whole or in part, unless specially authorized by law." * § 137. Unauthorized Sale of Franchises — Against Public Policy. — Franchises are conferred upon corporations to en-, able them to provide facilities of benefit to the public. The consideration for the grant is the discharge by the corporation of its public duties; and public policy forbids a corporation, without legislative authority, to sell its franchises to another corporation and thus render itself incapable of performing those duties.^ Mr. Justice Campbell, in York, etc. R. Co. ' Pittsburgh, etc. R. Co. v. Bed- ford R. Co., 81J Pa. St. 104 (1871). The extract quoted is subject to the criticism that it ignores the principle that the property of a guasi-public corporation — so far as it is indispen- sable — cannot be disposed of. ' United States: York, etc. R. Co. V. Winans, 17 How. (U. S.) 30 (1854) ; Cumberland Telephone, etc. Co. v. City of Evansville, 127 Fed. 187 (1903). Georgia: Georgia R. etc. Co. v. Haas, 127 Ga. 187 (1906), (56 S. E. Rep. 313) ; Singleton v. Southwestern R. Co., 70 Ga. 464 (1883). Massachusetts : Richardson v. Sib- ley, 11 Allen, 65 (1865), (87 Am. Deo. 700). Illinois: Peoria, etc. R. Co. v. Coal Valley R. Co., 68 111. 489 (1873): Hays V. Illinois, etc. R. Co., 61 111. 422 (1871). Nebraska: Cholette v. Omaha, etc. R. Co., 26 Neb. 159 (1889), (41 N. W. Rep. 1106, 4 L. R. A. 135). New Hampshire : Pierce v. Emery, 32 N. H. 484 (1856). Ohio : Railroad Co. v. Hinsdale, 45 Ohio St. 556 (1888), (15 N. E. Rep. 665). Tennessee: Frazier d. Railway Co., 88 Tenn. 138 (1889), (12 S. W. Rep. 537). Texas: East Line, etc. R. Co. v. Rushing, 69 Tex. 306 (1887), (6 S. W. Rep. 834) ; Gulf, etc. R. Co. v. Morris, 67 Tex. 692 (1887), (4 S. W. Rep. 156). Virginia: Naglee v. Alexandria, etc. R. Co., 83 Va. 707 (1887), (3 S. E. Rep. 369, 5 Am. St. Rep. 308). See also ante, § 18: "Consolida- tion of Qtiasi-puhlic Corporations without Legislative Authority against Public Policy" ; post, § 143: "Statu- tory Authority essential to Sale of Railroad"; post, § 177: "Lease of Railroad invalid without Legislative Authority. " In Threadgill v. Pumphrey, 87 Tex. 573 (1895), (30 S. W. Rep. 356), however, the Court said with respect to corporations organized under gen- eral laws, although engaged in the performance of guasi-public functions : "There is no personal trust involved in the grant of corporate powers under a general law of incorporation which authorizes all the citizens of the State to create a corporation for any one of certain specified objects, by merely fil- ing articles of incorporation with the Secretary of State ; and we do not see why the public interests may not be as well subserved by the purchasers of the property of the corporation as by the corporation itself, when it becomes confessedly unable or unwill- ing to pay its debts." For other cases apparently con- trary to the rule that especial 273 § 138 INTERCORPORATE RELATIONS [PAET IX V. Winans,^ thus stated the reason of the rule: " Important franchises were conferred upon the corporation to enable it to provide facilities for communication and intercourse re- quired for the public convenience. Corporate management and control over these were prescribed, and corporate respon- sibility for their insufficiency provided, as a remuneration to the community for their grant. The corporation cannot absolve itself from the performance of its obligations with- out the consent of the legislature." ^ § 138. Unauthorized Sale of Franchises — Unlawful Delega- tion of Powers. — A grant of franchises by the State consti- tutes the grantee, in a sense, an agent of the State in their exercise, and, upon an elementary principle of the law of agency, delegatus non delegare, the corporation — the agent — cannot sell its franchises to another corporation without the consent of the State — the principal. It is immaterial that the intend- ing purchaser agrees to fulfil all the public obligations of the grantee.' The State has the right to select the persons who shall enjoy the franchises it grants, as well as those who shall fulfil the obligations due it. While this reason for the doctrine that there is no implied power to transfer franchises is sound in principle, and has often been stated by the English courts, it is generally given as an additional reason to that of uUra vires or the rule of public policy, already considered. Thus, in Winch v. Birkenhead, etc. R. Co.,* Vice-Chancellor Parker, while referring to an legislative authority is essential to inapplicable where the transfer is the alienation of franchises see State to the public, i.e. to the municipal V. Topeka Water- Co., 61 Kan. 547 corporation for public service. (1900), (60 Pac. Rep. 337) ; Michigan City of Indianapolis v. Consumers' Telephone Co. v. City of St. Joseph, Gas Trust Co., 144 Fed. 640 (1906). 121 Mich. 502 (1899), (80 N. W. Rep. ' Troy v. Rutland R. Co., 17 Barb. 383, 80 Am. St. Rep. 520, 47 L. R. A. (N. Y.) 581 (1854) ; Beman v. Ruf- 87). See also Matter of Long Acre ford, 1 Sim. (n. s.) 569 (1851); Electric Light, etc. Co., 188 N. Y. Winch v. Birkenhead, etc. R. Co., 5 361 (1907), (80 N. E. Rep. 1101). De Gex & S. 562 (1852), (13 Eng. ' York, etc. R. Co. v. Winans, 17 L. & Eq. 506) ; Great Northern R. How. (U. S.) 30 (1854). Co. v. Eastern Counties R. Co., 9 2 But the rule that a gt«m-pubUc Hare, 306 (1851), (12 Eng. L. & Eq. corporation carmot, without the con- Rep. 224). sent of the legislature, convey away * Winch v. Birkenhead, etc. R. Co., its franchises and thus absolve itself 6 De Gex & S. 562 (1862), (13 Eng. from its obligations to the public, is L. & Eq. 506). 274 CHAP. XIl] SALES OP CORPORATE FRANCHISES § 139 agreement for " working a line " as a delegation of powers, also said that the agreement was that the company should "part with certain statutory powers which they have no authority to part with, and moreover, that they were to part with them to a body who, by their constitution, cannot accept them." The rule that a corporation has no implied power to delegate its franchises is essentially different from the rule that it has no power to delegate the performance of its public duties ; although both produce the same result. A corporation, upon principles of the law of agency, cannot delegate its powers and franchises. A corporation, as a party to a contract with the State, cannot, for reasons of public policy, transfer its fran- chises to others and absolve itself from its obligations to the public assumed in consideration of their grant. § 139. Legislative Authority essential to Purchase of Fran- chises. — The same principles of law which forbid a corpora- tion parting with its franchises, without the consent of the State which granted them, prevent a corporation, without legislative authority, from acquiring franchises granted to another corporation.* A corporation has no implied power to purchase corporate franchises and its acceptance of a con- veyance of franchises, without authority, would be ultra vires. It is essential to the validity of a contract transferring fran- chises that both parties should be expressly authorized to enter into it. As said by the Supreme Court of the United States in Louisville, etc. R. Co. v. Kentitcky: ^ " It is a fundamental ' Louisville, etc. R. Co. v. Ken- Gulf, etc. R. Co. v. Morris, 67 Tex. tucky, 161 U. S. 691 (1896), (16 Sup. 692 (1887), (4 S. W. Rep. 156). . See Ct. Rep. 714) ; St. Louis, etc. R. Co. also Rogers v. Nashville, etc. R. Co., V. Terre Haute, etc. R. Co., 145 U. S. 91 Fed. 299 (1898). 393 (1892), (12 Sup. Ct. Rep. 953); It has, however, been held that CentralTransp. Co. c Pullman Car Co., authority given to one corporation 139 U. S. 24 (1891), (11 Sup. Ct. Rep. to purchase the franchises of a speci- 478) ; Pittsburgh, etc. R. Co. v. fied corporation gives the latter Keokuk, etc. Bridge Co., 131 U. S. authority to sell. New York, etc. 371 (1889), (9 Sup. Ct. Rep. 770) ; R. Co. v. New York, etc. R. Co., 52 Oregon R., etc. Co. v. Oregonian R. Conn. 274 (1884). Co., 130 U. S. 1 (1889), (9 Sup. Ct. ' Louisville, etc. R. Co. v. Ken- Rep. 409) ; Pennsylvania Co. v. St. tucky, 161 U. S. 692 (1896), (16 Sup. Louis,etc.R. Co., 118 U.S. 310(1886), Ct. Rep. 714). See also post, § 144: (6 Sup. Ct. Rep. 1094) ; Camden, etc. "Seller must have Authority to sell, R. Co. V. May's Landing R. Co., 48 and Buyer to buy." N. J. L. 530 (1886), (7 Atl. Rep. 523) ; 275 § 139 INTEECORPORATB RELATIONS [pART II principle in the law of contracts that, to make a valid agree- ment, there must be a meeting of minds, and, obviously, if there be a disability on the part of either party to enter into the proposed contract there can be no valid agreement." So upon principles of public policy, one corporation, unless per- mitted by the State, cannot assume and attempt to perform the duties imposed upon another corporation. " A corporation having no authority under its own charter to acquire and exercise the rights, powers and franchises of another corporation, or to carry on the business of such other corporation, does not succeed to such rights, powers, and franchises by purchasing the property of the other company, though it be the whole of such property employed by that company in carrying on the business it was chartered to engage in." 1 It has been held that a sale of the special franchises of an insolvent corporation by its receiver to an individual vests in the purchaser all the rights conferred by the original grant, and that a subsequent sale thereof to another individual has the same effect.^ It would seem, however, upon principle, that the franchises in question — the right to operate electrical conductors in the streets of a city — involved the performance of public duties beyond* the powers of an individual.^ 'Southern R. Co. v. Mitchell, 139 expressions may be found which would Ala. 629 (1904), (37 So. Rep. 85). seem to support the broad doctrine ^ Matter of Long Acre Electric that such a transfer by a corporation Light, etc. Co., 188 N. Y. 361 to an individual is absolutely void (1907), (80 N. E. Rep. 1101). In this and of no more force than if it had case the Court said (p. 366) : never been made. But whatever "It seems to me to be very clear may have been the law originally on that the transfer to Minturn under this question, such a doctrine has his purchase at the receiver's sale long been practically ignored in this vested him with all the rights con- State. The text-books also recognize ferred by the original franchise. It the fact that the drift of authority cannot be disputed that a franchise has been in the direction of sanction- to operate electrical conductors in ing transfers such as were made in the streets is property, taxable, alien- this case. Many of the cases when; able, subject to levy and sale under the courts have recognized and sane- execution and to condemnation under tioned such transfers do not appear the exercise of the power of eminent do- to have been based on any special main. . . ." (p. 308) "There can be no statute authorizing it." doubtthatinsomeof thetext-books,a8 'See Stewart's Appeal, 56 Pa. St. well as in some of the adjudged cases, 41o (1807). 276 CHAP. XIIl] CONTEACT OP SALE AND ITS EXECUTION § 139a § 139a. Ultra Vires Sales of Franchises. — The legal prin- ciples governing attempted ultra vires transfers of franchises by sale, the effect of their execution, and the rights and duties of the parties, are similar to those governing such transfers by lease and are elsewhere fully considered.* Article II SALES OF RAILROADS CHAPTER XIII CONTRACT OF SALE AND ITS EXECUTION I. Nature of Sale of Railroad § 140. Conventional and Judicial Sales of Railroads distinguished. § 141. Distinction between Relation of Vendor and Vendee and Other Inter- corporate Relations. § 142. Distinction between Sale of Railroad and Sale of Franchises. II. Grants of Power to sell and purchase Railroads § 143. Statutory Authority essential to Sale of Railroad. § 144. Seller must have Authority to sell and Buyer to buy. § 145. What Railroads may be the Subject of Sale. Statutory Provisions. § 146. Construction of Statutes. § 147. Constitutional and Statutory Prohibitions of Purchase of Competing or Parallel Lines. III. Authorization and Execution of Contract of Sale § 148. Statutory Requisites. § 149. Assent of Stockholders. Whether Approval of Majority is sufficient. § 150. Acquiescence of Stockholders. § 151. Rights and Remedies of Dissenting Stockholders. • See post, ch. XXII, " Ultra vires executed by the delivery of the con- and Voidable Railroad Leases." See veyance and payment of the pur- a\so ante, ^ 129a,: " Ultra vires Sales of chase price. Leases are continuing Property of Quasi-public and Private contracts both as to rent and occu- Corporations." This distinction be- panoy and are executory in respect of tween sales and leases must, how- future performance, ever, be borne in mind : Sales are 277 § 141 INTERCORPORATE RELATIONS [PART 11 I. Nature of Sale of Railroad § 140. Conventional and Judicial Sales of Railroads distin- guished. — Sales of railroads by one corporation to another have been, perhaps, the least common form of intercorporate relations. A conjunction of interests has usually been obtained by consolidation, lease, or by the purchase of controlling stock interests. Sales of railroads in foreclosure proceedings have, on the other hand, frequently taken place. The numerous railroad reorganizations in the past ten years have, in nearly every case, required a sale of the railroad and franchises. There have also been instances of the sale of railroads upon execution. Conventional sales of railroads involve relations between corporations. Judicial sales involve relations between a cor- poration and its creditors. The former fall within, the latter without, the scope of this treatise.* § 141. Distinction between Relation of Vendor and Vendee and Other Intercorporate Relations. — A sale has already been distinguished from a consolidation in that the element of suc- cession to rights and liabilities is present in the latter and ab- sent in the former.^ The same distinction exists between a sale of a railroad and the form of reorganization wherein the stockholders of a railroad company turn over its property and franchises to another corporation, generally formed for the purpose, in exchange for its shares, and divide them directly, or through a distribution, pro rata among the stockholders.* ' A railroad company is a quasi- of principles — is, therefore, be- public corporation. The rules gov- lieved to be desirable, erning the sales of property of that ^ Ante, § 13: '* Distinction between class of corporations, considered in Consolidation and Sale." §§ 127-129, ante, apply to railroad 'The term "reorganization" is companies. A railroad company ex- more commonly, and perhaps more ercises franchises, and in their dispo- exactly, applied to an arrangement sition is controlled by the principles between the stockholders and credit- examined in the last' chapter. Sales ors of an insolvent corporation to of railroads, however, often involve form a new corporation to take over questions peculiarly applicable to the assets of the old upon foreclosure them, and there are many statutes sale. Reorganizations in the manner especially relating to them. A sepa- stated in the text have, howeverj rate examination of the subject — frequently been made. See 3 Cook although involving some repetition on Corp. § 884. 278 CHAP. XIIl] CONTRACT OF SALE AND ITS EXECUTION § 142 In case of a sale for a V9.1uable consideration and free from fraud, the purchasing corporation takes the property free from charges, except specific liens and equities of which it has notice, and is not liable for the debts of the vendor.* In the case of such a reorganization, however, the corporation taking the property in exchange for its shares will be treated as the successor of the old corporation, and, at least to the value of the property received, will be held responsible for its debts.^ The distinction between sales of raihroads and railroad leases, trackage contracts, pools and other agreements, is self- evident. § 142. Distinction between Sale of Railroad and Sale of Franchises. — The franchises of a railroad company are special privileges conferred by legislative grant. The railroad of a railroad company is property which may have been acquired by the exercise of its franchises.' The franchises are inalienable, without legislative authority, because a railroad company cannot delegate its powers and shift its obligations.' The railroad is inalienable, without like authority, because it is impressed with a trust in favor of the public .° A sale of the franchises of the railroad company alone would not carry its property.* A sale of a railroad, without men- ' Ante, § 123: "Liability of Pur- a public stream, with a right to de- chasing Corporation for Debts of mand tolls or ferriage; or to build a Vendor Company." mill upon a public river, and receive ' Ante, § 125 : "Remedies of Cred- tolls for grinding, etc. But the itors." franchise consists in the incorporeal ' Tuckahoe Canal Co. v. Tuckahoe, right ; the property acquired is not etc. R. Co., 11 Leigh (Va.), 75 (1840) : the franchise. A bank has a right to "Now, I take a franchise to be (1) an purchase a banking house; when incorporeal hereditament; and (2) a purchased, is the house a franchise? privilege of authority vested in cer- Surely not, for it is corporeal, whereas tain persons by grant of the sover- a franchise is incorporeal." eign (with lis, by special statute), to * See ante, ch. XII., subdiv. II. : exercise powers, or to do and perform "Legislative Authority for Sale of acts which, without such grant, they Franchises." could not do or perform. Thus, it is ' See ante, § 127: "Indispensable a franchise to be a corporation, with Property cannot be alienated or taken power to sue and be sued, and to hold on Execution without Legislative Au- property as a corporate body. So it thority." is a franchise to be empowered to ** That a franchise does not include build a bridge, or keep a ferry, over property gained by the exercise 279 § 143 INTERCORPORATE RELATIONS [part II tioning franchises, would carry thoge franchises necessary for its operation.' II. Grants of Power to sell and purchase Railroads § 143. Statutory Authority essential to Sale of Railroad. — As already shown, a sale by a q'Mosi-public corporation of its franchises, or of property necessary for the performance of its public duties, is invalid without legislative authority.^ A rail- road company can sell its franchises and indispensable prop- erty only when such sale is sanctioned by statute.' Mr. Justice Bradley in Branch v. Jesup * clearly stated the thereof, see Bridgeport v. New York, etc. K. Co., 36 Conn. 255 (1869). ' See post, § 157 : "Essential Fran- chises pass upon Sale of Railroad.'* Contra, Arthur v. C!ommercial and RaUroad Bank, 17 Miss. 394 (1848). ^See ante, §§ 17, 18 ("consolida- tion"); ante, §§ 127-129 ("indispen- sable property"); ante, §§ 135-139 ("franchises") ; post,\ 177 ("leases"). 'United States: Branch v. .legup, 106 U. S. 468 (1882), (1 Sup. Ct. Rep. 495, 9 Am. &Eng. R. Cas. 21.5) ; Mack- intosh V. Flint, etc. R. Co., 34 Fed. 582 (1888). Georgia : Singleton v. Southwestern R. Co., 70 Ga. 464 (1883), (48 Am. Rep. 574). Maryland : State v. Consolidation Coal Co., 46 Md. 1 (1876). Massachusetts : Richardson v. Sib- ley, 11 Allen (Mass.), 67 (186.5), (87 Am. Dec. 700) : "A corporation, created for the very purpose of con- structing, owning and managing a railroad, for the accommodation and benefit of the public, cannot, with- out distinct legislative authority, nia.ke any alienation, absolute or conditional, eitVier of the general franchise to be a corporation, or of the subordinate franchise to manage and carry ou its corporate business, without which its franchise to bo a corporation can have little more than a nomin.al existence." 280 Nebraska: Clarke v. Omaha, etc. R. Co., 5 Neb. 314 (1877). New York: Troy, etc. R. Co. v. Boston, etc. R. Co., 86 N. Y. 117 (1881).: "It is well settled that, un- less authorized thereto by statute, a railroad corporation, organized under our General Railroad Act, has no authority to transfer or lease its road." Ohio: Coe v. Columbus, etc. R. Co., 10 Ohio St. 377 (1859) : "In the case of a railroad corporation, its franchises and corporate rights are not alienable, without express statu- tory authority." Also Railroad Co. v. Hinsdale, 45 Ohio St. 556 (1888), (15 N. E. Rep. 665). Pennsylvania: Pittsburgh, etc. R. Co. V. Bedford R. Co., 81J Pa. St. 104 (1871). Tennessee : Frazier v. Railway Co., 88 Tenn. 1.38 (1889), (12 S. W. Rep. 537). Texas: East Line, etc. R. Co. v. Rushing, 69 Tex. 306 (1887), (6 S. W. Rep. 834); Gulf, etc. R. Co. v. Morris, 67 Tex. 692 (1887), (4 S. W. Rep. 156). As to legislative ratification of unauthorized sale of a railroad, see Wood V. Macon, etc. R. Co., 68 Ga. 539 (1882). * Branch v. Jesup, 106 U. S. 468 (1882), (1 Sup. Ct. Rep. 495, 9 Am. & Eng. R. Cas. 215). CHAP. XIIl] CONTRACT OF SALE AND ITS EXECUTION § 144 rule and the reasons therefor: " As a general rule, it is true, a railroad company, with only the ordinary power to construct and operate its road, cannot dispose of it to another company. Legislative aid is necessary to that end. . . . Generally the power to sell and dispose has reference only to transactions in the ordinary course of business incident to a railroad com- pany; and does not extend to the sale of the railroad itself, or of the franchises connected therewith. Outlying lands, not needed for railroad uses, may be sold. Machinery and other personal property may be sold. But the road and franchises are generally inalienable; and they are so not only because they are acquired by legislative grant, or in the exercise of special authority given, for the specific purposes of the incor- porating act, but because they are essential to the fulfilment of those purposes; and it would be a dereliction of the duty owed by the corporation to the State and to the public to part with them." ' Questions as to what constitutes indispensable, and what surplus, property are considered elsewhere.^ § 144. Seller must have Authority to sell and Buyer to buy. — From the principle that legislative authority is as necessary to accept a conveyance of franchises as it is to make a grant,' it follows that both vendor and vendee corporation must be authorized by statute to enter into a contract for the purchase and sale of a railroad.^ As said by the Supreme Court of Texas in East Ldne, etc. R. Co. v. State: ^ " To authorize such a trans- ' statutes authorizing quasi-puhlic * East Line, etc. R. Co. v. State, 75 corporations to sell their franchises Tex. 434 (1889), (12 S. W. Rep. 690); and property are within the constitu- East Line, etc. R. Co. v. Rushing, 69 tional powers of the legislature. Hav- Tex. 306 (1887), (6 S. W. Rep. ing power to create the corporation, it 834). has power to authorize the transfer A railroad company cannot trans- of its franchises and assets. See fer its franchises to a private person Claw V. Van Loan, 4 Hun (N. Y.), 184 so as to enable him to build a railroad (1875). and operate it for his own benefit. 2 See ante, 128: "Test of Indis- Stewart's Appeal, 56 Pa. St. 4)3 pensahUity" : ante, § 129: "Sales of (1867); Fanning v. Osborne, 102 N. Surplus Property." Also post, § 172 : Y. 441 (1886), (7 N. E. Rep. 307). "Leases of Surplus Property." ' East Line, etc. R. Co. v. State, 75 ^Ante, § 139: "Legislative Au- Tex. 434 (1SS9), (12 S. W. Rep. thority essential to Purchase of Fran- 690). chises. " 281 §145 INTERCORPORATE RELATIONS [part II action it must appear that one corporation had power to sell and the other to buy." Authority granted to one railroad company to purchase the railroad and franchises of a specified corporation gives the latter authority to sell.' § 145. What Railroads may be the Subject of Sale. Statu- tory Provisions. — Statutes of the different States authorizing sales of railroads are collected in the subjoined note.^ ' New York, etc. R. Co. v. New York, etc. R. Co., 52 Conn. 274 (1884). 'Alabama. Code 1896 (as amended by Laws 1898-1899), | 1169: "Whenever aU of the capital stock of a railroad corporation, char- tered under the laws of this State, is owned by a railroad corporation chartered by the laws of another State," the domestic corporation "may sell and convey to the cor- poration owning its stock all of its property, " franchises, etc. lb. Foreign railroad corporations operating ' domestic railroad may purchase or lease any other domestic railroad connecting with its own. lb. § 1170: " Any railroad corpora- tion ... of this or any other State, may lease or purchase any part or all of any railroad constructed by another corporation ... if the lines of such roads are continuous or connected." lb. § 1172: "A corporation . . . has authority, for the purpose of extending its line, or forming a con- nection, to acquire, hold and operate £b railroad without the State." Arizona. R. S. 1901, par. 864, § 1 : "Any railroad company . . . may pur- chase or lease the railroad" franchises, etc., "of any railroad company of this Territory or any other Territory or State. . . . No purchase or lease" shall be made "unless the line of rail- road so purchased or leased . . . shall, when constructed, form . . a branch of, or a continuous line with, the rail- road of such purchasing or leasing company either by direct connection 282 therewith, or through an intermediate line or lines." lb. Any railroad company may sell or lease its railroad, franchises, etc., to any railroad company, or- ganized under the laws of Arizona, or of any other Territory or State. The lines must be continuous, either directly, or by means of intermediate line or lines. Arkansas. Kirby's Dig. 1904, § 6742 : "Any railroad company of this State . . . may sell or lease its road, property and franchises to any other railroad company ... of any other State . . . whose line of rail- road shall so connect with the leased or purchased road by bridge, ferry or otherwise, as to practically form a continuous line of railroad ; and any railroad of this State may buy or lease, or otherwise acquire, any rail- road or railroads, with all property, . whenever the roads shall form, in the operation thereof, a continuous line or lines." lb. § 6743: "Any railroad com- pany . . of any other State . . . may buy, lease, or otherwise acquire any railroad or railroads, the whole or part of which is in this State . . whenever the roads of such companies shall form in the operation thereof a continuous line or lines." lb, § 6752: "Any railroad com- pany . . of this or any other State, or of the United States, may lease or purchase all, or any part, of a railroad . . . the whole or part of which is in this State, and constructed. CHAP. XIIl] CONTRACT OF SALE AND ITS EXECUTION § 145 In nearly all of these statutes the power to sell or purchase is granted in connection with the grant of power to lease or take a lease. owned or leased by any other com- pany, or connected at any point either within or without this State." lb. § 6762: "Every railroad cor- poration ... of tliis State ... is authorized to sell, lease or otherwise dispose of . . . its road," etc., "to any connecting railroad company, or to any railroad corporation . . of this or any other State." lb. § 6766: "Any railroad com- pany ... of any other State" may, for the purpose of continuing its line through this State, "lease or purchase the property ... of any railroad . . , of this State." California. Pomeroy's Code, 1901, § 494: "Any railroad corporation owning- a railroad in this State may sell, convey and transfer its property and franchises . . to any other rail- road corporation ... of this or any other State or Territory, or [organized] under any act of Congress, and any other such railroad corporation re- ceiving such conveyance may hold and operate." This section does not authorize any corporation to purchase any rail- road property operated in competi- tion with it. Colorado. Mill's Anno. Stat., 1891 (as amended by Sess. Laws 1899, pp. 162-163), § 611: "Any railroad corporation ... of this State; or . . . of an adjoining State or Territory, may lease or purchase any part or all of a railroad constructed by another company within or without this State, if the lines of roads of such com- panies are continuous or connected." Sess. Laws 1899, ch. 125, p. 313: "Any railroad company, owning or operating a line of railroad in this State, may purchase other lines of railroad, within or without this State, which shall connect with the road operated by such company, directly, or by means of any other line which such company shall have the right, by contract or otherwise, when con- structed, to use and operate." 76. "Any corporation ... of this State may sell its line of railroad to any other company, to which, under the laws of this State it may lease the same or with which it may consolidate." Florida. Gen. Stat. 1906, § 2812: "Any railroad ... in this State shall have power . to make and enter into contracts with any rail- road . . . which has constructed or will hereafter construct any railroad . . within this State or in another State, as will enable said companies to run their roads in connection with each other, ... or to lease and pur- chase the stock and property of any other company, and hold, use, and occupy the same in such manner as they shall deem most beneficial to their interests." Georgia. Code, 1895, § 2179: "Any railroad coiiipany incorporated under . . this article shall have authority to sell, lease, or transfer its . property or franchises to . . . any other railroad company incorporated under the laws of this or any other State or of the United States, whose railroad, within or without this State, shall connect with or form a continu- ous line with the railroad of the com- pany incorporated under this law. Conversely, any such corporation organized under the provisions of this article may purchase . . the prop- erty and franchises of any other rail- road company ... of this or any other State or of the United States whose railroads within or without this State shall connect with or form a continuous line or system with the 283 §145 INTERCORPORATE RELATIONS [part 11 As a general rule a railroad company, in these statutes, is expressly authorized to sell its railroad, property and fran- railroad of such company incorporated under this law." lb. § 2173: "A railroad company shall have power ... to lease or pur- chase the property of any other such company [one whose road connects with that of purchasing or leasing corporation] and hold, use and occupy the same in such manner as they shall deem most beneficial." Idaho. Laws 1901, p. 214: "Any railroad corporation whose line is wholly or in part within this State whether . . . organized under the laws of this State or of any other State or Territory or of the United States, may lease or purchase . . the whole or any part of the railroad of any other railroad corporation. . . . Any railroad company may sell or lease the whole or any part of its railroads ... to any railroad company . of the United States or of this State or of any other State or Territory of the United States." Illinois. R.S. 1903, §196, p. 1475: Domestic railroad corporations operat- ing foreign or domestic railroads may purchase same. No parallel or com- peting lines can purchase one another. 76. § 218, p. 1480: "Whenever a corporation . of another State shall be in possession of a railroad, the whole or a part of which is situated in this State, belonging to a corporation ... of this State, or shall own or control all the capital stock of such corporation of this State, then the corporation of this State may sell and convey, and such other cor- poration of another State . . may purchase in fee simple all the railroad of the corporation in this State." Indiana. Bums' Anno. Stat. 1901, § 5215: "Any railroad company, in- corporated under the provisions of this act, shall have the power and authority to acquire, by purchase or 284 contract, the road . . . and franchises of any other railroad corporation or corporations which may cross or intersect the line of such railroad company, or any part of the same, or the use and enjoyment, in whole or in part," may also purchase or contract for the use and enjoyment thereof, in whole or in part, of any railroads lying within adjoining States. . [This act does not authorize] "any railroad company organizing under the same to . . acquire the road . . . [or] franchises of any railroad already built, equipped and operated within the State of Indiana and which may cross and intersect the line of railroads organizing under this act ; but the powers . . . are . . . limited ... to such roads within the State ... as may cross or intersect the same and which have not been equipped and operated in whole or in part." Iowa. Code 1897, § 2066: "Any railroad corporation may sell or lease its property and franchises to . . . any corporation owning or operating any connecting railway.'* Kan.ias. G. S. 1897, ch. 70, § 95: "Any railroad company of this State may Sell or lease ... its railroad and branches ... to any railroad com- pany . . of this State or of any other State or Territory of the United States. .,. . No purchase . . . shall be entered into unless the line of rail- road so purchased . . . shall . . . form a continuous line with the road of the company purchasing either by direct connection therewith, or through an intermediate line or lines. " lb. § 51 : Domestic corporations may extend their lines into other States and purchase or lease lines of railroad in such States, provided that such Unes are connected, forming a continuous line. CHAP. XIIl] CONTRACT OF SALE AND ITS EXECUTION § 145 chises; but in some cases the power is confined to the sale of the railroad, in whole or part. Maine. R. S. 1903, § 30, p. 531 : No corporation can assign its charter or any right under it ; lease or grant the use or control of its road, or any part of it, without the consent of the legislature. Maryland. P. G. L. 1904, Art. 23, § 279 : '■* Any railroad company in- corporated under . . . [particular statutes] shall also have power to purchase or contract for the use and enjoyment, in whole or in part, of any other railroad or railroads lying within or without this State, if the same shall connect with or form a continuous line with the railroad of the company incorporated under said sections." Michigan. Pub. Acts 1901, Act No. 30, p. 50: '*Any railroad com- pany ... of this State *' is author- ized to "sell, lease, and convey its road . . . rights and franchises . to any other railroad company, whether organized within or with- out this State; and to acquire, by lease or purchase, from the owner of any other railroad such road . . . whether located within or without this State ; and . . the railroad company so purchasing or leasing" may "acquire and use such road, rights and franchises by purchase of stock, or otherwise, . . . said rail- roads not having the same terminal points and not being competing lines." Comp. Laws 1897, § 6328 : Domes- tic railroad company being unable to complete its road, may sell to any domestic corporation not owning a competing line. Pub. Acts 1899, No. 266, § 17, p. 447 : Miscellaneous provisions as to sale of unfinished railroads. Minnesota. Laws 1899, ch. 229, p. 253 : "Any railroad corporation, either domestic or foreign . may lease or purchase or in any way be- come the owner of, or control or hold the stock of any other railroad cor- poration when their respective rail- roads can be lawfully connected and operated together so as to constitute one continuous main line . . . and in case such lease or purchase shall be made by a foreign corporation " such corporation shall have the same rights as the vendor company. G. S. 1894, § 2721 : "Any railroad corporation may . . purchase or lease any railroad constructed by any other corporation whose lines of roads are continuous or connected with its own." Missouri. R. S. 1899, § 1060 : "A railroad company may aid other rail- road companies by purchase and "any railroad company . . of this or any other State or of the United States may lease or purchase all or any part of a railroad with all its privileges, rights, franchises, real estate and other property, the whole or part of which is in this State, if the lines of road or roads of such com- panies are continuous or connected at a point, either within or without this State, upon such terms as may be agreed between the companies re- spectively. " /6. § 1061 : " Any railroad com- pany ... of this State . . may ac- quire any line of railroad within or without this State which shall form a continuous line with the road operated by such company, by direct connec- tion or over any other line or lines . . . which such company shall have the right, by contract or otherwise ... to use and operate." Montana. Code 1895, § 912 : "Any railroad corporation whose line is wholly or partly within this State, or reaches the boundary line thereof, whether . . of the State or Terri- tory of Montana, or of the United 285 § 145 INTEKCORPOEATB RELATIONS [part II la all cases the purchaser must be a railroad company, but, generally, no distinction is made between domestic and foreign corporations as purchasers. States, or of any other State or Terri- tory, may lease or purchase the whole or any part of the railroad or line of railroad of any railroad corporation, . . . The railroad or line of railroad so leased or purchased" must be "continuous of or connected with its own line." lb. § 923: "Any company . . . within this State may . . . buy or lease any railroad or railroads in any other State or Territory, or . . . any other railroad in this State . . . ; or any railroad company may sell or lease the whole or any part of its rail- road or branches within this State ... to any railroad company . . of the United States, or of this State or of any other State or Territory of the United States." Nebraska. Comp. Stat. 1901, § 4024: " Every railroad company . . . of this State whose railroads . . . within this State shall be so sit- uated with reference to any rail- road constructed through any ad- joining State or Territory by any railroad company of the United States, or any State or Territory, that the same may be so connected at the boundary line of this State or at any point within this State, by bridge, ferry, or otherwise, as to practically form a continuous Une of railway over which cars may pass, is hereby author- ized to purchase such connecting rail- way, or to sell the same to the railroad company" that owns or operates, etc., said railroad through the adjoin- ing State, to said point of connec- tion. lb. § 1769 : "Any railroad com- pany, existing in pursuance of law, may lease or purchase . . any rail- road ... if said companies* lines of railroad . , . are continuous or con- nected." 286 See also ib. §§ 4018, 4019, 4026. Nevada. Laws 1901, p. 51 : " Any railroad corporation owning any rail- road in this State may sell . . its property . . to any other railroad corporation ... of this State or of any other State or Territory; or under any act of Congress." New Jersey. Laws 1900, ch. 46, p. 70: "Whenever any railroad cor- poration of this State shall own all the bonds and shares of stock of any other railroad corporation of this State whose railroad . . . connects with the railroad of said first-mentioned cor- poration " it may acquire, have, hold, use, etc., all the rights, etc., of the corporations so controlled. New Mexico. Comp. Laws 1897, I 3891 . "Any railroad organized in pursuance of law either within this or any other Territory, or State, may lease or purchase any part or all of any railroad constructed, owned, or leased by any other company." Neiv York. R. S. 1901 (Birdseye's) Railroad Law, § 79 : "Any corpora- tion . . of this State, or its suc- cessors, being the lessee of any other railroad corporation may take a sur- render of the capital stock of the stockholders or any of them in the corporation whose road is held under lease." The lessee corporation may issue in exchange therefor its own stock at par. When the greater part of the capital stock of the lessor cor- poration is so acquired the director? of the lessee corporation become ex officio directors of the lessor corpora- tion, and when the whole of the capi- tal stock is acquired and a certificate thereof filed with the Secretary of State, the estate, property, franchises, etc., of the lessor corporation vest in the lessee corporation and may be managed and controlled by its c'.i- CHAP. XIIl] CONTRACT OF SALE AND ITS EXECUTION §145 The right to purchase* and sell is usually limited to corpora- tions owning connecting or continuous lines of road. The rectors. Rights of creditors and existing liabilities of the lessor cor- poration are not affected by the transfer. North Dakota. Rev. Codes 1899, § 2954 : "Any such railroad corpora- tion [of this State or Territory of Dakota or existing by consolidation of railways of such State or Territory and of any other Territory or State] may lease or purchase and take by conveyance or assignment the rail- road franchises ... of any other rail- road corporation, or any portion thereof within or without this State, when their respective railroads can be lawfully connected and operated together to constitute one continuous main line, or when the roads so pur- chased will constitute branches or feeders of any road maintained and operated by such purchasing cor- poration. " Ohio. Bates' Anno. Stat. 1787- 1906, § 3300: "Any company may leaae or purchase any part or all of a railroad constructed or in the course of construction by another company, if the lines of road of such companies are continuous or connected ... upon such terms as may be agreed upon by the companies." /6. § 3409; A railroad company unable to complete its road may sell to any domestic railroad company authorized to operate over the same route. Oklahoma. Rev. and Anno. Stat. 1903, § 99, p. 360: "Any railroad corporation whose line is wholly or in part within this Territory, whether ... of this Territory, or of any other State or Territory, or of the United States, may lease or purchase and ' operate the . . . railroad of any other railroad corporation . . . when such railroads can be lawfully con- nected and operated together so as to constitute a continuous main or branch line." Oregon. Hills' Anno. Laws 1892, ch. 32, § 3221, subdiv. 7: Railroad companies have power "to lease or purchase, maintain and operate any part or all of any other railroad con- structed by any other company upon such terms and conditions as may be agreed upon between said companies respectively. " No parallel or competing lines are authorized to lease or purchase. Pennsylvania. Laws, 1901, Act No. 20, p. 53 : " It shall be lawful for any railroad corporation of this com- monwealth, having a railroad con- necting with that of any other like corporation, and owning at least two-thirds of the capital stock of the latter, to acquire in the manner here- inafter provided, and thereafter be possessed of, own, hold, exercise and enjoy, all the franchises, corporate property, rights and credits then pos- sessed, owned, held or exercised, by said last-mentioned vendor corpora^ tion." SoxUh Carolina. R. S. 1893, § 1624 : "Railroad companies ... of this State . . may . . . enter into con- tracts for the purchase, use or lease of other railroads . . . and may run, use and operate such road or roads in accordance with such contract or lease : Provided that the roads of the companies so contracting or leasing shall be directly, or by means of inter- vening railroads, connected with each other. " lb. § 1542 : "Every railroad com- pany incorporated in this State shall have all the rights, powers ... set forth in this article.'' 76. § 1546: "Such company shall have the power and authority ... to purchase, lease, . . any other rail- road or railroads in or out of this 287 §145 INTERCORPORATE RELATIONS [part II considerations of public policy inducing this limitation have already been considered in connection with similar provisions in consolidation statutes.' state, in such manner and upon such terms as may be agreed between such railroad companies." South Dakota. Rev. Code, § 494, p. 649 : "Any railroad company may sell or lease the whole or any part of its railroad or franchises within this State ... to any railroad company ... of the United States, or of this State, or of any other State or Terri- tory of the United States." Tennessee. Code 1896, § 1509: "Every railroad corporation in this State . . . shall have the power to" buy "any railroad . . belonging to any other railroad corporation." lb. § 1521 : "Any and all railroad companies ... of this State, or of this State and any other State or States, whose charters of incorporation were or may be granted by this State, " may "acquire the line or lines of any other railroad company either in this State or any other State or States, which may connect with or form parts and parcels or branches or extensions of the line of such company char- tered by this State" and may "so acquire branches or extensions by purchase, lease or otherwise. " 76. § 1540 : "Railroad companies of this State" may "lease or let, acquire by purchase, lease or otherwise . . any railroad or railroads in any State or States, or any parts or portions of any such railroads . . as may be determined upon by the stockholders." Utah. Laws 1901, ch. 26, p. 21, § 3 : " Any corporation owning any railroad line in this State may sell, convey, and transfer its property and franchises ... to any railroad cor- poration (not owning any competing line) in this State whether organized under the laws of this State or of any other State or Territory, or of any act of Congress." lb. § 4: "Railroad corporations may be formed, pursuant to the laws of this State, for the purpose of buy- ing or leasing a corporation or cor- porations whose lines of railroad are situated within or without this State, or partly within and partly without this State." Washington. Ballinger's Anno. Codes and Stat. 1897, § 4304 : "Any railroad corporation whose line is wholly or in part within this State, whether chartered by or organized under the laws of this State, or any other State or Territory, or of the United States, may lease or purchase the railroad of any other railroad corporation." West Virginia. Code 1906, § 2346 : (1) Same as "consolidation" statute (see ante, § 22), adding words "pur- chase" and "sell" to "consolidate."' Wisconsin. Sanborn's Supp. (1899-1906), vol 3, § 1833, p. 919: **Any such railroad corporation [see ante, § 22, "consolidation"], may give or take a lease or may sell to, or purchase from, any railroad com- pany . . within or without the State, and give or take a conveyance of the railroad franchises ... of any railroad corporation ... of this State, or of any other State, or of the United States, or any portion thereof, within or without the State, when their respective railroads can be lawfully connected and operated together to constitute one continu- ous main line, or when the road so purchased or leased will constitute a branch ... or be connected or intersected by, any line maintained and operated by such purchasing ' See ante, § 22: "What Railroads may consolidate — Statutory Provisions." 288 CHAP. XIIl] CONTRACT OF SALE AND ITS EXECUTION § 146 It will be observed that the New York statute relates rather to succession than to purchase and sale. § 146. Construction of Statutes. — A railroad company ob- tains power to sell its railroad and franchises, or to purchase the railroad and franchises of another corporation, only when it is distinctly conferred by statutory authority. Such power will not arise by implication unless necessary to give effect to the language employed in a statute. Any ambiguity in the terms of the grant will operate against the corporation claim- ing the power.' In Wood V. Bedford, etc. R. Co? Judge Sharswood said: " The general canon of construction applicable to legislative grants of this class, derogating as they do from common right and public policy, requires that the intention should be very manifest; if not to be unequivocally expressed, at all events not to depend upon ambiguous phrases rendering the implica- tion doubtful." Power to purchase does not include power to sell.' Au- thority to sell is not implied from a grant of authority to mort- gage.'' Authority granted to one railroad company to " pur- chase, lease, hold and maintain any other railroad " does not confer upon other railroad companies implied authority to or leasing corporation, or which such pare decision of the Chancellor in purchasing or leasing corporation is the same case, 22 N. J. Eq. 130 authorized to build, own, maintain (1871). or operate." ^ Wood v. Bedford, etc. R. Co., Wyoming. R. S. 1899, § 3206: 8 Phila. (Pa.) 95 (1871). "Any company owning or operating a ' Southern Pac. R. Co. v. Esquibel, railroad within this State may ex- 5 N. Mex. 123 (1889), (20 Pac. Rep. tend the same into any other State 109). Whether power to consolidate or Territory, and may . . buy, includes power to sell, see antCj § 28: lease or consolidate with any railroad "Construction of Particular Statutory or railroads in such other State or Provisions." Territory, or with any other railroad * Southern Pac. R. Co. v. Esquibel, in this State, and may operate the 5 N. Mex. 123 (1889), (20 Pac. Rep. same. . . . Any railroad may sell 109). "It was argued for the appel- or lease its railroad or branches lant that, if the land could be mort- within this State ... to any rail- gaged for the means to construct, road company ... of the United equip, and operate the road, it could States, or of this State, or of any be assigned, in the first place, for the other State or Territory of the United same object. The doctrine that a States." power to mortgage includes a power ■ Black V. Delaware, etc. Canal to sell is not supported by authority Co., 24 N. 3. Eq. 455 (1873). Com- of law." 289 § 146 INTERCORPORATE RELATIONS [PART II sell.' Authority to purchase the railroad of a specified cor- poration, however, empowers the latter corporation to make the sale.^ Power to sell a constructed railroad does not au- thorize the sale of road before it is finished; ' nor can a transfer of franchises be justified under a statute permitting the lease of a completed railroad.^ Power to sell or purchase will not be implied, in favor of a non-competing railroad, from a statute prohibiting the execution of a contract of sale between com- peting roads.' "Power to buy a railroad cannot be implied from an express grant of power to ' construct, own, maintain and. operate ' a railroad to be constructed by the corporation to which those express powers are given, for the existence of such a power is not necessary to accomplish the object specified." " A grant of power to a railroad company to locate and construct branches to its main road does not include authority to pur- chase the railroad of another company constructed under a different charter.' Where, however, the sale of a railroad and franchises is dis- tinctly authorized by statute a sale may be effected although thereby the objects for which the corporation was created are defeated.' Authority " to have, purchase, possess, enjoy ' state V. Consolidation Coal Co., (1871) ; Wood v. Bedford, etc. R. 46 Md. 1 (1876). Co., 8 Pliila. (Pa.) 94 (1871). ' New Yorlc, etc. R. Co. v. New ' East Line, etc. R. Co., v. State, 75 York, etc. R. Co., 52 Conn. 274 Tex. 434 (1889), (12 S. W. Rep. 690). (1884). « East Line, etc. R. Co. v. Rushing, 'Clarke v. Omaha, etc. R. Co., 67 Tex. 692 (1887), (4 S. W. Rep. 4 Neb. 458 (1876). 156). Under a statute authorizing a Where, however, a railroad corn- corporation chartered for the purpose pany was authorized to construct of constructing or operating a rail- its main line between certain points road to purchase any part of a road and "to build branches or extend constructed by any other corpora- its line into one or more towns" tion if the roads are continuous or it was held that it had power to connecting, a railroad company has purchase a railroad already con- power to convey a part of its right structed and to use it as a branch road, of way to a connecting line in aid of Central Trust Co. v. Washington its construction. Co. R. Co., 124 Fed. 813 (1903). Coyne v. Warrior Southern R. Co. ' Campbell v. Marietta, etc. R. 137 Ala, 553 (1903) (34 So. Rep. Co., 23 Ohio St. 168 (1872). 1004). 8 Mahaska County R. Co. v. Des ' Pittsburgh, etc. R. Co. v. Bed- ^Jtfoines, etc. R. Co., 28 Iowa, 437 ford, etc. R. Co., 81} Pa. St. 104 (1870). 290 ciia:'. xiii] contract of sale and its execution § 147 and retain lands, rents, hereditaments, goods, chattels and effects, of whatsoever kind, nature or quality " sanctions the purchase of a railroad.^ A statute authorizing " any railroad company " to purchase the railroad and franchises of a par- ticular corporation authorizes such purchase by a railroad company of another State.^ § 147. Constitutional and Statutory Prohibitions of Purchase of Competing or Parallel Lines. — The purchase by a railroad company of a line of railroad competing with, or parallel to, its own is prohibited in many constitutional and statutoiy provisions, in connection with similar prohibitions against con- solidations and leases. These provisions, - their construction and application, have already been fully considered.' ^ Branch v. Atlantic, etc. R. Co., 3 Woods (U. S.), 481 (1879). For construction of particular statutory and constitutional pro- visions relating to sales of railroads and franchises, see Mackintosh v. Flint, etc. R. Co., 34 Fed. 582 (1888) ; Venner v. Atchison, etc. R. Co., 28 Fed. 581 (1886) ; People v. Stan- ford, 77 Cal. 360 (1888), (18 Pac. Rep. 85, 2 L. R. A. 92) ; Barley v. Southern R. Co., 61 S. W. Rep. 31 (1901). " Boston, etc. R. Co. v. Boston, etc. R. Co., 65 N. H. 397 (1888), (2S Atl. Rep. 529). Chief Justice Doe said: "Express consent is given to a purchase by 'any railroad com- pany.' Taken without qualification this clause includes foreign as well as domestic railroad corporations. The words 'any railroad company' might be used in a connection and for a purpose that would show a restricted sense not including for- eign companies. Here is no evi- dence to exclude them." A statute authorizing a foreign railroad corporation, in possession or control of a domestic railroad, to purchase the latter, but providing that it should not be so construed as to permit the purchase of a parallel or competing line in the State, was held not to authorize the purchase of a line extending along one side of the boundary river within the State by a foreign corporation owning a parallel road on the opposite side of the river in another State. Illinois State Trust Co. v. St. Louis, etc. R. Co., 208 111. 419 (1904) (70 N. E. Rep. 357). ^ See a-nte, ch. III.: " ConstitiUionaZ and Statutory Restraints upon Con- solidation/* Upon a further hearing of the case referred to in the preceding note (Illinois State Trust Co. v. St. Louis, etc. R. Co. 208 111. 419 (1904) (70 N. E. Rep. 357)), the Court found that the two roads were, in fact, neither competing nor parallel, it appearing that the foreign line between the two termini was much longer and more indirect than the local road, requiring a change of cars and ferry- ing; that no through trains were operated on the former and no through business solicited, and that no facil- ities were provided for through busi- ness nor rates made thereon in com- petition with the local road. Illinois State Trust Co. v. St. Louis, etc, R. Co., 217 111. 504 (1905) (75 N. E. Rep. 562). The Court said (p. 515): "It, therefore, very plainly appeared 291 §148 INTERCORPOHATE RELATIONS [part II III. Authorization and Execution oj Contract of Sale § 148. Statutory Requisites. — The statutes of the different States prescribing the method to be followed in authorizing and executing sales of railroads are referred to in the footnote.^ from all the testimony that the Valley railroad, at either terminus or at any intervening point, was not and is not a competing line of road with that of the appellee and is not a parallel line of road either within the technical geometrical definition of the word ' parallel ' or under the more enlarged and practical meaning which, where the element of competition is present should be given the term 'parallel lines' as employed in the statute under consideration/' A statute authorizing a railroad company to purchase a competing portion of the road of another com- pany and to operate it, violates the provision of the Mississippi Constitu- tion, prohibiting legislation suspend- ing the operation of general laws for the benefit of any individual or corporation, since it has the effect of suspending the operation of the general law forbidding competing rail- road companies to operate parallel lines within twenty miles of each .other, or to purchase the lines of each other or any part thereof. Yazoo etc. R. Co. v. Southern R. Co., 83 Miss. 746 (1904) (36 So. Rep. 74). 1 Arizona. R. S. 1901, par. 864, § 1 : Assent of holders of two-thirds of entire corporate stock — by vote or in writing — necessary to contract of sale. Alabama. Code 1896, §§ 1170, 1173: Approval of holders of ma^ jority in value of stock of vendor and vendee corporations at meeting called for the purpose required. Arkansas. Kirby's Dig. 1904, §§ 6742, 6752, 6762: Assent of holders of two-thirds of capital stock is necessary. 292 California. Pomeroy's Code 1901, § 494: Contract of sale must be au- thorized by directors and ratified by three-fourths of stockholders of both corporations. Colorado. Mills' Anno. Dig. 1891, § 612. Also Sess. Laws 1899, ch. 125, p. 313: Assent of holders of two- thirds of capital stock of each com- pany required. Illinois. R. S. 1903, §§ 196, 218: Approval of holders of two-thirds of capital stock required. Kansas. G. S. 1897, § 95: Sale must be ratified by vote of two-thirds of capital stock of each company, or approved by such holders in writ- ing. Michigan. Comp. Laws 1897, § 6328 : Consent of two-thirds of stock- holders required for sale of uncom- pleted road. Consent of majority sufficient under 1901 Act (P. A. 1901, Act No. 30, p. 50). Minnesota. G. S. 1894, §§ 2721, 2736 : Sale must be approved by holders of two-thirds of capital stock of each company at meetings called for the purpose. Missouri. R. S. 1899, § 1060: Holders of a majority of stock of each company must assent in writing to sale proposed by directors before it can be perfected. Montana. Code 1895, § 912, re- quires approval of three-fifths of stockholders. lb. § 923 requires approval by majority vote or by majority in writing. Apply to sales under different statutes. Nebraska. Comp. Stat. 1901, § 1769: Sale must be assented to by vote of holders of two-thirds of capital stock; (§ 4026) by vote or written approval of like number. CHAP. XIIl] CONTRACT OP SALE AND ITS EXECUTION §149 The State may withhold the grant of power to sell entirely or may attach such conditions to its exercise as it may deem expedient. These conditions — as distinguished from mere directions — must be strictly complied with. They are con- ditions precedent to the validity of the sale. As a general rule, these statutes prescribe three steps in the authorization and execution of a contract of sale: 1. The contract must be approved by the boards of directors of both vendor and vendee companies. 2. It must be submitted to and approved by the prescribed majority of the stockholders of each company. 3. It must be formally executed in behalf of each corporation by agents appointed for the purpose. § 149. Assent of Stockholders. Whether Approval of Major- ity is sufficient. — As shown in the last section, statutes au- thorizing sales of railroads generally prescribe the number of stockholders whose consent is necessary. Where, however, the statute merely grants power to sell, questions may arise as to the manner of exercising the power. lb. §§ 4018, 4019, authorize approval of certain sales by majority vote. New Jersey. Laws 1900, ch. 46, p. 70 : Acquisition effected by written agreement executed pursuant to resolution adopted by directors of each company. New Mexico. Comp. Laws 1897, § 3891: Holders of two-thirds of capital stock must assent to sale. NoHh Dakota. Rev. Codes 1899, § 2954: Sale must be approved in same manner as consolidation. See ante, § 52: "Formal Statutory Req- uisitea" (consolidation). Ohio. Bates' Anno. Stat. 1787- 1902, §§ 3301, 3411: Two-thirds of stockholders must approve sale at meeting called by each corporation. Pennsylvania. Laws 1901, p. 52, Act No. 20: Agreement adopted by directors must be approved by ma- jority of stockholders of each corpora- tion present at meeting called for the purpose. South Dakota. Rev. Code, § 494 p. 649: Sale must be approved in same manner as consolidation. See ante, § 52: "Formal Statutory Req- uisites" (consolidation). Tennessee. Code 1896, § 1540: Sale must be approved by votes of holders of three-fourths of capital stock. West Virginia. Code 1906, § 2346 : Sale under first part of statute re- quires approval of majority of stock- holders; under second part two- thirds. Also refers to consolidation statute. See ante, § 52: "Formal Statutory Requisites'' (consolidation). Wyoming. R. S. 1899, § 3206: Sale must be approved by vote of holders of a majority of stock, or their written approval must be given. All the above abstracts should be examined in connection with the statutes collected in note to ante, § 145; "What Railroads may he the Subject of Sale, Statutory Provi- 293 §149 INTERCORPORATE RELATIONS [part II It may be contended that the grant of authority to sell only waives the rights of the public/ and, therefore, that a railroad company — a quasi-puhlic corporation — with power to sell, stands in the position of a private corporation with respect to the disposition of its property — that whether unanimous con- sent is necessary to a sale of a railroad and franchises, where the governing statute is silent, depends upon the principles of law, already considered, applicable to private corporations.' Upon principle, however, it seems the better view that authority granted a railroad company to sell its road and fran- chises is an express power of the corporation; and that it may be exercised, unless otherwise provided, in the same manner that other primary corporate powers are exercised — by a majority vote of the stockholders.^ As said by the Supreme Court of Mississippi in Hinds County v. Natchez etc. R. Co.'': ' Knoxville v. Knoxvjlle, etc. R. Co., 22 Fed. 763 (1884): "The au- thority thus given to any railroad com- pany to buy necessarily implies au- thority to other companies to sell, inasmuch as there could be no pur- chase without corresponding- sale. But it was not competent for the legislature to do more in this respect than to waive the public rights. It could not divest or impair the rights of the shareholders, as between themselves, as guaranteed by the company's charter, without their consent. It was upon the faith of the stipulations contained in said charter that the shareholders sub- scribed to the capital stock, and thereby made themselves members of the corporation. These stipula- tions, as. we have already seen, con- templated and provided for the con- struction of a railroad between the termini named, to be governed by the shareholders, in the manner and upon the terms prescribed. Each corporator is entitled to have the contract fairly interpreted and hon- estly enforced. The charter invests the owners of a majority of the capital stock with the right to control the 294 corporate business within the scope of its provisions. Within this limit, the power of the majority, when acting in good faith, is supreme. But complainant's charter does not, by any reasonable intendment, clothe the majority with authority to sell the company's franchise and property, and in tliis way coerce the minority and protesting shareholders into another and different corporation, owning and operating another and different railroad, under another and different charter imposing other and different obligations, and governed by a different set of operators. To so hold would be to divest them of their vested rights and force them into relations and subject them to duties and obligations which they have not, and probably would not, have voluntarily assumed." " See arete, ch. XI., subdiv. 1 : "Sales of Property of Private Corporations. " 2 See post, § 189 : "Whether Unani- mous Consent is necessary unless other- wise provided." * Hinds County v. Natchez etc. R. Co. 85 Miss. 599 (1905), (38 So. R«p. 189). In Louisville etc. R. Co. v. Jarvis CHAP. XIIl] CONTRACT OF SALE AND ITS EXECUTION §149 " Even in the absence of express statutory authority a private corporation doing a losing and unprofitable business may sell its entire assets, upon a vote of the majority of the stockholders. ... It is true that a railroad corporation has quasi public functions but when the State by a valid statute has consented to the sale all difficulty on this account is removed. What- ever interest the State might have in the continued ownership and operation of the road by the corporation this interest was certainly committed to the legislature." Unquestionably, the assent of at least a majority of the stockholders is essential. Unless the power is distinctly con- ferred by statute or by-laws upon the directors, they have no authority to sell the railroad or franchises of their corpo- ration, in whole or in part.' (Ky. 1905), 87 S. W. Rep. 759 where the charter of a railroad company was amended by providing that no contract which the president and directors might make with any otlier railroad company should be valid until "ratified by the stock- holders" it was held that a contract for the sale of the road did not re- quire the unanimous vote of the stockholders — that a majority vote was sufficient. The Court said (p. 761) : "It seems to us more reasonable to presume that the legislature meant by the expression 'ratified by the stockholders of this company' only to require the directors to bring all those contracts which, under section 21 of the original charter, they were authorized to make without the ap- proval of the stockholders, before a stockholders' meeting for ratification — not by the unanimous vote of the stockholders, but by a majority. It requires but little observation to know that the trend of railroad de- velopment has been constantly from isolated fragments of railway lines towards consolidation into grand trunk lines, and that in proportion as this has been successfully accom- plished has the great usefulness of this branch of the common carriers of traffic and passengers of this coun- try been increased. It therefore would seem to follow, as a natural and logical conclusion, that it is much to the interest of small and fragmentary lines that they should be enabled with the utmost facility, consistent with the preservation of the rights of the owners, to enter into contracts of consolidation or sale with other railroads, whereby they may become parts of great systems of interstate traffic, rather than re- main small, isolated lines. To require the unanimous vote of all the stock of a railroad to unite with another railroad, or to sell its franchises out to another railroad, if that be desir- able, is to render this method of developing the interests of the corpora- tion impracticable, as it simply pro- vides an opportunity for a small num- ber of the stockholders to entirely block the interest of the great ma- jority of the stock for their own selfish purposes. It needs but little under- standing of human nature to believe that the opportunist will be ready whenever the opportunity is pre- sented." 'See ante, § 112: "Sale of Entire Corporate Property by Directors." In Martin v. Continental Passenger 295 §151 INTERCOBPORATB RELATIONS [part II § 150. Acquiescence of Stockholders. — The assent of the stockholders of a railroad compauy to the purchase or sale of a railroad should, regularly, be expressed in the manner pro- vided in the statute authorizing the sale; and, in the absence of other statutory provision, by their votes at stockholders' meeting. Acquiescence, however, is an implied sanction of a sale.^ Stockholders who stand by and take no action until the rights of third persons intervene lose their right to ques- tion sales of railroads made without their approval.^ Stock- holders who participate in the transaction cannot, after its consummation, question its validity, although their formal votes were lacking.^ § 151. Rights and Remedies of Dissenting Stockholders. — It is well settled that equity will restrain, at the instance of a single stockholder, a majority of the stockholders of a corpora- tion, acting in its name, from entering into ultra vires or un- lawful contracts. Minority stockholders acting with due diU- gence may sue for an injunction against the unauthorized sale R. Co., 14 Phila. (Pa.) 10 (1880), the Court said : "Boards of managers are simply the agents of the corporation which, like natural persons, is bound only by the acts and contracts of its agents, done within the scope of their authority. The business of the direct- ors of a. railway is to manage the business intrusted to their charge. To give it away or sell it, or in any way put it out of their control, and to delegate to others the power which has been intrusted to them, is clearly in excess of their authority." ^ Boston, etc. R. Co. v. New York, etc. R. Co., 13 R. I. 260 (1881). See also ante, § 45: "Assent of Stock- holders, how manifested. Acquiescence Estoppel." Also ante, § 116: " De- fences to Stockholders^ Actions. Estop- pel." 2 Dimpfel v. Ohio, etc. R. Co., 9 Biss. (U. S.) 127 (1879), (affirmed 110 U. S. 209 (1884)): "In the second place, even if the right did not clearly exist by virtue of the laws of Illinois, after the lapse of so long a time, and 296 after so many rights and equities have been acquired by different par- ties imder the action of the railway company, it is not competent for the plaintiff, or the other stockholders of the Ohio and Mississippi Railway Company, any more than for the colnpany itself to question the au- thority under which the contract and mortgage were executed. The only power that could do that was the State itself." 'Where the charter of a, railroad company authorized it to purchasie railroads which might form a con- tinuation of its main line ; and where such purchase had been fully exe- cuted, and where its validity had never been questioned in a direct proceeding, it was held the parties to such purchase — those who ac- quiesced in it, and those who failed in due time, by some proper pro- ceeding, to question its validity — were estopped to raise any question. Hervey v. Illinois Midland Ry. Co., 28 Fed. 169 (1884). CHAP. XIIl] CONTRACT OP SALE AND ITS EXECUTION § 151 of a railroad before its consummation, and for the cancella- tion of the contract after its execution.^ A distinction has been drawn between the right of a dissen- tient stockholder to restrain an act ultra vires the corporation and an act ultra vires the majority. Thus, it has been declared that while a stockholder might have an unauthorized sale of a railroad declared illegal no relief could be granted where the prescribed majority sanctioned the sale, although made for stock in the purchasing corporation. Judge Jackson, in Farmers Loan, etc. Co. v. Toledo, etc. R. Co.^ said: " The sale, being sanctioned by the requisite majority of stockholders, and made by the corporation, as provided and authorized by the general law of the State under which the company was organized, invested the purchasing company with as perfect a title to the property and franchises as was vested in or held by the vendor corporation, and operated to make the purchas- ing corporation the legal successor of the vendor corporation. It would be paradoxical to hold that such a sale was valid as to the corporation, and invalid as to one of its stockholders who objected thereto, and whose assent was not necessary to give validity to the transaction. It would be equally incon- sistent to hold that such a sale, made under and in pursuance of statutory authority in force at the organization of the cor- poration and at the date of the transaction, should be treated as only binding upon the corporation and the stockholders assenting thereto, and invalid as to a dissenting shareholder whose consent was not a prerequisite to its validity." The distinction is not well taken. The opinion assumes too much.' A sale authorized by the requisite majority of the 1 See ante, § 46 : "Rights and Reme- etc. R. Co., 54 Fed. 767 (1893). See dies of Dissenting Stockholders" (con- also Young v. Toledo, etc. R. Co., 76 soUdation); arUe, § 114: "Remedies Mich. 485 (1889), (43 N. W. Rep. 632) of Dissenting Stockholders " (sales of — another case arising out of the property). same transactions. For extended examination of the ' In the case referred to (Farmers rights and remedies of dissenting Loan, etc. Co. v. Toledo, etc. R. Co., stockholders in the case of the sale of 54 Fed. 775 (1893)), Judge Taft said : street railway properties, see Tanner "Under the statute of Michigan per- il. Lindell R. Co., 180 Mo. 1 (1904), mitting the sale of an uncomplfted (79 S. W. Rep. 155). railroad by its stockholders to another * Farmers Loan, etc. Co. v. Toledo, road, the words of which are quoted 297 § 151 INTBRCOKPOKATB RELATIONS [part II stockholders, according to the statute, does bind the minor- ity. But an exchange of property for stock is not a sale. The prescribed majority have no more power, under a statute authorizing a sale, to make an exchange, than they have to make a donation. A transfer of property for stock may be ultra vires of the corporation. It is ultra vires of the majority, and may be restrained at the suit of any stockholder.' in the foregoing opinion, there Ih no power in two-thirds in interest of the Htockholders to bind one-third to a sale for any consideration but money or money credit. We have already held in this court, in the case of Perin v. Megibben, 53 Fed. Ilep. 80 (1892), that a statutory power to hi^I) does not include a power to cxriiariK'' for shares of stock in a corporation. Nor do I understand the Supreme; (Viiirt of Michigan to liold, in the cuMf! of Young V. Railroad Co., 70 M\<-h. 485 (1889), (43 N. W. Rop. 032), 1h:d it is within the power of two- Ihirds of the stockholders, under this Htatiitn, to bind a minority to a sale for anything but money." .Judge Hammond said (p. 778) : " 1 do not think that any corporation can go out of business, and sell its proper- ties and franchisfiH in entirety (out- side of sales made in the ordinary rnurse of business), and bind a mi- nority of the stockholders, by the will of the majority, to such a sale, upon any principle of the public wel- f.tre or like consideration; certairdy, not to compel the minority, on sucJi a sale, to take chips and whf^tstoncs for 1 lif'ir shares of stofk, — that is to say, anything elsr; than money," The decision in the case, however, finally turned upon other grounds. ' .Judge Taft also said, following the extract from his opinion in tlie last note : "There is no doubt whatever of the proposition urged in tlie fore- going opinion, — that a minority stockholder is bound by the acts of the majority so long as that majority acts within its cliarter powers, — ii*tr is there any doubt that neither the majority nor the entire body of stock- holders of the corporation can do u f;orporat() act wiiitth its charter for- bids ; but then' arc corporate acts wliich are not within the charter power of the majority of tlie stock- holders, and yet whiiOi are not be- yond (lie pow(;r of tli(! corporation. Thiire are aels of the corporation, whiih the Stale, as the grantor of the corporate franchisf;, has no intirrest to invalidate, providerl all the stock- holders consent thf;reto. There are acts which, if done by a majority, only infringe upon the charter righls of the minority. In this case the power to HcM for money was conferred by statute upon two-thirds of the stockholders of the uncompleted road. The sale (^ould not he for stock in an- other company, against the objection of the minority stockholders. No such power was vested by th(! statute; in the tw^i-thirds majority. If, how- ever, the minority cf»nsented, the State, the grantor of the corprjralt^ franchise, lijid no interest in object- ing to the transaction as beyond the corporati; power of tlif; cf>ni()ariy. " Hee also (aUe, § 114; " Remt'.fiirH of DisHenting Hlockholders in Cane of In- valid and Unfair Salea.". 298 CHAP. XIV] EFFECT OP EXECUTION OF CONTRACT OF SALE § 152 CHAPTER XIV EFFECT OF EXECUTION OF CONTRACT OF SALE I. Rights and Liabilities of Vendor Corporation § 152. Sale of Railroad and Franchises does not terminate Corporate Exist- ence. § 153. Bights of Vendor Corporation after Authorized Sale. § 154. Liabilities of Vendor Corporation in Case of Authorized Sale. § 155. Liabilities of Vendor Corporation in Case of Unauthorized Sale. § 156. Quo Warranto and other Proceedings against Vendor Corporation. II. Rights and Liabilities of Vendee Corporation § 157. Essential Franchises pass upon Sale of Railroad. § 158. Rights and Powers of Vendee Corporation — In General. § 159. Right of Eminent Domain. § 160. Exemptions from Taxation. § 161. Right to fix Rates of Fare. Chartered Rates. § 162. Obhgations of Vendee Corporation in Respect of Public Duties of Ven- dor. § 163. Vendee Corporation not liable upon Obligations of Vendor unless assiuned or imposed by Law. § 164. Status of Foreign Vendee Corporation. I. Rights and Liabilities of Vendor Corporation § 152. Sale of Railroad and Franchises does not terminate Corporate Existence. — The sale of all the property of a cor- poration does not work its dissolution.^ The sale by a rail- road company of its road and franchises, while disabling it from the performance of the functions for which it was cre- ated, does not terminate its corporate existence.^ Its dissolu- ' See ante, § 117: "Effect of Sale Delaware: Higgins v. Downward, of Entire Corporate Property. " 8 Houst. 227 (1888), (32 Atl. Rep. 133, 2 United States: United States v. 40 Am. St. Rep. 141). Little Miami, etc. R. Co., 1 Fed. 700 Illinois: Brufett v. Great Western (1880) ; Swan-Land, etc. Co. v. Frank, R. Co., 25 III. 353 (1861) ; Reichwald 39 Fed. 456 (1889). v. Commercial Hotel Co., 106 111. 439 Alabama: Davis v. Memphis, etc. (1883). R. Co., 87 Ala. 633 (1888), (6 So. Rep. Indiana: DeCamp ». Alward, 52 140). Ind. 468 (1876). Connecticut : Saugutuck Bridge Co. Iowa : Muscatine Western R. Co. V. Town of Westport, 39 Conn. 337 v. Horton, 38 Iowa, 33 (1873). (1872). Massachusetts : Richardson v. Sib- 299 §153 INTEECOEPORATB RELATIONS [part II tion can be accomplished only by the surrender, forfeiture or repeal of its charter. A sale, however, in pursuance of a statute authorizing a railroad company to sell its franchises, including the franchise to be a corporation, is, in effect, a surrender of the charter.' Statutes may also expressly provide that a sale of all its prop- erty shall constitute a dissolution of a corporation.^ But, under such a statute, an illegal or fraudulent sale will not effect a dissolution.^ § 153. Rights of Vendor Corporation after Authorized Sale. — As the sale of the railroad and franchises of a railroad com- pany does not ipso facto terminate its corporate existence, the corporation necessarily retains the formal powers essential to a nominal existence, to the winding up of its affairs and to the performance of its continuing public duties. It also retains any property and rights not included in the deed of conveyance, or of which the statute does not authorize the sale. Thus, for example, it has been held that power to sell a railroad does not authorize the sale of subscriptions to the stock of the vendor company.* ley, 11 Allen (Mass.), 67 (1865), (87 Am. Dec. 700). Missouri: Heath v. Missouri, etc. R. Co., 83 Mo. 617 (1884). New Jersey: Sewell v. East Cape May Beach Co., 50 N. J. Eq. 717 (1892), (25 Atl. Rep. 929). New York: Troy, etc. R. Co. v. Kerr, 17 Barb. 581 (1854). Texas: Gulf, etc. R. Co. v. Newell, 73 Tex. 334 (1889), (11 S. W. Rep. 342, 15 Am. St. Rep. 788). ' Snell V. City of Chicago, 133 lU. 413 (1890), (24 N. E. Rep. 532, 8 L. R. A. 858) ; Rogersville, etc. R. Co. v. Kyle, 9 Lea (Tenn.), 691 (1882); Reynolds u. Cridge, 11 Pa. Co.Ct. Rep. 306 (1892). ^ Under Pennsylvania statute of 1901 (Laws 1901, p. 53, Act No. 20), upon filing copy of agreement in office of secretary of the Commonwealth, cor- porate existence of vendor terminates. ' White Mountains R. Co. v. White 300 Mountains R. Co., 50 N. H. 50 (1870). * In Railroad Co. v. Hinsdale, 45 Ohio St. 556 (1888), (15 N. E. Rep. 665), where a person subscribed for stock in a railroad company — sub- scription payable when road was com- pleted — and the company sold its uncompleted road to another corpora- tion which completed the construc- tion, it was held that the Ohio statutes (Bates' Anno. Stat. 3300 and 3409) authorizing sales of railroads did not confer authority to sell stock sub- scriptions; that no ownership in the subscription passed to the purchaser of the railroad, and that such pur- chaser could not fulfil the condition precedent to the payment of the sub- scription by completing the road. Compare Armstrong v. Karschner, 47 Ohio St. 276 (1890), (24 N. E. Rep. 897), where it was held that a statute authorizing the sale of a railroad, in CHAP. XIV] EFFECT OF EXECUTION OF CONTRACT OF SALE § 155 § 154. Liabilities of Vendor Corporation in Case of Authorized Sale. — It has been held that the obligations of a railroad company to the public can only be discharged by a sale of its franchises to another company under a legislative enactment authorizing the sale and exempting the vendor from liability: that legislative consent is not sufficient — a legislative release is necessary. Upon this doctrine, the Supreme Court of Ne- braska held a vendor corporation, after an authorized sale, liable for the torts of the vendee in the operation of the road.' Public policy is declared to be the basis of the doctrine, and it may well be that, unless exempted, a vendor corporation remains liable upon its primary obligations to the State. But when the legislature has authorized a sale, and thereby mani- fested the policy of the State that the railroad should be owned and operated by the vendee, neither principle nor policy re- quires that the vendor should be held responsible for the opera- tion of the road of another by persons with whom it has no connection and over whom it can exercise no control.^ § 155. Liabilities of Vendor Corporation in Case of Unauthor- ized Sale. — Whatever question there may be as to the lia- bility of a vendor corporation in case of an authorized sale, it is indisputable that it remains liable for the torts of the vendee in case of an unauthorized sale. A railroad company cannot absolve itself from continued force at the time of a stock subscrip- End, etc. R. Co. v. Dameron, 4 Mo. tion, becomes a part of the contract App. 414 (1877). of subscription, and that a sale by ' Cholette v. Omaha, etc. R. Co., 26 the company of a part of its road does Neb. 159 (1889), (41 N. W. Rep. 1106, not release a subscriber. Compare 4 L. R. A. 135). See also Acker v. also Hays v. Ottawa, etc. R. Co., 61 Alexandria, etc. R. Co., 84 Va. 648 111. 422 (1871). (1888), (5 S. E. Rep. 688) ; Naglee v. A sale by a corporation of its Alexandria, etc. R. Co., 83 Va. 707 property and franchises does not carry (1887), (3 S. E. Rep. 369, 5 Am. St. with it stock in its treasury which it Rep. 308). has bought in and has not re-issued. ^ Pennison v. Chicago, etc. R. Co., Tulare Irr. Dist. v. Kaweah Canal, etc. 93 Wis. 344 (1896), (67 N. W. Rep. Co. (1896, Cal.), 44 Pac. Rep. 662. 702). One railroad corporation, having For full consideration of this ques- merely bought the road-bed of an- tion with reference to the liability of other, with intent to complete the a Zessorcorporation see posi, oh. XIX. : road, has no right to purchase the *' Rights and Liabilities of Lessor Cor- vendor's stock subscriptions and en- poration." force them against subscribers. West 301 § 157 INTEBCORPORATE RELATIONS [PART II liability for negligence by transferring its franchises to another company in the absence of a statute sanctioning the sale.' § 156. Quo Warranto and Other Proceedings against Vendor Corporation. — An attempt by a railroad company to sell its railroad and franchises may furnish ground for the forfeiture of its charter in quo warranto proceedings.' Especially is this true where a corporation, in transferring its property and franchises, acts not only without authority but in direct violation of a constitutional provision against a sale to a competing company, and persists in the novruser of its franchises.' Of the power of the State to reach a foreign corporation — party to such an unlawful contract — the Supreme Court of Texas, in Ea^t Line, etc. R. Co. v. State,* said: " The courts of this State would have no power to declare a forfeiture of the charter of that corporation granted by the laws of the State where it was created, but would have power to withdraw the franchise here granted, whenever the facts justified it, and, by injunction or otherwise, to prevent its carrying on business in this State in violation of its laws. They would also have power to place property controlled by it and situated in this State in the hands of a receiver, and to adjust the rights of such persons as might be shown to have valid claims against it, or even to avoid a valid incorporation in this State by those interested in property acquired by it in an unlawful manner." II. Rights and Liabilities of Vendee Corporation § 157. Essential Franchises pass upon Sale of Railroad. — A grant of authority to sell a railroad, without expressly includ- ing its franchises, embraces by implication the right to transfer those franchises which are essential to the maintenance and ' East Line, etc. R. Co. v. Rushing, forfeiture of its charter see State v. 69 Tex. 306 (1887), (6 S. W. Rep. 834). Pawtuxet Turnpike Co., 8 R. l'. .521 See also post, ch. XIX. . "Rights and (1867), (94 Am. Dec. 123). Liabilities of Lessor Corporation." ' East Line, etc. R. Co. v. State, 75 2 State V. Minnesota Central R. Co., Tex. 434 (1889), (12 S. W. Rep. 690). 36 Minn. 246 (1886), (30 N. W. Rep. * East Line, etc. R. Co. v. State, 75 816). That a sale of its road by a Tex. 451 (1889), (12 S. W. Rep. turnpike company is a ground for the 690). 302 CHAP. XIV] EFFECT OF EXECUTION OF CONTRACT OF SALE § 158 operation of the railroad. A sale of a railroad, under statu- tory authority, carries with it the ordinary franchises necessary for the use of the railroad property and without which it would be useless.' § 158. Rights and Powers of Vendee Corporation — In General. — A grant to a railroad company of power to sell its property and franchises, without limitation, authorizes the sale of all its property and franchises,^ except the franchise of corporate existence.^ The vendee corporation, under a sale in pursuance of such authority, may enjoy the property and exercise the franchises as freely as if directly granted to it. Statutes authorizing the sale of a railroad and franchises sometimes define the status of the vendee corporation and designate the rights and franchises acquired by the purchase.* ' United States: -New Orleans, etc. R. Co. V. Delamore, 114 U. S. 501 (1884), (5 Sup. Ct. Rep. 1009); Branch v. Jesup, 106 U. S. 468 (1883), (1 Sup. Ct. Rep. 495). Contra PuUan V. Cincinnati, ett. R. Co., 4 Biss. (U. S.) 35 (1865). Alabama: Meyer v. Johnston, 53 Ala. 237 (1875). Massachusetts : East Boston Freight R. Co. v. Eastern R. Co., 13 AUen, 422 (1866). Pennsylvania: Gloninger v. Pitts- burgh, etc. R. Co., 139 Pa. St. 13 (1891), (21 Atl. Rep. 211). Texas: Compare Missouri Pac. R. Co. D. Owens, 1 Te^as App. Civ. Cas. § 385 (1883), Wisconsin: Pierce v. Milwaukee, etc. R. Co., 24 Wis. 551 (1869), (1 Am. Rep. 203). England: County of Gloucester Bank v. Rudry Merthyr, etc. Co., L. R. 1 Ch. 629 (1895). ' Pierce v. Milwaukee, etc. R. Co., 24 Wis. 551 (1869), (1 Arn. Rep. 203). See also Sioux City Terminal R. etc. Co. V. Trust Co. of North America, 82 Fed. 124 (1897) ; Threadgill v. Pum- phrey, 87 Tex. 573 (1895), (30 S. W. Rep. 356). 'See ante, § 132: "Transferability of Franchise of Corporate Exist- ence. " * In Indiana a purchasing company may mortgage franchises acquired and issue new stock and bonds. (Bums' R. S. 1901, § 5215.) In Nebraska the purchasing com- pany is vested with all the property ' and franchises of the vendor, and may receive municipal aid, etc. (Comp. Stat. 1901, § 4018.) Foreign purchas- ing companies have all the powers and rights of domestic railroad companies (lb. § 4024). In Nevada foreign purchasing com- panies may hold and exercise fran- chises to the same extent as if domestic corporations (Sess. Laws 1901, p. 51). In Ohio the purchasing company acquires all the rights, privileges and easements of the vendor (Bates' Anno. Stat. (1787-1902) §§ 3300, 3384 (d), 3409). In Pennsylvania all rights, property and franchises of vendor vest in ac- quiring corporation (Laws 1901, p. 53, Act No. 20). This statute is of limited application. In Utah the purchasing company is vested with all the rights and fran- chises of the vendor and of domestic corporations generally; may extend 303 § 160 INTERCOBPOHATE RELATIONS [pART II § 159. Right of Eminent Domain. — Probably the right of eminent domain would not pass by implication, as an essential franchise, under a transfer which included in terms only a railroad} But when the conveyance, in pursuance of statu- tory authority, embraces a railroad and franchises, the right of eminent domain passes, with other franchises, to the purchasr ing corporation.^ Thus, a purchaser who acquires the prop- erty of a railroad company and " all its contracts, franchises, rights, privileges and immunities," acquires the right of emi- nent domain.' Where, however, a railroad is sold in sections to different purchasers, the right of eminent domain belonging to the vendor corporation is not parcelled out.* A purchasing cor- poration does not succeed to a right of eminent domain of a peculiar nature granted to a vendor corporation by special statute.^ A purchasing corporation does not acquire the right to prosecute condemnation proceedings, pending at the time of the purchase." § 160. Exemptions from Taxation. — An exemption from " taxation is a personal privilege of the corporation to which it is granted. It cannot be transferred, unless the legisla- ture, in authorizing a sale, uses apt words to describe the exemption, as distinguished from other privileges, and its lines ; may lease or piirchase con- etc. Co., 39 La. Ann. 427 (1887), (2 So. necting lines; may issue bonds and Rep. 69, 4 Am. St. Rep. 265). mortgage property, etc. (Laws 1901, In Arkansas (S. & H. Dig. 1894, oh. 26, p. 21, § 4). § 6342), Nevada (Sess. Laws 1901, In Wisconsin the purchasing com- p. 51) and Ohio (Bates'^Anno. Stat, pany takes all the rights, privileges (1787-1902), § 3300), Wyoming (R. S. and immiuiities of the vendor (Stat. 1899, § 3206), it is provided by statute 1888, § 1833, as amended by Laws that a purchasing corporation shall 1899, ch. 191). acquire the right of eminent do- * In Mayor of Worcester v. Nor- main, wich, etc. R. Co., 109 Mass. 103 ' North Carolina, etc. R. Co. v. (1871), it was held that authority to Carolina Central R. Co., 83 N. C. 489 lease a railroad would not confer, by (1880). implication, the right of eminent do- * State v. Morgan, 28 La. Ann. 482 main upon the lessee. Compare New (1876). Orleans, etc. R. Co. v. Delamore, 114 ' Little Rock, etc. R. Co. u. U. S. 501 (1885), (5 Sup. Ct. Rep. McGehee, 41 Ark. 202 (1883). 1009). • Mahoney v. Spring Valley Water ^Lawrence v. Morgan's Loviisiana, Co., 52 Cal. 159 (1877). 304 CHAP. XIV] EFFECT OF EXECUTION OF CONTRACT OF SALE § 160 the legislative intention that it should pass is clearly ap- parent.' In Memphis, etc. R. Co. v. Commissioners^ Mr. Justice Matthews said: " Exemption from taxation must be construed to have been the personal privilege of the very corporation specifically referred to, and to have perished with that, unless the express and clear intention of the law requires the exemp- •tion to pass as a continuing franchise to a successor. This salutary rule of interpretation being founded upon an obvious public policy which regards such exemptions as in derogation of the sovereign authority and of common right, and therefore not to be extended beyond the exact and express requirement of the grants, is construed strictissimi juris." In the application of this rule the words "rights," "fran- chises" and "privileges" have been held not to include an exemption from taxation; ' while the contrary has been held with reference to the word "immunities." * • United States: Yazoo, etc. R. Co. V. Adams, 180 U. S. 22 (1901), (21 Sup. Ct. Rep. 240) ; Phoenix Fire, etc. Ins. Co. V. Tennessee, 161 V. S. 174 (1896), (16 Sup. Ct. Rep. 471); Wil- mington, etc. R. Co. V. Alsbrook, 146 U. S. 279 (1892), (13 Sup. Ct. Rep. 72) ; Picard v. East Tennessee, etc. R. Co., 130 U. S. 637 (1889), (9 Sup. Ct. Rep. 640) ; Chesapeake, etc. R. Co. M. Miller, 114 U. S. 176 (1885), (5 Sup. Ct. Rep. 813) ; Memphis, etc. R. Co. V. Commissioners, 112 U. S. 609 (1884), (5 Sup. Ct. Rep. 299); Raih-oad Co. v. Palmes, 109 U. S. 244 (1883), (3 Sup. Ct. Rep. 193) ; East Tennessee, etc. R. Co. v. Hamblin Co., 102 U. S. 273 (1880) ; Railroad Co. v. Gaines, 97 U. S. 697 (1878) ; Morgan V. Louisiana, 93 U. S. 217 (1876). Arkansas: Arkansas Midland R. Co. ■». Berry, 44 Ark. 17 (1884). Kentucky: Evansville, etc. R. Co. V. Commonwealth, 9 Bush, 438 (1872) ; * Phoenix Ins. Co. v. Tennessee, 161 U. S. 177 (1896), (16 Sup. Ct. Rep. 471) ; Louisville, etc. R. Co. v. Palmes, Commonwealth v. Nashville, etc. R. Co., 93 Ky. 430 (1892), (20 S. W. Rep. 383). Minnesota: Contra, St. Paul, etc. R. Co. V. Parcher, 14 Minn. 297 (1869). Missouri: State v. Chicago, etc. R. Co., 89 Mo. 523 (1886), (14 S. W. Rep. 522). New Jersey: Assessors v. Morris, etc. R. Co., 49 N. J. L. 193 (1886), (7 Atl. Rep. 826). South Carolina: Contra, Hand v. Savannah, etc. R. Co., 17 S. C. 280 (1881). Tennessee: Wilson v. Gaines, 9 Baxt. 546 (1877), {affirmed 103 U. S. 417), (1880). See also ante, § 72 : "Exemptions from Taxation" (consolidation). 2 Memphis, etc. R. Co. v. Commis- Bioners, 112 U. S. 609 (1884), (5 Sup. Ct.jaep. 299). ' The decisions of the Supreme 109 U. S. 252 (1883), (3 Sup. Ct. Rep. 193); Trask v. Maguire, 18 Wall. (U. S.) 391 (1873) ; Nichols v. New 305 §161 INTERCORPORATE RELATIONS [part II § 161. Right to fix Rates of Fare. Chartered Rates. — It has been held that the rates prescribed in the charter of a railroad company for transportation upon its railroad follow the prop- erty when sold, and attach to its operation by a purchasing Court of the United States are irrec- oncilable. In Railroad Co. v. Gaines, 97 U. S. 697 (1878), it was held that an exemp- tion from taxation was not carried by the use of the words "rights, powers and privileges," In Keokuk, etc. R. Co. V. Missouri, 152 U. S. 301 (1894), (14 Sup. Ct. Rep. 592), it was doubted whether, under the name "franchises and privileges," an exemption would pass. In Chesapeake, etc. R. Co. u. Miller, 114 U. S. 176 (1885), (5 Sup. Ct. Rep. 813), it was decided that an exemption did not pass to the pur- chaser by the use of the words "fran- chises, rights and privileges." In Morgan v. Louisiana, 93 U. S. 217 (1876), it was held that the words "franchises, rights and privileges" did not, necessarily, include an exemption from taxation. See also Phoenix, etc. Ins. Co. V. Tennessee, 161 U. S. 182 (1896), (16 Sup. Ct. Rep. 471) ; Wil- mington, etc. R. Co. V. Alsbrook, 146 U. S. 279 (1892), (13 Sup. a. Rep. 72). Also Evansville, etc. R. Co. v. Commonwealth, 9 Bush (Ky.), 438 (1892). On the other hand, in Himi- phrey v. Pegues, 16 Wall. (U. S.) 24 (1872), the Supreme Court held the words, "all the rights, powers and privileges," to include an exemption from taxation. Again in Tennessee v. Whitworth, 117 TJ. S. 139 (1886), (6 Sup. Ct. Rep. 649), it was said that the same words included the right of exemption. Chief Justice Waite, in his opinion, said (p. 146) : "As has already been seen, the word 'privi- lege,' in its ordinary meaning, when used in this connection, includes an exemption from taxation." See also Atlantic, etc. R. Co. ■;;. Allen, 15 Fla. 637 (1876) ; Louisville, etc. R. Co. v.. Gaines, 3 Fed. 266 (1880). While the opinions cannot be recon- ciled the conclusion to be drawn from the later decisions of the Supreme Court of the United States is that there must be other language than the words "rights," "franchises" and "privileges" or other provisions suffi- cient to remove all doubt as to the legislative intention before the trans- fer of an exemption from taxation can take place. Gulf, etc. R. Co. V. Hewes, 183 U. S. 66 (1901), (22 Sup. Ct. Rep. 26). Phoenix Ins. Co. v. Tennessee, 161 U. S. 182 (1896), (16 Sup. Ct. Rep. 471) ; Wilmington, etc. R. Co. v. Als- brook, 146 U. S. 279 (1892), (13 Sup. Ct. Rep. 72) ; Picard v. East Tennessee, etc. R. Co., 130 U. S. 637 (1889), (9 Sup. Ct. Rep. 640). And any question as to the posi- tion of the Supreme Court has now been definitely settled by the very recent decision in Rochester Railway Co. V. aty of Rochester, 205 U. S. 236 (1907), (27 Sup. Ct. Rep. 469), where Mr. Justice Moody said : "We think it now the rule, notwithstand- ing earlier decisions and dicta to the contrary, that a. statute authorizing or directing the grant or transfer of the 'privileges' of a corporation, which enjoys immunity from taxa- tion or regulation, should not be inter- preted as including that immy- nity." Haven, etc. R. Co., 42 Conn. 103 (1875) ; Commonwealth v. Owens- boro, etc. R. Co., 81 Ky. 572 (1884) ; 306 State V. Nashville, etc. R. Co., 12 Lea (Teun.), 583 (1883). CHAP. XIV] EFFECT OF EXECUTION OP CONTRACT OF SALE § 162 company.* Thus in Campbell v. Marietta, etc. R. Co.,^ the Supreme Court of Ohio said: " It must be inferred that the legislature intended the purchasing company to succeed to the powers and privileges of the vending company, and to none other. . . . The intrinsic as well as the market value of such property as a railroad largely depends upon the rates which may be charged for transportation thereon. Now, if the chartered rates follow the property, the contracting parties stand on perfect equality, but if the value, or, in other words, the inducement to contract, depends upon the chartered privi- lege of the purchaser, the equality is not preserved, and espe- cially would different companies with different charters occupy unequal grounds as bidders for and purchasers of such prop- erty." This decision is too broad. It may be that restrictions and limitations upon rates of fare presumptively attach as burdens to railroads when sold; but the converse of the proposition is not true that the chartered rates so follow the property as 'privileges. In the absence of an express statutory direction, the right to fix and determine rates of fare, or to charge a greater rate then permitted by general laws, does not accom- pany a railroad in its transfer to a purchaser.' § 162. Obligations of Vendee Corporation in Respect of Pub- lic Duties of Vendor. — As a general rule, a vendee corporation, in the operation of a purchased railroad, takes the place of the vendor company and must hold and operate the road subject to the conditions attaching to it in the hands of the vendor.' 1 Campbell v. Marietta, etc. R. Co., organized under general laws, and, 23 Ohio St. 168 (1872) ; Peters v. therefore, subject to a statute fixing Railroad Co., 42 Ohio St. 275 (1884), rates of fare. See also Dow v. Beidel- (51 Am. Rep. 814). man, 49 Ark. 325 (1887), (5 S. W. 2 Campbell v. Marietta, etc. R. Co., Rep. 297). 23 Ohio St. 168 (1872). » Daniels v. St. Louis, etc. R. Co., " St. Louis, etc. R. Co. w. Gill, 156 62 Mo. 43 (1876). U.S. 656(1895), (15 Sup. Ct. Rep. 484). Where a street railway company In Norfolk, etc. R. Co. v. Pendle- under its charter was bound to pay ton, 156 U. S. 667 (1895), (15 Sup. only a part of the cost of paving be- Ct. Rep. 484), affirming 86 Va. 1004 tween and alongside its tracks, but (1890), (11 S. E. Rep. 1062), it was did not act under this provision, and held that a right to fix tolls, conferred purchased the franchises of another upon a vendor corporation, could not company which was required to be claimed by a purchasing company assume the entire cost of such pav- 307 163 INTERCORPORATE RELATIONS [part n While a vendor corporation may remain liable upon its public obligations notwithstanding a sale of its railroad, it seems clear that a vendee company, in purchasing and taking over a railroad and franchises, assumes and is bound to per- form the accompanying obligations to the State.' § 163. Vendee Corporation not liable upon Obligations of Vendor unless assumed or imposed by Law. — ■ A railroad com- pany purchasing, in good faith and for value, the railroad and franchises of another company is not liable for the obligations of the latter company which are not liens upon the property.' The reason for the rule and its qualifications are clearly ing, it was held that the purchasing company was bound to act under the provisions of the charter of vendee company in the streets which it was authorized to occupy. Kent V. City of Binghampton, 40 Misc. Rep. (N. Y.) 1 (1903), (81 N. Y. Supp. 198). ^ A railroad company which pur- chases the property and franchises of any other company pursuant to a, Michigan Statute (Act No. 10, Laws 1889), holds subject to all the duties and obligations prescribed by the general railroad laws of the State. Thayer v. Flint, etc. R. Co., 93 Mich. 150 (1892), (53 N. W. Rep. 216). A railroad company in selling its railroad cannot relieve the purchasing company from the performance of the duty imposed by statute to con- struct and maintain proper crossings over streams. Graham v. Chicago, etc. R. Co., 39 Ind. App. 249 (1906) (77 N. E. Rep. 1055). ' Chesapeake, etc. R. Co. v. Griest, 85 Ky. 625 (1887), (4 S. W. Rep. 323) : "If the power to sell is given by the terms of the graiit, the pur- chaser for value holds the property as if it had been an individual trans- action. There is no reason for mak- ing a distinction, and the rule in individual transactions should apply as between corporations when the 308 power to sell and purchase is con- ferred by charter. Wljile a dissolu- tion of a corporation would entitle the creditors to enforce their demands in a court of equity, or where there is a consolidation to follow the as- sets of their debtor in the consoli- dated company, still, where there is a sale of the corporate property, it passes the title as to all, in the ab- sence of some reservation in the char- ter protecting the rights of creditors." Burge V. St. Louis, etc. R. Co., 100 Mo. App. 460 (1903), (74 S. W. Rep. 7): "Under the section making valid the purchase by one railroad company of the line and property of another railroad company, no responsibility is imposed on the pur- chasing company for the obligations of its vendor. It is manifest that no statutory liability resulted from the mere purchase by the defendant, and, in the absence of averment and proof that it acquired and succeeded to the line and property of the selling company otherwise than as a pur- chaser in good faith, and for a valu- able consideration, the transaction in no wise differs in legal effect from the purchase of any other property, realty or personalty, and no duty is devolved by law upon defendant to respond to the liabilities, whether in contract or in tort, of the selling corporation. A mere purchase in CHAP. XIV] EFFECT OF EXECUTION OF CONTRACT OF SALE § 163 stated by the Supreme Court of Arkansas •in Sappington v. Ldttle Rock, etc. R. Co.: ' " It would not, as a matter of law, by virtue of its purchase of the property and franchises of the consolidated company, become bound to fulfil its personal obligations, as distinct from those which were liens upon the property. If the purchasing company knew of any equities against the other in favor of third persons, and bought subject to them, it might make a different case, and, perhaps, afford ground for some appropriate relief in chancery. But the obli- gation is not transferred ipso facto on the purchase. Other- wise no sale could ever be made of a railroad, from fear of coming into a damnosa haereditas." But when a purchasing corporation, as a part of the con- sideration for the transfer, assumes the obligations of the vendor company, it is, manifestly, liable for all obligations whether founded in contract or tort.^ It has been held, how- good faith for value imposes no such obligation." See also: United States : Rice v. Norfolk, etc. R. Co. 153 Fed. 497 (1907). Arkansas: Sappington v. Little Rock, etc. R. Co., 37 Ark. 23 (1881). District of Columbia: Capital Traction Co. v. Offut, 17 App. D. C. 292 (1900). Georgia: Southern R. Co. v. Puckett, 121 Ga. 322 (1904), (48 S. E. Rep. 968) ; Hawkins v. Central of Georgia R. Co., 119 Ga. 159 (1903) (46 S. E. Rep. 82). Illinois: Sartison v, Baltimore, etc. R. Co., 103 111. App. 507 (1902), Compare Chicago, etc. R. Co. v, Chi- cago, etc. Coal Co., 79 111. 121 (1875). Kansas: Hukle v. Atchison, etc. R. Co., 71 Kan. 251 (1905), (80 Pac. Rep. 603). Missouri: Hagemann v. Southern El. R. Co., 202 Mo. 249 (1907), (100 S. W. Rep. 1081); Lawson v. lUinois Southern R. Co., 116 Mo. App. 690 (1906), (94 S. W. Rep. 807) ; Porter 0. Illinois Southern R. Co., 116 Mo. App. 526 (1906), (92 S. W. Rep. 744) ; Kann v. Illinois Southern R. Co., 114 Mo. App. 162 (1905) (89 S. W. Rep. 346). South Carolina : Hammond v. Port Royal, etc. R. Co., 15 S. C. 10 (1881). Texas: Texas Central R. Co. v. Lyons (Tex. Civ. App. 1896), (34 S. W. Rep. 362). See also ante, § 123: "Liability of Purchasing Corporation for Debts of Vendor Company." ' Sappington v. Little Rock, etc. R. Co., 37 Ark. 27 (1881). ' Chesapeake, etc. R. Co. v. Griest, 85 Ky. 619 (1887), (4 S. W. Rep. 323). See also Union Trust Co. v. Illinois Mid. R. Co., 117 U. S. 434 (1886), (6 Sup. Ct. Rep. 809); Her- vey V. Illinois Mid. R. Co., 28 Fed. 169 (1884). Where an insolvent railroad com- pany sold its railroad to another com- pany and furnished a guaranty that the property sold should be free from incumbrances, and that all claims against the vendor company should be discharged and the purchasing company held harmless therefrom, it was held that the guaranty was 309 163 INTERCORPORATE RELATIONS [part II ever, that before «uch a purchaser can be held liable for a tort committed by the vendor company in the operation of the road before the sale, the claim must be reduced to judgment in an action against the vendor.^ A provision in the charter of a railroad company authoriz- ing it to purchase the railroad of another company and stipu- personal to the purchasing company and was not enforceable in favor of the creditors of the vendor company. Randall v. Detroit, etc. R. Co., 134 Mich. 493 (1903), (96 N. W. Rep. 567). Where the controlling stockholder of a corporation purchased a large amount of its stock and agreed with the remaining stockholders to give them for their shares stock in another corporation upon the conveyance thereto of the property and franchises of the former corporation, it was held that the latter corporation became responsible for the debts of the former and could not avoid liability upon the ground that the former was insolvent at the time of the sale. Camden Interstate R. Co. v. Lee, (Ky. 1905), (84 S. W. Rep. 332). A railroad company purchasing the railroad of another company without assuming its debts or obliga- tions is not bound to honor a per- petual pass given by the vendor company in consideration of a grant of a right of way. Neither does a covenant to furnish such a pass run with the land. Dickey -v. Railway Co., 122 Mo. 223 (1894), (26 S. W. Rep. 685). ^ Where the purchasing corpora- tion undertook to pay " all current indebtedness" incurred by the vendor in the operation, of its railroad, it was held that, even if the contract could be construed to render the pur- chaser liable for a tort committed by the vendor in the operation of its road, the claim must first be reduced to judgment in an action against the vendor. Chesapeake, etc. R. Co. 310 V. Griest, 85 Ky. 619 (1887), (4 S. W. Rep. 323). Where a railroad company took over the property of another com- pany subject to the payment of its indebtedness, it was held that as a claim for a tort could not be enforced against the purchaser until judgment therefor had been rendered against the vendor, the statute of limitations would only begin to run upon the rendition of such judgment. Louisville, etc. R. Co. v. Biddell, 112 Ky. 494 (1902), (66 S. W. Rep. 34). Under a statute authorizing the incorporation of railroad companies for the purpose of acquiring railroads authorized to be sold, and providing that, in case of purchase, the prop- erty should pass subject to all claims for damages, and also providing that the purchasing company might be made a party to pending suits, and that in case a judgment had been rendered against the vendor company execution might be levied against the property in the hands of the vendee, it was held: (1) That a judgment for a tort against the vendee corporation was binding upon the vendor although it had not been made a party to the suit; (2) That as the claim could not have been enforced against the pur- chasing company until judgment had been rendered against the vendor, the statute of limitations did not be- gin to run in favor of the purchaser until after judgment. Missouri, etc. R. Co. v. Warner, 30 Tex. Civ. App. 280 (1902), (70 S. W. Rep. 365). CHAP. XIV] EFFECT OF EXECUTION OF CONTRACT OF SALE § 164 lating that the sale shall in no way affect the rights of the latter's creditors, protects unsecured creditors.' The word " indebtedness," as used in a statute providing that a pur- chasing railroad company shall assume the indebtedness of its vendor, embraces all debts and demands — claims founded both upon tort and contract.^ § 164. Status of Foreign Vendee Corporation. — The legisla- ture, in granting to a foreign corporation power to purchase a railroad and franchises within the State, may describe the terms and conditions upon which the purchase may be made and define the status, within the State, of the purchasing cor- poration.' And, in Georgia, it has been held that where per- mission to a foreign corporation to purchase a domestic rail- road is made the subject of an original and direct grant by the legislature, the purchasing corporation, upon the purchase, " becomes eo instanti the offspring of the legislative will of the State." ^ ' Montgomery, etc. R. Co. v. Branch, 59 Ala. 139 (1877). ' Chicago, etc. R. Co. •». Limd- Btrom, 16 Neb. 254 (1884), (20 N. W. Rep. 198, 49 Am. Rep. 718). Where a railroad comipany ac- quired the property of another rail- road company subject to its bonded indebtedness and "all other indebt- edness," it was held that the term "indebtedness" should be broadly construed as including claims for torts, as well as contractual liabilities. Louisville, etc. R. Co. v. Biddell, 112 Ky. 494 (1902), (66 S. W. Rep. 34). The following statutes provide, in substance, that tlie sale of a railroad as therein authorized shall riot affect the rights of creditors: Alabama, Code 1896, § 1169 (as amended in 1899) ; Arizona, R. S. 1901, par. 864, § 1; Arkansas, S. & H. Dig. 1894, § 6188; California, Pomeroy's Code 1901, § 494; Michigan, Comp. Laws 1897, § 6328; Nebraska, Comp. Stat. 1901, §§ 1769, 4020, 4024, 4026; New Jersey, Laws 1900, ch. 46, p. 70; Ohio, Bates' Anno. Stat. (1787-1902), § 3300; Wisconsin, Stat. 1898, § 1833 (as amended in 1899). ' State V. Chicago, etc. R. Co., 89 Mo. 523 (1886), (14 S. W. Rep. 522). * Angier v. East Tennessee, etc. R. Co., 74 Ga. 640 (1885). The Court said (p. 641): "The truth is to be ascertained whether the State in- tended merely to license a foreigner to exercise franchises and buy a charter she granted to another with- out assuming all the liabilities which the charter it bought required, or did she intend it to be a domestic corporation and under all the obliga- tions of corporate citizenship? It is a question of intention; and it can- not be that she meant to make any such contract, with but one side to it, with anybody, natural or artificial, that might buy the charter she had granted. It must be that she in- tended, and expressed the intention in plain words, to substitute the pur- chaser for the entitys he allowed to be purchased and to make the purchaser subject to her control within her own borders as fully as the seller of the charter had been before the sale." 311 § 165 INTEECORPORATE RELATIONS [PART III PART III CORPORATE LEASES Article I CHAPTER XV LEASES OP CORPORATE PROPERTY AND FRANCHISES I. Leases of Property of Private Corporations § 165. Power to lease and take a Lease generally. § 166. Lease of Entire Property of Prosperous Corporation. § 167. Lease of Entire Property of Losing Corporation. § 168. Voidable Leases. § 169. Remedies of Objecting Stockholders. II. Leases of Property and Franchises of Qtuisi-public Corporations § 170. Distinction between Leases of Private and Qwost-public Corporations. § 171. Leases of Indispensable Property of (2«o«i-public Corporation. § 172. Leases of Surplus Property. § 173. Leases of Franchises. § 174. Railroad Leases typical of Leases of Quasi-public Corporations. I. Leases of Property of Private Corporations § 165. Power to lease and take a Lease generally. — Every corporation, as an incident to its existence, has power to ac- quire and dispose of property.' The greater power to sell and purchase includes the lesser power to lease and take a lease.^ 1 See ante, § 108: "Power to pur- Ct. 97 (1885), that authority granted chase and sell generally." to a corporation to sell real estate ' The decision in Metropolitan not required for its use did not au- Concert Co. v. Abbey, 52 N. Y. Super. thorize a lease thereof for a term of 312 CHAP. XV] LEASES OP PROPERTY AND FRANCHISES § 165 A corporation has implied power to lease any portion of its property not required for the purposes of its business; ' and may take a lease of property for the purpose of promoting its legitimate interests,^ but not for a purpose entirely foreign thereto.' years cannot be justified upon prin- ciple. In State v. Now Orleans Ware- house Co., 109 La. 69 (1902) (33 So. Rep. 81) the Court said: "This corporation had the right to sell the property. We think, under the cir- cumstances, that the power to sell carries with it the power to lease." ' Indiana : Phillips v. Aurora Lodge, 87 Ind. 505 (1882). Illinois: Keeley Brewing Co. v. Mason, 116 111. App. 603 (1904). Maaaachuaetta: Nye v. Storer, 168 Mass. 53 (1897), (46 N. E. Rep. 402). In this case it was held that a corpora- tion authorized by its charter to hold property might lease it so as to pro- duce an income, for purposes entirely different from its own objects of in- corporation. Miaaouri: Gillilandr. Chicago, etc., R. Co., 19 Mo. App. 411 (1886). New York; Denike v. New York, etc. Cement Co., 80 N. Y. 599 (1880) ; Smith u. Berndt, 1 N. Y. Supp. 108 (1888). Pennsylvania; Ardesco Oil Co. v. North American Oil, etc. Co., 66 Pa. St. 375 (1870). Tenneaaee; Coal Creek, etc. Co. v. Tennessee Coal, etc. Co., 106 Tenn. 651 (1901), (62 S. W. Rep. 162). England ; Featherstonhaugh v, Lee Moor Porcelain Clay Co., L. R. 1 Eq. 318 (1865); Simpson v. West- minster, etc. Hotel Co., 8 H. L. Cas. 712 (1860). ' Occum Co. V. A. & W. Sprague Mfg. Co., 34 Conn. 529 (1868). In this case it was held that a corpora- tion, chartered for a specific purpose, had no power to take a lease Power to sell land includes power to lease with an option of purchase. Re Female Orphan Asylum, 17 L. T. (N. s.) 59 (1867). If a corporation exceed its powers in the purchase of property it may nevertheless lease it and recover against a third person on a guaranty of the rent. Nantasket Beach S. S. Co. V. Shea, 182 Mass. 147 (1902), (66 N. E. Rep. 57). A lease of the real estate used by a corporation to carry on its business does not constitute an abandonment of the purposes for which it was created. Starke v. J. M. Guffey Petroleum Co., 98 Tex. 542 (1905), (86 S. W. Rep. 1). ^Abby V. Billups, 35 Miss. 618 (1858), (72 Am. Dec. 143); Crawford V. Longstreet, 43 N. J. L. 325 (1881). In .Jacksonville, etc. R. Co. v. Hooper, 160 U. S. 514 (1896), (16 Sup. Ct. Rep. 379), it was held that a railroad company might lease and maintain a hotel at its terminus. The Court said (p. 523); "Courts may be per- mitted, where there is no legislative prohibition sliown, to put a favorable construction upon such exercise of power by a railroad company as is suitable to promote the success of the company, within its chartered powers, and to contribute to the comfort of those who travel tliereon. To lease and maintain a summer hotel at the seaside terminus of a property not needed for that purpose, with the intention and for the object of harassing another party by the >ise, under the forms of law, of the supposed rights thus obtained. 313 § 106 INTEECOEPORATE RELATIONS [part III § 166. Lease of Entire Property of Prosperous Corporation. — While a lease of a portion of the property of a corporation — not impairing its capacity to do business — may be authorized by its directors or a majority of its stockholders, they have no authority to lease the entire property and business of the cor- poration. A lease by a prosperous corporation of all its prop- erty constitutes such a departure from the purpose for which it was organized that, in the absence of express statutory authority, it can be authorized only by the unanimous consent of its stockholders.^ railroad might, obviously, increase the business of the company and the comfort of its passengers, and be within the provisions of the statute of Florida above cited, whereby a railroad company is authorized 'to sell, lease, or buy any land or real estate necessary for its use,' and to 'erect and maintain all convenient buildings . . . for the accommoda- tion and use of their passengers.' " A foreign corporation has power to take a lease of property necessary for the transaction of its business. Northern Transportation Co. v. Chi- cago, 7 Biss. (U. S.) 45 (1874), affirmed 99 V. S. 635 (1878). ' In Cass V. Manchester, etc. Co., 9 Fed. 642 (1881), Judge McKennan said: "The change proposed here is not organic, it is true, but it is thor- ough and fundamental, as it affects the administration of the company's affairs, ' It involves a withdrawal, from the control and management of the stockholders, of the entire property of the corporation for a period of at least five years; it will preclude, for a like period, the exercise annually by the stockholders of their judgment as to the particular char- acter and method of conducting the business affairs of the corporation." In Small v. Minneapolis, etc. Co., 45 Minn. 267 (1891), (47 N. W. Rep. 797), the Court said: "We need not inquire how far, or under what cir- cumstances, considerations of public 314 policy and of the general interests of the State may aSect the right of a corporation to discontinue the busi- ness for which it was created, and to surrender to another corporation its property, and the conduct of such business. We do decide that such a surrender of the property, and, so far as possible, of the functions of a corporation, in order that, while it is still to continue in existence, its business can be carried on by another corporation, to which' such transfer is made, would violate the rights of a non-assenting stockholder arising from a contract Implied, if not expressed, in the creation of such an organiza- tion, and he would be entitled to have such acts restrained by injunc- tion." A manufacturing corporation made a lease of its plant and all its property to its president for a tenn of two and one-half years and it was hdii that the lease was void in that it suspended the business of the corporation for more than a year, and that it amounted to a surrender of the char- ter of the corporation, under a stat- ute providing that a corporation, suspending its ordinary business for more than a year, should be deemed to have surrendered its charter. Conro V. Port Henry Iron Co., 12 Barb. (N. Y.) 27 (1851). See also Copeland v. Citizens Gaslight Co., 61 Barb. (N. Y.) 60 (1871). Where a, solvent corporation has xv] LEASES OF PROPERTY AND FRANCHISES 166 This limitation upon the power of the majority is entirely apart from any public duty the corporation may owe. It is founded upon the principle that every stockholder in a going concern has a right to insist that its affairs be administered by its own officers. He is entitled to participate in dictating the poUcy of the company and to receive a proportion of the no express power to lease all its property, and it appears that in ad- dition to its tangible property a large part of the subscriptions to its capital stock are unpaid, a lease of its entire property upon the ground that it is impossible to obtain capital to carry on the business, by vote of a majority of the stockholders, will be set aside at the suit of a, dissenting stockholder. Parsons v. Tacoma Smelt, etc. Co., 25 Wash. 492 (1901), (65 Pac. Rep. 765). It has been held, however, that when a corporation is expressly authorized by its charter to lease its property it may lease its entire property, although it is thereby disabled from contintiing business. Gubernator v. City of New Orleans, 20 La. Ann. 106 (1868). In this case the Court said (p. 107): "The power to lease, granted by the charter, is unlimited and unrestricted; no dis- tinction is made whether or not it be for the whole or a part of the property. How can we discriminate and distin- guish when the law does not? Ubi lex non distiTiguit, nee nos distinguere de^emus. Were we to attempt to draw a line of restriction and limita- tion, where would we trace it? It would be an arbitrary exercise of power on our part, reprobated by law." And in Starke v. J. M. Gaffey Petroleum Co., 98 Tex. 542 (1905), (86 S. W. Rep. 1, 4), it was said: "There is some conflict of authority upon the power of a private corporar- tion, at common law, to lease for a term of years all of the property used in the transaction of its business. . . . These cases are based upon the broad proposition, that the power to lease does not exist in a private corporation, and therefore a lease made by such corporation is void, and amounts to an abandonment of the purposes for which it was in- corporated. . . The cases which hold adversely to our conclusion rest upon the proposition that the charter of a corporation is a contract between its stockholders to the effect that the funds put into the business should not be diverted to any other use or purpose without the consent of all. This is a sound principle . . . ; but from that proposition it is argued that the lease is a departure from the purposes for which the corpora- tion was formed, which had in view the management of the business by the directors themselves, ' and is therefore a violation of the terms of the contract between the stockholders. The reasoning cannot apply as to corporations in this State, because when the contract was formed (that is, when the charter was filed) the law authorized the corporation to lease its property, and each stock- holder entered into the contract (that is, into the corporation) with the understanding and knowledge of the fact that in doing so he em- powered the directors to lease the property. The lease was not idtra vires but was made by virtue of the power expressly given by the statute. It was not a violation of the con- tract between the stockholders, but was made in pursuance of the terms of the contract — the charter." 315 § 167 INTBRCOEPORATE RELATIONS [part III profits of the enterprise rather than a share of a fixed rental. He cannot be compelled to accept an annuity in lieu of his share in the profits. § 167. Lease of Entire Property of Losing Corporation. — When a corporation is in a position where it cannot further profitably carry on its business and is a losing concern, a major- ity of its stockholders, for the purpose of protecting the whole body from further loss and as a method of winding up the affairs of the corporation, may authorize the lease of its entire property and business to another corporation or person, provision being made for creditors.^ But a lease — which must necessarily occasion delay in winding up the affairs of a corporation and in distributing its assets — can only be justified, under such circumstances, when it appears to be the best method of real- izing upon the assets of the company. Its term must be fixed with reference to the fact that it is executed only as a method of winding up the affairs of the corporation within a reasonable time. A lease for a long term of years would be invalid with- out the unanimous consent of the stockholders.^ ' Denike v. New York, etc. Cement Co., 80 N. Y. 608 (1880) : "The lessee by the terms of the lease was to carry on the business of manufacturing and selling cement, so that the brand of the company would be kept before the public. I do not understand that this company could not lawfully tem- porarily lease its property to some per- son who would carry on its business when it could not profitably do so." A manufacturing corporation, for the purpose of protecting its stock- holders from further loss, may discon- tinue the business and sell or lease its property. Skinner v. Smith, 134 N. Y. 240 (1892), (31 N. E. Rep. 911). A private corporation has the power to rent its property for the purpose of raising money necessary to pay a pressing indebtedness which cannot otherwise be met, when it appears that such a course is neces- sary for its protection, and is entered into in good faith, and especially when it further appears that the 316 arrangement is temporary and there is no purpose on the part of the lessor to abandon its corporate powers. Plant V. Macon Oil, etc. Co., 103 Ga. 666 (1898), (30 S. E. Rep. 567). The directors of a manufacturing company which has been unsuccess- fully carrying on business and whose financial standing is impaired, may, with the consent of a majority of the stockholders, lease its entire plant and business to another cor- poration for ten years with the priv- ilege of purchase, the lease being the best means of preventing insolvency and the transaction being in good faith. Bartholomew v. Derby Rubber Co., 69 Conn. 521 (1897), (38 Atl. Rep. 45, 61 Am. St. Rep. 57). See Shawnee Compress Co. v. An- derson, decided by U. S. Supreme Court, April, 1908, affirming 17 Okl. 231 (1906). And see ante, § 111: "Sale of Entire Property of Losing Corporation by Majority Vote." ' In an English case, however. CHAP. XV] LEASES OF PROPERTY AND FRANCHISES § 168 It has been held that even a long term lease might be exe- cuted if provision were made for paying dissenting stock- holders, at their option, the cash value of their shares.' Un- less so provided by statute, however, the scheme is open to the objection that it gives a dissenting stockholder a theo- retical distributive share instead of the actual share of the assets to which he is entitled.^ If such a method be pro- vided, it can only be followed when it is clear that the corpo- ration is a losing concern. It can never be adopted for the purpose of forcing a stockholder in a prosperous company either to sell out or to consent to a lease. § 168. Voidable Leases. — The directors of a corporation are its trustees. They cannot deal with corporate property for their personal benefit. A lease of the property of a corpora- tion to another corporation in which a director is interested is voidable at the option of either corporation.' When the cor- where wide powers were given by the clauses of the charter of a porcelain company to a two-thirds vote of the stockholders, it was held that, after a period of nine years of unsuccessful working, a majority of two-thirds of the shareholders in general meeting were empowered, under such clauses, to authorize the directors to make a valid mining lease for twenty-one years of the whole of the works and buildings of the company. Semble, the clauses would not authorize the like majority to engage the company in a new enterprise wholly uncon- nected with their original purpose. Featherstonhaugh v. Lee Moor Porce- lain Clay Co., L. R. 1 Eq. 318 (1865). ^ In Black v, Delaware, etc. Canal Co., 22 N. J. Eq. 415 (1871), Chancel- lor Zabriskie said: "If I am right in the conclusion arrived at above, that the majority of corporators under a charter, which specifies no definite time for its continuance, have a right to abandon the undertaking, and dis- pose of and divide the property, the proceeding in this case is valid as against the complainants as a lawful way of accomplishing that end as to them. Two-thirds of these corpora^ tors have determined that they do not desire to go on with these enter- prises, under the charters, and that they wish to abandon them, and are willing to accept as their share of the corporate property a yearly rent or annuity secured by a provision like that contained in this proposed lease. Some stockholders are not willing; and although the majority can effect the abandonment, they cannot compel the dissentients to accept like com- pensation for their stock; it might be compelling them to embark in n, new enterprise. Provision is, there- fore, made to pay or return to them the full value of their share of the whole property of the corporation. This is all they would have if the works were sold out. The provision is a most equitable one, and without it the transaction, even if valid and legal, would not be equitable and just." 'See ante, § 121: "Appraisal of Stock of Dissenting Stockholders." ' Where a trustee of a corporation, whose presence is necessary to make a majority for the transaction of cor- 317 § 168 INTERCOEPORATE RELATIONS [PAET III poration fails to act a court of equity may intervene at the instance of any stockholder. The majority of the stockholders of a corporation stand in a similar fiduciary relation towards the minority. They can authorize the lease of corporate property to another corpo- ration, controlled by themselves, only vs^hen they act in the utmost good faith towards minority stockholders. In Meeker v. Winthrop Iron Co} Judge Baxter in declaring void, as a fraud upon minority stockholders, a lease of a mining property authorized by a majority of the stockholders of a corporation to another corporation of which they likewise held control, said: " The ownership of a majority of the capital stock of a corporation invests the holders thereof with many and valuable incidental rights. They may legally control the company's business, prescribe its general policy, make themselves its agents, and take reasonable compensation for their services. But, in thus assuming control, they also take upon themselves the correlative duty of diUgence and good faith. They cannot lawfully manipulate the company's business in their own interests to the injury of other corporators.^ porate business, is interested in an- ' Where one corporation purchases other corporation to which the board a, controlling interest in the stock of vote to lease the entire property of the another and thereby elects directors corporation, the lease, executed in and secures a lease of the property of pursuance of such authority, is void- such corporation on its own terms able upon the complaint of any stock- and conditions, it is held that such holder. Parsons v. Tacoma Smelting, lease will be set aside at the suit of etc. Co., 25 Wash. 492 (1901), (65 minority stockholders of the latter Pac. Rep. 765). company, even though obtained A lease by an officer of a corpora- without actual fraud, tion of property to the corporation Glengary Consol. Min. Co. v. may be binding upon the company Boehmer, 28 Colo. 1 (1900), (62 Pac. when made in good faith and ratified 839). by it by taking possession and paying In Shaw v. Davis, 78 Md. 308 rent for a time according to the terms (1894), (28 Atl. Rep. 619, 23 L. R. A. of the lease. Louisville, etc. R. Co. v. 294), however, where a minority Carson, 151 111. 444 (1894), (38 N. E. stockholder filed a bill against the Rep. 140). See also post, | 248: majority stockholders and officers "Voidable Railroad Leases," of a corporation praying an in- ' Meeker v. Winthrop Iron Co., 17 junction restraining the execution Fed. 50 (1883). See also cases cited of a lease of the property of such in notes to post, § 248 : " Voidable corporation to another corporation in Railroad Leases " and in notes to which such majority likewise held § 114, ante. controlling interests, the Court said 318 CHAP. XV] LEASES OF PROPERTY AND FRANCHISES 169 § 169. Remedies of Objecting Stockholders. — Any stock- holder in a prosperous corporation who objects to a lease of the entire property and business of his corporation is entitled to an injunction to restrain its execution.' But an injunction will not be granted where a lease of only a part of the property of the corporation, insufficient to interfere with the continued prosecution of its business, is contemplated.^ Courts of equity, at the instance of stockholders, will also issue injunctions to restrain the execution of leases authorized by directors or majority stockholders in violation of their fiduciary obligations.' (p. 318): "The fact that the same persons hold the majority of the stock in both companies does not of itself enlarge the court's jurisdiction; the act complained of furnishes the test of jurisdiction, and it must be ultra vires, fraudulent or illegal ; noth- ing short of this will suffice. This is true even in a case where directors and not stockholders do the act com- plained of. And for stronger and more obvious reasons it is also true in a, case where stockholders them- selves act directly. They are not trustees or giiosi-trustees for each other." But this last statement is contrary to the weight of authority. See post, § 300 : " Trust Relation of Controlling Corporation to Minority Stockholders" and cases cited. A domestic corporation acquired a controlling interest in a, foreign corporation and took a lease of its property, promising to pay rent in the form of dividends to the stock- holders of the lessor corporation and, after various transfers of this con- trolling stock interest, it came into the hands of n corporation which proposed to yote such controlling stock to rescind the agreement and avoid pajdng the dividend. It was held that a minority stockholder of the lessor corporation was entitled to restrain such action, as being so detri- mental to the interests of the lessor corporation as to lead to the inference that the interests of the majority stockholders were opposed to those of the corporation as well as to those of the minority, and also because such action was so oppressive to the minority as to amount to fraud. McLeary v. Erie Tel., etc. Co., 38 Misc. (N. Y.) 3 (1902), (76 N. Y. Supp. 712). ' A stockholder in a manufacturing corporation may enjoin a lease, au- thorized by a majority of the stock- holders, of all its property and busi- ness for twenty-five years at a rental equal to one-half the profits derived from the business. Small v. Min- neapolis, etc. Co., 45 Minn. 264 (1891), (47 N. W. Rep. 797). Also Copeland V. Citizens Gaslight Co., 61 Barb. (N. Y.) 60 (1871). That a lease, although unlawful, does not give a portion of the stock- holders a standing in equity to ask for the dissolution of the corporation, see Denike v. New York, etc. Cement Co., 80 N. Y. 599 (1880). See also ante, § 114; "Remedies of Dissenting Stockholders in Case of Invalid or Un- fair Sales. Voidable Sales." 2 Small V. Minneapolis, etc. Co., 57 Hun (N. Y.), 587 (1890), (10 N. Y. Supp. 456). ' Meeker v. Winthrop Iron Co., 17 Fed. 48 (1883); Parsons v. Tacoma 319 § 172 INTEECOHPORATB RELATIONS [PAET III II. Leases of Property and Franchises of Quasi-pvblic Corporations § 170. Distinction between Leases of Private and Quasi- public Corporations. — Leases of quasi-puhlic corporations vary from those executed by private corporations, owing no public duties, in their need of the approval of the State, in the for- malities attending their execution, and in their essential na- ture. A lease by a private corporation is generally an inci- dent to its business, runs for a limited term and is analogous to a lease by a natural person. A lease by a quasi-pxihlic corporation of its property and franchises requires legislative sanction, must follow the conditions of the legislative grant, and is, when executed for the customary periods — ninety- nine or nine hundred and ninety-nine years — substantially a sale in consideration of an annuity. While the relation of the parties is that of landlord and tenant, and the lease may be the subject of forfeiture, for practical purposes based upon present and future control of the franchises and property, the lessee stands in the position of owner. § 171. Leases of Indispensable Property of Quasi-public Cor- poration. — Upon principles already considered, property neces- sary for the performance of the public duties of a quasi-Tpnblic corporation cannot be leased without statutory authority.' The test of indispensability applicable in the case of corporate sales applies in the case of corporate leases.^ § 172. Leases of Surplus Property. — The greater power to sell and absolutely convey the surplus property of a quasi- public corporation includes the lesser power to lease it.^ In the absence of a statutory prohibition, such a corporation may lease its property, real and personal, not necessary to carry on the business for which it was chartered nor to fulfil its pubhc obligations, in the same manner and upon the same Smelting, etc. Co. 25 Wa.sh. 492 on Execution imthmit Statutory Au- (1901), (65 Pao. Rep. 765). See also thority." cases cited in notes to § 248, post: "See ante, § 128: "Test of Indis- " Voidable Railroad Leases." pensability." 'See aTite, § 127: "Indispensable ' See an*?, § 129 : " Sales of Surplus Property cannot be alienated or taken Property." 320 CHAP. XV] LEASES OF PROPERTY AND FRANCHISES §172 conditions as a natural person.* Thus, for example, a railroad company may lease its outlying lands and any rolling stock or other personal property not required in the use and opera- tion of its railroad.^ And a ferry company may let its boats when not needed in its business.' ' statutes regulating the method and formalities by which g«osi-public corporations may lease their property and franchises do not apply to ordi- nary leases of property not necessary for the proper discharge of corporate duties. Coal Creek, etc. Co. v. Ten- nessee, etc. Co., 106 Tenn. 651 (1901), (62 S. W. Rep. 162). ^ In Hartford Ins. Co. v. Chicago, etc. R. Co., 175 U. S. 99 (1899), (20 Sup. Ct. Rep. 33), Mr. Justice Gray said: "A railroad corporation holds its station grounds, railroad tracks and right of way for the public use for which it is incorporated, yet as its private property, and to be occupied by itself or by others, in the manner which it may consider best fitted to promote, or not to interfere with, the public use. It may, in its discretion, permit, them to be occupied by others with structures convenient for the receiving and delivering of freight upon its railroad, so long as a free and safe passage is left for the car- riage of freight and passengers. . The case is wholly different from those cited by the plaintiffs, in which a lease by a railroad corporation, transferring its entire property and franchises to another corporation, and thus undertaking to disable itself from performing all the duties to the public imposed upon it by its charter, has been held to be vUra vires, and therefore void." And in Union Pacific R. Co. v. Chicago, etc. R. Co., 51 Fed. 321 (1892), Judge Sanborn said: "The result is that it is not beyond the powers of a corporation authorized to construct, maintain and operate a railroad and its appurtenances to let by contract to a like corporation its surplus rolling stock, or the surplus use of its terminal tracks, depots, and bridges, which it has necessarily ac- quired for the purpose of its incor- poration ; provided, always, that such contract in no way disables it from the full performance of its obligations and duties to the State and the public." In Attorney-General v. Great East- em R. Co., L. R. 11 Ch. 449 (1879), it was held that the letting for hire by one railroad company to another whose line was connected with its own, and which could only be worked profitably in connection with it, of parts of its surplus rolling stock, was not -ultra vires. A railroad corporation may lease a portion of its property, not required in its business, to a public warehouse company. State V, New Orleans Warehouse Co., 109 La. 64 (1902), (33 So. Rep. 81). A railroad company has a right to lease a portion of its right of way for the purpose of securing freight from the lessee. Detroit v. Little, 146 Mich. 373 (1906), (1Q9 N. W. Rep. 671). See also Michigan Central R. Co. V. BuUard, 120 Mich. 416 (1899), (79 N. W. Rep. 635). A railroad company, authorized to construct and operate a telegraph line as well as a railroad, has no power to lease its telegraph line without statu- tory authorization. Its duties are the same with respect to the telegraph line as to the railroad. Atlantic, etc. Tel. Co. V. Union Pacific R. Co., 1 McCrary (U. S.), 541 (1880), 1 Fed. 745. ' In Brown v. Winnisimmet Co., 11 Allen (Mass.) 326 (1865), the Court, 321 § 174 INTERCORPORATE RELATIONS [PART III Analogous to this principle in practical results, although based upon essentially different grounds — in that a joint use is distinguishable from a lease — is the principle, that a rail- road company may grant to another corporatjion the surplus use of its tracks.* § 173. Leases of Franchises. — The principles of law gov- erning leases of franchises have already been considered at length in connection with the subject of the sale of franchises.^ § 174. Railroad Leases typical of Leases of Quasi-public Corporations. — As indicated in the preliminary part of this treatise, railroad companies have been granted, and have exercised, the power of leasing their property and franchise to a far greater extent than other corporations of a similar nature. Legal principles relating to leases of quasi-public corporations have been established, almost without exception, in cases involving railroad leases. While, therefore, in the further consideration of the subject special reference will be made to leases of railroads, it must be borne in mind that the principles exemplified are of general application and apply alike to every gwosi-public corporation — to turnpike, canal, telegraph, telephone, electric light, gas, water and other public utility companies.' after referring to the powers of ferry to carry over the persons who wish to companies and to their right to own use the ferry, they are at liberty to extra boats, said (p. 333): "It is not use them as they think fit, for the necessary that such extra or additional profit of the company, and either to steamboats should be kept unem- let them out to private parties for ployed when not required for the busi- excursions, or to carry excursion ness of the ferry, but . . it is com- parties themselves." petent for the defendants to use them • Chicago, etc. R. Co. v. Union Pac. or to let them to others to be used in R. Co., 47 Fed. 23 (1891), affirmed sub carrying on any legitimate business." nom. Union Pac. R. Co. v. Chicago, In Forrest v. Manchester, etc. R. etc. R. Co., 51 Fed. 321 (1892), 163 Co., 30 Beav. 47 (1861), the Master U. S. 564 (1895), (16 Sup. Ct. Rep. of the Rolls said: "What are they to 1173). See post, ch. XXIV.: "Track- do with those steamboats at other age Contracts." times when unemployed at the ferry? ' See ante, ch.Xll. : "Sales of Car- Are they to keep thera idle t I am of porate Franchises." opinion that they are not ; and that ' The following cases relate to leases if the capital of the company is really of guosi-public corporations other than embarked for the purpose of the ferry railroad companies, and not for the purpose of excursions. Gas and Electric Light Companies: when the steamboats are not required Jersey City Gas Co. v. United Gas 322 CHAP. XVl] NATUEE AND AUTHORIZATION OF LEASE § 175 Article II LEASES OF RAILROADS (INCLUDING TRACKAGE CON- TRACTS) CHAPTER XVI NATURE AND AUTHORIZATION OF CONTRACT OF LEASE I, Nature of Lease of Railroad § 175. What constitutes a Lease of a Railroad. § 176. Distinction between Relation of Lessor and Lessee and other Intercor- porate Relations. II. Legislative Authority for Lease of Railroad § 177. Lease of Railroad invalid without Legislative Authority, § 178. Necessity for Legislative Authority to take a Lease. § 179. Legislative Ratification of Unauthorized Lease. § 180. What Railroads may be leased. Statutory Provisions. § 181. Rule of Construction of Statutes. § 182. Construction of Statutes. — (A) Provisions authorizing Leases. § 183. Construction of Statutes. — (B) Provisions not authorizing Leases. § 184. Construction of Statutes. - — (C) Power to lease Unfinished Road. § 185. Construction of Statutes. — (D) Leases of Connecting Lines. § 186. Constitutional and Statutory Prohibitions of Leases of Competing or Parallel Lines. § 187. Long-term Leases not prohibited by Statutes against Perpetuities. I. Nature of Lease of Railroad §175. What constitutes a Lease of a Railroad. — A railroad lease is a conveyance by a railroad company, for rent reserved, Imp. Co., 46 Fed. 264 (1891) ; Visalia Rep. 525) ; Bath Gas Light Co. v. Gas, etc. Co. v. Sims, 104 Cal. 326 Claffy, 151 N. Y. 24 (1896), (45 N. E- (1894), (43 Am. St. Rep. 105, 37 Pac. Rep. 390, 36 L. R. A. 664). Rep. 1042) ; Chicago Gas Light, etc. Telegraph Companies : Philadelphia Co. V. People's Gas Light, etc. Co., v. Western Union Tel. Co., 11 Phila. 121 ni. 530 (1887), (13 N. E. Rep. 169, 327 (1876) ; Atlantic, etc. Tel. Co. v. 2 Am. St. Rep. 124) ; Brunswick Gas Union Pacific R. Co., 1 Fed. 745 Light Co. V. United Gas, etc. Co., 85 (1880), 1 McCrary (U. S.), 541; West- Me. 632 (1893), (35 Am. St. Rep. 385, em Union Tel. Co. v. Union Pacific R. 43 Am. & Eng. Corp. Cas. 459, 27 Atl. Co., 3 Fed. 1 (1880), 1 McCrary (U. 323 §175 INTERCORPORATE RELATIONS [part III of its railroad for any term which leaves a reversionary interest.' It necessarily involves a transfer of an estate in the railroad property and of the franchises attaching thereto. It generally involves a transfer of the railroad and all the franchises of the vendor corporation for a long term of years — often equivalent to a grant of the fee in consideration of stated payments.^ S.), 418; Central Branch Union Pacific R. Co. V. Western Union Tel. Co., 2 Fed. 417 (1881), 1 McCrary (U. S.), 551 ; Reiff v. Western Union Tel. Co., 49 N. Y. Super. Ct. 441 (1883). ' A grant and demise by one rail- road corporation to another of all its property, real and personal, and all its privileges and franchises in perpetuity, has been held equivalent to an abso- lute conveyance. Chicago, etc. R. Co. V. Boyd, 118 111. 73 (1886), (7 N. E. Rep. 487). See also Hazard v. Vermont, etc. R. Co., 17 Fed. 753 (1883); Vermont, etc. R. Co. V. Vermont Cent. R. Co., 34 Vt. 1 (1861); Town of West- brook's Appeal from Commissioners, 57 Conn. 95 (1889), (17 Atl. Rep. 368). Compare State v. Housatonic R. Co., 48 Conn. 44 (1880). While this conclusion may be cor- rect where no right of reentry is re- served in a lease, it is not well founded, as a matter of law, where there is clause of reentry. A reservation of the right to reenter together with that of rent, constitute a reversionary interest, — the essential feature of a lease as distinguished from an abso- lute conveyance. A conveyance of a right of way to a railroad company contained this condition: "In case the second party shall sell the above-mentioned right of way to any other company, the party of the first part shall be en- titled to receive one-half of the pur- chase money." The railroad com- pany leased its entire railroad and property for 999 years. It was held that the lease was not a sale within the meaning of the condition. 324 Morrison o. St. Paul, etc. R. Co., 63 Minn. 75 (1895), (65 N. W. Rep. 141, 30 L. R. A. 546). ' Moorshead.u. United Rys. Co., 119 Mo. App. 541 (1906), (96 S. W. Rep. 261), affirmed 203 Mo. 121 (1907), (100 S. W. Rep. 611): "Does the contract possess the elements of a lease ? In this connection it is proper to remark, in the first place, that goods, chattels, and franchises may be leased as well as lands and tene- ments. The statutes of the State gave the United Railways Company the right to lease its franchises, rail- way lines and every other property, and by the same statute the Transit Company had the right to acquire every character of property belong- ing to the United Railways Company, including its franchises. We need not be troubled about the power of the two companies to enter into a lease covering all the properties mentioned in the instrument. The contract mentioned divested the United Rail- ways Company of the possession and use of the properties during the period named (40 years) in considera- tion of a specific rent to be paid by the Transit Company, and other duties in the nature of rent, to be performed by the latter;' provided further for the reversion of the property to the grantor, the United Railways Company, at the end of the term, and for reentry if the Transit Company defaulted in the perform- ance of its covenants during the term. Those ingredients in the agree- ment suffice to constitute a lease." A vote by a railroad company to agree with another company to take CHAP. XVl] NATURE AND AUTHORIZATION OF LEASE §175 The elements essential to the existence of a valid railroad lease are as follows: a lease of a railroad to be constructed by the latter and to pay as rent a stipulated percentage upon its cost, and a similar vote of the latter cor- poration to lease its railroad to the former upon these terms, are merely preliminary and do not constitute an actual lease. Peters v. Boston, etc. R. Co., 114 Mass. 127 (1873). The receiver of a railroad, the earnings of which were less than the expense of operation, entered into a contract with a company owning a connecting line by which the latter agreed to operate the road, keeping the accounts in the receiver's name and charging against the road only the cost of operation and necessary repairs. It was held that the con- tract was not a lease, but one under which the latter company operated the road as agent of the receiver. South Carolina, etc. R. Co. v. Carolina, etc. R. Co., 93 Fed. 543 (1899). A railroad company agreed to sell to another company and the latter agreed to buy, part of its road at a, fixed price. The contract, however, recited that the vendor could not, at the time, make a clear title and it was, therefore, stipulated that, in the mean time, the vendor should lease the road to the purchaser. The provisions in relation to the sale and to the lease were kept distinct throughout the con- tract. It was held that, prior to the time when title could be transferred, the relations of the corporations were those of lessor and lessee, and that, even if the contract of sale was ultra vires, the lease was valid. United States Trust Co. v. Mercantile Co., 88 Fed. 140 (1898). A written agreement by -which one railroad company grants to another the right, for a term of years, to main- tain its track across the right of way of the former, upon payment of a nominal rental, is a lease, the cove- nants of which run with the land. Louisville, etc. R. Co. v. Illinois, etc. R. Co., 174 111. 448 (1898), (51 N. E. Rep. 824). The fact that the road of one rail- road company was operated by the receiver of another company who paid therefor a part of the gross receipts arising from its operation established the relationship of lessor and lessee rather than a partnership. Houston etc. R. Co. v. McFadden, 91 Tex. 194 (1897), (42 S. W. Rep. 593). A contract, by which a, telegraph company grants to another the privi- '^ lege of stringing wires on its telegraph poles, is not a lease of the corpo- ration's property, within the mean- ing of a statute providing that leases of corporate property can be made only when sanctioned by holders of three-fifths of the stock. Farnsworth V. Western Union Tel. Co., 53 Hun (N. Y.), 636 (1889), (6 N. Y. Supp. 735). As to whether a particular agree- ment was a "contract" or lease, see Archer v. Terre Haute, etc. R. Co., 102 111. 492 (1882), (7 Am. & Eng. R. Cas. 255). See also Wiggins Ferry Co. V. Ohio, etc. R. Co., 142 U. S. 396 (1891), (12 Sup. Ct. Rep. 188); South Carolina, etc. R. Co. v. Augusta, etc. R. Co., 107 Ga. 164 (1899), E. Rep. (33 S. 36). In Michigan Central R. Co. v. Pere Marquette R. Co., 128 Mich. 333 (1901), (87 N. W. Rep. 271) the Court said: "The rights of the parties must, therefore, be deter- mined by the contract which they voluntarily made. The situation was this : The Saginaw Valley Company desired to avoid the construction and maintenance of a separate road for u distance of five miles, and as 325 § 177 INTERCORPORATE RELATIONS [PART III (1) A grant of authority by the State to both lessor and lessee corporations. (2) The assent of the stockholders of both corporations. (3) A written instrument stating the term and rent. (4) Its formal execution. § 176. Distinction- between Relation of Lessor and Lessee and other Intercorporate Relations. — The distinction between a contract of lease entered into by railroad corporations and their consolidation has already been pointed out.^ The differ- ence between the relation of lessor and lessee and other inter- corporate relations is, generally, obvious. Contracts for the joint use of railroad property are, how- ever, analogous to leases, and some difficulty has arisen in distinguishing between them. The point of difference is that a lease conveys an estate in, and the possession of, the prop- erty constituting its subject-matter, while a trackage con- tract or terminal privilege carries with it no interest in the property and no right to its exclusive possession.^ II. Legislative Authority for Lease of Railroad § 177. Lease of Railroad invalid without Legislative Author- ity. — Upon principles elsewhere considered, a ^Mosi-public corporation cannot transfer, absolutely or for a limited period, its franchises, or the property necessary for the performance of its pubhc duties, without legislative authority.' A lease of well the construction of separate the arrangement, but might at any depots and the purchase of depot time construct its own road; and grounds. It must do this or make there is nothing in the contract to a contract with the Jackson . . prevent it. The relation between Company. The former could not the parties was simply that of lessor compel the use of the latter 's road and and lessee, and not that of tenants depots. The latter was willing to in common of the right of way. grant a permanent use of its road to The right conveyed was that of user, the former for certain considerations. and not that of ownership." These were agreed to. The Jackson i See ante, § 14 : "Distinction road did not sell to the Sa^naw between Consolidation and Lease." Valley road any of its real estate, 2 See post, § 255: "Nature of a but granted only a permanent lease. Trackage Contract." To hold otherwise would be doing ^ ggg ^^^^ gj 17-18 : "Necessity violence to the meaning of the plain- for Legislative Authority" (consolida- est terms. The Saginaw Valley road tion) ; ante, §§135-139: "Legisla- was under no obligation to continue tive Authority for Sale of Franchises.". 326 CHAP. XVl] NATURE AND AUTHORIZATION OP LEASE §177 a railroad, in the absence of a statute authorizing it, is ultra vires and against public policy.' ' I. Cases holding Unauthorized Railroad Lease invalid because Ultra Vires. United States: St. Louis, etc. R. Co. V. Terre Haute, etc. R. Co., 145 U. S. 393 (1892), (12 Sup. Ct. Rep. 953) ; Central Transp. Co. v. Pullman Car Co., 139 U. S. 24 (1891), (11 Sup. a. Rep. 478) ; Pittsburgh, etc. R. Co. v. Keokuk Bridge Co., 131 U. S. 371 (1889), (9 Sup. Ct. Rep. 770) ; Oregon R., etc. Co. V. Oregonian Co., 130 U. S. 1 (1889), (9 Sup. Ct. Rep. 409) ; Pennsylvania R. Co. v. St. Louis, etc. R. Co., 118 U. S. 290 (1886), (6 Sup. Ct. Rep. 1094) ; Thomas v. Railroad Co., 101 U. S. 71 (1879), (leading case) ; Hamilton v. Savannah, etc. R. Co., 49 Fed. 412 (1892). Alabama: Memphis, etc. R. Co. v. Grayson, 88 Ala. 572 (1889), (7 So. Rep. 122, 16 Am. St. Rep. 69, 43 Am. & Eng. R. Cas. 681). Indiana : Commissioners of Tippe- canoe Co. V. Lafayette, etc. R. Co., SO Ind. 85 (1875). Massachusetts; Middlesex R. Co. V. Boston, etc. R. Co., 115 Mass. 347 (1874). Montana : State v. Montana R. Co., 21 Mont. 221 (1898), (53 Pac. Rep. 623). Nebraska: State v. Atchison, etc. R. Co., 24 Neb. 143 (1888), (8 Am. St. Rep. 164, 38 N. W. Rep. 43). New Hampshire : Dow v. Northern R. Co., 67 N. H. 1 (1886), (36 Atl. Rep. 510). New Jersey: Black y. Delaware, etc. Canal Co., 24 N. J. Eq. 454 (1873). New York: Abbott v. Johnstown, etc. Horse R. Co., 80 N. Y. 27 (1880), (36 Am. Rep. 572); Troy, etc. R. Co. V. Kerr, 17 Barb. (N. Y.) 581 (1854); Gere v. New York Central, etc. R. Co., 19 Abb. N. C. 193 (1885). England: East Anglian R. Co. v. Eastern Counties R. Co., 11 C. B. (o. 8.) 775 (1851) ; Simpson v. Deni- son, 10 Hare, 51 (1852), (16 Jur. 828). II. Cases holding Unauthorized Railroad Lease invalid because against Public Policy. United States : Thomas v. Railroad Co., 101 U. S. 71 (1879); Earle v. Seattle, etc. R. Co., 56 Fed. 909 (1893). Compare, however, Pitts- burgh, etc. R. Co. V. Coliunbus, etc. R. Co., 8 Biss. 456 (1879). Georgia : Singleton v. Southwestern R. Co., 70 Ga. 464 (1883), (48 Am. Dec. 574). Illinois: Wabash, etc. R. Co. -v. Payson, 106 111. 534 (1883), 46 Am. Rep. 705). Kentucky: McCabe's Admx. v. Maysville, etc. R. Co., 112 Ky. 861 (1902), (66 S. W. Rep. 1054). MassoAihusetts : Braslin v. Somer- ville Horse R. Co., 145 Mass. 64 (1887), (13 N.E. Rep. 65): "The gen- eral rule is familiar, that neither a steam nor a street railway corporation can make a valid transfer, either by way of absolute deed, mortgage or lease, of its franchise, or of its railroad and bulk of its property, or relieve itself of the burdens imposed upon it by law, or by its charter, without the consent of the State.'' Minnesota: Freeman v. Minne- apolis, etc. R. Co., 28 Minn. 443 (1881), (10 N. W. Rep. 594). New Jersey : A corporation created by statute possesses no rights, and can exercise no powers, which are not expressly given or necessarily implied. Such a corporation can- not lease or dispose of any franchise needful in the performance of its obligations to the State, without legislative consent. Stockton v. Cen- tral R. Co., 50 N. J. Eq. 52 (1892), (24 Atl. Rep. 964). Also Mills v. 327 §177 INTERCORPOHATE RELATIONS [part III In Pennsylvania R. Co. v. St. Louis, etc. R. Co} Mr. Justice Miller thus applied the principle of ultra vires to railroad leases : " We think it may be stated, as the just result of these cases and on sound principle, that, unless specially authorized by its charter or aided by some other legislative action, a railroad company cannot, by lease or any other contract, turn over to another company, for a long period of time, its road and all its appurtenances, the use of its franchises, and the exercise of its powers; nor can any other railroad company, without similar authority, make a contract to receive and operate such road, franchises, and property of the first corporation, and that such a contract is not among the ordinary powers of a railroad company, and is not to be presumed from the usual grant of powers in a railroad charter." And in the earlier case of Thomas v. Railroad Co.'' the same Justice, after discussing the doctrine of ultra vires, said: " There is another principle of equal importance and equally conclu- Central R. Co., 41 N. J. Eq. 1 (1886), (2 Atl. Rep. 453) ; Black v. Delaware, etc. Canal Co., 22 N. J. Eq. 130 (1871) ; s. c. 24 N. J. Eq. 454 (1873). Pennsylvania: Van Steuben v. Central R. Co., 178 Pa. St. 367 (1896), (35 Atl. Rep. 992). South Carolina: Harmon v. Co- hunbia, etc. R. Co., 28 S. C. 401 (1887), (5 S. E. Rep. 835, 13 Am. St. Rep. 686). Texas: International, etc. R. Co. V. Moody, 71 Tex. 614 (1888), (9 S. W. Rep. 465) ; Gulf etc. R. Co. v. Morris, 67 Tex. 692 (1887), (4 S. W. Rep. 156) ; Central, etc. R. Co. v. Morris, 68 Tex. 49 (1887), (3 S. W. Rep. 457). Vermont: Nelson v. Vermont, etc. R. Co., 26 Vt. 717 (1854), (62 Am. Dec. 614). Virginia: Roper v. McWhorter, 77 Va. 214 (1883). West Virginia: Ricketts v. Chesa- peake, etc. R. Co., 33 W. Va. 433 (1890), (10 S. E. Rep. 801, 25 Am. St. Rep. 901, 7 L. R. A. 354) : "We think it may be stated, as the just result of the decided cases, and on 328 sound principle, that a railroad cor- poration cannot, without distinct legislative authority, by lease, or any other contract, turn over to another company its road and the use of its franchises, and thereby exempt itself from responsibility for the conduct and management of the road." Also Fischer v. West Virginia R. Co., 39 W. Va. 366 (1894), (9 S. E. Rep. 578). England: An agreement between two railway companies, made with- out the authority of the legislature, whereby one company delegates to another all the powers which have been conferred upon it by parliament, is an unlawful attempt to effect that which parliament alone can au- thorize, and is against public policy. Great Northern R. Co. v. Eastern Counties R. Co., 12 Eng. L. & Eq. 224 (1851), 9 Hare, 306. ' Pennsylvania R. Co. v. St. Louis, etc. R. Co., 118 U. S. 309 (1886), (6 Sup. Ct. Rep. 1094). ' Thomas v. Railroad Co., 101 U. S. 83 (1879). CHAP. XVl] NATURE AND AUTHORIZATION OF LEASE § 179 sive against the validity of this contract, which, if not coming exactly within the doctrine of ultra vires as we have just dis- cussed it, shows very clearly that the railroad company was without the power to make such a contract. That principle is that where a corporation, like a railroad company, has granted to it by charter a franchise intended, in large measure, to be exercised for the public good, the due performance of those functions being the consideration of the public grant, any contract which disables the corporation from performing those functions, which undertakes, without the consent of the State, to transfer to others the rights and powers conferred by the charter, and to relieve the grantees of the burden which it imposes, is a violation of the contract with the State, and is void as against public policy." § 178. Necessity for Legislative Authority to take a Lease. — Legislative authority is as necessary to take as to make a lease. A railroad company, unless expressly authorized, has no power to accept a lease of the railroad and franchises of another cor- poration. Such an act, unauthorized, is both ultra vires and opposed to public policy. One corporation cannot assume the performance of the pubUc duties of another unless the State approve. If either party to a lease of a railroad is acting without au- thority it is void. A contract beyond the powers of either is as invalid as if beyond the powers of both.' § 179. Legislative Ratification of Unauthorized Lease. — While legislative authority is essential to the validity of a lease of a railroad it is not necessary that it should be granted before the execution of the lease. The legislature may cure invalidity ' St. Loiiis, etc. R. Co. v. Teire Rep. 1094) ; Thomas v. Railroad Co., Haute, etc. R. Co., 145 U. S. 404 101 V. S. 82 (1879) ; Rogers v. Nash- (1892), (12 Sup. Ct. Rep. 953); viUe, etc. R. Co., 91 Fed. 316 (1898). Central Transp. Co. v. Pullman Car Also Louisville, etc. R. Co. v. Ken- Co., 139 U. S. 24 (1891), (11 Sup. Ct. tucky, 161 U. S. 691 (1896), (16 Sup. Rep. 478) ; Pittsburgh, etc. R. Co. Ct. Rep. 714) ; Winch v. Birkenhead, V. Keokuk, etc. Bridge Co., 131 U. S. etc. R. Co., 16 Jur. 1035 (1835). 371 (1889), (9 Sup. Ct. Rep. 770); And see ante, § 139: "Legislative Oregon R., etc. Co. v. Oregonian R. Authcyrity essential to Purchase of Co., 130 U. S. 36 (1889); Pennsyl- Franchises"; ante, § 144: "Seller vania Co. v. St. Louis, etc. R. Co., must have Authority to sell and Buyer 118 U. S. 310 (1886), (6 Sup. Ct. to buy." 329 §179 INTERCOEPORATE RELATIONS [part hi by subsequent ratification, and, when ratified, a contract stands as if authorized in the first instance.' Thus, a lease of a rail- road and franchises, unauthorized when made either by the corporation's articles of incorporation or by statute, was held to be validated by an act of the legislature subsequently passed conferring such authority.^ Legislative ratification must be clearly expressed. A refer- ence to " lessees," in an act regulating rates of fare upon a railroad operated under an unauthorized lease, does not vali- date it. " It is not by such an incidental use of the word ' Terre Haute, etc. R. Co. v. Cox, 102 Fed. 825 (1900). See also the following cases of mortgages and con- solidations without authority made binding by subsequent legislative rati- fication which involve principles applicable to cases of leases. United States: Graham v. Boston, etc. R. Co., 118 U. S. 161 (1886), (6 Sup. Ct. Rep. 1009) ; Gross v. V. S. Mortgage Co., 108 U. S. 447 (1883), (2 Sup. Ct. Rep. 940) ; Galveston R. Co. V. Cowdrey, 11 Wall. (U. S.) 459 (1870); Whitewater, etc. Canal Co. V. Valette, 21 How. (IT. S.) 414 (1858) ; Hall V. Sullivan R. Co. 11 Fed. Cas. 257 (1857), (2 Redfield Am. Ry. Cas. 621, 21 Law Rep. 138). Illinois: U. S. Mortgage Co. v. Gross, 93 111. 483 (1879), (s. c. 108 U. S. supra) ; Mitchell v. Deeds, 49 111. 416 (1867), (95 Am. Dec. 621); Racine, etc. R. Co. v. Farmers Loan, etc. R. Co., 49 111. 331 (1868), (95 Am. Dec. 595) ; Hatcher v. Toledo, etc. R. Co., 62 111. 477 (1872), (6 Am. R. Rep. 405). Maine: Kennebec, etc. R. Co. v. Portland, etc. R. Co., 59 Me. 1 (1871) ; Shepley v, Atlantic, etc. R. Co., 55 Me. 395 (1868). Massachusetts: Shaw v. Norfolk County R. Co., 5 Gray 162 (1855). New Hampshire : Richards v. Mer- rimack, etc. R. Co., 44 N. H. 127 (1862). See ante, § 20: "Legislative Sanc- tion — how expressed." 330 2 Terre Haute, etc. R. Co. v. Cox, 102 Fed. 825 (1900). In this case Judge Grosscup said: " From the mo- ment the act was passed the two rail- way companies had the power to enter into a lease containing provisions such as are here sought to be enforced. Thenceforth such power existed under the laws of Indiana. Had the two companies, at any time thereafter, formally adopted the lease, under the act giving authority, no one would insist that the lease was vZtra vires, .An adoption of the lease, otherwise unauthorized, under an act confer- ring authority, must be distinguished from an attempted ratification with- out any new statutory authority. In the one case the law is changed so that the contemplated agreement is no longer unlawful; in the other the contemplated ratification, if held valid, would, in effect, substitute, on the question of power, the will of the corporation for the will of the legis- lature. But an adoption of the agree- ment embodied in the lease, in the light of the new power conferred, may be impUed from conduct, as well as from a formal act of readoption. It is not an attempted over- reaching of the law, by the ratifica- tion of an unauthorized act; but is, in effect, a readjustment of the companies' relations to the powers conferred by the new legislative authority. ". CHAP. XVl] NATURE AND AUTHORIZATION OF LEASE §180 ' lessees ' . . . that a contract, unauthorized by the charter and forbidden by public poUcy, is to be made vaUd and ratified by the State." ' Ratification by the legislature must be distinguished from ratification by stockholders. The stockholders of a corpora- tion may ratify an irregularity in the exercise of granted powers; the State alone can make good an act beyond the scope of those powers.^ § 180. What Railroads may be leased. Statutory Provi- sions. — The power to lease railroads is, in many cases, granted in conjunction with a grant of power to sell them. Divers statutes of this character are included in the summary printed in connection with the subject of sales of railroads. Other statutes relating only to railroad leases are collected in the footnote.' > Thomas v. Railroad Co., 101 U. S. 85 (1879). See also Oregoa R., etc. Co. V. Oregonian R. Co., 130 U. S. 1 (1889), (9 Sup. Ct. Rep. 409). ' Louisville, etc. R. Co. v. Louis- ville Trust Co., 174 U. S. 552 (1899), (19 Sup. Ct. Rep. 817), and cases cited. ' Alabama. See ante, § 145 ("Sales"). Arizona. Code 1896, § 1171 r "Any railroad company incorporated by the laws of any other State and now owning or which is authorized to own or operate, by lease or other- wise, any railroad in this State," may "aid any railroad company in- corporated under any . . . law of this State ... by leasing . . . any such railroad, on such terms as may be agreed upon by the respective boards of directors." See also ante, § 145 ("Sales"). Arkansas. Seeante, § 145 ("Sales"). California. Pomeroy's Code 1901, § 473 (a) : "Railroad corporations doing business in this State, and organized under the law of this State, or of the United States, or any other State or Territory thereof, have power to enter into contracts with one another whereby the one may lease of the other the whole or any part of its railroad." Colorado. Seeanie, § 145("Sales"). Connecticut. G. S. 1902, § 3702 : "Any company may make lawful contracts with any other company with whose railroad its tracks may connect or intersect . . and may take a lease of the property or fran- chises of, or lease its property or franchises to, any such company." Florida. See ante, § 145 ("Sales"). Georgia. See ante, § 145 ("Sales"). Idaho. See ante, § 145 ("Sales"). Iowa. See ante, § 145 ("Sales"). Kansas. G. S. 1897, ch. 70, § 94 : "Any railroad company shall have power to lease its road and appurte- nances to any railroad corporation or- ganized under the laws of this State, or any adjoining State, when the road so leased shall thereby become on the operation thereof a continuation and extension of the road of the company accepting such lease." For additional statutes see ante, § 145 ("Sales"). Maine. See ante, § 145 ("Sales"). Maryland. See ante, § 145 ("Sales"). Massachusetts. Supp. to Rev. 331 180 INTERCORPORATE RELATIONS [part III These statutes, as a general rule, limit the right to make and take leases to railroad companies owning or operating con- necting lines. Laws, 1906, ch. 112, § 209: "Two railroad corporations created by this Commonwealth, whose roads enter upon or connect with each other . . ; and any such corporation may lease its road to any other such corporation." [This section, how- ever, does not authorize a, lease be- tween two corporations, each of which has a terminus in Boston.] "The roads of two railway companies shall be deemed to enter upon or connect with each other . if one of such roads enters upon, connects with, or intersects a road leased to the other, or operated by it under a contract." 76. § 210: "No railroad shall lease . . its road for a period of more than ninety-nine years." Michigan. See ante, § 145 ("Sales"). Minnesota. See anle, § 145 ("Sales"). Mississippi. Code 1906, § 4079 : "Every railroad corporation organ- ized under the provisions of this chapter shall have and exercise the following powers, rights, and privi- leges, viz :" — (,1b. § 4090). "To lease its rail- road and all its property and fran- chises, rights, powers, privileges, and immunities then owned or thereafter to be acquired, or to lease other rail- roads, in or out of this State, not in either case parallel or competing lines, for a term of years." Missouri. See ante, § 145 ("Sales"). Montana. See ante, § 145 ("Sales"). Nebraska. See ante, § 145 ("Sales"). New Hampshire. Pub. Stat. & Sess. Laws 1901, ch. 156, § 21, p. 503 : "Any railroad corporation may lease 332 its railroad ... to any other rail- road corporations for such a length of time and upon such terms as may be agreed to by the lessor and lessee corporations at meetings of their respective stockholders . . by a two-thirds vote of all the stock represented and voting at such meetings." lb. § 44, p. 506 : Foreign corpora- tions operating roads within this State shall have the same rights for the purpose of leasing other roads as if created by the laws of this State. New Jersey. See ante, § 22, note ("Consolidation"). New Mexico. Comp. Laws 1897, § 3847 : Every corporation formed under this act shall have the follow- ing powers: (15) "To lease the whole or any portion of its railroad ... to any other corporation formed under this act or . imder the laws of any other State or Territory, with the road of which its road may connect and form a continuous line of travel and transportation." (16) "To take leases of such other rail- roads . . as are mentioned in the last preceding subdivision of this section. " For additional statutes, see ante, § 145 ("Sales"). New York. R. S. 1901 (Birds- eye's) Railroad Law, § 78: "Any railroad corporation or any corpora- tion owning or operating a railroad route within this State may contract with any other such corporation for the use of their respective roads or routes in such manner ... as prescribed ... in such contract . and if such contract shall be a lease of any such road, and for a longer period than one year," it shall not be binding "unless approved by the CHAP. XVl] NATURE AND AUTHORIZATION OF LEASE §180 Power to take a lease of a railroad within the State is, as a general rule, conferred indiscriminately upon domestic and foreign corporations. votes of stockholders owning at least two-thirds of the stock of each cor- poration which is represented and voted upon in person or by proxy at a meeting called separately for that purpose." North Carolina. Laws 1885, ch. 108, p. 159, § 2: "Any railroad . . . may lease any railroad or branch rail- road . . in this or any adjoining State connecting with it, directly or indirectly." North Dakota. See anie, § 145 ("Sales"). Ohio. Bates' Anno. Stat. (1787- 1906), § 3384 (a) : "Any consolidated company . . of this State or any other State, may . . lease . . any railroad ... of this State or of any other State, if the line of road cov- ered by such lease . . is connected with tlie line of road of such con- solidated railroad company, upon such terms as may be agreed upon between the companies." For additional statute, see ante, § 145 ("Sales"). Oklahoma. See ariie, § 145 ("Sales"). Oregon. See ante, § 145 ("Sales"). Pennsylvania. Bright Purd. Dig. 1894, § 153, p. 1810 : (Act of March 13, 1847), relates to the running of cars on connecting railways. 76. § 154, p. 1810: The act of March 13, 1847, "shall be so construed as to authorize companies owning any connecting railroads in the State of Pennsylvania to enter into any lease . . . with each other." Ih. § 156, p. 1810: "It shaU be lawful for any railroad companies to enter into contracts for the use or lease of any other railroads upon such terms as may be agreed upon. Provided, that the roads of the com- panies so contracting or leasing shall be directly, or by means of intervening railroads, connected with each other. " Ih. § 169, p. 1812: "Any railroad company or companies ... of this Commonwealth" may "lease or be- come the lessees, by assignment or otherwise, of any railroad or rail- roads . . whether the road or roads embraced in such lease . . may be within the limits of this State, or created by or existing under the laws of any other State or States . . . Provided, however, that the road or roads, so embraced in any such lease . . . shall be connected, either di- rectly, or by means of an intervening line, with the railroad or railroads of said company or companies of this Commonwealth so entering into such lease . . and thus forming a con- tinuous route or routes for the trans- portation of persons and property." South Carolina. See ante, § 145 ("Sales"). South Dakota. See ante, § 145 ("Sales"). Tennessee. Code 1896, § 1538: "Any railroad company owning any main line may contract with any com- pany owning a railroad connecting with such main line for the lease thereof." For additional statutes, see ante, § 145 ("Sales"). Texas. Sayles' Civ. Stat. 1897 (Supp. to 1900), vol. 2, ch. 15a (Acts 1899, p. 73) : "Any railroad now or hereafter constructed, not exceeding thirty miles in length, connected at or near the State line with any other railroad, may be leased by the com- pany owning such other railroad" for not exceeding ten years. Utah. Laws 1901, ch. 26, p. 23, §7: "Any railroad . . . of this State may lease and operate . . . u rail- 333 §181 INTERCORPOBATE RELATIONS [part III The term for which leases of railroads may be taken is gen- erally unlimited. In Massachusetts, however, it cannot exceed ninety-nine years. The Enghsh " Railway Leasing Act," which forbids the lease of any railway " unless under a distinct provision of an Act specifying the parties " seems to be a " leasing act " in the negative. § 181. Rule of Construction of Statutes. —A statute grant- ing powers to a corporation is construed strictly, against the grantee and in favor of the public. In grants by the public everything must be expressed; nothing passes by implication.' road owned by any other company within or without this State; and any railroad ... of the United States, or of any State or Territory, may lease and operate . . . the rail- road owned by a company of this State." This act does not permit leasing of competing lines. For additional statute, see ante, § 145 ("Sales"). Vermont. Stat. 1894, § 3747: "Railroad companies in this State may make contracts and arrange- ments with each other, and with railroad corporations ... of other of the United States, or ... of the Dominion of Canada,, for leas- ing and running the roads of the respective corporations, or » part thereof. " Washington. See ante, § 145 ("Sales"). West Virginia. Code 1906, § 2346. See ante, § 22, note, where this statute is shown with reference to consolida- tions. Wisconsin, See ante, § 145 ("Sales"). Wyoming. (■''Sales"). England. "The Railway Leasing Act," 8 & 9 Vict. c. 96 (1845), pro- vides that no railway company shall grant or accept a lease or transfer of any railway unless under a, distinct 334 See ante, § 145 provision of an Act specifying the parties. ' Charles River Bridge v. Warren Bridge, 11 Pet. (U. S.) 420 (1837); Dubuque, etc. R. Co. v. Litchfield Co. 23 How. (U. S.)66 (1859) ; Turnpike Co. V. Illinois, 96 U. S. 63 (1877) ; SUdeU V. Grandjean, 111 U. S. 412 (1884), (4 Sup. Ct. Rep. 475); Oregon R., etc. Co. V. Oregonian R. Co., 130 U. S. 1 (1889), (9 Sup. Ct. Rep. 409). In Central Transp. Co. v. Pullman Car Co., 139 U. S. 24 (1891), (11 Sup. Ct. Rep. 478), the Supreme Court of the United States said: "By a familiar rule, every public grant of property, or of privileges or franchises, if am- biguous, is to be construed against the grantee and in favor of the public ; because an intention, on the part of the government, to grant to private persons, or to a particular corpora- tion, property or rights in which the whole public is interested, cannot be presumed, unless unequivocally ex- pressed or necessarily to be implied in the terms of the grant, and because the grant is supposed to be made at the solicitation of the grantee, and to be drawn up by him or by his agents, arid therefore the words used are to be treated as those of the grantee ; and this rule of construction is a wholesome safeguard of the interests of the public against any attempt of the grantee, by the insertion of am- CHAP. XVl] NATURE AND AUTHORIZATION OF LEASE § 182 The intention of the legislature to authorize a railroad com- pany to lease its railroad and franchises must clearly appear or the power will not exist.' In case of doubt, a construction will not be given which will authorize a ^wast-public corpora- tion to disable itself from performing the duties for which it was created. In fact, it has been said that to justify a rail- road company in claiming authority to lease its railroad to another corporation " it must be able to point to the exact statute granting such authority." ^ The correct rule is, undoubtedly, that grants are to be strictly construed, but that the intention of the legislature is not to be -defeated by an unreasonably strict construction.' § 182. Construction of Statutes — (A) Provisions author- izing Leases. — Power to purchase outright is said to include power to lease and operate for a definite term. Upon similar principles, it is held that where a railroad company, under its charter, has power both fo construct a railroad for another corporation to operate, and to operate a railroad in its own behalf, it has power to lease a railroad for its own operation.^ " Power to receive a lease from a connecting railroad cor- poration implies power in favor of the latter to give it." ' biguous language, to take what could was not approved by the appellate not be obtained in clear and express court, and cannot be justified in prin- terms." ciple. 24 N. J. Eq. 455 (1873). ' United States; Central Transp. Texas: East Line, etc. R. Co. v. Co. V. Pullman Car Co., 139 U. S. State, 75 Tex. 434 (1889), (12 S. W. 24 (1891), (11 Sup. Ct. Rep. 478); Rep. 690). Oregon R., etc. Co. v. Oregonian ^ State v. Atchison, etc. R. Co., 24 R. Co., 130 U. S. 1 (1889), (9 Sup. Neb. 161 (1888), (38 N. W. Rep. 43, Ct. Rep. 409) ; Pennsylvania Co. v. 8 Am. St. Rep. 164). St. Louis, etc. R. Co., 118 TJ. S. 290 ' See ante, § 27 : "General Rule (1886), (6 Sup. Ct. Rep. 1094). of Construction" (" ConsoUdation ") ; Nebraska: State v. Atchison, etc. anie, §146: "Construction of Statutes " R. Co., 24 Neb. 143 (1888), (38 N. W. (" Sales ")■ Rep. 43, 8 Am. St. Rep. 164). * Kaufman v. Pittsburg, etc. R. Co., New Jersey: In Black d. Delaware, 217 Pa. 599 (1907), (66 Atl. Rep. etc. Canal Co., 22 N. J. Eq. 130 (1871), 1108). the Chancellor distinguished between " Huntting v. Hartford St. R. Co., a primary grant of franchises and an 73 Conn. 179 (1900), (46 Atl. Rep. act authorizing the transfer of existing 824) . In this case the Court also franchises^ holding that the latter did said: "It was among the franchises not require the same strict rule of con- granted to the defendant to purchase struction applicable in the case of the or take leases of the property and former. This distinction, however, franchises of any other street railway 335 §182 INTEECOBPORATE RELATIONS [PAET III An Illinois statute * authorizing domestic railroad com- panies to make " contracts and arrangements with each other, and with railroad corporations of other States, for leasing and running their roads, or any part thereof," has been held by the Supreme Court of the United States to include, by the use of the words " their roads," not only roads of other do- mestic, but foreign, corporations and to confer power to make, as well as to take, leases.^ Power to construct a branch rail- road will carry with it by implication power to lease a branch already constructed, but such power cannot be exercised after the right to construct has expired. The loss of the right in- volves the deprivation of all powers flowing from it.' companies, with which its tracks might connect. The . Railroad Com- pany, being one of these connecting companies, and authorized by its charter to lay tracks on Bumside Avenue at the place in question, leased all its property and franchises to the defendant, for the term of thirty years, shortly before the latter constructed its tracks there. It was authorized to make such a lease by the charter of the defendant.'' Where the charter of a railroad company empowers it to take a lease of the property of another company the latter has implied power to make the lease — there being nothing in its charter to prevent. Kaufman v. Pittsburg, etc. R. Co., 217 Pa. St. 599 (1907), (66 Atl. Rep. 1108). ' Illinois : Statute of February 12, 1855; Priv. Laws 1885, p. 304; Rev. Stat. 1874, ch. 114, § 34. 2 St. Louis, etc. R. Co. v. Terre Haute R. Co., 145 XJ. S. 393 (1892), (12 Sup. Ct. Rep. 953). Compare Black V. Delaware, etc. Canal Co., 22 N. J. Eq. 130 (1871), reversed in 24 N. J. Eq. 455 (1873). Authority granted to a railroad corporation to lease a railroad con- nected with its own does not permit it to lease its own road to another company. Mills v. Central R. Co., 336 41 ISr. J. Eq. 1 (1886), (2 Atl. Rep. 453). A statute conferring authority upon a railroad company to lease its property is confined, in its operation, to property within the State. Briscoe V. Southern Kansas R. Co., 40 Fed. 273 (1889). A Massachusetts statute authoriz- ing " any railroad corporation created by this State" to lease its road to another corporation "so created" authorizes the making of a lease by a corporation formed by a consolidation of a domestic corporation with a cor- poration of another State; the con- solidated company being in Massachu- setts a corporation of that State. Peters v. Boston, etc. R. Co., 114 Mass. 127 (1873). A statute authorizing a. railroad company to acquire and use certain ferry franchises does not authorize it to lease such franchises to a foreign railroad company and thereby relieve itself from the attendant liabilities. Brooker v. Maysville, etc. R. Co., 119 Ky. 137 (1904), (83 S. W. Rep. 117). ' Camden, etc. R. Co. v. May's Landing, etc. R. Co., 48 N. J. L. 530 (1886), (7 Atl. Rep. 523). A provision in the charter of a rail- road company authorizing it to "make contracts with individuals, CHAP. XVl] NATURE AND AUTHORIZATION OP LEASE §182 Under a statute authorizing railroad corporations -to lease their properties and franchises without limiting the term, a lease for nine hundred and ninety-nine years, although amounting practically to a conveyance of the fee, is valid. Such leases have frequently been made and the legislature in enacting the statute without qualification will not be pre- sumed to have intended to exclude them.' Power to " farm out " the right of transportation has been held by the Supreme Court of North Carolina to be equivalent to power to lease.^ The phrase "to farm out," however, is an English one and, as applied to railroads, usually means the grant of running privileges. When a corporation is authorized to take a lease of a rail- road and franchises it may acquire the same through an assign- ment of the lease from an existing lessee.' corporations and other railroad com- panies for the building, completion and operating of said road or any part thereof," gave it power to lease the road. McCabe's Admx. v. MaysviUe, etc. R. Co., 112 Ky. 861 (1902), (66 S. W. Rep. 1054). ^ Dickinson v. Consolidated Trac- tion Co., 119 Fed. 872 (1903) : "The suggestion that, 'for all substantial and practical purposes, a, lease for 999 years is a conveyance in fee,' is without force. The question is not as to what may be the practical effect of the particular instrument, but as to its authorization ; and, as corpora- tion leases for 999 years were well known when, by the statutory pro- visions to which we have referred, the power to lease was broadly and un- qualifiedly given, we are not at hberty to assume that the exercise of that power was intended to be restricted to leases for a term not to exceed some limited, but wholly undefined and indeterminate, period." See also Wormser v. Metropolitan St. R. Co., 98 App. Div. (N. Y.) 29 <1904), (90 N. Y. Supp. 714). " State V. Richmond, etc. R. Co., 72 N. C. 634 (1875). In Hill V. Atlantic, etc. R. Co., 143 N. C. 541 (1906), (55 S. E. Rep. 854) the Court said: "The charter of the defendant company conferring the right to transport passengers and freight, and giving the power to 'farm out* the right of transporter tion, authorizes the company, by the former decisions of this Court, to execute a valid lease of its property and franchises to another railroad company. " The same phrase is used in a Georgia statute, and has been held to confer power upon a railroad com- pany to lease its property and fran- chises including the right to use and maintain terminal yards. Georgia R, Co. v. Maddox, 116 Ga. 63 (1902), (42 S. E. Rep. 315). ^ Stewart v. Long Island R. Co., 102 N. Y. 601 (1886), (8 N. E. Rep. 200, 55 Am. Rep. 844). An ordinance authorizing street railway companies, their successors and assigns to sell or lease their prop- erties and franchises to other corpo- rations, their successors and assigns 337 §183 INTERCORPORATE RELATIONS [part III The New York statute of 1839 » providing that " it shall be lawful for any railroad corporation to contract with any other railroad corporation for the use of their respective roads and thereafter to use the same in the manner prescribed in said contract " has been repeatedly held by the courts of that State to authorize a lease. As said by Judge Gray in Beveridge v. New York Elevated R. Co.:' " The act of 1839 has more than once been construed to authorize such a lease. The power therein conferred upon a railroad corporation to contract with another for the use of their respective roads, in such manner as the contract may prescribe, involves the power to make a lease iof a term of years." ' § 183. Construction of Statutes — (B) Provisions not author- izing Leases. — In contrast to the construction of the New York statute referred to in the last section, an Indiana statute ' authorizing a domestic railroad company " to make such con- empowers a purchasing corporation to itself exercise the power to lease without obtaining the further consent of the municipality, notwithstanding a constitutional provision forbidding the transfer of street railway fran- chises without such consent. Moorshead v. United Rys. Co., 119 Mo. App. 541 (1906), (96 S. W. Rep. 261); affirmed, 203 Mo. 121 (1907), (100 S. W. Rep. 611). ' Laws of 1839, ch. 218. ^ Beveridge v. New Yorlc Elevated R. Co., 112 N. Y. 21 (1889), (19 N. E. Rep. 489). ^ See also Day v. Ogdensburg, etc. R. Co., 107 N. Y. 129 (1887), (13 N. E. Rep. 765) ; Woodruff v. Erie R. Co., 93 N. Y. 609 (1883); People v. Albany, etc. R. Co., 77 N. Y. 232 (1879) ; Fisher v. New York Central, etc. R. Co., 46 N. Y. 644 (1871); Gere v. New York Central, etc. R. Co., 19 Abb. N. C. 193 (1885). Compare Troy, etc. R. Co. v. Boston, etc. R. Co., 86 N. Y. 107 (1881), where Judge Danforth said concerning the act of 1839 : "Assuming that the statute permits a grant of the exclusive right 338 to use a road, and does not contem- plate a, mere traffic arrangement, by which each of two companies may use the other's road, is the instrument called a lease, a contract for 'use,' within its meaning?" In Wormser v. Metropolitan St. R. Co., 98 App. Div. (N. Y.) 37 (1904), (90 N. Y. Supp. 714), the Court said : "It is well known that under the act of 1839 it was strongly contended that no larger or greater interpretation could be given to the permission thereby conferred than that running arrangements might be made by one railroad corporation with another. But it was held, as the proper interpretation of that statute, that it permitted the leasing of one railroad to another which con- templated the virtual abandonment of everything connected with the lessor road and the vesting of it in the lessee." See also Metropolitan El. R. Co. V. Manhattan R. Co., 14 Abb. N. C. 201 (1884). 'Indiana: Rev. 'Stat. (1881), § 3973. CHAP. XVl] NATURE AND AUTHORIZATION OP LEASE §183 tracts and agreements " with a connecting railroad in an ad- joining State " for the transportation of freight and passen- gers, or for the use of its said road, as to the board of directors may seem proper," was held by the Supreme Court of the United States not to confer authority to make contracts be- yond those relating to forwarding passengers and freight, and, possibly, to the use of the road of the one company by the other in running its cars to their destination.' The title to this act included the clause, " to connect their roads with the roads of other companies," and the Supreme Court of Indiana, in construing the act, said: " To connect one road with another does not fairly mean to lease or sell it to another." ^ A provision in the charter of a railroad corporation author- izing it "to make contracts and engagements with any other corporation, or with individuals, for transporting or convey- ing any kinds of goods, produce, merchandise, freight or pas- sengers," merely authorizes contracts relating to the carriage of goods or passengers and cannot be construed as authorizing a lease.' A statute authorizing a corporation to contract ' Pennsylvania Co. v. St. Louis, etc. R. Co., 118 TJ. S. 311 (1886), (6 Sup. Ct. Rep. 1094) ; St. Louis, etc. R. Co. V. Terre Haute R. Co., 145 U. S. 405 (1892), (12 Sup. Ct. Rep. 593) ; Com- missioners of Tippecanoe County v. Lafayette, etc. R. Co., 50 Ind. 85 (1875). ' Commissioners of Tippecanoe County V. Lafayette, etc. R. Co., 50 Ind. 110 (1875), (per Biddle, J). 3 Thomas v. Railroad Co., 101 TJ. S. 80 (1879) : "The authority to make this lease is placed by counsel pri- marily in the following language of the thirteenth section of the com- pany's charter : 'That it shall be lawful for the said company, at any time during the continuance of its charter, to make contracts and en- gagements with any other corporation, or with individuals, for the transport- ing or conveying of any kinds of goods, produce, merchandise, freight, or pas- sengers, and to enforce the fulfilment of such contracts.' This is no more than saying, ' you may do the business of carrying goods and passengers, and may make contracts for doing that business. Such contracts you may make with any other corporation or with individuals.' No doubt a con- tract by which the goods received from railroad or other carrying companies should be carried over the road of this company, or by which goods or pas- sengers from this road should be car- ried by other railroads, whether con- necting immediately with them or not, are within this power, and are, prob- ably, the main object of the clause. But it is impossible, under any sound rule of construction, to find in the language used a permission to sell, lease, or transfer to others the entire road and the rights and franchises of the corporation. To do so is to de- prive the company of the power of making those contracts which this clause confers and of performing the duties which it implies." 339 § 183 INTERCORPORATE RELATIONS [pART III with other corporations " for the leasing or hiring and transfer to them " of its " railway cars and other personal property " authorizes the lease of such cars in the regular course of busi- ness, but does not warrant the corporation in making a long lease to a single corporation of its entire personal property.' The use of the words "assigns" and "successors," in con- nection with the powers granted to railroad companies in their charters, or in general laws, does not necessarily imply that they may transfer all their property by lease. The use of such words recognizes the possibility of a transfer under statutory authority but does not itself grant the authority.^ The phrase " passing over," as used in the English Railway Clauses Act,' does not refer to a lease but means " passing, with the incidents which ordinarily attach to passing over, that is to say, the incidents of stopping and of taking up, at the points at which they do stop, both passengers and goods." * A general incorporation act authorizing the formation of corporations for " any lawful purpose " does not authorize a corporation created thereunder to assume to itself the power of leasing railroads, because of the mere declaration in its articles of association that it possesses such power.'' A con- ' Central Transp. Co. v. Pullman legislature. Naturally, we would look Palace Car Co., 139 XJ. S. 24 (1891), for the authority to do these things in (11 Sup. Ct. Rep. 478). some express provision of law. We ' Thomas v. Railroad Co., 101 U. S. would suppose that if the legislature 71 (1879) ; Pennsylvania Co. v. St. saw fit to confer such rights it would Louis, etc. R. Co., 118 U. S. 311 do so in terms which could not be (1886), (6 Sup. Ct. Rep. 1094) ; Bris- misunderstood. To infer, on the con- coe V. Southern Kan. R. Co., 40 Fed. trary, that it either intended to confer 278 (1889). In Oregon R., etc. Co. v. them or to recognize that they already Oregonian R. Co., 130 U. S. 30 (1889), existed, by the simple use of the word (9 Sup. Ct. Rep. 409), Mr. Justice Mil- 'assigns,' a very loose and indefinite ler said : "One of the most important term, is a stretch of the power of the powers with which a corporation can court in making implications which be invested is the right to sell out its we do not feel to be justified.'' whole property together with the ' 8 Vict. ch. 20. franchises under which it is operated, * Simpson v. Denison, 10 Hare, 57 or the authority to lease its property (1852), (16 Jur. 828). for a long term of years. In the case » Oregon R., etc. Co. v. Oregonian of a railroad company, these privileges, R. Co., 130 U. S. 1 (1889), (9 Sup. Ct. next to the right to build and operate Rep. 409). its railroad, would be the most im- The New York statute of 1839 portant which could be given it, and which for a long time furnished the this idea would impress itself upon the sole authority for railroad leases, pro- 340 CHAP. XVl] NATURE AND AUTHORIZATION OP LEASE § 184 stitutional provision ' prohibiting parallel or competing roads from being consolidated is a restriction upon the powers of the corporations owning such roads, and is not to be construed as a grant of authority to non-competing corporations to lease.^ § 184. Construction of Statutes — (C) Power to lease Un- finished Road. — • Power to construct does not give power to take a lease and, conversely, power to take a lease does not give power to construct.^ Where, therefore, the statute au- thorizing railroad leases is inapplicable to roads not yet con- structed, a lease by a railroad company of its road and fran- chises before its road is completed is invalid, and the lessee acquires no right to finish the work.* Thus it was held that a statute authorizing the leasing of a railroad and conferring upon the lessee power " to run, use and operate " the road implied a finished road, as did a condition that the leased roads should be connected; and that, under such authority, the franchise for building a road could not be transferred.' While power to construct will not be implied from a grant of power to take a lease, power to enter into an executory con- tract for leasing, when completed, a railroad in process of construction, may fairly be implied from such a grant of power." vided that nothing therein should Co., 130 XJ. S. 1 (1889), (9 Sup. Ct. authorize the railroad of any corpora- Rep. 409). tion to be used in a manner incon- * Wood v. Bedford, etc. R. Co., 8 sistent with its charter. The charter Phila. 94 (1871) ; Clarke v. Omaha, of a railroad company authorized it to etc. R. Co., 4 Neb. 458 (1876), (sale), construct and operate its road be- ' Wood j'. Bedford, etc. R. Co., tween certain termini. It sought to 8 Phila. 94 (1871). lease a portion of its road to another ^ Jones v. Concord R. Co., 67 N. H. corporation which would have ren- 234 (1892), (30 Atl. Rep. 614, 68 dered it impossible for the lessor to Am. St. Rep. 650) ; March v. Eastern have constructed and operated the R. Co., 40 N. H. 548 (1860), (77 Am. road between the termini prescribed Dec. 732) ; Hazard v. Vermont, etc. in the charter. It was held that the R. Co., 17 Fed. 753 (1883). In Day statute did not authorize such a v. Ogdensburg, etc. R. Co., 107 N. Y. lease. 129 (1887), (13 N. E. Rep. 765), the Brooklyn, etc. R. Co. v. Long road was finished in performance of an Island R. Co., 72 App. Div. (N. Y.) agreement entered into at the same 496 (1902), (76 N. Y. Supp. 777). time the lease was agreed upon, and 1 Texas, Const. Art. X. § 5. it was held that the lease was valid — ^ Central, etc. R. Co. v. Morris, 68 that the parties intended a completed Tex. 49 (1887), (3 S. W. Rep. 457). road and before the lease was executed ^ Oregon R., etc. Co. v. Oregonian the road was completed. 341 § 185 INTERCORPORATE RELATIONS [pART III The construction of a railroad requires the exercise of powers dissimilar to those required in the operation of a leased road. An agreement for a lease — or a lease to commence in future — involves merely the exercise in an uncommon form of the power conferred. As somewhat broadly stated by the Supreme Court of New Hampshire in Jones v. Concord R. Co.: ^ " What- ever may be the practical effect of a conveyance or lease of a building or road that does not exist, the corporate power of liiring a road, like the power of hiring a passenger or freight station, includes the power of rriaking an executory contract for a lease of a road or building to be constructed within a time or in a place or manner or form, prescribed by the contract." § 185. Construction of Statutes — (D) Leases of Connecting Lines. — As already shown, statutes authorizing railroad leases generally provide that railroad companies may lease their roads to corporations owning roads which form continuous or con- necting Unes with their own.^ The construction of statutes of this character has been the subject of extended consideration in connection with similar limitations attached to the right to consolidate, and the principles there shown to be established apply with equal force to statutes authorizing leases.^ ' .Tones v. Concord R. Co., 67 N. H. caused by the inclined plane, in the 243 (1892), (30 All. Rep. 614, 68 Am. line of the former. An absolute pas- St. Rep. 650). sage for a car from one road to another ' See ante, § 180: "What Railroads without interruption is not necessary may be leased. Statiitory Provisions." to constitute a. "connected or cou- ' See ante, § 29: "Construction of tinuous" line within the meaning of Statutes authorizing Consolidation of the statutes in question. Railroads — Connecting or Continuous Hampe v. Traction Co., 165 Pa. Lines." St. 468 (1895), (30 Atl. Rep. 931). Power to take a lease from a con- The general statutes of Pennsyl- necting railroad company iraphes vania referred to in the preceding power in the latter to make a lease. case requiring the railroads of lessor Huntting v. Hartford St. Ry. Co., and lessee to be connected,' do not 73 Conn. 179 (1900), (46 Atl. Rep. apply to corporations chartered by 824). the legislature upon which express An inclined-plane railway com- power to merge, con.sohdate or unite, pany organized under the laws of without such condition, is conferred Pennsylvania, has authority, under by another statute, statutes of that State, to lease its entire Kaufman v. Pittsburgh, etc. R. Co., property to another railway company, 217 Pa. 599 (1907), (66 Atl. Rep. where one of the lessor's lines forms 1108). a continuous route with the lessee's Under a Georgia statute a belt line road, notwithstanding the break company may lease its road to another 342 CHAP. XVl] NATURE AND AUTHORIZATION OF LEASE §187 § 186. Constitutional and Statutory Prohibitions of Leases of Competing or Parallel Lines. — The leasing by railroad com- panies of competing or parallel lines of road is prohibited by constitutional and statutory provisions in many States. The same and similar prohibitions, the considerations of public policy which induced their adoption, and their construc- tion and application, have already been examined at length in the consideration of the subject of consoUdation.' § 187. Long-term Leases not prohibited by Statutes against Perpetuities. — The question has been judicially raised whether a lease in perpetuity or for nine hundred and ninety-nine years comes within the prohibition of statutes against perpetuities as suspending the disposition of the leased property longer than the periods prescribed in such statutes. A slight ex- amination of the question, however, will show clearly that a lease does not create a perpetuity. A perpetuity was defined, in the early case of Scattergood v. Edge,^ to be an estate " in- aUenable though all mankind joined in the conveyance." But the interests of lessor and lessee may generally be separately conveyed; and they can always, by uniting, freely and without restraint convey the entire estate — the fee and the leasehold interest.^ company with whose road it connects or forms a continuous Une, Georgia R. etc. Co. v. Maddox, 116 Ga. 64 (1902), (42 S. E. Rep. 315). * See ariie, ch. III. . ** Constitutional and Statutory Restraints upon Con- solidation. " The constitutional provisions against leases of competing lines — as well as consolidation and sales — are collected, and many statutes re- ferred to, in note to § 32, ante: "Con- stUvMonal and Statutory Provisions against Consolidation of Competing Railroads. " ' Scattergood v. Edge, 1 Salk. 229 (1795). In Washburn v. Donnes, 1 Ch. Cas. 23 (1671), it is said : "A perpetu- ity is where if all that have interest join and yet cannot bar or pass the estate." ' Todhunter v. Des Moines, etc. R. Co., 58 Iowa, 205 (1882), (12 N. W. Rep. 267, 7 Am. & Eng. R. Cas. 67), where the question stated in the text is considered. 343 § 188 INTERCOEPOEATB RELATIONS [PART III CHAPTER XVII APPHOVAL AND EXECUTION OF CONTBACT OF LEASE I. Assent of Stocklwlders to Railroad Lease § 188. Necessity for Consent of Stockholders to Lease of Railroad. Power of Directors. § 189. Whether Unanimous Consent is necessary unless otherwise provided. § 190. Requisite Majority prescribe Terms of Lease. § 191. Remedies of Dissenting Stockholders. § 192. Acquiescence and Laches of Stockholders. II. Method of approving and executing Railroad Leases § 193. Statutory Requirements. § 194. Construction of Statutes prescribing Mode of approving and executing Leases. § 196. Formalities attending Execution of Lease of Railroad. § 196. Corporation may be estopped from alleging Irregular Execution of Lease. I. Assent of Stockholders to Railroad Lease § 188. Necessity for Consent of Stockholders to Lease of Railroad. Power of Directors. — The New York Court of Ap- peals has held that a lease by one railroad corporation to an- other of its road, property and franchises for a term of years, under a statute conferring the power but not prescribing its mode of exercise, may be made by the directors of the cor- poration, and that the concurrence of the stockholders is not essential to its validity.' The ground upon which this decision was placed was that all powers conferred upon a corporation, unless otherwise expressly prescribed, must be exercised by its directors, — that the consent of stockholders is not neces- sary to the validity of a corporate act, unless expressly required by statute or the by-laws of the corporation. This conclu- sion is, however, opposed by other authorities and cannot be justified upon principle. ' Beveridge v. New York Elevated Conro v. Port Henry Iron Co., 12 R. Co., 112 N. Y. 1 (1889), (19 N. E. Barb. (N. Y.) 27 (1851). Rep. 489, 2 L. R. A. 648). See also 344 CHAP. XVIl] APPROVAL AND EXECUTION OF LEASE §188 The directors of a corporation are its executive agents — the corporation acts through them — but their duties are to administer its affairs in furtherance of the objects of its creation} They may exercise all ordinary and incidental corporate powers without the approval of the stockholders, but the extraordi- nary power of leasing the corporate property and franchises for a long term of years — of completely changing the control of the property and the administration of the affairs of the corporation — must be exercised by the stockholders them- selves, unless expressly conferred upon the directors.^ When ^ The directors of a railroad com- pany are its agents with limited powers and their duties are to so con- duct its affairs as to further the ends of its creation; they have no power to destroy it or give away its funds or deprive it of any of the means for accomplishing the purposes for which it was chartered. Bedford R. Co. v. Bowser, 48 Pa. St. 29 (1864). Where an increase of the capital stock of a corporation was authorized "at the pleasure of the said corpora- tion" and its charter provided that "all the corporate powers of the said corporation shall- be vested in and exercised by a board of directors" it was held that the directors had no authority to increase the stock, upon the ground that "the general power to perform all corporate acts refers to the ordinary business transactions of the corporation." Railway Co. v. Allerton, 18 Wall. (U. S.) 234 (1873). ' United States : In Cass v. Man- chester, etc. R. Co., 9 Fed. 642 (1881), Judge McKennan, in considering the necessity for the stockholders' consent to a lease, said: "The change pro- posed here is not organic, it is true, but it is thorough and fundamental, as it affects the administration of the company's affairs. It in\'olves a with- drawal from the control and manage- ment of the stockholders of the entire property of the corporation for a period of at least five years; it will preclude for a like period the exercise annually by the stockholders of their judgment as to the particular char- acter and method of conducting the business affairs of the corporation; and it denies to the stockholders any right of suggestion or disapproval of the conditions upon which a relin- quishment of important corporate faculties may be conceded. Surely a power which will be attended with such consequence does not relate 'to the ordinary business transactions,' nor 'to the orderly and proper ad- ministration of the affairs,' of the company, and hence cannot be exercised by the directors without express authority to them.'" Rogers v. Nashville, etc. R. Co., 91 Fed. 322 (1898) : "The power of leas- ing out a railroad, or acquiring an- other by lease, is one which very vitally affects the , contract between shareholders. That every such con- tract should be referred to the share- holders is, therefore, most reasonable ; and it should not be lightly pre.sumed that the law-making p'ower would, when dealing with the general sub- ject, intend to provide that some contracts of this character should be submitted to the shareholders for their approval, while others just as vital might be made without their consent." Also Farmers Loan, etc. Co. K. St. Joseph, etc. R. Co., 1 McCrary 247 (1880). Indiana : Commissioners of Tippi- 345 §189 INTERCORPORATE RELATIONS [part III the statute conferring power to lease is silent as to the mode of its exercise a lease of a railroad must be authorized, or, what is equivalent, ratified by the stockholders. The right of the stockholders to authorize a lease and the necessity for their approval are in no way affected by the fact that the directors have agreed upon the terms of the lease.' § 189. Whether Unanimous Consent is necessary unless otherwise provided. — As shown in another section, statutes au- thorizing leases of railroads nearly always prescribe the pro- portion of the stockholders whose consent is necessary. Where, however, the statute contains no such provision, a question arises whether the unanimous consent of the stockholders is required or whether the consent of a majority is sufficient. Thus, on the one hand, it has been held that a lease for a long term of canoe County v. Lafayette, etc. R. Co., 50 Ind. 85 (1875). New York: Metropolitan El. R. Co. V. Manhattan El. R. Co., 11 Daly 373 (1884), (15 Am. & Eng. R. Cas. 55, 14 Abb. N. C. 103). In this case (decided before the Beveridge case supra) the Court said; "If the board of directors have the power, without the assent of the shareholders, to lease the properties of tlie corpora- tion for all time, then tiie shareholders may be deprived of, not only the ad- ministration of their property through its agents, the directors, but its very possession, without a moment's warn- ing, A board of directors are elected for one year, to manage the business and affairs of the corporation, such business being the operating and maintaining of a railroad. At the time of their election, the shareholders have no intimation that anything else is to be done by the directors, and the expectation is that such directors, at the end of their year in office, will turn over the property committed to them to their successors in office, with an account of their .stewardship. Can it be possible that this board, elected for only one year, without any notice or warning has the power 346 to terminate the business of the cor- poration, and transfer all the proper- ties to another corporation ? It seems to me clearly not. This is not the management of the business of the corporation. It is terminating the business to carry on which it was incorporated." Pennsylvania: Kersey Oil Co. v. Oil Creek, etc. R. Co., 12 Phila. 374 (1877). Also Martin v. Continental Pass. R. Co., 14 Phila. 10 (1880). Virginia: Stevens v. Davison, 18 Gratt. 819 (1868), (98 Am. Dec. 692). See also ante, § 112: "Sale of En- tire Corporate Property by Directors." It has been held that the consent of stockholders, necessary for the authorization of a lease, is required for its cancelation. Henry v. Pitts- burgh, etc. R. Co., 2 Ohio N. P. 118 (1895). A modification of a lease must be approved by the same stockholders' vote as is required by the statute in the case of the original lease. Con- tinental Ins. Co. V. New York, etc. R. Co. 187 N. Y. 225 (1907), (79 N. E. Rep. 1026). ' Jones V. Concord, etc. R. Co., 67 N. H. 234 (1892), (30 Atl. Rep. 614, 68 Am. St. Rep. 650). CHAP. XVIl] APPROVAL AND EXECUTION OP LEASE 189 years works such a complete change in the conduct of the affairs of a corporation and the custody of its property that it can be brought about only by the unanimous consent of the stock- holders.^ On the other hand, it has been held that every stock- holder in joining a corporation impliedly agrees to be bound by the will of the majority, and that it is the right of the majority to determine whether or not a lease — which makes no organic change — shall be made.^ "It is true this doctrine," says 1 Mills V. Central R. Co., 41 N. J. Eq. 1 (1886), (2 Atl. Rep. 453). See also Zabriskie v. Hackensack, etc. R. Co., 18 N. ,T. Eq. 178 (1867). In Boston, etc. R. Co. v. New York, etc. R. Co., 1.3 R. I. 260 (1881), the Court said; "Such an arbitrary deprivation of property it cannot be within the power of a majority in a corporation to direct or of a legisla- ture to ratify. If this could be up- held no investment in a corporation would be secure, for any minority could be deprived of their property by a vote of a majority confirmed by legislative act, without the require- ment of public necessity and without provision for 'just compensation.' " ^ Dady V. Georgia, etc. R. Co., 112 Fed. 842 (1901), (consolidation); Inhabitants of Waldoborough v. Knox, etc. R. Co., 84 Me. 469 (1892), (24 Atl. Rep. 942) (sale). See also Durfee v. Old Colony R. Co., 5 Allen (Mass.) 230 (1862). In Dickinson v. Cqnsolidated Trac- tion Co., 114 Fed. 933 (1902), affirmed, 119 Fed. 871 (1903), — a New Jersey case, — the Court followed the princi- ple of the New Jersey decisions cited in the preceding note in holding that where authority to lease is not con- ferred until after the organization of the corporation unanimous consent is necessary to authorize a lease; but that when such power existed at the time the corporation was organized, a majority vote is sufficient. Judge Gray said (p. 253): "The objection most strenuously and seriously urged. is that although express power may be given to a corporation to lease, that power cannot, in the absence of express legislative authority to the contrary, be exercised without the consent of .all the stockholders. It is urged with some plausibility, that without express legislative authority, a corporation could not make a lease of its property and franchises, even with the assent of all its stockholders, and that express legislative authority to make o, lease is only a conferring of a power not existent without such legislative grant, upon the whole body of stockholders. Many cases have been cited in the brief and in the argument, to support these propo- sitions. The distinction, however, between these cases and the one at bar, is, that the former concern grants of legislative power to lease, to cor- porations already in existence, and whose stockholders have subscribed under the conditions of the original charter, by which no such power was given. The implied contract between the stockholders, inter sese, in such cases, is, as already stated, that no such additional power, so radical in its nature, though conferred by legis- lative authority, shall be capable of being exercised without the assent of all the stockholders. In the case before us, however, the power €o lease was conferred by the act under which both corporations were formed. It was inherent in their organization and corporate existence, and was a condition upon which every stock- 347 § 190 INTERCORPORATE RELATIONS [PAET III the Supreme Court of Maine/ "subjects minorities to the will of majorities; but it is equally true that the contrary- doctrine subjects majorities to the will of minorities; and since one side or the other must yield, it seems to us more in harmony with the principles of natural justice that it should be the minority." Upon principle, it seems the better view that where author- ity to make or take a lease is expressly granted to an existing railroad company and, a fortiori, where it appears in the laws under which the corporation is organized, the authority be- comes a power of the corporation which, in the absence of a con- trolling statutory provision, may be exercised in the same manner as other powers requiring action by the stockholders — by a majority vote. § 190. Requisite Majority prescribe Terms of Lease. — Where the charter of a corporation or a general law authorizes it, by a vote of a prescribed majority of its stockholders, to lease its property and franchises, and contains no restrictions as to the terms of the lease or the rent to be reserved, the majority may agree upon such provisions and rental as they see fit, and, the minority stockholders have no remedy, except in case of fraud.^ Thus, where the charter of a railroad corporation authorized it, without restriction, by a vote of three-fourths of its stock- holders to lease its railroad, it was held that a lease so entered into for ninety-nine years, at a rent not exceeding the amount needed to pay fixed charges and dividends on the preferred stock was, in the absence of fraud, valid, although the possi- holder received his stock. It was Stockholders. — Whether Approval of competent for the legislature to have Majority is sufficient." imposed in its creative act any con- ' Inhabitants of Waldoborough v. ditions it pleased upon the stock- Knox, etc. R. Co., 84 Me. 469 (1892), holders of the corporation which it (24 Atl. Rep. 942). had called into existence. The power 2 Where the majority are au- to lease having been so given, with- thorized to lease the property and out prescribing any mode in which franchises of a corporation and no it was to be exercised, it must be limitation is placed upon the term of classed with the general powers con- the lease, a lease for so long a term ferred by a charter, which are to be as to amount practically to a con- exercised by the majority of the cor- veyance of the fee may be executed, porators or stockholders." Dickinson v. Consolidated Trac- See also ante, § 149; ''Assent of tion Co., 119 Fed. 871 (1903). 348 CHAP. XVIl] APPROVAL AND EXECUTION OF LEASE §191 bility of any dividend being paid on the common stock was thereby excluded for the entire term.' The conclusion reached in the case referred to, while the logical outcome of the application of fixed principles to the pro- visions of the charter, was most inequitable. The rule that the majority may prescribe the terms and conditions of a lease is founded upon an elementary principle in corporation law, and where there is only one class of stockholders works fairly. But that preferred stockholders, interested in securing a certain payment of their limited dividends, may with the aid of a minority of the holders of the common stock obtain a perpetual guaranty of their dividends and deprive the common stock- holders of any chance of return from the enhanced value of their property, is opposed to principles of natural justice. A rule producing such result, under forms of law, should be the subject of legislative enactment. Selfishness may work as grievous wrongs as fraud. § 191. R&medies of Dissenting Stockholders. — The pro- tection of the interests of minority stockholders from the un- ^ Town of Middletown v. Boston, etc. R. Co., 53 Conn. 358 (1885), (5 Atl. Rep. 706), where Judge Beardsley said : "But it is claimed that altliough there is no restriction in the language of the charter as to the term for which the company may lease its road, or as to the rent to be received, yet it is unreasonable so to construe it as to enable three-fourths of the stockholders to make a lease which deprives the other fourth of any chance for dividends for so long a period, and hence that the lease in question is not a rightful and lawful exercise of the power given by the charter. We see no ground for this claim, especially in view of the fact that leases of railroads are, and from the nature of the case must generally be, made for long terms. Railroads are leased, as they are built, with a view to the advantages to arise in the distant future from the development of population and business in the neighborhood by the facilities for transportation which they afford. The complaint also charges that, by the provision of the lease, the entire resources of the defendant company from which income can be derived are fraudulently appropriated for the benefit of the holders of the preferred stock. This is not a charge of fraudulent conduct or intent in the making of the lease, but only that, by its operation, the income will be fraudulently appropriated for the benefit of the preferred stockholders. This is simply an allegation that this appropriation of the income will be disastrous to the common stock- holders and wrongful; not that the preferred stockholders have acted fraudulently. If the company had the right, as it clearly had by its charter, to make the lease upon a three-fourths vote, the Court cannot regard the effect of the lease as wrongful, or in any proper sense fraudulent." 349 §192 INTEECORPOBATE RELATIONS [part III authorized acts of the majority, and of the interests of every stockholder from the unlawful acts of those intrusted with the management of the affairs of a corporation, is pecuUarly within the province of equity.' Upon this principle a court of equity at the instance of a stockholder in a corporation which has, without authority, agreed to lease its property and franchises, or which has agreed to accept an unauthorized lease from another corporation, will grant an injunction against both corporations, parties to the agreement, restraining the execution of the lease.^ Thus, where the directors of a rail- road company, without the approval of its stockholders and without sanction of law, made a lease of its railroad for ninety- nine years, it was held that such lease was ultra vires and void, and that an action would lie in behalf of any stockholder against both corporations for an injunction and for the cancellation of the lease.^ § 192. Acquiescence and Laches of Stockholders. — Upon ^ In Pond V. Vermont Valley R. Co., 12 Blateh. (TJ. S.) 287 (1874), upon a stockholder's bill to restrain an un- authorized lease of a railroad, about to be consummated by directors. Judge Woodruff said: "It is not in- sisted, and cannot be successfully claimed, that the matters complained of are not of equity cognizance ; or that a court, having general jurisdic- tion in equity, has no jurisdiction, at the instance of stockholders, to re- strain a corporation, or those engaged in the control and management of its affairs, from acts tending to the de- struction of its franchises, or viola- tions of the charter or from misuse or misappropriation of the corporate powers or property, or other acts prejudicial to the stockholders, amounting to a breach of trust on the part of the managers." ^ Winch V. Birkenhead, etc. R. Co., 5 De Gex &. Sm. 562 (1852), (16 Jur. 1035, 13 Eng. L. & Eq. 506); Com- missioners of Tippecanoe County v. Lafayette, etc. R. Co., 50 Ind. 85 (1875); Mills v. Central R. Co., 41 350 N. J. Eq. 1 (1886), (2 Atl. Rep. 453) ; St. Louis, etc. R. Co. v. Terre Haute, etc. R. Co., 33 Fed. 447 (1888), s. c. on appeal, 145 U. S. 393 (1892), (12 Sup. Ct. Rep. 953). See also post, § 248: ^'Voidable Railroad Leases'^ and cases cited, for consideration of remedies of minority stockholders in case of unfair leases. ^ Commissioners of Tippecanoe County V. Lafayette, etc. R. Co., 50 Ind. 85 (1875). Where, however, the directors of a corporation with the approval of the majority of the stockholders leased its property for a long term of years to another corporation in which they became interested, it was held that a court of equity would not, at the suit of a minority stockholder, annul the lease, in the absence of proof of fraud or that the lease was detri- mental to the interests of the lessor corporation. Dickinson v. Consolidated Trac- tion Co., 114 Fed. 232 (1902); affirmed 119 Fed. 871 (1903). CHAP. XVIl] APPROVAL AND EXECUTION OF LEASE 192 principles similar to those already considered in connection with the subjects of consolidation and sale, a stockholder by his acquiescence may waive irregularities in the execution of a lease of a railroad and may be estopped by his laches from taking steps to have it set aside.' Statutes providing that a prescribed majority of stockholders must assent to a lease in a particular manner, and other provisions of a similar char- acter, are enacted in the interest of the stockholders. The compliance with these regulations may be a condition prece- dent to the validity of the lease as against a stockholder, but he may be estopped by acquiescence and delay from setting up the invalidity.^ Thus an Illinois statute requiring the ' See ante, § 49; "Laches of Stock- holders" ; ante, § 116: "Defences to Stockholders* Actions. Estoppel" ; ante, § ISO: " Acquiescence of Stockholders." Although a stockholder in a rail- road company, by voting for the lease of its road to another company, is estopped — as between himself and his corporation — from attacking its validity, the corporation is not es- topped to proceed against the lessee for the avoidance of the lease; and the estoppel against the stockholder does not prevent him from instituting proceedings for such purpose in the name of the corporation when such procedure is otherwise permissible. Memphis, etc. R. Co. v. Grayson, 88 Ala. 572 (1889), (7 So. Rep. 122, 16 Am. St. Rep. 69). 2 St. Louis, etc. R. Co. v. Terre Haute, etc. A. Co., 145 U. S. 393 (1892), (12 Sup. Ct. Rep. 953), (s. c. 33 Fed. 447 (1888)). Citing Za- briskie v. Cleveland, etc. R. Co., 23 How. (U. S.) 381 (1859); Central Transportation Co. v. Pullman Car Co., 139 U. S. 60 (1891), (11 Sup. Ct. Rep. 478) ; Davis v. Old Colony R. Co., 131 Mass. 258 (1881), (41 Am. Rep. 221) ; Beecher v. Marquette, etc. R. Co 45 Mich. 103 (1881), (7 N. W. Rep. 695) ; Thomas v. Citizens R. Co., 104 111. 462 (1882). See also Taylor V. Railroad Co., 4 Woods (U. S.), 575 (1882). In the Terre Haute case supra Mr. Justice Gray said (p. 403); "Al- though this statute, in terms, declares that any such lease, made without the written consent of the Illinois stock- holders, 'shall be null and void,' it would seem to have been enacted for the protection of such stock- holders alone, and intended to be availed of by them only. It did not limit the scope of the powers con- ferred upon the corporation by law, an excess of which could not be ratified or be made good by estoppel ; but only prescribed regulations as to the manner of exercising corporate powers, compliance with which the stockholders might waive, or the corporation might be estopped, by lapse of time, or otherwise, to deny." Hill V. Atlantic, etc. R. Co., 143 N. C. 539, 558 (1906), (55 S. E. Rep. 854); "While » court of equity will interpose at the suit of a single stock- holder to enjoin acts done by the officers of a corporation irregularly or in excess of their powers, which are injurious to his rights, or acts vltra vires, yet if he has stood by until the transaction to which he objects has become executed, he will not afterwards be heard to complain ; and this is so although the party who may have dealt with the corpora- tion in the particular case knew of 351 §192 INTERCORPORATE RELATIONS [part III written consent of all the Illinois stockholders to a lease of a railroad in that State to a foreign corporation, was held to be for the personal benefit of the stockholders which they could waive by acquiescence. Judge Gresham said: ' " The silence of the stockholders for almost twenty years was equivalent to their written consent. Any resident stockholder might have enjoined the execution and performance of the contract by a suit brought in due time, but no such suits could be main- tained after an acquiescence for the period stated, and no one but a stockholder could object to the contract on that ground." the irregularity of the proceedings or the invalidity of the transaction." In this case (Hill v. Atlantic, etc. R. Co., sv,pra) a stockholder with knowledge of the execution of a lease maintained silence for more than a year, during which time the lessee expended large sums of money in carrying out its part of the agree- ment, and it was held that by such delay he had lost the right to object to the lease. A stockholder's action to set aside an alleged illegal lease will not be sustained where there is no charge that the directors or stockholders had been requested to take action to have it declared void, and it has been acquiesced in for five years. Latimer v. Richmond, etc. R. Co., .39 S. C. 44 (1892), (17 S. E. Rep. 258). A delay of three months, however, is not laches. Mills v. Central R. Co., 41 N. J. Eq. 1 (1886), (2 Atl. Rep. 453). As to what constitutes acquiescence, see Kersey Oil Co. v. Oil Creek, etc. R. Co., 12 Phila. 374 (1877), where the Court said (p. 376) : "It is further contended that the contract and lease cannot be rescinded because the plain- tiff company is estopped by its ac- quiescence and silence. What is acquiescence? It is something more than non-resistance. It is more than mere passiveness, unless the passive- ness induces belief in error, and then it becomes an act." See also Boston, etc. R. Co. v. New York, etc. R. Co., 13 R. I. 260 (1881). A statute ratifying an important railroad lease provided that: "Every stockholder of either the lessor or the les.see shall be deemed to consent to the contract of lease authorized by this act, unless he shall file with the clerk of the lessee a writing de- claring his dissent therefrom. The shares of any stockholder dis- senting as above specified shall be acquired by the lessee and shall be valued and the value thereof be paid or tendered or deposited to or for the account of such stockholder." It was held that this . provision did not require the lessee to buy the shares of stockholders who had voted for the lease and then, after the enact- ment of the ratification statute, had filed declarations of dissent. Boston, etc. R. Co. v. Graham, 179 Mass. 62 (1901), (60 N. E. Rep. 405). • St. Louis, etc. R. Co. v. Terre Haute, etc. R. Co., 33 Fed. 447 (1888), affirmed 145 U. S. 393 (1892), (12 Sup. Ct. Rep. 953). 352 CHAP. XVIl] APPROVAL AND EXECUTION OF LEASE 193 II. Method of approving and executing Railroad Leases § 193. Statutory Requirements. — -The uniform policy in- dicated in statutes authorizing leases of railroads is to place restrictions upon the exercise of the power granted, to require the formal approval of a prescribed majority of the stock- holders of the contracting corporations, and to prescribe the method to be followed in the adoption of the lease.' Thus it -'Alabama. Code 1896, § 1170: Approval of proposed lease by holders of majority in value of stock of both corporations at meetings called for the purpose required. Arizona. R. S. 1901, par. 864: Assent of holders of two-thirds of en- tire capital stock of each corporation ■ — by vote or in writing — necessary to contract of lease. Arkansas. Kirby's Dig. 1904, §§ 6742, 6752, 6762: Proposed lease must be assented to by holders of two-thirds of capital stock of each corporation after conditions and terms are agreed to by directors. Colorado. Mills' Anno. Stat. 1891, § 612 (as amended by Sess. Laws 1899, p. 163): Assent of holders of two-thirds of capital stock of each company required to proposed lease. Connecticut. G. S. 1902, § 3703: "No lease of any railroad shall be binding on either of the contracting parties for a period of more than twelve months, unless- approved of by the stockholders of the companies that are parties to the lease, by a vote of two-thirds of the stock repre- sented at a meeting of the stock- holders called for that purpose." Georgia. Code 1895, § 2179, p. 128: Terms of lease are such as may be agreed upon. No particular method provided. Kansas. G. S. 1897, § 95: Terms and conditions of lease must be agreed to by directors and must be ratified by vote of the holders of two-thirds of capital stock of each company or approved by such holders in writing. See also *. ch. 70, § 94. Massachusetts. Supp. to Rev. Laws 1906, ch. 112, § 209: Directors agree upon the terms which must be "approved by a majority in interest of the stockholders of both corpora- tions at meetings called for that purpose." Michigan. P. A. 1901, Act No. 30, p. 50: "Stockholders owning a majority of stock of said companies shall consent thereto." Minnesota. G. S. 1894, §§ 721, 2736; Lease must be assented to Iw holders of two-thirds of capital stock of each company at meetings called for the purpose. Missouri. R. S. 1899, § 1060: Holders of a majority of stock of each company must assent in writing to lease proposed by directors before it can be perfected. Montana. Code 1895, § 912 re- quires approval of three-fifths of stock- holders, lb. § 923 requires approval by majority vote or by majority in writing. These provisions apply to leases authorized by different stat- utes. Nebraska. Comp. Stat. 1901, § 1769 : No lease shall be perfected until assented to by vote of holders of two- thirds of capital stock; (i6. § 4026), by vote or* written approval of like number. lb. §§ 4018, 4019, authorize approval of certain leases by majority vote. New Hampshire. See statute in note to § 180, ante; "What Rail- 353 § 194 INTBHCOHPOHATE RELATIONS [pART III is generally provided that the proposed lease shall not become effective until it shall have been approved by a vote of the holders of a designated majority of the capital stock of each corporation. In several States, however, formal action by the stockholders may be dispensed with if the specified number give their assent in writing and certificates showing the ap- proval of the lease are filed in the ofiice of the Secretary of State. Some of these statutory requirements constitute conditions precedent to the vaUdity of the lease. Others are directory only. § 194. Construction of Statutes prescribing Mode of approv- ing and executing Leases. Ratification. — Statutes prescrib- ing the method of approving and executing leases of railroads are, in the essential elements, mandatory and must be strictly complied with. A provision that no lease of a railroad shall be perfected until the stockholders of the contracting corporations shall have approved it by their votes at stockholders' meetings requires their approval in that form. Their consent obtained individually, outside of the meetings, is not sufficient. Delib- erate action as stockholders is necessary.^ Conversely, a pro- roads may he leased. Statutory Pro- same manner a.g consolidation. See visions." ante, § 52: " Formal Statutory Requi- New Jersey. See statute in note sites" (" Consolidation ")- to § 22, arUe. Tennessee. Code 1896, | 1540 : New Mexico. Comp. Laws 1897, Lease must be approved by votes of § 3891 : Holders of at least two- holders of three-fotn-ths of capital thirds of capital stock must assent stock, to proposed lease. West Virginia. Code 1899, ch. New York. See statute in note to 54, § 82a : Lease requires approval % ISO, ante: "What Railroads may he of holders of two-thirds of capital leased. Statutory Provisions." stock at meeting called for the pur- North Dakota. Rev. Codes 1899, § 2954 : Lease must be approved in Wyoming. E,. S. 1899, § 3206 : same manner as consohdation. See Lease must be approved by vote of ante, § 52 : "Formal Statutory Req- holders of a majority of stock, or uisites" (" Consolidation"). their written approval may be given. Ohio. Bates' Anno. Stat., 1787- ■ In Peters v. Lincoln, etc. R. Co., 1906, § 3301 : Two-thirds of stock- 2 McCrary 275 (12 Fed. 514) (1881), holders must approve proposed lease Judge McCrary said : "The legislature at meeting called by each corporation. has seen fit to provide that no lease South Dakota. Anno. Stat. 1901, of a railroad in this State, executed § 3906 : Lease must be approved in by one railroad company to another, 354 CHAP. XVIl] APPROVAL AND EXECUTION OF LEASK §194 vision that a proposed lease may be executed if a majority of the stockholders have assented in writing is not complied with by the casting of ballots in its favor by a majority of stock- holders at a meeting where it has been the subject of considera- tion. Ballots do not contain the signatures of stockholders. They are cast to accompUsh corporate, and not individual, action.' Where an act of Parliament authorized one railroad com- pany to grant, and another railroad company to accept, a lease of a railroad upon such terms as should be agreed upon, but shall be completed until a meeting of the stockholders of both companies shall have been called by the directors thereof or until such lease has been assented to by the votes of at least two-thirds of the stock represented. In our judgment the stockholders' meeting and the vote in such meeting upon the question of assenting to the proposed lease are matters of essence, of substance and not of mere form. . . . The action of stockholders outside of such meeting is individual action only. It is not such action as the law requires. It does not bind the corporation." See also same case upon amended bill, 14 Fed. 319 (1882). In Smith v. Hurd, 12 Met. (Mass.) 385 (1847), (46 Am. Deo. 690), Chief Justice Shaw thus stated the relation of » stockholder, in his individual capacity, to his corporation : "Should all the stockholders join in a, power of attorney to any one, he could not take possession of any real or personal estate, any security or chose in action ; could not collect a debt, or discharge a claim or release damage arising from any default; simply because they are not the legal owners of the propertj', and damage done to such property is not an injury to them. Their rights and their powers are limited and well defined." See also Humphreys v. McKissock, 140 U. S. 304 (1891), (11 Sup. Ct. Kep. 779). ' Humphreys v. St. Louis, etc. R. Co., 37 Fed. 313 (1889) : "No vote at any meeting was required by the laws of Missouri, if the holders of a majority of the stock assented to the lease in writing, and the proper certificates were filed in the office of the Secre- tary of State. The propositions voted upon were in writing, and the voting was by written ballots. This is argued to have been an assent in writing to the lease; but the ballots were not signatures, and were cast to accom- plish corporate, and not individual, action. This does not seem to amount to the assent in writing contemplated by the statute. " Under a New York statute, how- ever, requiring the written consent of two-thirds of the stockholders to a mortgage, it was held that a resolu- tion passed at a stockholders' meet- ing by the vote of stockholders holding two-thirds of the stock amounted to the written assent required. Beebe V. Richmond Light, etc. Co., 13 Misc. Rep. 737 (1895), (35 N. Y. Supp. 1). A statute authorized a railroad company to enter into an agreement for a lease with the assent of two-thirds of its shareholders. Held, that hold- ers of registered bonds, having voting powers, might vote upon the ques- tion. Hendrie v. Grand Trunk R. Co. (Ont.), 13 Am. & Eng. R. Cas. 62 (1883). 355 § 195 INTERCORPORATE RELATIONS [pART III provided that the power should not be exercised until the Board of Trade had certified that it had been proved to its satisfac- tion that half the capital of the leasing company had been raised and applied for the purposes of the act, it was held that no lease or binding agreement for a lease could be made before the certificate had been obtained.' Where power to make a lease is vested in the stockholders and tliey have agreed upon its terms and conditions, the direct- ors have no power, without the consent of the stockholders, to make any material change in the terms agreed upon.^ Irregularities in a stockholders' meeting at which a lease is authorized may be cured by appropriate action at a subse- quent meeting. Thus where a railroad company voted to lease its road at a special stockholders' meeting of which one stockholder had no notice, but at the annual meeting held subsequently, of which he had due notice, a resolution to set aside the lease, introduced at his instance, was defeated, it was held that this action constituted a ratification of the lease and relieved it of any irregularity by reason of the want of notice of the first meeting.' § 195. Formalities attending Execution of Lease of Railroad. — When the statutory requirements essential to the authori- zation of a railroad lease have been complied with, the matter of its formal execution is governed by principles applicable to corporations generally in the execution of conveyances.^ ' Kent Coast, etc. R. Co. v. London, Regarding the formalities required etc. R. Co., L. R. 3 Ch. App. 656 in modifying the provisions of a duly (1868). executed lea.se, the New York Court 2 Met. El. R. Co. V. Man. El. R. of Appeals in the recent case of Con- Co., 11 Daly, 373 (1884), (14 Abb. N. tinental Ins. Co. v. New York, etc. Cas. 103, 15 Am. & Eng. R. Cas. 51). R. Co., 187 N. Y. 225, 242 (1907), Compare, however, People v. Met. (79 N. E. Rep. 1026) said: "It is El. R. Co., 26 Hun, 82 (1881). urged that the compromise agree- ^ Hill V. Atlantic, etc. R. Co., 143 ment was in effect a new lease modi- N. C. 539 (1906), (55 S. E. Rep. 854). fying the provi.sion for rent reserved * That an agreement to give a in the old lease, and that not suffi- lease does not require, in its execu- cient in amount of the Central stock- tion, the formalities necessary in the holders voted for its adoption to execution of the lease itself, and that render the agreement valid in law as a decree of specific performance may a lease. We concede that a modi- be entered against a corporation, see fication of a lease must be executed Conant v. Bellows Falls Canal Co., with the same formalities and with 29 Vt. 263 (1857). the same vote as required by stat- 356 CHAP. XVIl] APPROVAL AND EXECUTION OP LEASE §195 1. Place of Execution. The meeting of the stockholders for the authorization of a proposed lease must be held within the State where the corporation is chartered. When the lease is authorized, it may be executed by the proper officers within or without the State.' 2. Authority of Officers or Agents. While the authority of the officers or agents of a corporation to execute a lease must be shown, written evidence of a formal vote is not necessary, and it may be implied from facts and circumstances. In the absence of proof to the contrary, the law presumes that the acting officers of a corporation are rightfully in office, and it is not necessary to prove their election to establish the validity of their acts.^ ute in the case of an original lease." ' Pittsburgh, etc. R. Co. v. Colum- bus, etc. R. Co., 8 Biss. (U. S.) 456 (1879). In Wright V. Bundy, 11 Ind. 404 (1858), the Court said: "The mere place where the active agents of a corporation enter into a contract must, in general, be immaterial. The important question arising must be one of power, not of place. The exercise of the power has relation to the place of their legal establish- ment, where the contract may be subsequently acted under. The meet- ings of the directors of a business corporation are not analogous to the sessions of a judicial tribunal. The corporation is organized by the elec- tion of directors ; but the mere organ- ization of the directors into .a cor- poration for business afterwards, is quite a different thing." Where the president of a railroad company operating a railroad in Ken- tucky acknowledged the execution of a mortgage thereof in Ohio it was held that the mortgage was properly executed. Hodder ^. Ken- tucky, etc. R. Co., 7 Fed. 793 (1881), affirmed sub nom. Wright v. Ken- tucky, etc. R. Co., 117 U. S, 72 (1886), (6Sup. Ct. Rep. 697). For principle applicable to inter- state consolidated corporation, see Graham v. Boston, etc. R. Co., 14 Fed. 753 (1883), affirmed 118 U. S. 161 (1886), (6 Sup. Ct. Rep. 1009). ' In Union Pacific R. Co. v. Chicago, etc. R. Co., 51 Fed. 327 (1892), af- firmed 163 U. S. 564 (1896), (16 Sup. Ct. Rep. 1173'!, Judge Sanborn said: "The Pacific Company delivered this contract, signed by its president and secretary, to the Rock Island Com- pany. This was prima facie evidence that it was executed in behalf of the corporation by lawful authority." See also Susquehanna Bridge, etc. Co. V. General Ins. Co., 3 Md. 305 (1852), (56 Am. Dec. 740) ; Jackson- ville, etc. R. Co. t/. Hooper, 160 U. S. 519 (1895), (16 Sup. Ct. Rep. 379). Where a committee of three direct- ors were given discretionary power to execute a lease of corporate property, it was held that two of the members had power to affix the corporate seal, the third member being absent but having approved the execution of the lease. Union Bridge Co. v. Troy, etc. R. Co., 7 Lans. (N. Y. 240 (1872-1). Where, however, a resolution pro- vided " that the president and treasurer of this association be, and they are hereby authorized to exe- 357 195 INTERCOEPORATB RELATIONS [part III 3. Seals. A seal is necessary upon a written lease made by a corporation only when it is required upon a similar lease made by a natural person.^ When a seal is necessary, and a contract purporting to be sealed is shown to have been duly signed and executed by the proper officers, the law will pre- sume that the seal was affixed by proper authority.^ 4. Acknowledgment, Witnesses, etc. Statutory provisions concerning the execution of a lease of real estate adopted in the State where the railroad is situated, prescribing the num- ber of witnesses, form of acknowledgment, etc., are, undoubt- edly, applicable to railroad companies in the execution of leases of their roads. Failure to comply with such provisions, however, does not, as a general rule, affect the validity of the lease between the parties. 5. Record. A failure to record the lease of a railroad in the office of the Secretary of State or otherwise as the statute may prescribe will not, unless expressly so provided, affect its valid- ity as between the parties.^ cute and deliver . . a lease," it was held that the authority of the two officers was joint, and that a lease executed by one of them alone was invalid. Pond v. Vermont Val- ley R. Co., Fed. Cas. No. 11, 263 (1876). ' United States Bank v. Dand- ridge, 12 Wheat. (U. S.), 64 (1828). ' Fidelity Insurance, etc. Co. v. Shenandoah Valley R. Co., 32 W. Va. 224 (1889), (9 S. E. Rep. 180, 38 Am. & Eng. R. Cas. 577). Also Jackson- ville, etc. R. Co. V. Hooper, 160 XJ. S. 519 (1895), (16 Sup. Ct. Rep. 379). ^ The general principle that the recording of a deed or lease is only necessary for the purpose of giving notice, and that an unrecorded lease is as valid between the lessor and lessee as if recorded, is undoubtedly as applicable to leases of railroad and other corporations as to those of natural persons. The following cases illustrate this general principle : Cole- son V. Blunton, 3 Haywood (Tenn.), 152 (1816) ; Galpin v. Abbot, 6 358 Mich. 17 (1858) ; Lawry v. Williams, 13 Me. 281 (1836) ; Stearns v. Morse, 47 N. H. 532 (1867) ; Turner v. Stip. 1 Wash. (Va.) 319 (1794); Cooper V. Day, 1 Rich. Eq. Rep. (S. C.) 26 (1844). A State statute providing that every corporation operating a rail- road within the State under lease shall have the lease recorded is not invalid as an interference with inter- state commerce. Commonwealth v. Chesapeake, etc. R. Co., 101 Ky. 159 (1897), (40 S. W. Rep. 250). Under statutes, requiring, under penalties, the lessee in every railroad lease to have it recorded in the office of the Secretary of State, and of the county clerk of every county in which the road lies, an indictment stating the offence of operating a railway in the State under a lease without having the same recorded in said offices is sufficient. Commonwealth v. Chesapeake, etc. R. Co., 115 Ky. 57 (1903), (72 S. W. Rep. 361). CHAP. XVIl] APPROVAL AND EXECUTION OF LEASE 196 § 196. Corporation may be estopped from alleging Irregular Execution of Lease. — When a railroad company, acting within the scope of its corporate powers, executes a lease of its rail- road to another corporation, and permits the lessee to take possession of the leased property and make improvements thereon, or when such a railroad company takes a lease and assumes control of the leasehold estate, it is estopped to allege irregularities in its own execution of the lease.^ In Union Pacific R. Co. V. Chicago, etc. R. Co.,^ Judge Sanborn said: " Under these circumstances, to permit this company now to repudiate this contract would violate every principle of equity and fair dealing.. By its presentation to the Rock Island Company of this contract and this resolution, acts ap- parently official, by its acceptance of a part of the benefits of the contract, by its silence for seven months while this large expenditure of money was being made in reliance on this con- tract, it is estopped to declare it void, either because its board of directors failed to pass a formal resolution approving it, or because its secretary failed to state in its calls that this con- tract would be considered at the meetings that unanimously authorized and ratified it." As to allegation and froof of exe- cution of lease see George v. Central R., etc. Co., 101 Ala. 607 (1893), (14 So. Rep. 752). See also Hawley V. Gray Bros., etc. Co., 106 Cal. 337 (1895), (39 Pac. Rep. 609). A certified copy of a lease of a railroad is admissible in evidence under Illinois statutes. Chicago, etc. R. Co. v. Weber, 219 III. 372 (1905), (76 N. E. Rep. 498). ' Union Pacific R. Co. v. Chicago, etc. R. Co., 51 Fed. 309 (1892), affirmed 163 U. S. 564 (1896), (16 Sup. Ct. Rep. 1173); Humphreys v. St. Louis, etc. R. Co., 37 Fed. 307 (1889). In Pittsburgh, etc. R. Co. v, Keokuk, etc. Bridge Co., 131 U. S. 381 (1889), (9 Sup. Ct. Rep. 770), the Supreme Court of the United States said: '*When a contract is made by any agent of a corporation in its behalf, and for a purpose authorized by its charter, and the corporation receives the benefit of the contract, without objection, it may be presumed to have authorized or ratified the contract of its agent." 2 Union Pacific R. Co. v. Chicago, etc. R. Co., 51 Fed. 328 (1892), af- firmed 163 U. S. 564 (1896), (16 Sup. Ct. Rep. 1173). Same case in Cir- cuit Court, 47 Fed. 15 (1891). 359 § 197 INTERCOBPOEATE RELATIONS [PABT III CHAPTER XVIII THE CONTEACT OF LEASE I. Form and Construction of Railroad Leases § 197. Form of Lease. § 198. Consideration. § 199. Rule of Construction of Leases. § 200. Construction of Particular Leases. § 201. Lease for Longer Term than Existence of Corporations may be Valid. § 202. Partial Invalidity of Leases. Void Restrictions. § 203. Dependent and Independent Contracts. § 203a. Assignments of Leases. II. Covenants in Railroad Leases § 204. Covenant to pay Rent. Assumption of Interest Payments. § 205. Covenant to pay Taxes. I 206. Covenant not to Assign. § 207. Covenant to make Repairs. § 208. Covenant to pay Damages and defend Suits. § 209. Miscellaneous Covenants. I. Form and Construction of Railroad Leases § 197. Form of Lease. — The formal parts of a lease exe- cuted by a railroad company of its road and franchises gener- ally and properly follow, so far as applicable, the form of a lease of real estate. While any form expressing the intention of the parties may be adopted, there is an advantage in, the use of the ordinary covenants and conditions in that they have acquired a recog- nized judicial construction. A lease commences with the premises, the object of which is to state (1) the parties — the corporations, lessor and lessee — (2) the grant and (3) the description of the property leased — the railroad, franchises, appurtenances and personal property — which may be particularly set forth in the lease itself, or re- ferred to in an attached schedule. The habendum follows the premises, the object of which is to limit the grant. 360 CHAP. XVIIl] THE CONTRACT OF LEASE § 199 After the habendum the term — the commencement and duration of the lease — is stated, and lastly the reddendum, which fixes the amount of rent to be paid, specifies the manner and form of payment, and the periods at which the payments are to be made. Following these formal parts, the ordinary covenants, con- ditions and provisions of leases so far as applicable to railroads are inserted, together with any special provisions agreed upon in the particular caae.' § 198. Consideration. — ■ The consideration of a lease is the rent. The rent is due primarily to the lessee, but, in the case of an individual, he may stipulate that it be paid to another person. The stipulation does not affect the validity of the lease. The only reason why a similar contract might not be made by the officers — or by a majority of the stockholders of a cor- poration — is that they are trustees for the whole body of stockholders, and may not alienate corporate property unless the accruing benefit enures to their beneficiaries. But where one railroad company owns substantially all the stock and bonds of another company, a lease of the railroad of the latter for rent to be paid to the former company is not void for want of consideration. In such a case, the rent is paid directly to the corporation ultimately entitled to it — the real owner.^ § 199. Rule of Construction of Leases. — Leases of railroads being executed in pursuance of express legislative authority receive a reasonably strict construction, but the object of the construction, as in the case of other leases and contracts, is to ascertain and effectuate the intention of the parties. In ascer- taining the meaning to be given to any particular clause in a lease the Court, as said by Mr. Justice Brown in Chicago, etc. R. Co. V. Denver, etc. R. Co.,^ is " required to examine the entire contract, and may also consider the relations of the par- ' As to form of railway lease in Sup. Ct. Rep. 1173). Same case in England, when authorized, see Rail- Circuit Court, 47 Fed. 15 (1891). way Clauses Act 1845 (8 Vict. ch. 20, ^ Chicago, etc. R. Co. v. Denver, § 112). etc. R. Co., 143 U. S. 609 (1892), 2 Union Pacific R. Co. v. Chicago, (12 Sup., Ct. Rep. 479), affirming etc. "R. Co. 51 Fed. 309 (1892), 45 Fed. 304 (1891). affirmed 163 U. S. 564 (1896), (16 361 §, 200 INTERCORPORATE RELATIONS [pART III ties, their connection with the subject-matter of the contract, and the circumstances under which it was signed." When a lease consists of several distinct writings, the differ- ent provisions of all the parts must be considered in order to ascertain the intention of the parties as evidenced by the in- strument as a whole. Words and expressions must be given plain meanings which the context requires in order to make, if possible, all the parts consistent.^ While the rule is that where a lease is susceptible of two constructions, that most favorable to the lessee must prevail, such rule cannot be invoked where the intention of the parties can be ascertained from the language of the instrument when examined in the light of the surrounding circumstances.^ In case of ambiguity, the court may consider the practical construction given by the parties to the particular provisions in question.' § 200. Construction of Particular Leases. — Where a lease of a railroad provided that the lessee was " to have and to hold " the demised property during the term " paying the rents and keeping and performing the covenants" therein contained, it was held that any agreements and stipulations, the keeping of which was reasonably essential to the performance by the lessee of its part of the contract, should be treated as " cove- nants " whether so designated or not.* A provision in such a lease that in case the lessee corpora- tion "shall at any time fail to pay to the lessor such sums of money as may be due under the contract, or shall fail to per- form any other covenant herein, and such default or failure to perform shall continue for thirty days after written notice re- quiring such performance, then ... it shall be lawful for the ' Ciacinnati, etc. R. Co. v. Indiana, ■* South Carolina, etc. R. Co. v. etc. R. Co., 44 Oliio St. 287 (1886), Augusta, etc. R. Co., Ill Ga. 420 (7 N. E. Rep. 139, 26 Am. & Eng. R. (1900), (36 S. E. Rep. 593). Cas. 615). A demise of a street railway not in 2 P^re Marquette R. Co. v. Wabash existence and the right to construct R. Co., 141 Mich. 215 (1905), (104 which depends upon the obtaining N. W. Rep. 650). of consents from abutting proprietors ' Chicago, etc. . R. Co. v. Denver, is an executory contract. Atlantic etc. R. Co., 46 Fed. 145 (1890), s. c. Ave. R. Co. v. Johnson, 134 N. Y. 375 143 U. S. 596 (1892), (12 Sup. Ct. (1892), (31 N. E. Rep. 903). ' Rep. 479), 45 Fed. 304 (1891). 362 CHAP. XVIIl] THE CONTRACT OP LEASE § 200 [lessor], at its option, to reenter," gives the lessor, upon a breach by the lessee of any agreement or stipulation, the right to en- force the forfeiture of the lease.' Where a lease provided that, upon its expiration, the lessee should return the road in as good condition as when received, and where, under a statute, failure to operate the road would work a forfeiture of the lessor's charter, it was held that the lessee was bound to keep the road in operation.^ A railroad company demised its railroad and railroad prop- erty of every description " including " its railroad, rights and appurtenances; " and also " all buildings and equipment and all personal property belonging to it; "and also" all fran- chises, etc. It was held that the words "and also" related back to the words of demise and were not restrained by the word "including" to distinctively railroad property.' A provision in a lease that the lessee shall pay a definite sum for the expenses of keeping up the organization of the lessor imposes an obligation of a specific nature which the lessee is bound to perform, and against which it cannot set off the amount of a judgment which it holds against the lessor.* ' South Carolina, etc. R. Co. v. Michigan Central R. Co. v. PSre Augusta, etc. R. Co., Ill Ga. 420 Marquette R. Co., 128 Mich. 333 (1900), (36 S. E. Rep. 593). (1901), (87 N. W. Rep. 271). ^ Southern R. Co. v, Franklin, etc. * Louisville, etc. R. Co. i), Cumber- R. Co., 96 Va. 693 (1899), (32 S. E. land, etc. R. Co., 21 Ky. Law Rep. Rep. 485, 44 L. R. A. 297). 1126 (1900), (54 S. W. Rep. 5) ; ' Gray v. Massachusetts Cent. R. rehearing denied, 21 Ky. Law Rep. Co., 171 Mass. 116 (1898), (50 N. E. 140 (1900), (55 S. W. Rep. 884). Rep. 549). In a street railway lease the lessee One railroad company granted to agreed to pay an annual rental ; another the right in perpetuity to to operate the railway at its own use in common with itself a portion expense and make necessary repairs ; of its road. This contract was held to pay the floating debt of the lessor to be a lease. The contract contained and all assessments, and to apply- stipulations concerning the character all moneys not required for current of the business to be done upon the liabilities or interest to the improve- road, but provided that such stipu- ment of the leased property. It lations should not apply in case the was held that the lessor was not lessee made a certain extension of bound to turn over to the lessee any its lines. It was held that a pur- moneys received by it and that the chasing corporation did not take the rent paid by the lessee would not be lessee's rights free from the restric- repaid to it. tions, although its own lines were Moorshead v. United Rys. Co., extended to the designated points. 119 Mo. App. 541 (1906), (96 S. W. 363 §201 INTERCORPORATE RELATIONS [part III The phrase "terminal facilities," as understood by persons operating railroads, includes only tracks used in making up trains. A lease of such facilities does not include a track used only for the purpose of reaching car works.' § 201. Lease for Longer Term than Existence of Corpora- tions may be valid. — A lease for a time certain provided the lessee live so long is valid, and, extending this principle, it has been held that a lease to a railroad company for nine hundred and ninety-nine years is not invalid although the charter of the corporation will expire long before the termination of the lease, for the reason that the existence of the corporation may be prolonged by law for the entire term.^ A fortiori is this Rep. 261), affirmed 203 Mo. 121 (1907), (100 S. W. Rep. 611). A railroad company agreed with another company to construct and build its road with suitable terminals at a designated city and immediately thereafter took a lease of the road, for a period of ninety-nine years with power to complete it as previously agreed upon, at a. fixed rental, and with a further provision that all taxes upon the property and fran- chises of the lessor might be paid by the lessee but should be deducted from the rent. The lessee purchased real estate outside but adjoining the lessor's location at said terminal, and erected sidings and buildings thereon. It was held that the lessee had no right to deduct taxes paid upon this last-mentioned property from the rent. The lessee also paid a franchise tax assessed upon the basis of the gross earnings of all the lines operated by it within the State, divided by the total number of miles so operated. It was held that this was not a tax upon the franchises of the leased lines alone ; that it was either a tax upon the lessee's franchises alone or upon its franchises and those of the leased road. In the latter case it could not be apportioned and de- ducted from the rent. Lewiston, etc. R. Co. V. Grand Trunk R. Co., 364 97 Me. 261 (1903), (54 Atl. Rep. 750). ' Jacksonville, etc. R. Co. v. Louis- ville, etc. R. Co., 47 111. App. 414 (1893). The rights of a railroad company under a lease of terminal facilities from a station company cannot be affected by a subsequent lease exe- cuted by the station company to another railroad company. Pfere Marquette R. Co. v. Wabash R. Co., 141 Mich. 215 (1905), (104 N. W. 650). See this case also for examination of many questions relating to ter- minal agreements. For construction of a series of leases and renewals between a ter- minal company and its constituent corporations as tenants — rental being, paid on a wheelage basis — see Grand Trunk West. R. Co. r. Chicago, etc. R. Co., 141 Fed. 785, (1905). ' Hill V. Atlantic, etc. R. Co., 143 N. C. 241 (1906), (55 S. E. Rep. 854) : "Where the term of a lease of the property of a railroad company extends beyond the time fixed by its charter for the corporate existence of the lessor, such a lease is valid for the period of the corporate life of the lessor, and will extend beyond that period if the charter is renewed. CHAP. XVIIl] THE CONTRACT OF LEASE § 202 principle applicable in a case where the lease provides that it shall bind the successors and assigns of the parties thereto and the charter of the lessee corporation contains a provision for its continued renewal. As said by Judge Sanborn in Union Pacific R. Co. V. Chicago, etc. R. Co.^ " The contingency that this corporation will cease to exist, and leave neither assigns nor successors, is far too remote to have any influence upon the validity of this contract.'' Upon the same principle, a lease by a corporation for a longer period than its own existence is not void where the laws of the State creating the corporation permit an extension of its charter.^ § 202. Partial Invalidity of Leases. Void Restrictions. — A conveyance of property which a corporation is authorized to make is not rendered wholly void by including therein prop- erty and franchises which the corporation is without authority to ahenate. It is valid as to the former property and invalid as to the latter.' This principle is applicable to leases. A lessor railroad corporation can impose upon the use of its railroad by the lessee only such restrictions as are consistent with the discharge by the lessee of those obligations which, as common carrier and otherwise, it owes to the State and to the public. In Metropolitan Trust Co. v, Columbus, etc. R. Co.,'^ Judge Taft said: " Restrictions in the nature of conditions subsequent, which in respect to the demised premises forbid the lessee to do its public duties as a common carrier, would, if enforced, prevent the lessee from enjoying the demised prem- ises at all in a lawful manner, and are, therefore, repugnant and by this process it may endure A railroad company cannot prolong for the full term." its existence, which depends upon ' Union Pacific R. Co. v. Chicago, the user of its franchises, by leasing etc. R. Co., 51 Fed. 329 (1892). Af- them to another corporation which firmed 163 U. S. 592 (1895), (16 uses them for its own benefit. Re Sup. Ct. Rep. 1173), where the Ian- Brooklyn, etc. R. Co., 81 N.' Y. 69 guage of Judge Sanborn stated in (1881). the text is quoted with approval ' Butler v. Rahen, 46 Md. 541 by Chief Justice Fuller. The con- (1877) ; Hendee v. Pinkerton, 14 tract denominated a "lease" in this Allen (Mass.) 381 (1867); Gloninger case was really a trackage contract, v. Pittsburgh, etc. R. Co., 139 Pa. St. but the principles are equally ap- 13 (1891), (21 Atl. Rep. 211). plicable to a lease. * Metropolitan Trust Co. v. Colum- " Gere v. New York Ceiitral, bus, etc. R. Co., 95 Fed. 22 etc. R. Co., 19 Abb. N. C. 193 (1885). (1899). 365 § 203 INTERCORPORATE RELATIONS [PART III to the grant and void. When one takes an estate upon condi- tion subsequent, which is void as against public policy or for any other reason, the estate continues in the lessee or grantee freed from the condition." ' § 203. Dependent and Independent Contracts. — Where a contract of lease is invalid, the question whether other con- tracts in a measure connected with and referring to it are also void, depends upon whether such contracts are dependent upon the lease or independent of it. "While sometimes " by referring in a document signed by the party to another document, the person so signing in effect signs a document containing the terms of the one referred to " ' and a contract referring to an invalid lease may fall with it, such is not always the case. The effect of a reference de- pends upon the language of the instrument containing it. Thus, a lease of A's railroad to B is not made dependent upon the validity and continuing existence of a lease of C's road to B by a covenant that A shall receive from B a monthly state- ment of the gross receipts of C's road and shall have an oppor- tunity to inspect its books and accounts, which are, however, important only in case B seeks a reduction of the rental from the maximum amount stated in the lease.' So, it was held 'Railroad Co. v. Mathers, 71 III. lease was made dependent. Ifthepar- 592 (1874); 1 Story Eq. Jur. § 288; ties had intended this lease should ter- 2 Washb. Real Prop. (5th ed.), 8. minate in case the Lowell voluntarily ^ Fitzmaurice v. Bayley, 9 H. L. or involuntarily ceased to operate or Cas. 99 (1860). control the Northern, their accidental ^ Boston, etc. R. Co. v. Boston, failure to put that important part of etc. R. Co., 65 N. H. 393 (1888), their contract in the lease could have (23 Atl. Rep. 529), where Doe, C. J., been cured in a suit for the reformation said (p. 402) : "There has been no of the defective instrument. In the breach of the express covenant to lease there is no express stipulation pay rent, or the express agreement to of that kind, and no evidence on render to the plaintiffs a statement which it can be found that such a con- of the gross receipts of the five roads, dition (which would naturally be or the express covenant that books expressed in direct and distinct and accounts relating to the busi- terms) was intentionally left to be ness of the five roads shall be open implied from the mode in which the to the plaintiff's inspection. But the lessees are to ascertain and show lease of the Northern and its branches the amount of rent to be paid if they to the defendants has been judicially seek to avoid the payment of the annulled; and the plaintiffs contend largest sum named in the contract, that upon the validity and continuing . . . The lease of the Montreal was existence of that leaise the Montreal not made dependent upon the valid- 366 CHAP. XVIIl] THE CONTRACT OF LEASE 203a that a bridge contract, referring to certain articles in a lease for the purpose of defining the extent of liabilities and benefits assumed, did not make the bridge contract a part of the lease. The validity of the contract was entirely independent of the validity or invalidity of the lease.' § 203a. Assignments of Leases. — Where there is no covenant not to assign in a lease of a railroad the lessee corporation may assign it to another corporation authorized to take it, and the rights of the three parties — lessor, lessee and assignee — will be governed by principles similar to those applicable in the case of ordinary assignments of leases. Where possession of the leased property is taken without an express covenant to assume the rent, the assignee is liable for it through privity of estate. Where the assignee promises to pay the rental it is liable through privity of contract. No particular form is necessary for the assignment of a raiboad lease.^ Thus where a lessee of a railroad itself executed a lease of all the property embraced therein to another corpora- tion, it was held to operate as an assignment of the original lease for its entire term.' ity and continuing existence of the lease of the Northern." ' Railway Co. v. Keokuk Bridge Co., 131 U. S. 371 (1889), (9 Sup. Ct. Rep. 770, 39 Am. & Eng. R. Cas. 213). 2 Frank v. New York, etc. R. Co., 122 N. Y. 197 (1890), (25 N. E. Rep. 332). Where a lessee sold the right to use and possess the leased property as long as the lessee could, the rent to be paid to the lessee and the lessee to pay lessor, it was held that the arrange- ment was, in legal eifect, an assign- ment of the lease. Indianapolis Mfg. Union v. Cleveland, etc. R. Co., 45 Ind. 281 (1873). A contract whereby a railroad com- pany — - lessee of a railroad — agrees with another company for the opera- tion of the leased road, the latter company receiving the income, pay- ing the expenses and fixed charges and turning over the surplus to the forme? company, is an operating contract and not an assignment of the St. Joseph, etc. R. Co. v. St. Louis, etc. R. Co., 135 Mo. 173 (1896), (36 S. W. Rep. 602, 33 L. R. A. 607). ' Frank v. New York, etc. R. Co., 122 N. Y. 197, 214 (1890), (25 N. E. Rep. 332): "By the agree- ment ... a leasehold estate was carved out of the fee belonging to the former, and the consideration agreed to be paid therefor by the latter was the rent reserved, although in an unusual form. As the lease from Woodruff to the Erie Company em- braced all that he had acquired from his lessor, it operated as an assign- ment in fact, although not such in form, of the entire term granted by the original lease. Thenceforward the legal relations of the three parties named were those of lessor, lessee and assignee under a lease. The Erie 367 204 INTERCORPORATE RELATIONS [part III The lessor, lessee and assignee of a lease of a railroad may modify its provisions and reduce the rent, notwithstanding there is a mortgage upon the road, where there is no covenant on the part of the assignee for the benefit of the mortgagee.' The assignee of a railroad lease may be required, in equity, to specifically perform its terms.^ II. Covenants in Railroad Leases § 204. Covenant to pay Rent. Assumption of Interest Pay- ments. — A lessee is liable for rent during- his occupancy with- out an express covenant to pay it, and, therefore, the special covenant to pay rent may be termed a precautionary covenant, since its ofBce is to prevent a lessee from assigning his lease perhaps to an irresponsible person and thereby releasing him- self from further responsibility. When such special covenant appears in a lease a lessor has double security. There is priv- Company become liable for the inter- est and principal, as it fell due, both by privity of contract and by privity of estate. The former liabiUty de- pended upon its express promise to pay, whether it entered into possession or not, and could be discharged only by payment, while the latter depended upon entry into possession under the lease, and could be avoided by assign- ing the entire term and relinquishing possession." ' Frank v. New York, etc. R. Co., 122 N. Y. 197 (1890), (25 N. E. Rep. 332): "It is clear that, ordinarily, the lessor, lessee and assignee of a lease may modify its terms by re- ducing the amount of rent. Can they do so when there is a mort- gage upon the property covered by the lease, but not upon the leasehold estate itself? Why can they not in the absence of fraud and when, as in this case, there is no covenant on the part of the assignee for the benefit of the mortgagee? Without such a covenant, or some express promise, the assignee of » lease is under no more obligation to the mortgagee of a 368 lessor, than a grantee is to the mort- gagee of a grantor." ' One railroad company purchased all the property of another railroad company, including a lease held by it of still another railroad, and took charge of and operated the latter road for a long time. It then brought suit to recover from the lessor corporation under said lease sums of money due to the said selling corporation — the original lessee — under the terms of the lease. It was held that such purchasing corporation thereby as- sumed the obligation of the selling corporation under the lease and was not a tenant by sufferance, and that specific performance of the terms of the lease by it would be adjudged, notwithstanding the original lessor had failed to perform its undertaking to provide means for completing xhe construction of the road. Schmidtz v. Louisville, etc. R. Co., 101 Ky. 441 (1897), (41 S. W. Rep. 1015, 38 L. R. A. 809). See also Southern R. Co. v. Franklin, etc. R. Co., 96 Va. 693 (1899), (33 S. E. Rep. 485, 44 L. R. A. 297). CHAP. XVIIl] THE CONTRACT OF LEASE 204 ity of estate between him and the assignee ; privity of contract between him and the lessee. This covenant has a proper place in railroad leases and may contain provisions for the payment of rent in various ways and forms. It may stipulate that a fixed sum shall be paid at stated intervals; that prescribed dividends on the shares of the lessor corporation shall be provided for; or that a portion of the gross or net earnings arising from the operation of the leased railroad shall be turned over to the lessee or expended in its behalf. Thus, under a statute authorizing railroad com- panies to lease and operate the roads of other companies, a covenant in a lease by which the lessee, in lieu of directly paying rent, guaranteed the payment of interest accruing upon bonds of the lessor was held valid.' Where such a covenant takes ' Eastern Townships Bank v. St. Johnsbury, etc. R. Co., 40 Fed. 424 (1889). Judge Wheeler said: "The laws of Vermont, under which the de- fendant has and exercises its corporate powers, provide that 'railroad com- panies in this State may make con- tracts and arrangements with each other, and with railroad corporations incorporated under the laws of other of the United States, or under the authority of the government of Canada, for leasing and running the roads of the respective corporations, or parts thereof, by either of their respective companies.' R. L. Vt. § 3303. This statute conferred ample power upon the defendant corporation to take the lease, and to agree to pay the rent as it should fall due, and doubtless to arrange for paying the rent, by paying coupons of the same amount or guarantying their pay- ment." A railroad lease provided that the lessee should pay the lessor's bond interest as a part of the annual rental ; that if the lessor should pay its bonds when they matured, the lessee should pay to it a sum equal to the interest so saved, but that if the lessor should not pay them, the lessee should issue new bonds. The lessor did not pay an issue of bonds, and the lessee re- funded them at a lower rate of inter- est. A question arose as to which party was entitled to the benefit of the refunding, concerning which the New York Court of Appeals said (Continental Ins. Co. v. New York and Harlem R. Co., 187 N. Y. 225 (1907), (79 N. E. Rep. 1026)) : "The distinguished jurist before whom, as referee, this case was tried, was of the opinion that by the terms of the origi- nal lease the Harlem Company was entitled, if it could procure the neces- sary funds, to pay ofT the consolidated mortgage bonds and thus secure to itself any advantage in the reduction in the interest charged on its road. We think that in this view he was clearly right. By the first clause of the lease all pajrments to be made by the lessee were reserved as rent, and by the second subdivision of the clause that rent was to be paid by pay- ing certain specific interest charged to the holder of the bonds. This pro- vision did not change the character of the payment, but merely the method of the payment. The pay- ment was still to be of rent." A lease of a railroad in perpetuity 369 205 INTBRCORPOKATB RELATIONS [part III the form of an agreement to pay to the trustees of the lessor's mortgage interest thereon as it accrues, the lessee corporation is directly liable to the mortgagees therefor although they are not parties to the lease, since the agreement shows that it was intended for their benefit.' § 205. Covenant to pay Taxes. — In this country, as distin- guished from England, lands and property are generally as- sessed in the name of the owner, so that the lessee is under no obligation to pay taxes unless he assume them as a part of the rent. Covenants wherein the lessee assumes the taxes are not provided that the lessee should pay an annual rental of the specified sum by- paying interest on certain bonds and dividends at a stated rate upon the stock. The lessee also had the right to take stock for improvements upon the road without limitation as to total amount. A sinking fund was provided for to pay off certain bonds. A, supplemental agreement was en- tered into limiting the amount of stock to be issued and providing for a higher dividend in view of the saving of interest caused by the operation of the sinking fund. The bonded debt was refunded at its maturity at a lower rate of interest. The Circuit Court held that the lessor was en- titled to the benefit of the saving by the refunding. .iEtna Ins. Co. v. Albany, etc. R. Co., 156 Fed. 132 (1907). The ap- peal in this case to the United States Circuit Court of Appeals has not yet been decided. 1 Welden Nat. Bank v. Smith, 86 Fed. 398 (1898), s. c. sub nom. Grand Trunk E.. Co. v. Central Ver- mont R. Co., 78 Fed. 690 (1897). In this case where a lessee under a rail- road lease covenanted to pay all ob- ligations of the lessor incurred "as common carriers, warehousemen, or otherwise," and thereafter to pay the interest on certain mortgage bonds of the lessor, it was hdd, that "of otherwise" referred only to obli- gations of the same class as those 370 enumerated, and that earnings accru- ing in the hands of receivers of the lessee were applicable to interest on the bonds, rather than to judgments on claims not falling within that class. In Day v. Ogdensburgh, etc. R. Co., 107 N. Y. 129 (1887), (13 N. E. Rep. 765), an agreement between two railroad companies and others pro- vided that one company should issue so many of its first mortgage bonds, not exceeding a sum specified, as should be sufficient to construct its road ; that these should be purchased by the parties to the agreement, other than the two corporations. De- fendant corporation agreed when the road was completed to take a lease of it on terms and conditions specified. After the completion of the road a lease was executed as agreed upon. By the terms of the lease defendant agreed to maintain and operate the demised road as a part of its line, to pay taxes and certain other expenses, and to pay at maturity the principal and interest of the bonds ; also, that the gross earnings of the road should be apphed, first, to pay the interest accruing, and second, for the creation of a sinking fund for the payment of the principal of the bonds. It was held that the agreement and lease were within the power of the two cor- porations to make and were valid. See post, § 212: "Rights of Stock- holders when Rent is payable in Form of Dividends, " CHAP. XVIIl] THE CONTRACT OF LEASE § 205 uncommon in leases of real estate and are general in leases of railroads, although the systems of taxing that class of property vary widely in the different States. Upon the principle that a tax, in the sense in which the word is ordinarily used, is " something exacted for pubHc service and not by way of compensation for benefits conferred," it is held that a covenant to pay " all taxes " does not include an assessment for benefits, or other special rates of a similar nature.^ The application of this principle is, however, readily and commonly avoided by the use of the phrase, " all taxes and assessments." Where a railroad lease provided that the lessee should pay all taxes and assessments imposed during the term by any govern- mental or lawful authority on the railroad and leased property, or on any business, earnings or income of the same or, " by reason of the ownership thereof," it was held that the lessee was bound to pay a tax imposed upon the franchise of the^ lessor, it being a tax imposed " by reason of the ownership " of the road.^ A general covenant to pay all taxes relates only to future taxes imposed during the term of the lease and involves no 1 Wood's Landlord and Tenant, tion. The Court said : "The lease p. 685, and cases there cited. sued on did not stipulate for the pay- ^ Thomas v. Cincinnati, etc. R. ment by the lessee of all taxes imposed Co., 93 Fed. 587 (1899). on the lessor company, but of all A lessee corporation which cove- taxes on the property demised and nants to pay all taxes assessed upon was so understood and acted upon by "the real and personal property, the parties for thirty years." ^ franchises, capital stock or gross re- Erie, etc. R. Co. v. Pennsylvania R. ceipts" of the lessor during the term Co., 208 Pa. 506 (1904), (57 Atl. Rep. is not bound to pay a tax levied on 980). "dividends." Jersey City Gas Light Where the lessee of a railroad was Co. 0. United Gas Imp. Co., 58 Fed. to pay all taxes and deduct them 323 (1893), s. c. 46 Fed. 264 (1891).* from the rent, it had no right to de- Where a lease provided that the duct taxes upon land which it had lessor should pay "all taxes now or itself purchased outside the lessor's hereinafter imposed by law upon the location and used for sidings and property hereby demised and the buildings in connection with the earnings from or business thereof" it railroad; nor could it deduct a fran- was held that the covenant would chise tax which was incapable of not be construed to cover a tax on the apportionment as against the lessor, capital stock of the lessor, particularly Lewiston, etc. R. Co. v. Grand as the parties for many years had Trunk R. Co., 97 Me. 261 (1903), acted under the contrary interpreta- (54 Atl. Rep. 750). 371 I 206 INTERCOHPORATB RELATIONS [PAET III assumption of past due taxes. Thus, a covenant by the les- see in a railroad lease that it " will pay, as operating ex- penses, all taxes and assessments . . . which may be law- fully levied or assessed " upon the demised property, is not an assumption of habihty for taxes already assessed and levied.^ The covenant to pay taxes and assessments is for the sole benefit of the lessor corporation. It confers no right of action against the lessee in favor of the municipality levying the assessment, because there is no privity between them.^ § 206. Covenant not to Assign. — The covenant not to assign or sublet the demised premises without the written consent of the lessor used in ordinary leases of real estate is generally inserted in railroad leases, and is of the utmost importance when so employed, in safe-guarding the interests of the lessor corporation. As observed by Judge Clark in Boston, etc. R. Co. V. Boston, etc. R. Co.^: " The lessor had the right to choose its tenant, and, whatever may have been its purpose in doing it, the conclusion is irresistible that the stipulation against assigning, underletting or parting with the possession of the demised premises, was inserted in the lease to secure the ex- ercise of the personal integrity, discretion, and judgment of • If there is any contract implied ment upon the property of the lessor, by law whereby one railroad company, including the leased line, having been acquiring the control of the property, raised, it was contested, but, after income, etc., of another, becomes extended litigation, was sustained, directly liable for taxes already due. In the meantime, receivers had been and constituting a lien thereon, for the appointed for the lessee, and they fiscal year then current, such liability took possession of the leased line and is only in proportion to the part of the paid other taxes through the issue of fiscal year remaining after the assump- receivers' certificates. It was held tion of such control. Cleveland v. that they were bound to repay to the Spencer, 73 Fed. 559 (1898). lessor the proper proportion of the A railroad company leased part of judgment for the contested taxes. its road to another company, which United States Trust Co. v. Mercan- agreed to pay all taxes assessed tile Co., 88 Fed. 140 (1898). against the leased property. Under ' Chicago, etc. R. Co. v. City of the statute, taxes on the leased line Ottumwa, 112 Iowa, 300 (1900), (83 were assessed against the lessor, as N. W. Rep. 1074, 51 L. R. A. 763). owner, in the same manner as the ' Boston, etc. R. Co. v. Boston, etc. taxes upon the part of its road not R. Co., 65 N. H. 448 (1888), (23 Atl. leased, and were paid, reimbursement Rep. 529). being made by the lessee. The assess- 372 CHAP. XVIll] THE CONTRACT OP LEASE § 206 the lessee, in shaping the policy and controlling the manage- ment and operation of the road." Therefore, when a lessee corporation voluntarily parts with its power to control the operation of the railroad leased and becomes the mere agent of a third corporation in the opera- tion of the road, the covenant not to assign is broken in sub- stance and the estate granted by the lease is forfeited.* The covenant not to assign as usually drawn, however, is, under certain conditions, of no benefit to the lessor corporation and may be broken by indirection without incurring a for- feiture.^ Thus, upon the principle that a mortgage, outside of the New England States, is not a transfer of the legal title or possession, it is held that the giving of a mortgage of a lease- hold interest without the consent of the lessor is not a violation of the covenant not to assign; and, upon the further principle that an assignment or transfer, by operation of law, does not constitute a breach of the covenant, it is held that a sale of the leasehold interest in foreclosure proceedings is not a breach because it is in invitum? A lessee railroad company may, therefore, mortgage its lease and the leasehold interest may be sold to a corporation objectionable to the lessor without a breach of the covenant not to assign. The position of the lessor may be protected, however, by providing in the cove- nant that the lease hold interest shall not be mortgaged with- out the lessor's consent, or by adding a provision that . the ' A covenant by the lessee of a rail- ^ Riggs v. Pursell, 66 N. Y. 193 road not to assign the lease is broken (1876). This decision is expressly by its assignment of the future gross put upon the ground (p. 200) that "a earnings of the road to a third person mortgage in this State of land is not and contracting to use and operate it a transfer of the legal title, or the pos- under the direction of the assignee. session, but a mere security," citing Boston, etc. R. Co. v. Boston, etc. R. Trimm v. Marsh, 54 N. Y. 599 (1874), Co., 65 N. H. 393 (1888), (23 Atl. Rep. (13 Am. Rep. 623), where the New 529). York rule, as distinguished from the The assignee of the lease of a rail- rule in England and the New Englamd road cannot take advantage of the States, is discussed at length. It fiact that the lease was not consented may, therefore, be doubtful whether to by the lessor corporation as re- a mortgage in those States where it is quired by its terms. Schmidt v. regarded, between the parties, as a Louisville, etc. R. Co., 101 Ky. 441 conveyance of the fee, would not con- (1897), (41 S. W. Rep. 1015, 38 L. stitute a breach of the covenant not R. A. 809). to assign. 373 § 207 INTERCORPORATE RELATIONS [PART III lessor may terminate the lease if transferred by operation of law. The general rules of law relating to this covenant, as, for example, that where consent has once been given to an assign- ment the restriction is gone forever, and that the lessor may waive the forfeiture occasioned by a breach of the covenant by accepting rent,^ are applicable to leases of railroads only as they apply to leases in general, and are fully considered in treatises upon the general subject of the relation of landlord and tenant. § 207. Covenant to make Repairs. — The covenant upon the part of the lessee corporation to make repairs is usually in- serted in railroad leases. It often appears in conjunction with the covenant — of an analogous nature — to preserve the leased personal property and to substitute new for old. A covenant in a railroad lease that the lessee corporation shall " return said road and property, both real and personal, at the termination of this lease, in as good condition and re- pair in all respects as it is now in, natural wear only excepted," binds the lessee to keep the road in good running condition, and to renew all structures which by decay or accident become unsafe.^ • A lessor corporation may waive a store the' leased railroad in good repair breach of a covenant not to assign or at the termination of the lease is quali- sublet, by acquiescing and by failing fied by the words, "unless prevented to object within a reasonable time by unavoidable casualty, legal pro- when the leased property is turned ceedings or operation of law," a over to another without its consent. lessee is bound to turn over the prop- "The Elevator Case," 17 Fed. 200 erty in good repair, where the lease (1881). is terminated by a sale in foreclosure Where a lease contains a covenant proceedings. It was also held in this not to assign without the written con- case that a trustee under a mortgage sent of the lessor, the assignee is to secure the bondholders of the chargeable with notice of its terms, lessor corporation might sue the les- and if rent is not accepted after an see upon such a covenant, the assignment the lessor is not estopped undertaking being, according to from claiming a forfeiture. the agreement, for the benefit of Indianapolis Mfg. Union v. Cleve- the bondholders, land, etc. R. Co., 45 Ind. 281 (1873). Louisville, etc. R. Co. v. Schmidt, ^ Sturgesw. Knapp, 31 Vt. 1 (1858). 112 Ky. 717 (1902), (66 S. W. Rep. See also Southern R. Co. v. Franklin, 629). etc. R. Co., 96 Va. 693 (1899), (32 S. For consideration of the rights of a E. Rep. 485, 44 L. R. A. 297). trustee for bondholders in a suit Notwithstanding a covenant to re- against a lessee corporation for failure 374 CHAP. XVIIl] THE CONTRACT OF LEASE § 208 Under a covenant in a lease to make "necessary repairs," it has been held that a lessee is obliged only to make such repairs as its own use of the premises requires. In so holding the Court said: " The word ' necessary ' applied to repairs, may well be understood to denote such repairs as were necessary to the defend- ants, and not such as might be necessary for some future or different use of the property, after their lease had expired." ' § 208. Covenant to pay Damages and defend Suits. — While upon considerations of public policy the courts of several States hold that a lessor railroad company cannot by leasing its railroad, even with legislative sanction, absolve itself from liability to third persons for the negligence of the lessee in the operation of the road, and while it is unquestioned that the liability of the lessor for the proper discharge of its primary obligations continues after a lease as before, yet as between themselves the liability to pay damages and the obligation to defend suits may be the subject of agreement between the lessor and lessee, and covenants relating thereto are usual in railroad leases. " Similar provisions," said Judge Brawley in a recent case,' " will doubtless be found in every contract whereby one railroad company undertakes to lease or operate another. Suits, actions, or damages are incidental to the operation of every railroad, and provision must always be made whereby one or the other of the contracting corporations as- sumes such burdelis." to keep the roadbed of a leased road (41 Pac. Rep. 783, 50 Am. St. Rep. in repair as stipulated in the lease, 17, 29 L. R. A. 751). see First National Bank v. Louisville, A lease by a railroad company of a etc. R. Co. (Ky. 1904), 79 S. W. Rep. portion of its right of way, upon con- 280. In this case it was also held that dition that the company shall not be the fact that the lessee denied any ob- liable for any damage to buildings or ligation to keep the road in repair personal property situated thereon, did not prevent its recovering back, as by reason of fire originating from its one of the bondholders, its proportion- locomotives, or for damages resulting ate share of what it was obliged to from the negUgence of its employees pay as lessee. or agents, is not void, as against • White V. Albany R. Co., 17 Hun public policy, either under the Iowa (N. Y.), 98 (1879). decisions or upon general principles. ' South Carolina, etc. R. Co. ». Hartford Fire Ins. Co. v. Chicago, etc. Carolina, etc. R. Co., 93 Fed. 557 R. Co., 70 Fed. 201 (1895), (30 L. R. (1899). See also Stephens v. South- A. 193). ern Pacific Co., 109 Cal. 86 (1896), 375 209 INTBRCOEPOEATB RELATIONS [part III As the corporations — lessor and lessee — stand upon the same plane, such covenants as they may agree upon regarding the assumption of liabilities are not opposed to public policy, and are valid and enforceable. § 209. Miscellaneous Covenants. — In addition to the cove- nants already considered, the contracting parties to a railroad lease authorized by legislative authority have, as incident to the power conferred, the right to include in the lease such other covenants usual in leases as may be agreed upon in the particular case.^ Thus, a corporation authorized to lease a building may covenant to keep it insured;^ and a railroad company as lessee may properly covenant " to use all proper and reasonable means to maintain and increase the business " of the leased railroad.' ' Abby V. Billups, 35 Miss. 618 (1858), (72 Am. Dec. 143). An arbitration clause in a railroad lease providing that in case of dispute each party "shall select a referee of experience and skill in railroad man- agement, and the said referees shall select another of like skill and ex- perience " is valid and is not rendered unlawful by the fact that the lessee company owns a majority of the stock of the lessor company. Wolf V. Pennsylvania R. Co., 195 Pa. St. 91 (1900), (45 Atl. Rep. 936). 2 A corporati6n with power to lease a building may, in consideration of the lessor's obligation to rebuild in case the building should be burned down, covenant to keep the same in- sured. Jacksonville, etc. R. Co. v. Hooper, 160 U. S. 514 (1896), (16 Sup. Ct. Rep. 379). ^ Where a lessee corporatidn en- tered into such u. covenant and sub- sequently became the practical owner of another railroad having the same general direction as the leased road and practically the same terminals, it was held that while the lessee had no right to violate either the letter or spirit of the lease, yet that the cove- 376 nant was not broken by shipping freight over its parallel road, where the carrying of such freight over the leased road would have been imprac- ticable on account of its heavy grades. Catawissa R. Co. v. Philadelphia, etc. R. Co., 168 Pa. St. 544 (1894), (32 Atl. Rep. 62). A railroad company leased to an- other company the right to use a por- tion of its road for ninety-nine years, renewable forever. The lease pro- vided that the lessee should not ex- tend its road into certain coal territory, or receive coal for transportation from any connecting lines, and that, in case of violation of such conditions, the right of the lessee to use the de- mised road should be suspended dur- ing its continuance. The successor of the lessee acquired, by purchase, certain connecting lines extending into the prohibited territory, which it operated in connection with its origi- nal road for nine years, without ob- jection from the lessor. Held, that conceding the provision against ex- tension to have been valid, it was waived by the lessor by acquiescence, and with it the right to object to the transportation by the lessee of coal received for shipment on its purchased CHAP. XIX] RIGHTS AND LIABILITIES OP LESSOR § 210 CHAPTER XIX RIGHTS AND LIABILITIES OF LESSOR CORPORATION I. Rights and Remedies of Lessor Corporation § 210. Lessor Corporation retains Prerogative Powers — Right of Eminent Domain. § 211. Rights of Lessor when entitled to Share of Earnings — Equitable Lien. § 212. Rights of Stockholders when Rent is payable in Form of Dividends. § 213. Mortgage of Rent Charge. § 214. Remedies of Lessor Corporation. II. Liabilities of Lessor Corporation § 215. Obligations of Lessor Corporation to State. § 216. Lessor Corporation cannot avoid Statutory Obligations unless exempted. § 217. Lessor cannot avoid Primary Obligations unless exempted. § 218. Liability of Lessor for Negligent Operation of Railroad — (A) Under Unauthorized Lease. § 219. Liability of Lessor for Negligent Operation of Railroad — (B) Under Authorized Lease. § 220. Liability of Lessor for Negligent Operation of Railroad — (C) To Employees of Lessee. § 221. Liability of Lessor for Negligent Operation of Railroad — (D) When it shares in Control. § 222. Liability of Lessor upon Contracts of Lessee. § 223. Liability of Lessor for Reconstruction and Repairs. § 224. Taxation of Leased Railroads. I. Rights and Remedies of Lessor Corporation § 210. Lessor Corporation retains Prerogative Powers — Right of Eminent Domain. — A lease of a railroad executed with legislative sanction, carries with it the right to exercise the franchises necessary for its maintenance and operation.^ Ex- traordinary powers and privileges are, however, not included unless the State expressly approve their transfer and the lease clearly embrace them. As a general rule, a lessor corporation retains its preroga- tive powers.^ Thus, the lease of a railroad does not divest a lines. Metropolitan Trust Co. v. '^ See ante, ^ 157 : " Essential Fran- Columbus, etc. R. Co., 95 Fed. 18 chises pass upon Sale of Railroad." (1899). ' A. street railway company which 377 §210 INTEKCOHPOKATB RELATIONS [part III lessor corporation of the right of eminent domain. The same necessity for taking lands may exist when a railroad is in the hands of a lessee as when in the hands of its owner, and pend- ing condemnation proceedings are not abrogated by a lease but may be continued in the name of the lessor.' As the right of eminent domain remains in the lessor, it cannot, manifestly, be exercised by the lessee in its own name,^ although when duly authorized the lessee may institute and pros- ecute condemnation proceedings in the name of the lessor, but for its own benefit.' These principles do not prevent a lessee has leased its property to another company for 999 years, and prac- tically all of the stock of which is owned by the latter company, has no standing to maintain a suit in equity against a third corporation to restrain an alleged unlawful use of its tracks, especially where it has failed to ob- ject to such use for fourteen years. South Side Pass. R. Co. v. Second Ave. Pass. R. Co., 191 Pa. St. 492 (1899), (43 Atl. Rep. 346). ' Kip V. New York, etc. R. Co., 67 N. Y. 229 (1876), per Church, J. : "In the supplemental complaint the plain- tiffs allege the leasing of the defend- ant's road and property to the New York Central and Hudson River Railroad Company for 401 years, and claim that such lease operated to abrogate the pending proceedings to condemn the land in question, and terminated and removed all necessity for the acquisition thereof for the corporate use of the defendant. In this I think the learned counsel for the defendant is mistaken. The lease did not affect the defendant corporation in its relation to the State. The same necessity existed for the land proposed to be con- demned after as before the lea.se for the purpose of the defendant as n- corporation." Se^ also Matter of Petition of New York, etc. R. Co., 99 N. Y. 21 (1885) (1 N. E. Rep. 27). In Chicago, etc. R. Co. v. Illinois 378 Central R. Co., 113 111. 156 (1885), it was held that it was immaterial that the increase of the right of way for which property was sought to be condemned, was occasioned by the use of the road by a lessee ; that the use was a public u.se, and that the need of the lessee was that of the lessor. 2 Mayor, etc. of Worcester v. Nor- wich, etc. R. Co., 109 Mass. 113 (1871): "None of these leases or assignments can be construed to extend to the lessees or assignees the power to exercise the right of eminent domain, or to restrict the right of the legislature to alter or repeal the charters. Their rights are subordi- nate t(j that right; arid if the legis- lature shall see fit to exercise it, they are not bound to give notice to any of these parties. . . . The lease by the Norwich and Worcester Railroad Company did not make the lessees, or their representatives, parties to the grant of power to exercise the right of eminent domain. That right remained in the original corporation, aiid the legislature might properly deal with it exclusively in amending their charter." ' Chicago, etc. R. Co. v. Illinois Central R. Co., 113 111. 156 (1885). See also Kip v. New York, etc. R. Co., 67 N. Y. 227 (1876) ; Dietrichs v. Lincoln, etc. R. Co., 13 Neb. 361 (1882), (13 N. W. Rep. 624) ; Gott- schalk V. liincoln, etc. R. Co., 14 Neb. 389 (1883), (15 N. W. Rep. 695). CHAP. XIX] RIGHTS AND LIABILITIES OF LESSOR § 211 corporation from exercising in its own name, for proper pur- poses, the power of eminent domain conferred upon it by statute. In such a case, it exercises an original and not a derivative power which might be broad enough to authorize the condemnation of lands connected with the lessor's road.' § 211. Rights of Lessor when entitled to Share of Earnings — Equitable Lien. — It is competent for two railroad corpora- tions, parties to a lease of a railroad, to agree that the lessee company shall pay a fixed rental to the lessor or that the earn- ings of the leased road, gross or net, shall be divided in pre- scribed proportions between the parties. Where the lease expressly provides that the share of the earnings payable to the lessor is in lieu of rent — a measure of the rental — or where it may be plainly inferred that such is the case, the remedies of the lessor are confined to the enforce- ment of the covenants of the lease. Thus, in a case where a lease provided that " as rental for the said demised premises " the lessee company should pay a percentage of its gross earn- ings in excess of a fixed sum to the lessor. Judge Lurton said : ^ " The rental is determined by the amount of gross earnings. These earnings belong to the lessee company. The complain- ant has no right to any specific dollar or part of a dollar." Where, however, it is clear from the language of the lease that a division of earnings, as earnings, is contemplated, the duty of the lessee does not arise from its mere covenant, but the share of the lessor becomes in equity its property imme- diately upon its receipt by the lessee. The lessor has an equi- table lien upon such share and it is held in trust by the lessee for the benefit of the lessor and may be followed in equity.^ A Michigan statute (P. A. 1901, Chattanooga Terminal R. Co. v. p. 117, § 19 of Act. No. 80) authorizes Felton, 69 Fed. 273 (1895). a lessee of a railroad to institute con- It is provided by statute in Ar- denjnation proceedings with the con- kansas (S. & H. Dig. 1894, § 6342), sen^ and in the nalme, of the lessor. Ohio (Bates' Anno. Stat. (1787-1902), 1 Whether the lessee of a railroad § 3300), Wyoming (R. S. 1899, § 3206), can exercise the right of eminent that a lessee of a railroad may exer- domain to build switches and spur cise the right of eminent domain, tracks to the leased line, which do ' New York, etc. R. Co. v. New not connect with its own line, or "York, etc. R. Co., 58 Fed. 282 (1893). whether such right must be exercised ' Terre Haute, etc. R. Co. v. Cox, by the lessor company, — quaere. 102 Fed. 825 (1900). 379 §211 INTERCORPORATE RELATIONS [part III In case of the appointment of a receiver for the lessee, he may be compelled to restore any portion of the earnings due the lessor and misapplied by the lessee, even if it be necessary to appropriate the earnings of the road during the receivership for that purpose.' Thus, a provision in a railroad lease that the " lessee shall, in each and every year of the term demised, pay or cause to be paid to said [lessor] in the manner and at the times hereinafter specified, thirty per centum of the gross earnings, of the demised property," provides for a division of the earnings, as such, and vests in the lessor the equitable title to its share of such earnings upon their receipt by the lessee. Where the lessee, under such a lease, has failed to pay over the lessor's share of the earnings and has mingled the same with its own funds, bondholders of the lessor, the interest on whose bonds is required by the terms of the lease to be paid from such share, are entitled to have the amount so misap- plied by the lessee restored by its receiver.^ In Bank v. Smith, 86 Fed. 398 (1898), where the lease provided that "all gross earnings, income and re- ceipts," should, in each year, after payment of expenses of operation be expended, among other things, for payment of interest on bonds of the lessor company. Judge Wallace said, with reference to the covenant to pay the interest upon the bonds (p. 401): It "gave to the bond holders an equitable lien upon the earnings, because the trustee could have com- pelled the lessee to apply the earnings to the payment of the interest." The general principle upon which the rule stated is based is thus stated in Pomeroy's Equity Jurisprudence (vol. 3 (2d.ed.), I 1236): "The doc- trine is carried still further and applied to property not yet in being at the time when the contract is made. It is well settled that an agreement to charge, or to assign, or to give security upon, or to effect property not yet in existence, or in the ownership of the party making the contract, or property to be acquired by him in 380 the future, although, with the excep- tion of one particular species of things, it creates no legal estate or interest in the things when they afterwards come into existence or are acquired by the promisor, does constitute an equitable lien upon the property so existing or acquired at a subsequent time, which is enforced in the same manner and against the same parties as a lien upon specific things existing and owned by the contracting party at the date of the contract." ' Terre Haute, etc. R. Co. v. Cox, 102 Fed. 825 (1900). ' In Terre Haute, etc. R. Co. v. Cox, 102 Fed. 833 (1900), Judge Grosscup said: "There is no word respecting rentals; there is no plain inference that the thirty per centum thus agreed upon shall be a mere measure of rentals. It is, as indis- putably as language can make it, a plain division of the earnings be- tween the parties whose properties, taken together, produce the earnings. Unless an arrangement for division of earnings, as earnings, is in law an CHAP. XIX] RIGHTS AND LIABILITIES OP LESSOR §212 § 212. Rights of Stockholders when Rent is payable in Form of Dividends. — A distinct provision in a lease that the lessee shall pay directly to the stockholders of the lessor corporation as rental specified dividends upon their shares, enures to their benefit and gives them individual rights of action — either at law or in equity — against the lessee.' This is upon the impossibility, the language employed can bear no interpretation, other than a contemplated division of earnings, as earnings. ... It is clear to us, then, that, in the case under considera- tion, the duty of the Indianapolis Company, in respect to the thirty per centum of gross earnings, does not arise out of its mere prorriise; it is an equity growing out of the con- ditions from which the unified rail- way lines arose. The division of the earnings does not rest in an in- tention merely to be executed in the future ; it is to be regarded, in equity, as a present fact, made so by the cir- cumstances, together with the agree- ment that brought about the means creating such earnings." • ' It does not follow from the fact that the stockholders as the parties beneficially interested may naaintain an action for the recovery of dividends that the lessor corporation — the party to the contract — may not likewise bring .suit to enforce it. In fact Judge Nelson, in Pacific R. Co. V. Atlantic, etc. R. Co., 20 Fed. 280 (1884), said that the lessor corpora- tion was the proper party to enforce a claim for unpaid dividends payable under a lease directly to the stock- holders. This decision, however, in so far as it .seems to deny any right in the stockholders to sue in such a case, cannot be justified upon prin- ciple. See cases cited in the note following. A railroad company leased its railroad to another corporation for a rental which the lease provided should be distributed directly among the stockholders of the lessor in the form of dividends. The lessee corpora- tion went into the hands of a receiver who took possession of the leased road and operated it but paid no rental. Thereupon the lessor com- pany intervened in the receivership proceedings and a settlement was finally arranged providing that the lessor should receive the net earn- ings of its road during the contin- uance of the receivership; that upon the reorganization of the lessee cor- poration the new company should assume the lease, and in addition should pay the lessor a certain sum of money. This settlement was ap- proved by the court in the receivership proceedings and was carried out — the lessor company receiving moneys thereunder a part of which it distrib- uted as dividends among its stock- holders, and the remainder of which it used for other purposes. This action of the lessor company was approved by a majority vote of its stockholders. Some years afterwards certain stock- holders of the lessor instituted proceed- ings against it and the new corpora- tion upon the theory that the entire sum paid by the reorganized company for the renewal was rental and belonged to its stockholders instead of to the les- sor corporation and charging that that corporation held the same in trust for the stockholders. It was, however, held that even if the entire sum paid for the renewal of the lease was rental, yet the bill showed that more than that amount had been distributed among the stockholders and accepted by them. Central R. etc. Co. v. Farmers Loan, etc. Co. 112 Fed. 81 (1901). 381 ~ §212 INTEBCOEPORATE EBLATIONS [part III principle that " when one person makes a promise to another for the benefit of a third person, that person may maintain an action based on such promise." ' It is essential, however, in actions depending upon this principle, that a distinct provision for the direct benefit of the third person be shown. An agreement wherein a lessee cor- poration guarantees the lessor a specified annual dividend upon its capital stock, free from taxes, payable to the lessor, is not a guarantee to the stockholders individually, although evidently intended to, enable the lessor corporation to make that dividend to its stockholders.^ Similarly, a provision in a lease that the lessee corporation shall pay to the lessor a sum equal to a fixed percentage upon its capital stock is an agree- ment for the direct benefit of the corporation and gives a stock- holder no right of action. The rental is due and payable to the corporation. It may or may not be appropriated for the payment of dividends to stockholders.' ^ Schermerhorn v. Vanderheyden, 1 Johns. (N. Y.) 139 (1806). See also Welden National Bank v. Smith, 86 Fed. 402 (1898). In Austin v. Selig- man, 18 Fed. 522 (1883), Judge Wallace said : " The result of the better-consid- ered decisions is that a third person may enforce a contract made by others for his benefit, whenever it is manifest from the nature or terms of the agree- ment that the parties intended to treat him as the person primarily inter- ested." See also Mr. Wharton's elab- orate note to this case for full con- sideration of the general subject and citation of many authorities. 2 In Flagg V. Manhattan R. Co., 10 Fed. 430 (1881), Judge Blatchford said: "The language of article 2 of the lease is that the Manhattan guarantees to the Metropolitan an annual dividend of ten per cent on the capital stock of the Metropolitan. . . . There is no agreement either by the Manhattan or the Metropolitan that these sums shall be paid to the .stockholders of the Metropolitan. The case, therefore, is not one 382 of any vested right in the stock- holders of the Metropolitan to the ten per cent payments." For other cases of leases providing for the payment of rentals directly to the stockholders of the lessor corporation in the form of dividends, see jEtna Ins. Co. v. Albany etc. R. Co., 156 Fed. 132 (1907); McLeary V. Erie Tel., etc. Co., 38 Misc. (N. Y.) 3 (1902), (76 N. Y. Supp. 712). ^ In Beveridge v. New York Elevated R. Co., 112 N. Y. 24 (1889), (19 N. E. Rep. 489, 2 L. R. A. 648), the New York Court of Appeals said (per Gray,- J.): "Regarding then, the lease itself and the so-called guaranty which is contained among its provisions, I find therein no contract made with individual stock- holders, but only one made with the New York Company which stipulates for the payment of a sum of money equal to ten per cent upon the capital stock of that company. There is no contract to pay ten per cent dividends to individual stockholders upon their holdings; nor any con- CHAP. XIX] RIGHTS AND LIABILITIES OF LESSOR §214 § 213. Mortgage of Rent Charge. — The execution of a lease of a railroad for a limited term does not affect the right of the lessor to mortgage the remainder estate. But a perpetual lease, without a clause of reentry for non-fulfilment of its con- ditions, leaves nothing in the lessor corporation but a claim against the lessee for rent." This rent may be a charge upon the income of the leased property. In such a case, the lessor may mortgage the rent charge.^ § 214. Remedies of Lessor Corporation. — The remedies of a railroad company to enforce its demands against third per- sons are in no way affected by the fact that it has leased its railroad. The remedies of a railroad company, as lessor, against its lessee, to recover damages for breach of covenant or to enforce a forfeiture are, in general, those which are available to a les- sor under an ordinary lease of real estate.' Where an action at law will furnish a lessor corporation adequate relief resort cannot be had to equity.* Thus, where tract that the New York company- will pay it out in the shape of ten per cent dividends to its stockholders. Payments under that contract are to and for the lessor corporation and go into its treasury, as would any other moneys or revenues derived from, or produced by, corporate property.'' See also Harkness v. Manhattan El. R. Co., 54 N. Y. Super. Ct. 174 (1886). ' Hazard v. Vermont, etc. R. Co., 17 Fed. 753 (1883); Vermont, etc. R. Co. V. Vermont Cent. R. Co., 34 Vt. 1 (1861). See also Langdon v. Vermont, etc. R. Co., 54 Vt. 593 (1882). '■' In Hazard v. Vermont, etc. R. Co., 17 Fed. 756 (1883), Judge Wheeler said: "The disposition of the rent and the claim for it in future is the principal thing, for that rep- resents substantially the corporate assets of the Canada company, and when that is gone the transfer or surrender of the stock would be a mere nominal formality. Power to deal with the rent is implied in the power to make the lease and reserve the rent, which it was held the cor- poration had. (Vermont, etc. R. Co. V. Vermont Cent. R. Co., 34 Vt. 1 (1861).) And powers necessarily im- plied from those expressly granted are as well granted as the express powers." ^ Where a lease of a railroad con- tained a covenant on the part of the lessee that it would not at any time "during the continuance of said term fix or establish a rate on local freight at a higher average rate than the average tariff rate for local freight as established by the lessor at the time of the execution of the lease," but did not provide for a forfeiture for breach of such covenant, it was held that an action for damages for such breach and not to enforce a forfeiture, was the proper remedy. Hill V. Atlantic etc. R. Co., 143 N. C. 539 (1906), (55 S. E. Rep. 854). * In Boston, etc. R. Co. v. Boston, etc. R. Co., 65 N. H. 393 (1888), 383 §214 INTEECORPOHATE RELATIONS [part III a legal action against a responsible corporation is an adequate remedy for neglect to keep a railroad in repair, in violation of a covenant, the remedy of a receivership will be denied.' The circumstances may be such, however, that a remedy at law will be inadequate. In such a case equity will afford re- lief. Thus, where a lessee railroad company covenanted to keep the line in as good repair as when received, and where its abandonment of the road before the expiration of the lease would result in loss of traffic, deterioration of the road and, possibly, forfeiture of the lessor's charter for non-user, it was held that the lessor was entitled to a mandatory injunction preventing a threatened abandonment.^ A lessor corporation has a right to reenter for condition broken, according to the terms of the lease. It may also, under such conditions, maintain ejectment and similar actions for the recovery of the possession of the leased property. (2.3 Atl. Rep. 529), the Court said: "In this suit at law the rights of the parties depend upon no general or special question of an equitable, as distinguished from a legal, char- acter. This case is a simple one of breach of contract. The Lowell agreed that if it transferred the plain- tiff's road to another company the plaintiff might take it back; and the Lowell has made the transfer it agreed not to make." ' Boston, etc. R. Co. v. Boston, etc. R. Co., 65 N. H. .393 (1888), (23 Atl. Rep. 529). That a les-sor railroad company has no lien upon the rolling stock of the lessee under the Iowa statute relating to landlord's liens, see Trust Co. of Xorth America v. Manhattan Trust Co., 77 Fed. 82 (1896). ' Southern R. Co. v. Franklin, etc. R. Co., 96 Va. 693 (1899J, (32 8. E. Rep. 485, 44 L. R. A. 297). In this case the Court said : "It was objected tliat, conceding the remedy at law to be inadequate, equity will neverthe- less not compel specific performance of a contract having some years to run, 384 which is practically what is sought by the mandatory injunction, that re- quires continuous acts involving the exercise of skill and judgment. It may be admitted that the authorities are not uniform, and that tliere are decisions which sustain the objection, but an examination of the deci'led cases will disclose the fact that the great weight of authority, and espe- cially the recent decisions of the highest respectability and influence, maintain the jurisdiction of equity in a case like that at bar. The courts are c Iowa: Bower v. Borlington, etc. R. Co., 42 Iowa, 546 (1876). Kentucky: Brooker v. Maysville, etc. R. Co., 119 Ky. 137 (1904), (83 S. W. Rep. 117) ; Chesapeake, etc. R. Co. V. Osborne, 97 Ky. 112 (1895), (30 S. W. Rep. 21, 53 Am. St. Rep. 407). New York: Abbott v. Johnstown, etc. R. Co., 80 N. Y. 27 (1880), (36 Am. Rep. 572). South Carolina : Bouknight v. Charlotte, etc. R. Co., 41 S. C. 415 (1894), (19 S. E. Rep. 915). Texas: International, etc. R. Co. V. Eckford, 71 Tex. 274 (1888), (8 S. W. Rep. 679). West Virginia: Ricketts v. Chesa- peake, etc. R. Co., 33 W. Va. 433 (1890), (10 S. E. Rep. 801, 25 Am. St. Rep. 901, 7 L. R. A. 354) ; Fisher v. West Virginia, etc. R. Co., 39 W. Va. 366 (1894), (19 S. E. Rep. 578, 23 L. R. A. 758). II. Cases holding lessor corporation — under unauthorized lease — liable lor injuries to persons upon its tracks : United States ; Briscoe v. Southern 392 Kansas R. Co., 40 Fed. 273 (1889) (live stock). Kentucky: Louisville, etc. R. Co. V. Breeden's Admx., Ill Ky. 729 (1901), (64 S. W. Rep. 667). Minnesota : Freeman v, Minne- apolis, etc. R. Co., 28 Minn. 443 (1881), (10 N. W. Rep. 594, 7 Am. & Eng. R. Cas. 410). South Carolina: Smalley v. Atlan- tic, etc. R. Co., 73 S. C. 572 (1906), (53 S. E. Rep. 1000). Texas: Galveston, etc. R. Co. v. Gartesier, 9 Tex. Qv. App. 456 (1895), (29 S. W. Rep. 939). III. Miscellaneous cases stating general rule that lessor is liable for negligence of lessee in operation of road under unauthorised lease : United States : Welden Nat. Bank V. Smith, 86 Fed. 398 (1898); Hayes V. Northern Pacific R. Co., 74 Fed. 282 (1896); Hukill v. Maysville, etc. R. Co., 72 Fed. 745 (1896); Arrow- smith V. Nashville, etc. R. Co., 57 Fed. 165 (1893).; Van Dresser v. Oregon R., etc. Co., 48 Fed. 202 (1891). Alahama: Rome, etc. R. Co. v. Chasteen, 88 Ala. 591 (1889), (7 So. Rep. 94). District of Columbia: Howard v. Chesapeake, etc. R. Co., 11 App. Cas. 300 (1897). Idaho : Palmer v. Utah, etc. R. Co., 2 Idaho, 350 (1888), (16 Pac. Rep. 553, 36 Am. & Eng. R. Cas. 443). Illinois: Railway Co. v. Dunbar, 20 111. 623 (1858), (71 Am. Dec. 291). CHAP. XIX] RIGHTS AND LIABILITIES OF LESSOR § 219 " Shippers, who have a common-law right to demand of the common carrier that he shall carry their goods safely, passen- gers, who have a common-law right to demand of the common carrier that they shall be carried safely to their destination, and travellers upon the highway, who have a statutory and common-law right to such a reasonable and careful operation of the road as shall not unduly injure them in the pursuit of their lawful rights," sustaining damages by the failure of a lessee, under an unauthorized railroad lease, to fulfil all the obligations required of railroad companies, may hold the les- sor — as well as the lessee — responsible therefor.* § 219. Liability of Lessor for Negligent Operation of Rail- road — (B) Under Authorized Lease. — Extending the prin- ciple, already considered, that the approval by the legislature of a railroad lease is insufficient without a clause of exemption to release a lessor from the performance of its statutory duties and the fulfilment of its primary obligations, it is held by courts of high authority that an express exemption is also necessary to relieve a lessor from liability for injuries to third persons caused by the negligence of a lessee in the operation and man- agement of a leased railroad; that although the lessor has, with statutory authority, parted with the control of its railroad, it is still liable for the torts of the lessee.^ Louisiana: Muntz v. Algiers, etc. Where a railroad company, without R. Co., Ill La. 423 (1903), (35 So. authority, leases its railroad to an- Rep. 624, 64 L. R. A. 222, 100 Am. other corporation, the lessee is con- st. Rep. 495). sidered its agent in the operation of Oregon : Lakin v. Railroad Co., the road, and in an action against the 13 Or. 436 (1886), (11 Pac. Rep. 68, lessor for a tort committed by the 67 Am. Rep. 25). lessee service of process upon the South Carolina : Harmon v. Colum- agents of the lessee has been held bia, etc. R. Co., 28 S. C. 401 (1887), sufficient. (5 S. E. Rep. 835, 13 Am. St. Rep. Van Dresser v. Oregon R., etc. Co., 686). 48 Fed. 202 (1891). Texas: Railroad Co. v. Culberson, ^ Connecticut: In Driscoll v. Nor- 72 Tex. 375 (1888), (10 S. W. Rep. wich, etc. R. Co., 65 Conn. 230 (1894), 706, 13 Am. St. Rep. 805, 3 L. R. A. (32 Atl. Rep. 354), it was said that a 567). railroad company cannot, by a lease Vermont: Nelson ». Railroad Co., of its property, absolve itself from 26 Vt. 717 (1854), (62 Am. Dec. liability for an injury to a stranger, 614). caused by the negligence of the lessee ' Hukill V. Maysville, etc. R. Co., in the operation of the road, unless 72 Fed. 752 (1896). such exemption is provided for in the 393 §219 INTERCORPORATE RELATIONS [part III It is urged, in support of this position, that public policy requires that the obligations of a railroad corporation — to lease, and is also expressly sanctioned by legislative authority. The conclusion of the Court in this case can, however, be justified on other grounds. See post, § 221 : "Liability of Lessor for Negligent Operation of Railroad — (D) When it shares in Control." Georgia: Green v. Coast Line R. Co., 97 Ga. 27 (1895), (24 S. E. Rep. 814, 54 Am. St. Rep. 379, 33 L. R. A. 806): "It is by reason of this firm adhesion of duty imposed to franchise granted that an incorporated railroad company caiuiot lease its line of rail- way and permit it to be operated by the lessee without being liable for negligent torts committed by the lessee, to the same extent as if they were committed by itself. . And this rigid rule of liability, which is directly the opposite of that which prevails touching leases where no charter franchises of a guasi-puhVic nature are involved, is not relaxed in favor of a company having express permission from the legislature to make the lease, unless there be also an express exemption or grant of abso- lution from liability. Thus, in the case of 5^ mere permissive lease of a railroad, there is a cumulative rather than diminished security to the in- jured citizen, who for a tort committed . by the lessee, in the exerci-se of franchises derived from the lessor, can hold either or both answerable for the damages." In Singleton v. South Western R. Co., 70 Ga. 464 (1883), (48 Am. Rep. 574), a lessor was held liable for inju- ries to a passenger upon lessee's train through the negligence of lessee's serv- ants. This decision was placed upon the broad ground that a lessor is liable for the torts of its lessee even under an authorized lease, but might well have been based upon the privity of 394 contract between the lessor and the passenger, for the passenger^s ticket was issued in the name of the lessor. See also Georgia R., etc. Co. v. Haas, 127 Ga. 187 (1906), (56 S. E. Rep. 313) ; Central R., etc. Co. v. Phinazee, 93 Ga. 488 (1893-), (21 S. E. Rep. 66) ; Central R. Co. v. Brinson, 64 Ga. 475 (1880). Illinoi,s: Chicago, etc. R. Co. v. Schmitz, 211 111. 446 (1904), (71 N. E. Rep. 1050); Chicago, etc. R. Co. v. Doan, 195 111. 168 (1902), (62 N. E. Rep. 826) ; Balsley v. St. Louis, etc. R. Co., 119 111. 68 (1886), (8 N. E. Rep. 859, 59 Am. Dec. 784); Penn- sylvania Co. V. EUet, 132 111. 654 (1890), (24 N. E. Rep. 559, 42 Am. & Eng. R. Cas. 64) ; Peoria, etc. R. Co. V. Lane, 83 111. 448 (1876). Kentucky: McCabe's Admx. v. Maysville, etc. R. Co., 112 Ky. 876 (1902), (66 S. W. Rep. 1054): "By its acceptance of the franchises con- ferred by the State the corporation assumed the corresponding burdens thereby imposed. These franchises it could not transfer to another with- out distinct legislative authority. The grant of power to lease its prop- erty is one thing; the grant of abso- lution from responsibility is another, and is not to be inferred from a mere power to lease the road, where the corporation still retains its existence and the enjoyment of its franchises in the rents. For such grants are strictly construed, and, as against the public, are never extended by construction. In the case before us there is only a grant to the lessor of power to contract for the operating of the road. The company enjoys all its franchises in the fruits of the con- tract. There is nothing in the pro- vision to show that the Legislature had in mind authorizing the company to divest itself of its franchises, or CHAP. Xix] RIGHTS AND LIABILITIES OF LESSOR §219 persons using its road as passengers and shippers, to travel- lers upon highways crossed by its tracks — should not be dis- permitting it, while enjoying tiiem or their fruits, to be acquit of responsi- bility for their abuse, without regard to the financial ability of the lessee or his amenability to suit." Com- pare, however. Harper v. Newport News, etc. R. Co., 90 Ky. 359 (1890), (14 S. W. Rep. 346). Massachusetts: Braslin v. Somer- villeHorse R. Co., 145 Mass. 68 (1887), (13 N. E. Rep. 65) (per Allen, J.): "It is nowhere stated that the lessor should be exonerated from responsibility, nor was it possible for the parties to make a contract which should have that effect. The sanction of the legi.s- lature was given the contract as made by the parties, but added nothing by way of exemption from the primary responsibility of the lessor. The lease did not purport to transfer the lessor's franchise, or the whole of its property. The lessor was not going out of busi- ness entirely, but only leased a portion of its road, with provisions for restora- tion of the leased property at the end of the term, and for reentry. It was under a positive duty and obligation to the public, and the consent of the legislature to the making of the lease did not imply a discharge from the duty and obligation. Indeed, there is a certain implication that the par- ties did not contemplate any such discharge, arising from the stipulation for indemnity "during said term," that is, during the whole term of the lease. Where a corporation seeks to escape from the burdens imposed upon it by the legislature, clear evi- dence of a legislative assent to such exoneration should be found." In the earlier Massachusetts case of Quested v. Newburyport Horse R. Co., 127 Mass. 204 (1879), a lessor was held liable to persons injured through the negligence of the lessee, but in that ca,se it was expressly provided by statute that the lease should not "release or exempt such company from any duties, liabilities or restric- tions to which it would otherwise be subject." Mississippi: Illinois Central R. Co. V. Lucas, 89 Miss. 411 (1907), (42 So. Rep. 607). Nebraska: In Chollette v. Omaha, etc. R. Co., 26 Neb. 159 (1889), (41 N. W. Rep. 1106, 4 L.' R. A. 135), where a passenger was injured through the negligence of the lessee's em- ployees, it was held that, upon grounds of public policy, the original obligation of a railroad company to the public cannot be discharged by a transfer of its franchises to another company, except by legislative enact- ment consenting to and authorizing such transfer, with an exemption granted to such company relieving it from liability; that mere legislative consent to the transfer is not suffi- cient, there must~be a release from the obligations of the company to the public. North Carolina: Raleigh v. North Carolina R. Co., 129 N. C. 265 (1901), (40 S. E. Rep. 2) ; Perry v. Western North Carolina R. Co., 129 N. C. 333 (1901), (40 S. E. Rep. 191); Harden V. North Carolina R. Co., 129 N. C. 354 (1901), (40 S. E. Rep. 184, 85 Am. St. Rep. 747, 55 L. R. A. 784) ; Pierce v. North Carolina R. Co., 124 N. C. 83 (1899), (32 S. E. Rep. 399, 44 L. R. A. 316); Kinney v. North Carolina R. Co., 122 N. C. 961 (1898), (30 S. E. Rep. 313) ; Logan v. North Carolina R. Co., 116 N. C. 940 (1895), (21 S. E. Rep. 959). South Carolina: In Harmon v. Columbia, etc. R. Co., 28 S. C. 401 (1888), (5 S. E. Rep. 835, 13 Am. St. Rep. 686), a lessor was held liable for stock killed through negligence of lessee. In Parr v. Spartansburgh, 395 § 219 INTERCORPORATE RELATIONS [pART III charged by a lease of its property and franchises to another corporation unless it is exempted from liability by legislative authority; that when a corporation seeks to escape from the burdens imposed upon it, clear evidence of legislative assent to such exoneration must be shown, which is not furnished by a mere approval of the transfer of its property and fran- chises. As tersely expressed by the Supreme Court of Georgia in Singleton v. South Western R. Co.:^ " The view which we take of the law and the cases cited is that the original obhga- tions can only be discharged by legislative enactment consent- ing to and authorizing the lease, with an exemption to the lessor company." On the other hand, it is said by courts of equally high au- thority that the legislature, by sanctioning a lease, gives its con- sent that the lessee shall stand as a substitute for the lessor with respect to all matters arising out of the future manage- ment and control of the leased railroad. It is held by these courts that a lessor having, with the approval of the legisla- ture, leased and entirely parted with the possession and control of its railroad, is not hable for the torts of the lessee ; that legislative exemption is not necessary in addition to legislative sanction.^ etc. R. Co., 43 S. C. 197 (1895), (20 ' Singleton v. South Western R. S. E. Rep. 1009), (49 Am. St. Rep. Co., 70 Ga. 469 (1883), (48 Am. Rep. 826), the Court went the extreme 574). length of holding a lessor liable for For consideration of proper plead- the torts of a receiver of the lessee. ing when it is sought to hold a lessor This holding that <* lessor is respon- corporation liable for the acts or sible for the management of property negligence of a lessee, see Georgia R., in custodia legia cannot be justified etc. Co. v. Haas, 127 Ga. 187 (1906), upon principle or authority. See (56 S. E. Rep. 313). also Hart v. Railroad Co., 33 S. C. ^ United States : Hayes d. Northern 427 (1890), (12 S. E. Rep. 9, 10 L. Pacific R. Co., 74 Fed. 282 (1896), R. A. 794); Chester Nat. Bank v. (Jenkins, J.): "It is, however, a Atlanta, etc. R. Co., 25 S. C. 216 different question when the lessor (1886). company is sought to be made liable Tennessee : In Hanna y. Railway for the negligent management of Co., 88 Tenn. 310 (1889), (12 S. W. the road which it was authorized Rep. 718, 6 L. R. A. 727), a railroad to lease, and of which management company was held not liable for an it had no control. In such case, we injury to an employee of a contractor, perceive no ground of public policy but the Court remarked that both which should impose such liability "sanction and exemption" were upon the lessor company with respect necessary to relieve a lessor. to injuries resulting to individuals 396 CHAP. XIX] RIGHTS AND LIABILITIES OP LESSOR §219 In Arrowsmith v. Nashville, etc. R. Co.,^ Judge Lurton dis- tinguished the case where statutory exemption is necessary from the negligent operation of the railway. The subject has been much discussed, and some of the cases are characterized by lack of discrimina- tion between liability for duties absolutely imposed by law upon the lessor company and duties arising from the manner of the operation of trains." See also Curtis v. Cleveland, etc. R. Co.,140 Fed. 777 (1905); Yeates V. Illinois Central R. Co., 137 Fed. 943 (1905); Arrowsmith v. Nashville, etc. R. Co., 57 Fed. 165 (1893), (a leading case). Arkansaii: Little Rook, etc. R. Co. V. Daniels, 68 Ark. 171 (1900), (56 S. W. Rep. 874). Kansas: St. Louis, etc. R. Co. v. Curl, 28 Kan. 623 (1882): "If the injury results from negligence in the handling of trains or in the omission of any statutory duty connected with the management of the road, matters in respect to which the lessor com- pany could, in the nature of things, have no control — then the lessee company will alone be responsible." See also Caruthers v. Kansas City, etc. R. Co., 59 Kan. 629 (1898), (54 Pac. Rep. 673, 44 L. R. A. 737). Maine: Nugent v. Railroad Co., 80 Me. 76 (1888), (12 Atl. Rep. 797, 6 Am. St. Rep. 151) ; "An authorized lease, without any exemption clause, absolves the lessor from the torts of the lessee resulting from the negli- gent operation and handling of its trains and the general management of the leased road, over which the lessor could have no control." See also Mahoney v. Atlantic, etc. R. Co., 63 Me. 68 (1873). Michigan: Ackerman v. Cincin- nati, etc. R. Co., 143 Mich. 61 (1906), (106 N. W. 558) : "No one doubts that without statutory authority a railroad company would be precluded from substituting another in its place to perform its obligations to the State and public. This question wa« con- sistently disposed of in England, by the holding that a railroad company could not make a valid lease of its rights and franchises ; this is upon the ground that the effect of a lease of property is to relieve the lessor from obligation to others in regard to its use, and that hence there could be no presumption of an intent to grant the power to lease — a logical conclusion. But the doctrine that a statutory au- thority to lease a railroad leaves the lessor liable to the full extent that it would be if it operated the road itself, unless it be expressly stated to the contrary in the statute, can rest on nothing less than a supposed legisla^ tive intent to use the word 'lease' in a limited and different sense than that usually given the term." Minnesota: Heron «. St. Paul, etc. R. Co., 68 Minn. 542 (1897), (71 N. W. Rep. 706). Missouri: Moorshead v. United Rys. Co., 119 Mo. App. 541 (1906), (96 S. W. Rep. 261), affirmed 203 Mo. 121 (1907), (100 S. W. Rep. 611): "The reasoning of these cases is, in the main, that when the legislature by statute confers the authority on a railroad company to lea.se its prop- erties, and on another company to take and operate them, and, pursuant to such statute, a lease is made turn- ing over all property in an unrestricted way to the lessee, the proper view is that the legislature intended that all the ordinary incidents of a lease should accompany the transaction and the lessor not remain liable for operating torts." » Arrowsmith v. Nashville, etc. R. Co., 57 Fed. 177 (1893). 397 § 219 INTEBCOBPORATE RELATIONS [PABT IH from that where statutory sanction is sufficient: " Where obligations are imposed by charter or statute law upon a rail- road company for the protection and advantage of the gen- eral pubUc not having contract relations with it, it may very well be said that a general authority to lease out its road, which contains no provision exempting it from such public obUgations, will not absolve it from liability. So, if a railway be in such condition that it is a nuisance when leased out by reason of the absence of something necessary to its safe operation, or the presence of something dangerous to its safe operation, and this nuisance be con- tinued by the lessee, both the lessor and lessee would be liable, — the one as having created, and the other as having continued the nuisance. But to say that, after the lessor has, by authority of law, transferred the control and man- agement of its road to another, he shall, unless especially exempted, remain liable for all the torts and contracts of the lessee, is to ignore the contract of lease and the legis- lative sanction under which it was made. The State, on grounds of public policy, may well refuse its consent to the transfer; but if it consent, then there is no public policy to authorize the courts to say that the responsibility for the future management and operation of the road has not been exclusively This was a case of a street railway upon a highway, for damages result- lease. A steam railroad company ing from an omission of the lessee as lessor is liable for the negligence of to repair a fence which was in good its lessee under a Missouri statute. order at the time of the lease and See notes to § 216, ante: " Lessor Cor- surrender of possession. poreUion cannot avoid Statutory Obli- See also Miller v. Railroad Co., gations unless exempted." 125 N. Y. 118 (1890), (26 N. E. Rep. New Hampshire: Murch v. Con- 35); Fisher v. Metropolitan EI. R. cord R. Co., 29 N. H. 1 (1854). Co., 34 Hun (N. Y.), 433 (1885). New York : Phillips v. Northern R. Pennm/lvania : Pinkerton v. Phila^ Co., 41 N. Y. St. Rep. 780 (1891), (16 delphia Traction Co., 193 Pa. St. 229 N. Y. Supp. 909). In Ditchett v. (1899), (44 Atl. Rep. 284). Spuyten, etc. R. Co., 67 N. Y. 425 Texas: Houston, etc. R. Co. v. (1876), it was held that a railroad McFadden, 91 Tex. 194 (1897), (40 corporation which had parted with S. W. Rep. 216, 42 S. W. Rep. 593) ; the possession and control of its Missouri Pacific R. Co. v. Watts, 63 road under a lease thereof to another Tex. 549 (188S). corporation, containing a covenant Virginia. Virginia, etc. R. Co. v. that the lessees should keep up the Washington, 86 Va. 629 (1890), (10 fences was not liable to one travelling S. E. Rep. 927). 398 CHAP. XIX] RIGHTS AND LIABILITIES OF LESSOR § 219 imposed upon the lessee as the lawful substitute for the com- pany owning the roarl." Upon' principle there is no obvious reason why, when the legislature has authorized a railroad company to lease its rail- road, and it has exercised the power conferred and has entirely parted with the control of the leased property, it should still be responsible for the negligence of the lessee in the operation of the road. The doctrine of respondeat superior has no appli- cation, for the lessee is the owner pro hoc vice. The legislature has passed upon considerations of pubUc policy in authorizing the lease. Under these conditions, it would seem that the privileges and corresponding obligations should both pass to the lessee in the manner of other property, and that the general principle that a landlord is not responsible for the negligence of his tenant in the management of the leased property should be applicable and controlling. The federal courts in adopting the view just stated, that the lessor corporation under an authorized lease is not respon- sible for the negligence of the lessee, so hold as a matter of general law, and are not controlled by the decisions of the courts of the State in which the railroad is located.^ ■ Yeates v. Illinois Central R. Co., weight of federal decisions establishes 137 Fed. 943 (1905). the contrary rule. . . The rule In Curtis v. Cleveland, etc. R. Co., of law in question is not local, or the 140 Fed. 578 (1905) the Court said: effect of a statute, or its construction, "The question for decision, therefore, but exists as a general rule of the is whether the mere leasing of the common law, which the federal courts right of way, track, turnouts, and determine for themselves. One of stations to be used and operated the benefits secured through federal exclusively by another ipso facto jurisdiction is the uniform and equal reserves or creates a liability against administration of the law affecting the lessor for the negligence of the the rights of citizens of different lessee in its own exclusive use of States, and, if we were required to operating appliances owned and con- follow the decision of the local coiirts trolled by it upon the track and right upon questions not arising upon the of way possessed and used under the statutes of the State, with great terms of the lease. The Supreme respect to the State courts, be it Court of Illinois has decided (Chicago, said, there would be more or less etc. R. Co. V. Hart, 209 111. 414 discord and uncertainty in . the (1904), (70 N. E. 654, 66 L. R. A. 75)) decisions. It would be an anomalj', that both lessor and lessee companies were this court required to hold the are liable for such negligence, and law different from its own judgment that a joint action may be maintained of what it is, except in obedience to against them for damages. The superior authority, in order that the 399 § 220 INTERCORPOKATE RELATIONS [part IU § 220. Liability of Lessor for Negligent Operation of Rail- road — (C) To Employees of Lessee. — The rule that a lessor corporation, under an unauthorized lease, is responsible to the public for the negligence of the lessee is, upon principles already illustrated, well settled.' A similar rule, in favor of the employees of the lessee, has been adopted by several courts upon the theory that the original obHgation of the lessor to compensate its own servants for injuries received enures to the benefit of the servants of the lessee.^ And, extending this theory upon what are denominated grounds of public policy, two courts, at least, hold that a lessor corporation even under an authorized lease is responsible for injuries to the lessee's employees due to its negHgence.' jurisdiction of the State court may be sustained and its own jurisdiction defeated." ' Ante, § 218: "Liability of Lessor for Negligent Operation of Railroad — (A) Under Unauthorized Lease." 2 In Logan v. North Carolina B. Co., 116 N. C. 949 (1895), (21 S. E. Rep. 959), the Court said: "If we apply the test which we hold to be the true one, that the liability of the lessor grows out of the duty im- posed with the privilege in the first instance, the same reason is found to exist for holding it liable to serv- ants of the lessee for injuries sus- tained by them, as for injuries in- flicted on passengers. A part of the original duty imposed by the charter was to compensate servants in dam- ages for any injuries they might sus- tain, except such as should be due to the negligence of their fellow-serv- ants. The employee is deemed in law to contract ordinarily to incur such risks as arise from the careless- ness of the other servants of the company, but where the lessor com- pany would be liable, if it remained in charge of the road, to a, person acting as its own servant, we see no reason why it should not be answer- able to him when employed by the lessee. Its implied obligation in 400 the first instance — to come back to the touchstone — was to com- pensate its own servants for injuries due to any cause other than the care- lessness of their fellows, and the same rule must apply in its relation with the servants of the lessee." In Macon, etc. R. Co. v. Mayes, 49 Ga. 355 (1873), (15 Am. Rep. 678), the Court held, generally, that a lessor, under an unauthorized lease, is liable to an employee of the lessee for injuries caused by the negligent operation of the road, but in that case the negligence was actually that of the lessor itself. Compare Galveston, etc. R. Co. v. Daniels, 9 Tex. Civ. App. 253 (1894), (28 S. W. Rep. 548). ' In Chicago, etc. R. Co. v. Hart, 209 ni. 414, 421 (1904), (70 N. E. Rep. 654, 66 L. R. A. 75), the Supreme Court of Illinois said: "In the absence of statutory exemption from liability for the negligence of the lessee company, the obligation to respond for such negligence is also to be maintained upon grounds of public policy. The fact that the con- tract relation is between the employee and the lessee company, and was voluntarily entered into by the em- ployee with the lessee company alone cannot be allowed to control. . . . CHAP. XIX] RIGHTS AND LIABILITIES OF LESSOR 220 These doctrines are believed to be fundamentally unsound. The obligations of the lessor to its own servants grow out of the contract of employment. Their duties are reciprocal. But after the lease of a railroad there is no privity of contract between the lessor and the servants of the lessee. An employee of the lessee owes the lessor no duty, and the lessor owes him no corresponding obligation. Upon principle and the weight of authority, the lessor corporation is not liable to an employee of the lessee for injuries sustained through the negligence of the lessee in the operation of the road, even though the lease be without legislative sanction. " To his own master he standeth or falleth." ' A fortiori is this true where the legis- The obligation to provide cars and engines that are reasonably safe and servants that are reasonably competent and skilful, which was cast upon the lessor company by the grant to it of its corporate powers, is not shifted to one with whom it has contracted to operate its road as lessee, but remains to be discharged by the lessor company to all the public, and to relieve it of that duty as to its employees would be to invite negligence from which injury to the public would likely occur. The lessee's employees are a part of the general public and the lessor company is liable to them for the actionable negligence of the lessee company to the same extent as if such workmen were in the employ of the lessor company." See also Harden v. North Carolina R. Co., 129 N. C. 354 (1901), (40 S. E. Rep. 184, 55 L. R. A. 784, 85 Am. St. Rep. 747). ■ Reed v. Southern R. Co., 75 S. C. 162 (1906), (55 S. E. Rep. 218) states similar general views, but the decision is based primarily upon the South Carolina statute referred to in note to § 216, ante: "Lessor Corporation cannot avoid Statutory Obligations unless exempted." ' In East Line, etc. R. Co. v. Cul- berson, 72 Tex. 379 (1888), (10 S. W. Rep. 706, 13 Am. St. Rep. 805, 3 L. R. A. 567, 38 Am. & Eug. R. Cas. 225), where a conductor upon a train of a lessee corporation, under an unauthorized lease, was injured by the negligence of the lessee in supply- ing a, defective engine and employ- ing a, careless engineer, the Court said: "The duties which are owed by a railroad company to its servants are not duties owed to him in common with the public, but grow out of the contract of service. He assumes the relation of servant to his em- ployer voluntarily, and out of it arises the reciprocal obligations from one to the other. It seems to us that the relation of the servant of the company operating the road to the owner is very different from his relation to his employer, and that the relation of the owner of the road to him is different from its relation to the general public. His contract is not with the company owning the road, and, it may be asked, does the latter owe him the duty of a master to a servant, or guarantee that the master with whom he has voluntarily contracted will perform its obliga- tion to him? It may be that if the injury had occurred by reason of a defect in the roadbed or track and not by reason of a defect in the engine, the company charged with the duty 401 220 INTERCORPORATE RELATIONS [part ni lature has authorized the lease. In such a case there is not only no privity between the parties but the legislature in sanc- tioning the lease has itself determined the questions of public policy involved.^ The rules already considered, however, that a lessor corpo- ration is Liable for any failure in the performance of its own statutory and primary duties, unless expressly exempted,^ are apphcable in favor of employees of the lessee, as well as other persons. Thus, a lessor may be Hable to such employees for injuries caused by the improper construction of a station- house ' and by defects in the roadbed where the owner is charged with the duty of keeping it up.^ of keeping up the road would be liable. But if it were true that the injury was caused entirely by another company operating the owner's road, and was inflicted upon one of its own employees by reason of a defect in machinery entirely under its control, it is difficult to see upon what principle of policy or justice the lessor should be held liable merely because it owned the road." See also: United States : Hukill v, Maysville, etc. R. Co., 72 Fed. 745 (1896) ; Hayes V. Northern Pacific R. Co., 74 Fed. 279 (1896) ; "WiUiard v. Spartansburg, etc. R. Co., 124 Fed. 796 (1903). Indiana: Baltimore, etc. R. Co. V. Paul, 143 Ind. 23 (1895), (40 N. E. Rep. 519, 28 L. R. A. 216). Mississippi: Buckner v. Rich- mond, etc. R. Co., 72 Miss. 873 (18 So. Rep. 449). Tennessee: Hanna v. Railway Co., 88 Tenn. 310 (1889), (12 S. W. Rep. 718, 6 L. R. A. 727). Texas : Baxter v. New York, etc. Co., 22 S. W. Rep. 1002 (1893). Virginia: Virginia Midland R. « East Line, etc. R. Co. v. Culber- son, 72 Tex. 375 (1888), (10 S. W. Rep. 706, 13 Am. St. Rep. 805, 3 L. R. A. 567, 38 Am. & Eng. R. Cas. 225); Galveston, etc. R. Co. 402 Co. V. Washington, 86 Va. 629 (1890), (10 S. E. Rep. 927). ' See cases cited in preceding note and also: Lee v. Southern Pacific R. Co., 116 Cal. 97 (1897), (47 Pac. 932, 38 L. R. A. 71, 58 Am. St. Rep. 140) ; Swice v. Maysville, etc. R. Co. 116 Ky. 253 (1903), (75 S. W. Rep. 278) ; Missouri Pacific R. Co. v. Watts, 63 Tex. 549 (1885). In Banks v. Georgia R. etc. Co., 112 Ga. 655 (1900), (37 S. E. Rep. 992) a lessor company which had leased its railroad with legislative authority was held not liable for an injury to a lessee's employee caused by the negligence of a co-employee. In this case the Court distinguished Macon, etc. R. Co. v. Mayes, 49 Ga. 355 (1873), cit«d in a preceding note, upon the ground that there was in that case no legislative authority for the lease. ' See ante, § 216: "Lessor cannot avoid Statutory Obligations unless ex- empted"; ante, § 217: "Lessor cannot avoid Primary Obligations unless ex- empted." ' Nugent V. Boston, etc. R. Co., 80 V. Daniels, 9 Tex. Gv. App. 253 (1894), (28 S. W. Rep. 548). See, however, Murch v. Concord R. Corp., 29 N. H. 9 (1854), (61 Am. Dec. 631). CHAP. XIX 1 RIGHTS AND LIABILITIES OP LESSOU § 221 § 221. Liability of Lessor for Negligent Operation of Railroad — (D) When it shares in Control. — A cogent reason why a railroad corporation which has, with legislative sanction, leased and turned over the possession of its road to another company should not be held responsible for the torts of the lessee is that they are committed by persons over whom it has no control, upon property in the exclusive possession of an- other. This reason fails when the lessor, having leased its railroad, retains any part in its control. Thus, for example, where a lease provided that the managing agent of the leased road should be satisfactory to the lessor, and that its treasurer should receive and disburse the earnings,' it was held that the lessor, as well as the lessee, was responsible for all injuries to the pubUc through the negligent operation of the road. Where the control retained amounts to joint management, the lessor is undoubtedly liable for injuries to employees equally with the lessee. Upon other principles — contractual liability and estoppel — the lessor corporation will be held responsible where it allows the lessee to use its name in the operation of the leased road and in the issue of tickets for travel thereon.^ Me. 62 (1898), (12 Atl. Rep. 797, serves to itself an absolute control 6 Am. St. Rep. 151). The lessor has, over all business done by the lessee however, been held not liable for upon the leased property, by requiring injuries received by an employee of that the managing agent to be ap- the lessee when the proximate cause pointed by the lessee shall be a person of the injury was the running of the satisfactory to itself; that its own train by a co-employee, although treasurer shall collect all the money a defective railroad platform con- received from and the earnings of tributed to the injury. Evans v. the leased property, and have pos- Sabine, etc. R. Co. (Tex. 1892), session of the same; from which he (18 S. W. Rep. 493). See also Jones shall pay all the expenditures and V. Georgia Southern R. Co., 66 Ga. dues incurred in respect to the 558 (1881). property demised, all taxes, assess- ' In Driscoll v. Norwich, etc. R. Co., ments, and other liabilities, and 65 Conn. 230 (1894), (32 Atl. Rep. shall, at the end of each six months, 354), the Court held a lessor corpo- pay to himself for and on account ration responsible for the negligence of the defendant, the semi-annual of its lessee upon several grounds, rent due by the terms of the contract, and, while some of them seem op- and the balance, if any, deliver over posed to the current of authority, to the lessee, the said New York the following ground, as stated by and New England Railroad Com- Chief Justice Andrews (p. 254), is pany." unexceptionable: "The defendant pre- ^ Bower v. Burlington, etc. R. Co., 403 I 222 INTERCORPORATE RELATIONS [PAKT III In Railroad Co. v. Brown ^ the Supreme Court of the United States said: " The holder of such a ticket contracts for car- riage with the company, not with the lessees and receiver. Indeed, there is nothing to show that Catherine Brown knew of the difficulties into which the original company had fallen, nor of the part performed by the lessees and receiver in operat- ing the road. She was not required to look beyond the ticket, which conveyed the information that this road was run, as railroads generally are, by the chartered company. Besides, the company, having permitted the lessees and receiver to conduct the business of the road in this particular as if there were no change of possession, is not in a position to raise any question as to its liability for their acts." § 222. Liability of Lessor upon Contracts of Lessee. — Where a railroad company leases its railroad to another corporation, with or without legislative authority, it is not liable upon con- tracts made by the lessee with third persons, not relating to the performance of its duties to the public.^ There is no privity between the lessor and the parties to such contracts, nor are there reasons of public policy which require that the lessee should be considered the agent of the lessor in their execution. Contracts of the lessee relating to the discharge of the lessor's public duties stand upon a different basis. In case of an un- authorized lease, the lessee, in the operation of the road, is treated as the agent ' of the lessor, and the lessor may be held 42 Iowa, 546 (1876) ; Singleton v. ' In Nelson v. Vermont, etc. R. Co., Southwestern R. Co., 70 Ga. 464 26 Vt. 721 (1854), (62 Am. Dec. (1883), (48 Am. Rep. 574) ; Harmon 614), Judge Redfield used this com- V. Columbia, etc. R. Co., 28 S. C. 401 prehensive language: "The lessors (1887), (5 S. E. Rep. 835, 13 Am. St. must, at all events, be held respon- Rep. 686). sible for just what they expected '^Railroad Co. v. Brown, 17 Wall. the lessees to do, and probably, for (U. S.) 451 (1873). all which they do do, as their general ^ Pittsburgh, etc. R. Co. v. Har- agents. For the public can only baugh, 4 Brewst. (Pa.) 115 (1870). look to that corporation to whom Compare International, etc. R. Co. v. they have delegated this portion of Thornton, 3 Tex. Civ. App. 197 (1893), the public service." (22 S. W. Rep. 67). It is incorrect to say, however, that A lessor is not liable for construe- the lessee is the general agent of the tion work done by contractors having lessor, except so far as relates to the contracts solely with the lessee. St. performance of its public duties. Louis, etc. R. Co. v. Ritz, 30 Kan. 30 (1883), (1 Pac. Rep. 27). 404 CHAP. XIX] RIGHTS AND LIABILITIES OF LESSOR § 223 responsible, in actions ex contractu upon contracts of carriage and in actions ex delicto for any failure to perform the obliga- tions imposed by law upon common carriers.' The foundation of liability in each case is the same. The lessee is agent of' the lessor because the public have the right to look to the corpora- tion to which they have delegated the performance of public duties. The lessor is responsible for the negligence of the lessee because it cannot, by its own action, absolve itself from its obUgations to the pubUc.^ The foundation of the lessor's liability in actions ex contractu being the same as that in actions ex delicto, the liability of a lessor, under an authorized lease, upon the contracts of the lessee is determinable according to the principles already con- sidered which fix its liability for negligence. In the juris- dictions which require an express legislative exemption to relieve a lessor in the case of negligence, it is undoubtedly necessary in the case of a contract. If legislative sanction is sufficient in the one case, it is sufficient in the other.^ § 223. Liability of Lessor for Reconstruction and Repairs. — At common law, in the absence of an express covenant in the lease, the lessor was not bound to repair or rebuild, or to allow the lessee compensation for repairs made without his authority. The lessee took the leased property as he found it, and there was no implied covenant or warranty on the part of the lessor in regard to the condition of the property, its continuance in its existing condition through the term, or its availability for the purposes for which it was leased. These principles, except as they have been modified by • Chester National Bank v. At- ing its charter, has assumed obliga- lanta, etc. R. Co., 25 S. C. 216 tions from which it cannot absolve (1886). itself by leasing its road to anotlier Lessor is liable for lessee's failure company; and as such company is to carry goods. Central, etc. R. Co. not only under obligations to carry V. Morris, 68 Tex. 49 (1887), (3 S. W. passengers safely but also to deliver Rep. 457). Lessor is liable for goods goods intrusted to it for transporta- received by it to be carried by its tion, the same principles apply in lessee, a foreign corporation. Langley each case. Chester National Bank V. Boston, etc. R. Co., 10 Gray (Mass)., v. Atlantic, etc. R. Co., 25 S. G. 216 103 (1857). (1886). 2 The foundation of liability in ac- = See ante, § 219: "LiabUity of tions ex delicto and actions ex con- Lessor for Negligent Operation of RaH- tractu is that the company, by accept- road — (S) Under Authorized Lease." 405 § 224 INTERCORPORATE RELATIONS [PART III statute, are still of general application and apply where the property leased is a railroad. A railroad company, leasing its railroad, remains under no obligation, unless it is so pro- vided in the lease, to rebuild bridges or other similar property, whether regarded as repairs, reconstruction or substitution, or to reimburse the lessee corporation or its receiver for any such improvements made upon the leased road without its authority.' § 224. Taxation of Leased Railroads. — The exercise of the taxing power is evidenced entirely by statutes which, in the different States, vary widely in their provisions. Especially is this true in the matter of the taxation of rail- road companies. The method of assessment, whether upon earnings, capital stock or property, and the manner of collec- tion, are governed by statutes of essentially different charac- ter in different States. The respective obligations of lessor and lessee corporations to pay taxes, the question whether lease- hold interests are taxable separately from the fee, and the obligations of foreign lessor corporations regarding taxes, may also properly be determined by statutory provisions.^ ' Felton, Receiver, v. City of Cin- should be furnished by the lessor, cinnati, 95 Fed. 336 (1899). In this The purchasing agent of the lessee case a receiver was appointed, at the ordered equipment and directed that suit of creditors and stockholders, it should be charged to the lessor, for the property of a. railroad com- but there was no agreement to that pany whose only interest in the road effect and no demand made upon the it operated was a leasehold for a term lessor to furnish such equipment, of years. The lessor was not a party It was held that the lessee, and not to the suit. It was held that the prin- the lessor, was liable, ciples upon which courts authorize Southern R. Co. v. Ensign Mfg. expenditures by receivers of railroads Co., 117 Fed. 417 (1902). in foreclosure suits for necessary im- ^ A.rkansas. San. & H. Dig. 1894, provements, and charge the cost as a § 6333 : If a railroad company of an- first lien on the property, do not other State leases a railroad in this authorize a court to charge the cost State such part of the railroad as is of bridges rebuilt by a receiver under within this State is subject to taxa- order of the court upon the lessor's tion. interest in the property, where the Kansas. G. S. 1897, ch. 70, § 96: lease gives the lessee no right to make Nothing in the provisions authorizing such- improvements at the lessor's leases of railroads to foreign corpora- expense, tions shall be construed as curtailing A lease of a railroad provided that any rights of the State, or counties, when the parties agreed that new etc. of this State, through which road equipment was needed the same is located, to levy and collect taxes 406 CHAP. XIX] BIGHTS AND LIABILITIES OF LESSOR §224 As a general rule in America, real estate is taxable as a whole, without regard to separate estates of different persons therein,* and is assessed in the name of the lessor — as owner — rather than in the name of the lessee.^ These principles on the same, in conformity with the provisions of the laws of this State. Missouri. R. S. 1899, § 1060: Similar to Arkansas provision, supra. Montana. Code 1895, § 923: Similar to Kansas provision, supra. Nebraska. Comp. Stat. 1901, § 1768: Lessees of railroads "shall cause the same to be listed for taxa- tion." /6. §4026: Similar to Kansas provision, supra. North Carolina. Pub. Laws 1895, ch. 116, § 40, p. 127: Where a rail- road is operated in this State by virtue of a lease, taxes shall be paid by the lessee and may be charged against, and deducted from, any payments due or to become due the lessor on account of the lessee or otherwise. lb. § 48, p. 151 : If the property of any railroad company be leased or operated by any other corporation, foreign or domestic, the property of the lessor 'shall be subject to taxa- tion. South Dakota. Anno. St. 1901, § 3906: Nothing in the provisions of the statute authorizing leases shall curtail the right of the State and counties through which the road is located, to levy and collect taxes; and all roads leased or purchased shall be subject to taxation. Wyoming. R. S. 1899, § 3206: Similar to South Dakota provision, supra. ' Cooley on Taxation, p. 288. 2 In Rutland R. Co. v. Central Vermont R. Co., 63 Vt. 25 (1890), (21 Atl. Rep. 262, 10 L. R. A. 562), the Supreme Court of Vermont said regarding a tax on earnings: "Under the original as well as the modified lease no provision for the payment of taxes was made. The lease being silent, the duty to pay, under the com- mon law, rested upon the lessor." In this case [Rutland R. Co. v. Central Vermont R. Co.], it was also held that a stat^ite levying a tax on the gross receipts of railroad com- panies and providing that in the case of a leased road the tax should be paid by the lessee corporation and deducted from the rent was not unconstitutional as impairing the obligation of the contract of lease. The Court said: "It is further con- tended that our law violates another clause of the federal constitution in that it impairs the obligation of the contract subsisting between the parties respecting the payment of rent, by requiring the lessee to pay the tax and deduct the same from the stipulated rent. . . We think the method prescribed for the collection of the tax is no impairment of the contract to pay the rent due under the lease. . . When, therefore, the parties made the lease . both parties made their contract with notice of, and in subordination to the right of the State to exact from the fruits of their contract by way of taxation such sum as it might properly collect for public purposes. Having then the right to levy the tax the method to be adopted for its collection is purely a question of legislative discretion with which the court has no power to interfere so long as no legal or constitutional rights are disturbed. . . . We hold, therefore, that the Section ... is not unconstitutional in respect to the method prescribed for the collection of taxes assessed upon the earnings of railroads operated by lessees." See also Irvin v. New Orleans, etc. 407 §224 INTERCORPORATE RELATIONS [part III are applicable to railroads, in the absence of controlling statute, and must be followed irrespective of covenants in the lease, which merely determine the obligations of the parties between themselves.' An exception to the general rule that, in the absence of a governing statute, taxes are assessed in the name of the lessor, has sometimes been made in the case of leases in perpetuity, and might properly, be made in the case of other long term railroad leases. These exceptions, however, in no way modify the principle, for a lessee under such a lease is treated for purposes of taxation as the owner, and the lease as equivalent to a conveyance in fee in consideration of an annuity.^ R. Co., 94 111. 105 (1879), (34 Am. Rep. 208); Wood's Landlord and Tenant, p. 685; Taylor's Landlord and Tenant, pp. 341, 395. In Maryland the general principle that the lessor is bound to pay all State and municipal taxes is modified by statutes requiring the lessee to pay them but giving him, in the absence of other agreement, the right to re- cover the amount paid from the lessor or to deduct it from the rent. Philar- delphia, etc. R. Co. v. Appeal Tax Court, 50 Md. 397 (1879). Upon the principle that only the owners of railroads are liable for assessments, it has been held that the lessee of a railroad cannot be held liable for a ditch assessment. Balti- more, etc. R. Co. V. Pausch, 7 Ohio N. P. 624 (1896). Under a New Mexico statute pro- viding that leased property shall be taxed to the lessor unless listed by the lessee, railroad property, held under lease, cannot be assessed against the lessee unless so listed. Valencia County V. Atchison, etc. R. Co., 3 N. M. 677 (1886), (10 Pac. Rep. ^94). ^Ante, § 205: "Covenant to pay Taxes." * Where the charter of a railroad company authorized it to acquire, by lease or purchase, any necessary ex- tension of its road, and provided that all property so acquired should be- come part of Its property, and in pursuance thereof it leased other rail- roads forever, and provided in the leases that the roads so leased should beconie and be operated as a part of its main line, it was held that the leased railroads would, if not for all purposes, at least for the purposes of taxation, be regarded as the property of the lessee. Huck v. Chicago, etc. R. Co., 86 111. 352 (1877). See also Appeal Tax Court v. Western Maryland R. Co., 50 Md. 274 (1879) ; Commonwealth v. Nashville, etc. R. Co., 93 Ky. 430 (1892), (20 S. W. Rep. 383). Compare State v. Housatonic R. Co., 48 Conn. 44 (1880). In People v. Feitner, 171 N. Y. 641 (1902), (63 N. E. Rep. 786), however, it was held where one rail- road company leased the railroad of another company for the entire life of the latter's charter and the re- newals thereof, that the lessee ac- quired only a lessee's interest, with a right to use the leased property upon payment of the rental, and was not taxable as owner. 408 CHAP. XX] RIGHTS AND LIABILITIES OP LESSEE § 225 CHAPTER XX EIGHTS AND LIABILITIES OF LESSEE CORPORATION I. Rights and Remedies of Lessee Corporation § 225. Rights of Lessee in General. Incidental Franchises. § 226. Rights of Lessee in Matter of Tolls. § 227. Mortgages of Leases. § 228. Remedies of Lessee Corporation. * II. Liabilities of Lessee Corporation § 229. Obligation of Lessee to perform Lessor's Public Duties. § 230. Statutory Liability of Lessee. § 231. Liability of Lessee for Torts in Operation of Road under Authorized or Unauthorized Lease. • § 232. Joint Liability of Lessor and Lessee. § 233. Liability of Lessee for Debts of Lessor. I. Rights and Remedies of Lessee Corporation § 225. Rights of Lessee in General. Incidental Franchises. — Under a lease of a railroad and franchises, by legislative au- thority, the lessee as a general rule succeeds to all the rights and privileges of the lessor and is entitled to the full enjoy- ment of the property leased.^ But the lessee acquires by the lease no rights superior to those enjoyed by the lessor. The power to lease does not imply power to transfer greater privi- leges than the lessor possesses.^ A lessee takes the benefit of 1 Fisher v. New York, etc. R. Co., Chicago, etc. R. Co. u. Weber, 219 46 N. ¥.644(1871); Chicago D.Evans, III. 373 (1905), (76 N. E. Rep. 489, 24 111. 52 (1860). 4 L. R. A. (n. S.) 272). A statute authorizing a foreign The contrary is, however, held railroad companj' to lease a domestic under an unauthorized lease in Van railroad invests the foreign corpora- Dresser v. Oregon R., etc. R. Co., 48 tion with all the powers and fran- Fed. 202 (1891). chises of the lessor corporation with In Pennsylvania (Bright. Pur. Dig. respect to the leased road. 1894, § 123, p. 1804) the lessee cor- Canton v. Canton, etc. Co., 84 poration may indorse, guarantee or Miss. 268 (1904), (36 So. Rep. 266, otherwise become liable for, or assume 65 L. R. A. 561, 105 Am. St. Rep. the principal and interest of, bonds 528). of the lessor corporation. The servants of a lessee corpora- ' Nibbs v. Chicago, etc. R. Co., 39 tion are not servants of the lessor Iowa, 344 (1874): " It (the lessee) can for the service of process. exercise no right which its lessor could 409 § 226 INTERCOKPORATE RELATIONS [part III contracts for the use of railroad property, entered into by the lessor with other corporations ,' and may purchase the lease- hold interests of the lessor in connecting lines.^ And where a portion of the leased property is taken by process of con- demnation for the use of another corporation, the lessee is entitled to the use of the money awarded as compensation during the remainder of the term of the lease. ^ A lessee taking under a lease a railroad, without other words of description in the lease or governing statute, takes, as inci- dental thereto, such rights and franchises as are necessary for the continued operation of the road.^ Only such rights and franchises, however, as are essential to such purpose are so acquired and, as already shown, the lessee, under statutory authority to take a lease of a railroad, does not succeed to the prerogative franchises fif the lessor.^ § 226. Rights of Lesjee in Matter of Tolls. — Upon the prin- ciple that a lessee corporation in operating a leased road exer- cises only derivative franchises," it has been held that a lessee. not. If that corporation had no right to use the land and may be re- strained from operating its road, the lessee acquired no higher or superior right under its lease, which could not transfer privileges the lessor did not possess." See also McMillan v. Michi- gan, etc. R. Co., 16 Mich. 79 (1867), (93 Am. Dec. 208). ' London, etc. R. Co. v. South Eastern R. Co., 8 Ex. (W. H. & G.) 584 (1853). ' Philadelphia, etc. R. Co. v. Cata- wissa R. Co., 53 Pa. St. 20 (1866). ' Where a railroad lease included all lands reasonably useful and con- venient in operating a railroad, and another railroad company condemned a piece of land which might be useful although not then in use, it was held that the land was included in the lease and that the lessee was entitled to the use of the money awarded as damages tor such taking, during the continu- ance of the lease. Matter of New York, etc. R. Co., 49 N. Y. 414 (1872). 410 * See ante, § 157: "Essential Fran- chises pass upon Sale of Railroad.** Pennsylvania Co. v. Lake Erie, etc. R. Co., 146 Fed. 447 (1905): "As the complainant is lessee of the road its interest in the property is such as to give it the right to prevent by judicial process any illegal interfer- ence with its enjoyment of the leased property, and this right it may enforce by injunction." A lessor corporation operating a railroad under a perpetual lease may file a petition to railroad commis- sioners with respect to the alteration of the road and the elimination of grade cro.ssings. Town of Westbrook's Appeal from Commissioners, 57 Conn. 95 (1889), (17 Atl. Rep. 368). " See ante, § 210 : " Lessor Corpora- tion retains Prerogative Powers. Right of Eminent Domain." ° Where one railroad company leases the rights and property of an- other railroad company, all corporate rights exercised by the lessor in the CHAP. XX] EIGHTS AND LIABILITIES OF LESSEE § 227 in taking over the railroad of the lessor, is entitled to charge the rates of fare fixed by the charter of the lessor without regard to the rates prescribed in its own.^ But while the rates fixed in the owner's charter may limit — as a condition — the tolls collectible upon the leased road, the privilege of charging a greater rate of fare than authorized in the lessee's charter or in general laws applicable to it, can only be transferred by lease where the statute permits the transfer and the lease distinctly includes the privilege.^ § 227. Mortgages of Leases. — A railroad corporation, having power to mortgage its property to secure its bonds, may mort- gage its leasehold interest in a railroad, as well as other prop- erty, and such an interest will pass whenever comprehended, expressly or by implication, in the terms of the mortgage.' So, also, a leasehold interest in a railroad acquired after the execution of a mortgage may be included within its " after acquired property " clause whenever it clearly appears from the language that leasehold estates were intended to be em- braced. Thus, a railroad mortgage covering " all the corpo- rate rights, privileges, franchises, and immunities and all things in action, contracts, claims, and demands of the said party of the first part, whether now owned or hereafter ac- quired in connection or relating to said railroad," has been held to include a subsequently acquired lease of a connecting road.' operation of the leased road are refer- and lessee's roads combined gives the able to the chartered rights of the lessor no claim on earnings from new lessor. McCandless v. Richmond, etc. roads subsequently built or acquired R. Co., 38 S. C. 103 (1892), (16 S. E. by the lessee. Murch v. Eastern R. Rep. 429, 18 L. R. A. 440). Co., 43 N. "H. 515 (1862). 'Where one railroad company ^ See ante, § 161: "Right to fix leased the road of another with all its Rates of Fare. CJiartered Rates." rights, powers, privileges, etc., it was The lessee can collect only the tolls held that the lessee, in using the stated in the lessor's charter though lessor's road, was not subject to the less than its own. McGregor v. Erie charges fixed by its own charter as R. Co., 35 N. J. L. 89 (1871). to toll, but to the regulations in the ' Beekraan v. Hudson River, etc. charter of the lessor. Pennsylvania R. Co., 35 Fed. 3 (1888). R. Co. V. Sly, 65 Pa. St. 205 (1870). The Iowa statute (Code 1897, See also Fisher v. New York, etc. R. § 2067> authorizes the mortgaging of Co., 46 N. Y. 652 (1871). leases to secure construction bonds. A lease on the basis of a division * Columbia, etc. Co. v. Kentucky of the net profits from the lessor's Union R. Co., 60 Fed. 794 (1894). 411 § 229 INTERCORPORATE RELATIONS [pART III Where a mortgage made by a railroad company provided that it should include all property subsequently acquired by the mortgagor, it was held that it included a railroad with its appurtenances subsequently leased, and that the title thereto was valid as against the assignee of the mortgagor.' On the other hand, however, a lease executed by a mort- gagor after the execution of a mortgage creates no privity of estate or contract between the mortgagee and the lessee, and a covenant of the lessee to make advancements cannot be treated as " after acquired property," within the meaning of that phrase as used in mortgages.^ § 228. Remedies of Lessee Corporation. — The fact that a railroad company takes a lease of a railroad manifestly affects, in no way, its remedies against third persons. The demands of a lessee against a lessor corporation depend upon the terms of the lease. In enforcing these demands and estabUshing its rights as lessee, a railroad company must, ordinarily, depend upon an action at law, but when this remedy is inadequate resort may be had to equity. Thus, where an attack was threatened upon the validity of a lease, under which a railroad company held a road forming a necessary part of its system, it was held that the company might maintain a bill in equity against the lessor corporation and its ofHcers to establish the validity of the lease.^ II. Liabilities of Lessee Corporation § 229. Obligation of Lessee to perform Lessor's Public Duties. — A lessee railroad, company taking by lease the railroad, franchises and privileges of a lessor corporation, assumes its correlative duties and obUgations. The burdens are insepa- 1 Barnard v. Norwich, etc. R. Co., defendant, in an action by the at- 14 N. B. R. 469 (1876). tomey-general to forfeit the charter ' Moran v. Pittsburgh, etc. R. Co., of the lessor corporation, especially 32 Fed. 878 (1887). where, the interests of the lessor being ' Southern R. Co. v. North Carolina protected by stipulations, there is R. Co., 81 Fed. 595 (1897). State v. reason to believe it is not unfriendly Mobile, etc. R. Co., 86 Miss. 172 to the proceeding. (1905), (38 So. Rep. 732). People v. Albany, etc. R. Co., 77 A lessee may intervene, as a party N. Y. 232 (1879). 412 CHAP. XX] EIGHTS AND LIABILITIES OF LESSEE 229 rable from the privileges.' Tiie lessee assumes the obligations connected with the operation of the railroad contained in the lessor's charter and must conform to its requirements.^ It must fulfil the conditions upon which the franchise was origi- nally granted.^ A lessee corporation must, primarily, keep the road in opera- tion.^ Where the lessor, in consideration of a grant of State or municipal aid, has entered into an agreement to maintain the road in a certain location, the lessee must fulfil the obliga- tion.' So, where the charter of the lessor provides for the have sought and obtained a, charter imposing obligations cannot repudiate the latter merely because they are onerous or unprofitable. Thus where the charter of a railroad company required it to build its road to a cer- tain town and, having leased its road, an amendment to the charter was obtained relieving it from this duty on condition that the right should be obtained from a third corporation owning a connecting road to run trains to said town over such road, it was held that the fact that the obtain- ing of such right would entail loss upon the lessee was no excuse for its failure to discharge the lessor's char- ter obligations. Winchester, etc. R. Co. v. Com- monwealth, 106 Va. 264 (1906), (55 S. E. Rep. 692). Where it is the duty of a railroad company to maintain n depot at a county seat and it leases its railroad the lessee is bound to fulfil the same obligation and cannot avoid it by changing the line of the road. State V. Mobile, etc. R. Co., 86 Miss. 172 (1905), (38 So. Rep. 732). Where the charter of a railroad company provided that in case it should be necessary to change the location of any public road the com- pany should, at its own expense, reconstruct the road in the most favorable location possible and in as perfect a manner as the original road, and it occupied a highway with a 413 ' Mayor, etc. v. Twenty-Third St. R. Co., 113 N. Y. 311 (1889), (21 N. E. Rep. 60_) ; Chicago v. Evans, 24 111. 52 (1860). ^ People V. St. Louis, etc. R. Co., 176 111. 512 (1898), (52 N. E. R«p. 292, 35 I,. R. A. 656). ^ Mullen V. Philadelphia Traction Co., 4 Pa. Co. Ct. Rep. 164 (1887). * The law is clearly established that a railroad company may be com- pelled, by mandamus, to operate its railroad, and the underlying principles would seem to require the application of the same remedy where a lessee, after acquiring, under an authorized lease, a railroad and its franchises, fails to operate it. It has, however, been held that the lessee of a railroad under an unauthorized lease cannot be compelled by mandamus to operate it. See People v. Colorado, etc. R. Co., 42 Fed. 638 (1890). ' Chicago, etc. R. Co. v. Crane, 113 U. S. 424 (1885), (5 Sup. Ct. Rep. 578). See also State v. Central Iowa R. Co., 71 Iowa, 410 (18,S7), (32 N. W. Rep. 409, 60 Am. Rep. 799). A lessee corporation which has agreed to perform all the public obligations of the lessor, and which is of financial ability to do .so, will be compelled to discharge such obliga- tions notwitlistanding the lessor may be financially unable to do so and it may entail loss upon the lessee. A lessor and lessee corporation which 230 INTERCORPORATE RELATIONS [part III payment of a certain percentage of the receipts to the State or to a city, the lessee is bound to make the payment.' Where a lessor corporation under its charter is not permitted to abridge its liability as a common carrier, the lessee operates the road subject to the same condition.^ A lessee corporation is not only bound to fulfil the public obligations of the lessor existing at the time of the lease, but is subject to laws subsequently enacted imposing duties with respect to the railroad leased.^ § 230. Statutory Liability of Lessee. — Statutes have been enacted expressly providing that all duties imposed by law upon railroad companies shall be discharged by lessee corpo- rations, and that all liabilities may be enforced against them.^ any provision in the lease imposing upon tlie lessee the obligation to pay the percentage, it was held that the lessee, upon taking the place of its lessor a.s to its charter rights and powers, took its place also as to its charter obligations and duties, and was not entitled to exercise the former without discharging the latter. Mayor, etc. v. Twenty-Third St. R. Co., 11.3 N. y. 311 (1889), (21 N. E. Rep. 60). ^ McMillan v. Michigan, etc. R. Co., 16 Mich. 102 (1867): "The power to lease does not imply the power to transfer greater rights than the lessor himself possesses; and where the obligations assumed by the lessor, pertaining to the management of his business, and the liabilities which would spring ' therefrom, were the consideration upon which the fran- chise was granted, it would be » vio- lent inference that the legislature designed to waive them when they are no less important to the public pro- tection after the lease than before." ' Dryden v. Grand Trunk R. Co., 60 Me. 512 (1872). * Iowa : Code 1897, | 2039. An- other provision of the Iowa Code (I 2066) is as follows: " Any . . . corporation operating the railway of another shall be liable in the same wall and embankment, but took no steps towards reconstruction and leased its road to another corpora- tion, it was held that the lessee was bound to reconstruct the road. The Court said that the rights and fran- chises of the lessor corporation were not changed in character in passing to the lessee and that the latter in the exercise thereof assiuned all the obligations of a public character im- posed by the lessor's charter. Commonwealth v. Pennsylvania R. Co., 117 Pa. St. 637 (1888), (12 Atl. Rep. .38). A statute requiring every railroad company operating a passenger rail- road in the State to provide and maintain closets at each of its stations makes no distinction between lessor and lessee, and a lessee of a station from another company cannot avoid responsibility for failure to provide such closets upon the ground that the lessor company had agreed to perform the duty. State v. So. Kansas R. Co., (Tex. Civ. App. 1907), 99 8. W. 167. ' Where the charter of a street rail- way company obliged it to pay one per cent of the fares received to the city in which it was located, and the company leased its railroad and fran- chises to another company, without 414 CHAP. XX] RIGHTS AND LIABILITIES OF LESSEE 230 Other statutes have been construed to apply to them as well as to lessor corporations. As a general rule, statutes imposing duties upon railroad companies apply to the corporation actually operating the road. They are often applicable to the lessor corporation also — but the liabihty of the lessee is not thereby affected. Statutes requiring railroad companies to fence their roads and to maintain cattle guards at crossings apply to lessee cor- porations, and they are held responsible for any failure to ob- serve their provisions.' manner and extent as though such- railway belonged to it." For con- struction of this statute see Stewart V. Chicago, etc. R. Co., 27 Iowa, 282 (1869); Stephens v. Davenport, etc. R. Co., 36 Iowa, 327 (1873); Bower V. Burlington, etc. R. Co., 42 Iowa, 546 (1876). In Indiana, by statute, the lessee is solely liable when it operates the rail- road in its own name. Pittsburgh, etc. R. Co. V. Bohier, 57 lud. 572 (1877); Pittsburgh, etc. R. Co. v. Hannon, 60 Ind. 417 (1878), Cin- cinnati, etc. R. Co. V, Bunnell, 61 Ind. 183 (1878). For additional statutory provisions prescribing the liability of lessees of railroad see : Arizona: R. S. 1901, par. 864. Arkansas: S. & H. Dig. 1894, §§ 6188, 6334. Georgia: Code 1895, § 1863. Massachusetts: Pub. St. ch. 112, §5. Nebraska: Comp. Stat. 1901, § 4020. ■ Ohio: Anno. Stat. (1787-1902), § 3305. " Tennessee: Code 1896, § 1539. Texas: Sayles' Qv. Stat. 1897 (Supp. to 1900), vol. ii. ch. 15a (Acts 1899, p. 73). In Georgia (Code 1895, § 2335), a lessee of any railroad may be sued in the same jurisdiction in which the lessor might have been sued. ' I. Failure to maintain fences : Ditchett V. Spuyten Duyvil, etc. R. Co., 67 N. Y. 425 (1876); Tracy v. Troy, etc. R. Co., 38 N. Y. 433 (1868), (98 Am. Dec. 54); Birchfield v. Northern Central R. Co., 57 Barb. (N. Y.) 589 (1870) ; Clement v. Can- field, 28 Vt. 302 (1856); Cook v. Milwaukee, etc. R. Co., 36 Wis. 45 (1874) ; McCall v. Chamberlain, 13 Wis. 637 (1861); Clary v. Iowa Midland R. Co., 37 Iowa, 344 (1873) ; Down- ing V. Chicago, etc. R. Co., 43 Iowa, 96 (1876). The Uability of a, lessee is sometimes placed upon grounds of public pohcy. Thus, in Ilhnois Cent. R. Co. V. Kanouse, 39 111. 272 (1866), (89 Am. Dec. 307) the Court said, in substance, that the defendant was liable for using a defective road ; that public policy required that it should be held responsible for injuries result- ing from such use ; that the fencing law was enacted for the pubhc good and would be defeated if an irre- sponsible owner could lease an un- fenced road to a responsible company which would not be liable for injuries ; that the company using the road was pro hoc vice the owner. See also Toledo, etc. R. Co. v. Rumbold, 40 111. (1866). In New York, since 1890 (General Railroad Law, 1891 and 1892, § 32), both lessor and lessee are liable for want of fences. Prior to that statute the lessee was alone held liable. Thorne v. Lehigh Valley R. Co., 8 Hun (N. Y.), 141 (1895), (34 N. Y. 415 § 230 INTERCOEPORATE RELATIONS [pART III Statutes fixing the liability of railroad corporations for damages by fire communicated by their locomotives also apply to lessee corporations.' In construing such a Massachusetts statute, Judge Ames, in Davis v. Providence, etc. R. Co.,^ after reviewing cases holding the lessor responsible, said: " But there is nothing in these decisions, or in the reasons upon which they appear to rest, that confines the liability in such "a case exclusively to the lessor, or that excludes the idea that the party injured may seek his remedy either of the les- sor or the lessee. The case of the defendant comes literally within the terms of the statute. The fire was communicated from its engine. The damage was occasioned by its use of the road. . . . All the reasons, assigned in the above cited cases, for holding the corporation owning the road liable, apply with at least equal force to the corporation using the road and actually doing the mischief. Under such circumstances, the route for the time being may be considered as the route of the defendant; and there is no reason why it should not be held responsible for the damage caused by its use of the road, although the law has given to the injured party the right, if he sees fit, to seek his remedy against the corporation owning the road." Supp. 525). See also ante, § 216 : that proper cattle guards exist "Lessor Corporation cannot avoid wherever its railroad enters or leaves Statutory Obligations unless ex- improved or fenced lands, whether empted." such railway company owns the rail- The Iowa statute (Code 1897, road or is simply operating it under a §2058) is as follows: "If the . . . lessee owning or engaged in the opera- An Iowa statute (Code 1897, tion of any railroad in the State re- § 2054) relates to cattle guards and fuses or neglects to comply with any holds all railroad companies (includ- provision of this chapter relating to ing lessees) liable for all damages fencing of the tracks, it shall be guilty occasioned by a failure to inaintain of a misdemeanor. " Compare Liddle them. V. Keokuk, etc. R. Co., 23 Iowa 378 ' Pierce v. Concord R. Corp., 51 (1867). N. H. 590 (1872); Davis v. Provi- II. Failure to maintain Cattle dence, etc. R. Co., 121 Mass. 134 Guards: (1876); Cantlon v. Eastern R. Co., In Missouri Pacific R. Co. v. Mor- 45 Minn, 481 (1891), (48 N. W. Rep. row, 32 Kan. 217 (1884), (4 Pac. Rep. 22). See also Slossen v. Burlington, 87, 19 Am. & Eng. R. Cas. 630), it etc. R. Co., 60 Iowa, 215 (1882), (14 was held, under a Kansas statute, N. W. Rep. 244). that it is always the duty of a railway " Davis v. Providence, etc. R. Co., company operating a railroad to see 121 Mass. 134 (1876). 416 CHAP. XX] RIGHTS AND LIABILITIES OF LESSEE § 231 A lessee corporation holding under a long term lease has been held to the " proprietor " of the railroad, within the mean- ing of a New Hampshire statute relating to fires, and to be liable for damages sustained; ' and has been held to be the cor- poration " owning the tracks," within the provisions of a statute imposing upon railroads whose tracks crossed at grade, the joint duty of making repairs and of maintaining a lookout at the crossing.^ A lessee corporation is also liable for injuries to travellers at highway crossings caused by a failure to equip its engines with statutory signals to warn them, and must observe other statutory provisions for the protection of the Uves and prop- erty of the pubhc' § 231. Liability of Lessee for Tprts in Operation of Road under Authorized or Unauthorized Lease. — A railroad company opera- ting, under lease, the railroad of another corporation, is liable for injuries caused by its negligent or improper operation, to the same extent that the lessor would have been had it continued to operate the road; * and its liability is not affected by the fact that the lease may have been unauthorized and the lessor also responsible for the same acts or omissions.^ ' Kerce v. Concord R. Corp., 51 and constructed by itself, see Nichols N. H. 590 (1872). v. Boston, etc. R. Co., 174 Mass. 379 2 Baltimore, etc. R. Co. v. Worker, (1899), (54 N. E. Rep. 881). 45 Ohio St. 577 (1888), (14 West. Rep. * In Sprague v. Smith, 29 Vt. 425 172, 16 N. E. Rep. 475). (1857), (70 Am. Dec. 426), Chief Jus- ' A Massachusetts statute which tice Redfield said : " It is well settled required every railroad corporation to in practice, and by repeated decisions, carry a bell on every engine passing that the lessees of railroads are liable upon "their road," etc., applied to a to the same extent as the lessors would railroad corporation which had taken have been, while they continue to op- a lease of a railroad owned by another erate the road. . . . The party hav- corporation and was running its own ing independent control is, in general, engines upon it under such lease. liable for the acts of those under such Linfield v. Old Colony R. Corp., 10 control, whether in contract or tort." Cush. (Mass.) 562 (1852), (57 Am. » peital v. Middlesex R. Co., 109 Dec. 124). Mass. 405 (1872), (12 Am. Rep. 720) For construction of a Massachu- (per Colt, J.) : "The defendants were setts statute (Pub. St. ch. 112, § 5), in actual possession and use of the providing that a corporation lawfully track without objection from the maintaining and operating a railroad owners or the Commonwealth; they laid out and constructed by another assumed this responsibility to the corporation should be subject to the plaintiff for a valuable consideration; game duties and liabihties as if laid out and it is wholly immaterial, so far as ■ 417 §231 INTERCORPORATE RELATIONS [part III The lessee is liable for its own wrongs regardless of the lia- bility of others, and its responsibility is usually placed upon this ground.* It may also be placed upon the ground that, in assuming the rights and franchises of the lessor to operate the road, the lessee assumes the correlative duty of operating it properly and the consequent liability for negligent operation.^ The obligation of a common carrier may be contractual, and a lessee corporation will be responsible for any damage arising from its breach of contract of carriage.' So, of course, the relations of the lessee corporation with its employees are con- tractual, and it is liable to them for any failure in the fulfil- ment of its obligations as master.^ The lessee corporation this action is concerned, that the lease was not legally made." In McCluer v. Manchester, etc. R. Co., 13 Gray (Mass.), 124 (1859), (74 Am. Dec. 624), it was held that a rail- road company could not avoid liability for goods injured upon a railroad leased by it on the ground that the lease was void. The Court said (p. 129): "An innkeeper might as well resist the claim of a, guest for compensation for the loss of his bag- gage, by suggesting doubts as to the validity of his landlord's title to the inn which he hired." Where one railroad corporation has acquired, through judicial proceedings, the right to cross at grade the tracks of another company, a suit to enforce the decree in such proceedings is, in effect, to enjoin a continuing trespass upon the right acquired therein. In such a suit the lessee of the railroad whose tracks are crossed, and not the lessor, is an indispensable party. Baltimore, etc. R. Co. v. Wabash R. Co., 119 Fed. 678 (1902). A lessee cannot be held liable for the torts of the lessor committed be- fore the execution of the lease. Pitts- burgh, etc. R. Co. V. Kain, 35 Ind. 291 (1871). ' Wabash, etc. R. Co. v. Peyton, 106 111. 534 (1883), (46 Am. Rep, 705) ; Hall V. Brown, 54 N. H. 495 (1874), 418 Toledo, etc. R. Co. v. Rumbold, 40 111. 143 (1866); Philadelphia, etc. R. Co. V. Anderson, 94 Pa. St. 351 (1880), (39 Am. Rep. 787; 6 Am. & Eng. R. Cas. 407) ; St. Louis, etc. R. Co. v. Curl, 28 Kan. 622 (1882), (11 Am. & Eng. R. Cas. 458). ' Sprague v. Smith, 29 Vt. 421 (1857), (70 Am. Dec. 424); McMillan V. Michigan, etc. R. Co., 16 Mich. 79 (1867),- (93 Am. Dec. 208); Haff v. Minneapolis, etc. R. Co., 14 Fed. 558 (1882). 2 Wabash, etc. R. Co. o. Peyton, 106 111. 534 (1883), (18 Am. & Eng. R. Cas. 1), (46 Am. Rep. 705); Arrow- smith V. Nashville, etc. R. Co., 57 Fed. 165 (1893) ; Philadelphia, etc. R. Co. V. Anderson, 94 Pa. St. 351 (1880), (6 Am. & Eng. R. Cas. 407, 39 Am. Rep. 787). In Mahoney v. Atlantic, etc. R. Co., 63 Me. 68 (1873), and Murch v. Con- cord R. Corp., 29 N. H. 1 (1854), it was held that the remedy of a pas- senger injured is against the company with which he contracts. * The lessee of a continuous line of railroad is liable to suit by an em- ployee for an injury received any- where on the line, which may be brought at the general residence of the lessee corporation whether within or without the limits of the State where the injury occurred. Watson CHAP. XX] EIGHTS AND LIABILITIES OP LESSEE §232 is also liable for creating a nuisance, as well as for maintaining and continuing a nuisance created by the lessor.' § 232. Joint Liability of Lessor and Lessee. — As a general rule, in cases where, upon principles already considered, the lessor corporation is responsible for the negligence of the les- see, both corporations may be jointly sued and a joint judg- ment obtained.^ A joint liability is also sometimes created by statute.' The lessor and lessee corporations may be jointly liable for a nuisance — the former for creating, the latter for con- V. Richmond, etc. R. Co., 91 Ga. 222 (1892), (18 S. E. Rep. 306). ' Ante, § 217 : "Lessor cannot avoid Primary Obligations unless exempted." In Wasmer v. Delaware, etc. R. Co., 80 N. Y. 216 (1880), (1 Am. & Eng. R. Cas. 125, 36 Am. Rep. 608), where a railroad was improperly laid upon and along a street, the Court said : "The defendant cannot escape liability for this condition of the rail- road, because it was simply the lessee of the road. It had the possession, the use and control of the road, and could not keep and maintain the rails in such «■ way in the street as to be dangerous to travellers thereon, and yet escape responsibility. He who knowingly maintains a nuisance is just as responsible as he who created it." See also Dickson v. Chicago, etc. R. Co., 71 Mo. 575 (1880); Western, etc. R. Co. V. Cox, 93 Ga. 561 (1894), (20 S. E. Rep. 68). Compare, however, Kearney v. New Jersey Central R. Co., 167 Pa. St. 362 (1895), (31 Atl. Rep. 637), where a lessee was held not liable for an over- flow caused by an improperly con- structed bridge. Compare also another Pennsylvania ease where it was held that a lessee, taking possession of and operating a leased road, is responsible for dam- ages caused by a defective sewer under the road. Coyle ■». Pittsburgh, etc. R. Co., 18 Pa. Super. Ct. 235 (1901). Where the lessee of a railroad makes a change in a culvert built by the lessor which results in damage,; the lefeee is liable therefor. Shores v. Southern R. Co., 72 S. C. 244 (1905), (51 S. E. Rep. 699). See also ante, § 217: "Lessor cannot avoid Primary Obligations unless exempted," z Pennsylvania Co. v. EUet, 132 111. 654 (1890), (24 N. E. Rep. 559). In' this case the plaintiff recovered a joint judgment against both defendants — lessor and lessee. Compare, however,' Spangler v. Atchison, etc. R. Co., 42 Fed. 307 (1890), where the Court said : "It may also be conceded that both are liable. But the action is joint as well as several. The plaintiff had the right to proceed against either one of them, and would be entitled in the joint action to take judgment against one, and dismiss as to the other." See also Logan V. North CaroUna R. Co., 116 N. C. 940 (1895), (21 S. E. Rep. 959). 3 In Ohio (Anno. Stat. 1787-1902, § 3305), it is provided that lessor and lessee may be jointly sued for negli- gence. This statute is construed in Staltz V. Baltimore, etc. R. Co., 7 Ohio N. P. 129 (1897). For construction of an Iowa statute, see Stephen v. Davenport, etc. R. Co., 36 Iowa, 327 (1873) ; Clary v. Iowa Midland R. Co., 37 Iowa, 344 (1873). 419 § 232 INTERCORPOEATE RELATIONS [PART IH tinuing it.' A separate liability, as has been shown, also exists.^ So, where both lessor and lessee participate in the management of a railroad, they are jointly and severally liable for injuries caused by the negligence of employees, for the employees are as much the servants of the one as of the other.^ And where a railroad is operated under an unauthorized lease, the lessee becomes the agent of the lessor in such operation, and the general principle is applicable that the Uability for negligence of principal and agent may be enforced in a suit against either or both.'' The lessor and lessee may also, in such a case, be held jointly Uable, upon the ground that they are undertaking an unlawful enterprise and are wrongfully usurping powers. This general rule also, undoubtedly, applies in the case of an authorized lease, without an exemption clause in those States where an express grant of immunity is necessary to relieve a lessor from liabiUty for the negligence of its lessee. It should be observed, however, that this apphcation of the rule renders a railroad company which makes a lease, with the approval of the State, a joint tort feasor in the operation of a road over which it has no control.^ ' Stickley v. Chesapeake, etc. R. agement of the train, whether owner Co., 9.3 Ky. 323 (1892), (20 S. W. Rep. or not of the cars, it is responsible for 261). damages for wrongs ; and if this be so, In Railroad Co. v. Hambleton, it follows, necessarily, that if, in fact, 40 Ohio St. 503 (1884), (14 Am. & that control be joint, and the train Eng. R. Gas. 126), the Supreme Court jointly under the control of agents of of Ohio said: "Numerous cases are re- the two companies, then both must be ferred to by counsel for the plaintiff held responsible. Two persons may in error involving the liability of lessor be joint masters, and thereby subject and lessee. But most of them are to a joint liability for the acts of serv- cases involving the separate liability ants or employees; and such joint of lessor and lessee. This case in- liability may be converted into a sev- volves the joint liability of lessor and eral liability by the election of the lessee, and this class of liability is plaintiff to sue only one, which may clearly applicable to a person who be done in such a case." creates a nuisance jointly with him See also Railroad Co. v. Brown, 17 who continues it." Wall. (U. S.) 445 (1873). Also ante, 'Ante, i 217: " Lessor cannot avoid §221: " Liability of Lessor for Negli- Primary Obligations unless exempted." gent Operation of Railroad — (_D) ' In Nashville, etc. R. Co. i<. Carroll, When it shares in Control." 6 Heisk. (Tenn.) 357 (1871), the Court » Cooley on Torts, p. 165. said: "The principle is, that where ' Even if tVie lessor and lessee under one has the exclusive control and man- an authorized lease are joint tort 420 CHAP. XX] RIGHTS AND LIABILITIES OP LESSEE §233 § 233. Liability of Lessee for Debts of Lessor. — A railroad company taking under lease, in good faith, the railroad and franchises of another corporation, assumes, as a general rule, no responsibility for the unsecured debts of the latter. Where, however, the lease embraces the entire property of a lessor corporation in debt, of the existence of which indebtedness the lessee has notice, it may, upon the principle that the prop- erty of a corporation constitutes a trust fund for the payment of its debts, be chargeable as a trustee and compelled to apply the property so received in payment of the debts of the les- sor.^ And even without bad faith on the part of the lessor or lessee, where the entire property of a corporation having debts is transferred, under a lease permitting the lessee to dispose of a portion of the leased property and apply the pro- ceeds, not only for the improvement of the remaining property but for its own benefit — - thus preventing any application for the satisfaction of debts — and the lessee makes such sale and application, a court of equity will decree the payment of a judgment debt of the lessor by the lessee.^ In such a case feasors it is certain that the rule which forbids contribution among wrong- doers is inapplicable in favor of a lessee. ■ Mellen v. Molinc Iron Works, 131 U. S. 352 (1889), (9 Sup. Ct. Rep. 781) ; Central R. Co. v. Pettus, 113 U. S. 116 (188.5), (5 Sup. Ct. Rep. 387). 2 In Chicago, etc. R. Co. v. Third National Bank, 134 U. S. 276 (1890), (10 Sup. Ct. Rep. 550), affirming 26 Fed. 820 (1886), where a railroad com- pany, heavily 'in debt, leased all its property to another company for nine hundred and ninety-nine years; and also executed a deed of trust securing bonds to a large amount which were to be sold for the payment of existing liens and for the benefit of the lessee, and the bonds were so sold and applied, among other things, for the building of a bridge for the lessee's benefit, the Supreme Court of the United States said (p. 286): "The contracting par- ties arranged not merely for the dis- charge of the foreclosure lien, but for the completion of the road for which the lessor's franchise was granted. The lessee not only performed these stipulations, but, with moneys arising from the sale of these bonds, built, for its own benefit, a bridge across the Mississippi River, connecting this road with its line in Iowa, and thus making a continuous line of road to Omaha. Neglecting to pay the debts of the lessor, it appropriated a large amount of the proceeds of the trust deed upon the lessor's property to its own benefit, and the improvement of its own property. Here clearly was a diversion of funds, which the creditors of the lessor might follow in equity. This is only the applica- tion of familiar doctrine. The proper- ties of a corporation constitute a trust fimd for the payment of its debts; and, when there is a misappropriation of the funds of a corporation, equity, on behalf of the creditors of such cor- poration, will follow the funds so diverted." 421 § 234 INTERCORPORATE RELATIONS [PART III the lessee corporation is liable, not as lessee, but as a trustee which has diverted funds due creditors to its own use. A lessee corporation may, as a part of the consideration of the lease, assume and agree to pay the debts of the lessor. In such a case, the weight of authority supports the view that the lessee may be held directly liable to creditors of the lessor upon the assumption clause.' CHAPTER XXI RAILROAD LEASES UNDER RECEIVERSHIP § 234. Receiver not Assignee of the Term. May not abrogate Leases as be- tween Parties. § 235. Receiver may elect within Reasonable Time to assume or renounce Lease. § 236. Obligations of Receiver pending Election. § 237. Obligations of Receiver after Election. § 238. Lease of Railroad by Receiver. § 234. Receiver not Assignee of the Term. May not abro- gate Leases as between Parties. — The appointment of a re- ceiver of the property of a railroad company, by a court of equity,^ does not change the title to the property or even the right of possession. The receiver takes the property, including leasehold interests, merely as a custodian for the court from 'See ante, § 123: "Liability of of an insolvent with, substantially, the Purchasing Corporation for Debts of powers of trustees in bankruptcy. Vendor Company." Such statutes are, however, generally For cases illustrating assumption in.ipplicablo to railroad companies, of debts of lessor by lessee corpora- and the receivers referred to in this tion, see Mississippi, etc. R. Co. v. chapter are those appointed according Southern R. Ass'n, 7 Baxt. (Tenn.) to the course of equity. See Quinoy, 595 (1874), (11 Am. & Eng. R. Cas. etc. R, Co. v. Humphreys, 145 U. s! 576); Pennsylvania Co. v. Erie, etc. 82 (1892), (12 Sup. Ct. Rep. 787), and R. Co., 108 Pa. St. 621 (1885), (29 Gaither v. Stockbridge, 67 Md. 222 Am. & Eng. R. Cas. 549). (1887), (9 Atl. Rep. 632). Also ' In some of the States, as in New Booth v. Clark, 17 How. (U. S.) 322 York, a certain class of receivers are, (1854). by statute, invested with the estate 422 CHAP. XXl] LEASES UNDER RECEIVERSHIP §234 which he derives his authority; he does not become an assig- nee of the unexpired term of the leasehold estate.' As said by the Supreme Court of Maryland,^ in language approved by the Supreme Court of the United States:^ "If the order of the court, under which the receiver acts, embraces the lease- hold estate, it becomes his duty, of course, to take possession of it. But he does not, by taking such possession, become the assignee of the term, in anj'^ proper sense of the word. He holds that as he would hold any other personal property in- volved, — for and as the hand of the court, and not as assignee of the term." The intervention of a court of equity for the preservation of property involved in litigation by putting it into the hands of a receiver — a ministerial officer — not only makes no change in the title but alters no lien or contract. A contract . ' Quincy, etc. R. Go. v. Humphreys, 145 U. S. 82 (1892), (12 Sup. Ct. Rep. 787), affirming svb nom. Central Trust Co. V. Wabash, etc. R. Co., 34 Fed. 259 (1888) ; Union Bank of Chicago v. Kansas aty Bank, 136 U. S. 223 (1890), (10 Sup. Ct. Rep. 1013); Central Trust Co. v. Continental Trust Co., 86 Fed. 517 (1898) ; Empire Dis- tilling Co. V. McNulta, 77 I'ed. 700 (1897), affirmed sub nom-. Dennehy v. McNulta, 86 Fed. 825 (1898), (41 L. R. A. 609) ; Carswell v. i'armers Loan, etc. Co., 74 Fed. 88 (1896) ; Ames v. Union Pacific R. Co., 60 Fed. 966 (1894) ; New York, etc. R. Co. v. New York, etc. R. Co., 58 Fed. 268, 280 (1893); Park v. New York, etc. R. Co., 57 Fed. 799 (1893); Bell v. American Protective League, 163 Mass. 558 (1895), (40 N. E. Rep. 857, 47 Am. St. Rep. 481); Gaither v. Stockbridge, 67 Md. 222 (1887), (9 Atl. Rep. 632). Com- pare, however, United States Trust Co. V. Wabash Western R. Co., 150 U. S. 287 (1893), (14 Sup. Ct. Rep. 86), where Mr. Justice Brown apparently overlooks the language of Mr. Chief Justice Fuller in Quincy, etc. R. Co. v. Humphreys, supra, and considers a receiver as standing in the same posi- tion as an assignee. In Brown v. Toledo, etc. R. Co., 35 Fed. 444 (1888), Judge Gresham, in view of the nature of the proceedings, treated the receiver as an assignee of the term, but that decision has been criticised in later cases. New York, etc. R. Co. v. New York, etc. R. Co., 58 Fed. 268 (1893). Compare also Commonwealth v. Frank- fort Ins. Co., 115 Mass. 278 (1874); Frank v. New York, etc. R. Co., 122 N. Y. 197 (1890), (25 N. E. Rep. 232). A claim for unpaid rentals due a lessor corporation before the appoint- ment of a receiver for the lessee cor- poration cannot be established as an equitable lien upon a fund in the hands of the receiver arising from the operation of the road during the re- ceivership — no part of the rental withheld by the lessee having been received by the receiver. Cox. V. Terre Haute, etc. R. Co., 133 Fed. 371 (1904). 2 Gaither v. Stockbridge, 67 Md. 224 (1887), (9 Atl. Rep. 632). ^ Quincy, etc. R. Co. v. Humphreys, 145 U. S. 98 (1892), (12 .Sup. Ct. Rep. 787). 423 § 235 INTERCORPORATE RELATIONS [PART III of lease is not affected by the appointment of a receiver, nor is the right of the lessor corporation to insist upon perform- ance or forfeiture in any way impaired. The lease remains in full force until terminated by the parties, and the receiver has no power to abrogate it as between them. " It is not in the power of such receivers to annul or abrogate such a lease as between the lessor and lessee company." ^ § 235. Receiver may elect within Reasonable Time to assume or renounce Lease. — When a receiver of a railroad company, having leased lines, is appointed, it is necessary, in order to keep the entire system a going concern, that he should take possession of and operate the leased roads, as well as the other roads of the system. The pubUc duties of the corporations — lessor and lessee — ^must be performed; their obligations, to the government in carrying the mails, to the pubUc as common carriers, must be fulfilled without interruption, and this result can only be obtained by putting the receiver into temporary possession of the leasehold interests. The mere act of taking possession, however, does not constitute an adoption of the lease by the receiver nor render him liable upon its covenants, and he is entitled to a reasonable time — a breathing spell — ■ to determine whether he will assume or renounce the lease.^ ' New York, etc. R. Co. v. New lease, pending receivership, without York, etc. R. Co., 58 Fed. 280 (1893), the consent of the court. In deter- per Lurton, J. In Park v. New York, mining the matter, the court will take etc. R. Co., 57 Fed. 802 (1893), Judge into consideration the situation of the Lacombe said: "The right to insist parties at the time the receiver is ap- upon the execution of this contract ac- pointed. Day v. Postal Tel. Co., 66 cording to its terms — the right to re- Md. 354 (1886), (7 Atl. Rep. 608). fuse further use and possession of that ^ A receiver, appointed by order of property to any one who will not or a court of equity, is obliged to take cannot make such payments — is in possession of a leasehold estate, if it be no way impaired by the fact that the included within the order of the court ; court has taken possession of all the but he does not, thereby, become the property owned and held by the Erie assignee of the term or liable for the Company, to administer the same for rent, but holds the property as the the interests of all concerned, and has hand of the court and is entitled to a placed its officers, the receivers, as reasonable time to ascertain its value, custodians and caretakers, not only before he can be held to have accepted to preserve the same, but also to main- it as lessee. Quincy, etc. R. Co. v. tain it as a going concern pending the Humphreys, 145 U. S. 82 (1892), (12 final adjustment." Sup. Ct. Rep. 787). In so holding A receiver cannot, by agreement Mr. Chief Justice Fuller said (p. 101) : with the lessor company, abrogate a "The court did not bind itself or its 424 CHAP. XXl] LEASES UNDER RECEIVERSHIP § 235 As said by Judge Lurton in Carswell v. Farmers Loan, etc. Co.: 1 " A receiver may take and retain possession of leasehold interests for such reasonable time as will enable him to intelli- gently elect whether the interest of his trust will be best sub- served by adopting the lease, and making it his own, or by returning the property to the lessor." What constitutes a reasonable time, within which a receiver must elect, depends to such an extent upon the facts and cir- cumstances appearing in any particular case, that no general rule can be laid down for determining it.^ receivers eo instanti by the mere act of taking possession. Reasonable time had necessarily to be taken to ascertain the situation of affairs. The Quincy Company, as a gttasi-publio corporation operating a public high- way, was under a public duty to keep up and maintain its railroad as a going concern, as was the Wabash Company iinder the contract between them, but the latter had become unable to perform the public service for which it had been endowed with its faculties and franchises, and which it had as- sunxed to discharge as between it and the other company. Its operation could only be continued under the re- ceivers, whose action in that respect cannot be adjudged to have been dic- tated by the idea of keeping the prop- erty in order to sell it, or using it to the advantage of the creditors, or doing otherwise than 'abstain from trying to get rid of the property.'" See also United States Trust Co. v. Wabash Western R. Co., 150 XJ. S. 287 (1893), (14 Sup. Ct. Rep. 86) ; Seney V. Wabash Westein R. Co., 150 U. S. 310 (1893), (14 Sup. Ct. Rep. 94) ; St. Joseph, etc. R. Co. v. Humphreys, 145 U. S. 105 (1892), (12 Sup. Ct. Rep. 795) ; Sunflower Oil Co. v. Wilson, 142 U. S. 313 (1892), (12 Sup. Ct. Rep. 235) ; Central Trust Co. v. Continental Trust Co., 86 Fed. 517 (1898); Mer- cantile Trust Co. V. Farmers Loan, etc. Co., 81 Fed. 254 (1897); Empire Distilling Co. u. McNulta, 77 Fed. 700 (1897) ; Carswell v. Farmers Loan, etc. Co., 74 Fed. 88 (1896); Ames V. Union Pacific R. Co., 60 Fed. 966 (1894); Farmers Loan, etc. Co. v. Northern Pacific R. Co., 58 Fed. 257 (1893) ; New York, etc. R. Co. v. New York, etc. R. Co., 58 Fed. 268 (1893) ; Park V. New York, etc. R. Co., 57 Fed. 799 (1893) ; Bell v. American Protec- tive League, 163 Mass. 558 (1895), (40 N. E. Rep. 857, 47 Am. St. Rep. 481). An agreement that the receipt of less than full rental for leased property shall be without prejudice to a claim for the balance, or the lessor's right to forfeit the lease, makes the receiver hold under the agreement, and not under the lease, so that his continued possession does not amount to an adoption of the lease. Thomas v. Cincinnati, etc. R. Co., 77 Fed. 667 (1896). ' Carswell v. Farmers Loan, etc. Co., 74 Fed. 91 (1896). ' Receivers of a lessee railroad com- pany are not bound, merely by their appointment, to assume all its leases ; but they have a reasonable time in which to determine whether they will assume, or renounce them. And where numerous contracts are to be examined, a delay of 65 days before renouncing a lease is not imreasonable. Ames V. Union Pacific R. Co., 60 Fed. 966 (1894). In Quincy, etc. R. Co. o. Hum- phreys, 145 U. S. 82 (1892), (12 Sup. Ct. Rep. 787), one month was said to be 425 § 236 INTERCORPOKATE RELATIOlfS [PAHT III It is not necessary in order to charge the receiver that he should have formally elected to assume the lease. His pos- session of the leased property might be continued for such a period and under such circumstances as would, in law, be equivalent to an election.' Thus, receivers of a leased rail- road, who for a long time continued to operate the leased line, and issued receivers' certificates to raise money for pay- ing taxes thereon according to the provisions of the lease, were held to have adopted the lease, and to be Uable to repay to the lessor taxes on the leased line which it had been compelled to pay by the judgment of a competent court.^ Where the question of the renunciation or adoption of a lease has been by a receiver submitted to and determined, after due considera- tion, by the court appointing him, its decision, being upon a question of business policy and not of law, and administrative rather than judicial in its nature, will not be disturbed by an appellate court, unless it appears that the discretion of the lower court has been abused.^ If the receiver elect to adopt a lease, he becomes vested with the title to the leasehold interest, and a privity of estate is thereby created between the lessor and the receiver by which the latter becomes liable upon the covenant to pay rent.* § 236. Obligations of Receiver pending Election. — As al- ready shown, the appointment of a receiver of a lessee cor- a reasonable time in which to make an cantile Trust Co., 88 Fed. 140 election to accept or surrender a lease. (1898). In St. Joseph, etc. R. Co. v. Hum- ' Mercantile Trust Co. v. Farmers phreys, 145 U. S. 105 (1892), (12 Sup. Loan, etc. Co., 81 Fed. 254 (1897). Ct. Rep. 787), under somewhat ex- Disputed questions of fact as to traordinary circumstances, a period whether a receiver has renounced or of nine months was held not to be an assumed a lease must be determined unreasonable time. In Park v. New by action and not by mere petition York, etc. R. Co., 57 Fed. 799 (1893), in the receivership cavise. two weeks was said not to be un- People v. Erie R. Co., 54 How. Pr. reasonable. A period of ten months, 59 (1877). See also Woodruff v. during all of which time negotiations Erie R. Co., 93 N. Y. 609 (1883). were being carried on for a reduction A receiver will not be ordered to of the rental, was held in Carswell v. assume a lease merely because the Farmers Loan, etc. Co., 74 Fed. 88 company he represents is solvent. (1896), to be a reasonable time. Empire Distilling Co. v. McNulta, ' Empire Distilling Co. v. McNulta, 77 Fed. 700 (1897). 77 Fed. 700 (1897), and cases cited. « Mercantile Trust Co. v. Farmers ' United States Trust Co. v. Mer- Loan, etc. Co., 81 Fed. 254 (1897). 426 CHAP. XXl] LEASES UNDER RECEIVERSHIP 236 poration does not work an assignment of the lease or render him liable upon the covenants therein. While the receiver may operate the leased railroad for a reasonable time in order to determine whether he will adopt the lease, he does not, as a general rule, thereby become Uable for the stipulated rent for such period, in case he finds the road unprofitable, and, with the approval of the court, surrenders it to its owner.' He ' In Quinoy, etc. R. Co. v. Hum- phreys, 145 U. S. 98 (1892), (12 Sup. Ct. Rep. 787), Mr. Chief Justice Fuller said: "But appellants insist that, without regard to privity of estate or privity of contract, receivers in chancery are liable, not for a reason- able rental value during the occu- pancy of leased property committed to their charge by order of court, but for rental according to the cov- enants of the leases whenever there are unequivocal acts of use and con- trol of such property ; and that they thus adopt the leases and become bound by their terms so long as such use and control continue. . . . Clearly, this was no case of the em- ployment of the property of another for one's own benefit. Within a, month, the receivers applied to the court for instructions, distinctly set- ting forth that there was no income wherewith to pay the rental in ques- tion, and the order of court, entered at once, proceeded under the theory that they were not to be bound by the rental prescribed. . . . We do not discover any equitable ground upon which appellants are entitled to a preference in the distribution of the proceeds of the sale of the mortgaged property. The cost of the maintenance of the Quincy road by the receivers exceeded its total earnings ; and the net earnings of the whole Wabash system, before the Quincy Company retook its road, did not amount to one quarter of the amount of preferred debt existing when the receivers were appointed. The property was surrendered to it freed from any charge for that debt, to the payment of which it con- tributed nothing." An order directing receivers to keep divisional accounts, and to pay rental on leased lines only to the extent of any surplus earned by them, is notice to such lines that they must not expect payment of rentals unless there is a surplus; and if they do not then intervene to regain possession of the property, they have no claim on the receivers in the event that there is no surplus. United States Trust Co. V. Wabash Western R. Co., 150 U. S. 287 (1893), (14 Sup. Ct. Rep. 86) ; Seney v. Wabash Western R. Co., 150 U. S. 310 (1893), (14 Sup. Ct. Rep. 94). Receivers have, as a general rule, a reasonable time in which to deter- mine whether they will adopt the lease, or will merely pay to the lessor the net earnings of its road, subject, always, to the lessor's right to re- enter for condition broken. Farmers Loan, etc. Co. v. Northern Pacific R. Co., 58 Fed. 257 (1893). The expenses and deficits incurred by receivers in operating a railroad under a lease which it was their duty to renounce are chargeable to the leased road, and not to the re- ceivers, where they have not assumed the lease. Mercantile Trust Co. v. Farmers Loan, etc. Co., 81 Fed. 254 (1897). A lessor corporation has no pre- ferred claim for rentals accruing during receivership where it did not demand either possession, or con- firmation of lease by receiver. New 427 236 INTEBCORPOEATE RELATIONS [part III must, however, deal fairly with the lessor and is bound to turn over the net earnings of the road, if less than the stipulated rent, to the lessor, and to pay a reasonable rental for leased property, in itself non-producing.' This is equitable. The York, etc. R. Co. v. New York, etc. R. Co., 58 Fed. 268 (1893). See also as sustaining general principle stated in text : St. Joseph, etc. R. Co. V. Humphreys, 145 U. S. 105 (1892), (12 Sup. Ct. Rep. 987); Milwaukee, etc. R. Co. v. Brooks, etc. Works, 121 U. S. 430 (1887), (7 Sup. Ct. Rep. 1094) ; Park v. New York, etc. R. Co., 57 Fed. 799 (1893); Ames V. Union Pacific R. Co., 60 Fed. 966 (1894); Bell v. American Protective League, 163 Mass. 558 (1895), (40 N. E. Rep. 857, 47 Am. St. Rep. 481). Contra, however. Woodruff v. Erie R. Co., 93 N. Y. 609 (1883), where the New York Court of Appeals held that a, receiver could not take possession of a leased railroad and enjoy its use and occupation, Without incurring liability for the rent reserved. And in Frank v. New York, etc. R. Co., 122 N. Y. 197 (1890), (25 N. E. Rep. 232) it was again held that the principles governing the liability of an assignee of a lease apply in the case of a receiver of the property of the lessee, and that he is chargeable with the payment of the rent reserved for such time as he occupies the leased property. See also Mercantile, etc. Co. v. Southern, etc. R. Co., 113 Ala. 543 (1897), (21 So. Rep. 373) ; Brown v. Toledo, etc. R. Co., 35 Fed. 444 (1888). ' See cases cited in preceding note. Also Carswell v. Farmers Loan, etc. Co., 74 Fed. 88 (1896), where a, receiver of a railroad retained pos- session of leased depot property for ten months, with the assent of the depot company, negotiations being all the time in progress to fix a reason- able rent. At the end of this time, 428 a receiver of the depot company was appointed. It was held that the rail- way receiver had not elected to adopt the lease, and was liable only for a reasonable rent of the depot, not for the stipulated rental. And see Savannah, etc. R. Co. v. Jacksonville, etc. R. Co., 79 Fed 35 (1897). Where a mortgage trustee notified the lessor upon taking po.ssession that he repudiated the lease but would pay fair compensation the court upheld the notice. Milwaukee, etc. R. Co. V. Brooks, etc. Works, 121 U. S. 430 (1887), (7 Sup. Ct. Rep. 1094). A lessee railroad company became insolvent and a receiver was ap- pointed who took possession of the leased road. Thereafter, and during almost the entire period of the re- ceivership, the lease was practically abrogated and while the leased road was operated by the receiver in con- nection with the insolvent road it was for its own benefit. Upon the sale of the insolvent road a settle- ment was made with the lessor and a fund was set apart as a, result of the operation of the leased road. Stockholders of the lessor corpora- tion who were entitled under the lease to the rental by way of divi- dends brought suit for "back rent- als" and it was held that they were only entitled to dividends out of such fund for the time during which the road was operated before the abro- gation of the lease, and not to the balance which, under the settlement, went directly to the lessor corpora- tion and not as a dividend to its stockholders. Farrar v. South Western R. Co., 116 Ga. 337 (1902), (42 S. E. Rep. 527). CHAP. XXl] LEASES UNDER RECEIVERSHIP § 237 receiver operates the leased road subject to the right of the lessor to re-enter for condition broken and to insist upon an immediate adoption of the lease or surrender of the road. If the lessor fail to assert his right, it may fairly be presumed that the trial of the road by the receiver is of as much impor- tance to him as to the receiver, and there is no reason why the receiver should hazard the corpus of his estate by the experi- ment. Where, however, the lessor, immediately upon the appoint- ment of the receiver, demands of the receiver and of the court, either an assumption of the lease or a surrender of the road, and the decision is long delayed that the receiver may deter- mine which policy is expedient, he must pay the stipulated rent for the time he has had possession, in case he elects to surrender the road.' So, where a receiver operates a leased road and keeps no separate accounts showing the net earnings of the road, he must pay the rent stipulated for the time of his possession although he renounces the lease.^ In such cases, equity establishes exceptions to the general rule. § 237. Obligations of Receiver after Election. — When, after due investigation^ a receiver elects, and the court, after con- sideration, determines to surrender a leasehold interest to its owner and such surrender is made and compensation for the use pending election is paid according to the principles just indicated the connection of the receiver with the leased prop- ' In Farmers Loan, etc. Co. v. them: 'While we take and withhold Northern Pacific R. Co., 58 Fed. 265 that possession until it shall be satis- (1893), Judge Jenkins said: "So factorily determined whether it is that here the lessors have been con- profitable or not to operate the road, tinuously knocking at the door of you, the lessee, shall not have your the court, demanding possession of rental pending that determination the demised premises, and possession according to the stipulations of the has been withheld from them against lease under which possession was their consent, and against their pro- taken. ' " test. It appears to the court that, ^ Central, etc. Co. v. Farmers Loan, under such circumstances, it would etc. Co., 79 Fed. 158 (1897). be inequitable to say that the court Where a receiver operates leased or its receivers should hold posses- lines for a year, and uses the earnings sion of the demised premises, refusing to pay interest, the court will order to pay rent accruing before the re- him, to that extent, to pay taxes on ceivership, taking from the lessor the road as required by the terms of their estate without their consent, the lease. Clyde o. Richmond, etc. express or implied, and saying to R. Co., 63 Fed. 21 (1894). 429 237 INTERCORPORATE RELATIONS [part III erty terminates; but when the receiver, with the approval of the court, decides not to surrender the lease and so notifies the lessor and continues in possession of the leased property, .such acts constitute an adoption of the lease and carry with it an obligation to fulfil the covenants of the lease and to pay the rental stipulated.' Thus, where a receiver adopts a lease containing provisions for the purchase of the property leased, he is bound by the instrument.^ When a receiver is operating a railroad system consisting of many leased lines, the leases of which have been adopted, the accounts of each line should be kept separately, and the outlay of each reduced, if possible, until it pays operating expenses; but if the receiver is unable to do so, receiver's cer- tificates on the whole system may be issued to make up the deficiency.' So, where a receiver has been unable to obtain money for the payment of rentals, the court on final decree may properly declare the unpaid rentals a first lien on the property and direct that the same, with interest, be paid out of the proceeds of the sale as a preferential lien.* ' Central Trust Co. v. Continental Trust Co., 86 Fed. 517 (1898). See also Easton v. Houston, etc. R. Co., 38 Fed. 784 (1889) ; Mercantile, etc. Co. V. Southern, etc. Co., 113 Ala. 543 (1897), (21 So. Rep. 373). Spen- cer V, World's Columbian Kxposition, 163 lU. 117 (1896), (45 N. E. Rep. 250). Where a lessee corporation agreed to pay, as a part of the rental, the interest on certain bonds, the holders of such bonds, on the appointment of a receiver by a federal court for such corporation, were perrnittrjd to come in and directly assert their claims for interf;Ht against the fund in the hands of the court for the payment of rentals, notwithstanding the appointment of a receiver for the lessor corporation, with power to collect the rentals. Mercantile Trust Co. V. Baltimore, etc. R. Co., 94 Fed. 722 (1899). See also Grand Tnjnk R. Co. v. Central Vermont R. Co., 78 Ferl. 090 430 (1897), affirmed md) nom. Bank v. Smith, 86 Fed. 398 (1898). A« to submission of amount of in- creased rental due to improvements to arbitration see Farmers Loan, etc. Co. 0. Chicago, etc, R. Co., 18 Fed. 484 (1883), affirmed mib nom. Peoria, etr:. R. Co. V. Chicago, etc. R. Co., 127 U. S. 200 (1888), (8 Sup. Ct. Rep. 112.5). ^ Mercantile Trust Co. v. Atlantic, etc. R. Co., 8fJ Fed. 18 (1897). ' Central Trust Co. v. Wabash, etc. R. Co., 23 Fed. 863 (1885). See also Miltenberger v. Logansport R. Co., 166 U. S. 286 (1882), (10 Sup. Ct. Rep. 140). * Central Trust Co. v. Continental Trust Co., 86 Fed. 517 (1898). Where a railroad lease is declared void the lessor has no right to a ijuan- turn meruit against funds in hands of receiver, the operation of the leased road having been a source of loss. St. Louis, etc. R. Co. v. Clevela,nd, etc. R. Co., 125 U. S. 658 (1888), (8 Sup. CHAP. XXl] LEASES UNDER RECEIVERSHIP § 238 Where, however, the court in authorizing a receiver to oper- ate a leased Une provides that the rent shall be paid only after certain prior payments have been made, the lessor cannot claim payment from the receiver absolutely.^ The lessor may re-take its road if dissatisfied with the provisions of the order, but its only demand against the receiver is in accord- ance with the order. Where a receiver makes a valid contract for repairs on leased rolling stock, he is liable thereon as receiver, although it is subsequently turned over to another receiver.^ § 238. Lease of Railroad by Receiver. — As a railroad cor- poration cannot, itself, lease its railroad and franchises, with- out legislative authority, a receiver who temporarily assumes its functions does not, without like authority, possess the power.' The necessary authority is legislative, not judicial, and in order to justify a lease by receivers some statutory pro- vision must confer the right to execute it. Courts have, however, sometimes authorized receivers ap- pointed by them to take leases of railroads, — generally short connecting Unes, — ^ where the interest of the creditors and the corporation required it.^ Upon the principle that legisla- tive authority is as necessary to take as to make a lease, it is assumed that such orders have been passed only where some general or special law authorized the connection, by lease, of the road leased with that controlled by the receiver. It can- not be that a receiver, without an enabling statute in his be- half and without authority in the corporation he represents, can, by mere order of court, assume the discharge of public duties imposed on another corporation. Ct. Rep. 1011). Whether a debt for ' Central Trust Co. v. Wabash, etc. rental of a leased line, part of a rail- R. Co., 38 Fed. 63 (1889). road system, shall be treated as an ' Central Trust Co. v. Wabash, etc. obligation of the receivership, see R. Co., 50 Fed. 857 (1892). Central R., etc. Co. v. Farmers Loan, ' State v. McMinnville, etc. R. etc. Co., 79 Fed. 158 (1897). Co., 6 Lea (Tenn.), 369 (1880) ; Lessor has no preferred claim for McMinnville, etc. R. Co. v. Huggins, rentals during receivership where it 3 Baxt. (Tenn.) 177 (1873). did not demand either possession ' Gibert v. Washington City, etc. or confirmation of lease by receiver. R. Co., 33 Gratt. (Va.) 586 (1880) ; New York, etc. R. Co. v. New York, Mercantile Trust Co. v. Missouri, etc. etc. R. Co., 58 Fed. 268 (1893). R. Co., 41 Fed. 8 (1889). 431 239 INTERCOEPORATE RELATIONS [PART IH CHAPTER XXII ULTRA VIRES AND VOIDABLE RAILROAD LEASES § 239. Distmction between Ultra Vires and Irregular Leases. § 240. Enforcement of Executory Ultra Vires Leases. § 241. Delivery of Possession under Ultra Vires Lease. § 242. Right and Duty of Disaffirmance. § 243. Recovery of Property after Disaffirmance. § 244. Recovery on Quantum meruit for Past Use. § 245. Improvements made by Lessee under Ultra Vires Lease. § 246. Effect of UUra Vires Lease upon Stock Subscriptions. § 247. Guarantee of Ultra Vires Lease Void. § 248. Voidable Railroad Leases. § 249. Leases of Railroads for Purpose of suppressing Competition. § 250. Remedy of State — Quo Warranto. § 251. Remedy of State — Injunction. § 239. Distinction between Ultra Vires and Irregular Leases. — There is an obvious distinction between a want of power and a want of formalities in the exercise of power. More precisely, the exercise by a corporation of a power not con- ferred by its charter or the laws of its incorporation, is clearly distinguishable from the irregular exercise, in a particular instance, of a general power conferred upon a corporation.' ' In Central Transp. Co. v. PuU- be the foundation of any right of man Car Co., 139 U. S. 59 (1891), action upon it. When a corporation (11 Sup. Ct. Rep. 478), Mr. Justice is acting within the general scope of Gray said : " A contract of a corpora- the powers conferred upon it by the tion, which is ultra vires, in the proper legislature, the corporation, as well sense, that is to say, outside the ob- as persons contracting with it, may ject of its creation as defined in the be estopped to deny that it had co n- law of its organization, and there- plied with the legal formalities which fore beyond the powers conferred are prerequisites to its existence or upon it by the legislature, is not to its action, because such requisites voidable only, but wholly void, and might in fact have been complied of no legal effect. The objection to with. But when the contract is the contract is, not merely that the beyond the powers conferred upon it corporation ought not to have made by existing laws, neither the cor- it, but that it could not make it. poration, nor the other party to the The contract cannot be ratified by contract, can be estopped, by assent- either party, because it could not have ing to it, or by acting upon it, to show been authorized by either. No per- that it was prohibited by those laws, formance on either side can give the The doctrine of the common law, by unlawful contract any validity, or which a, tenant of real estate is- es- 432 CHAP. XXIl] ULTRA VIRES LEASES 239 A lease of a railroad, without legislative authority, is wholly void, and the parties thereto are permitted to plead their want of authority, upon the ground that a court will not inter- fere in aid of parties to an illegal enterprise. Principles of estoppel and ratification are inapplicable. A corporation cannot ratify that which it was without power to do in the first instance; and it cannot be estopped from pleading ultra vires, because all persons having dealings with it are bound to take notice of the limitations of its charter/ If, however, topped to deny his landlord's title, has never been considered by this court as applicable to leases by rail- road corporations of their roads and franchises. It certainly has no bear- ing upon the question whether this defendant may set up that the lease sued on, which is not of real estate, but of personal property, and which includes, as inseparable from the other property transferred, the inalienable franchise of the plaintiff, is unlawful and void, for want of legal capacity in the plaintiff to make it. " And in Davis v. Old Colony R. Co., 131 Mass. 260 (1881), (41 Am. Rep. 221), Mr. Justice Gray, then Chief Justice of the Supreme Judicial Court of Massachusetts, said : "There is a clear distinction, as was pointed out by Mr. Justice Campbell in Za- briskie v. Cleveland, etc. R. Co., 23 How. (U. S.) 398 (1859), by Mr. Justice Hoar in Monument Bank V. Globe Works, 101 Mass. 58 (1869) (3 Am. Rep. 322), and by Lord Chancellor Cairns and Lord Hatherly in Ashbury Carriage, etc. Co. v. Riche, L. R. 7 H. L. 684 (1875), between the exercise by a corporation of a power not conferred upon it, varying from the objects of its creation as declared in the law of its organiza- tion, of which all persons dealing with it are bound to take notice ; and the abuse of a general power, or the fail- ure to comply with prescribed for- malities or regulations, in a partic- ular instance, when such abuse or failure is not known to the other con- tracting party." See also Miners' Ditch Co. v. Zeller- bach, 37 Cal. 543 (1869), (99 Am. Dec. 300) ; City Fire, etc. Ins. Co. v. Car- rugi, 41 Ga. 660 (1871); Royal British Bank v. Turquand, 6 El. & Bl. 327 (1856). ' Union Pacific R. Co. v. Chicago, etc. R. Co., 163 U. S. 581 (1896), (16 Sup. Ct. Rep. 1173) : "The general rule is that a contract by which a. railroad company renders itself in- capable of performing its duties to the public, or attempts to absolve it- self from those obligations without the consent of the State, or a contract made by a corporation beyond the scope of its powers, express or implied, on a proper construction of its charter, can- not be enforced, or rendered enforce- able by the application of the doctrine of estoppel ; . . . but where the sub- ject-matter of the contract is not for- eign to the purposes for which the cor- poration is created, a contract em- bracing 'whatever may fairly be regarded as incidental to, or consequen- tial upon, those things which the leg- islature has authorized, ought not, un- less expressly prohibited, to be held by judicial construction to be ultra vires.' " A legislative act purporting to ratify an ultra vires lease, is, in effect, a new grant of power. The accept- ance of rent under an ultra vires lease does not make it valid. Ogdensburgh, etc. R. Co. V. Vermont, etc. R. Co., 4 Hun (N. Y.), 268 (1875). 433 §240 INTERCOEPOBATE RELATIONS [part III the execution of the lease is within the powers of the contract- ing corporations, but either has failed to conform to statutory- regulations designed for the protection of its stockholders, the stockholders may ratify the lease and, as already shown, both the corporation and the stockholders may be estopped from denying its validity.' § 240. Enforcement of Executory Ultra Vires Leases. — While executed contracts made by corporations in excess of their legal powers have, in some jurisdictions, been upheld by the courts, and parties have been precluded from setting up as a defence to actions brought by or against corporations their want of power to enter into such contracts, the doctrine has never been appUed to mere executory contracts.^ Public poUcy forbids ultra vires leases of railroads, and the authorities are practically unanimous in holding that in no way, directly or indirectly, will the courts allow an action to be maintained to enforce the provisions of such leases, while they remain executory.' They will not aid a corporation to ' Boston, etc. R. Co. v. New York, etc. R. Co., 13 R. I. 260 (1881) ; Hum- phreys V. St. Louis, etc. R. Co., 37 Fed. 307 (1889). See also ante, § 192 : " Acqui€sce7i4:e and Laches of Stock- holders" ; ante, § 196: "Corporation may be estopped from alleging Irregular Execution of Lease. " ^ United States : Safety Insulated Wire, etc. Co. v. Baltimore, 74 Fed. 135 (1890). Massachusetts : In White v. Buss, 3 Cush. 449 (1849), Chief Justice Shaw laid down the rule as follows : "It is well settled by the authorities, that any promise, contract or under- taking, the performance of which would tend to promote, advance, or carry into effect an object or purpose which, is unlawful, is in itself void and will not maintain an action." New York : Nassau Bank v. Jones, 95 N. Y. 122 (1882), (47 Am. Rep. 14). Also Jemison v. Citizens Savings Bank, 122 N. Y. 142 (1890), (25 N. E. Rep. 264), 19 Am. St. Rep. 482 ; Tracy „. Talmadge, 14 N. Y. 162 (1856). 434 England: Ashbury Railway Car- riage, etc. Co. V. Riche, L. R. 7 H. L. 653 (1875), L. R. 9 Ex. 224; Caledonian, etc. R. Co. v. Magis- trates of Helensburgh, 2 Macq. 391 (1855). ' United States : Pullman Car Co. V. Central Transp. Co., 171 U. S. 138 (1898), (18 Sup. Ct. Rep. 808); St. Louis, etc. R. Co. v. Terre Haute, etc. R. Co., 145 U. S. 393 (1892), (12 Sup. Ct. Rep. 953) ; Central Transp. Co. v. Pullman Car Co., 139 U. S. 24 (1891), (11 Sup. Ct. Rep. 478); Oregon R., etc. Co. 0. Oregonian R. Co., 130 U. S. 1 (1889), (9 Sup. Ct. Rep. 409) ; Penn- sylvania R. Co. V. St. Louis, etc. R. Co., 118 U. S. 290 (1886), (6 Sup. Ct. Rep. 1094) ; Thomas v. Railroad Co., 101 U. S. 71 (1879). Maine: Brunswick Gas Light Co. V. United Gas, etc. Co., 85 Me. 532 (1893), (27 Atl. Rep. 525, 35 Am. St. Rep. 385). New York: Compare Bath Gas Light Co. V. aaffy, 151 N. Y. 24 (1896), (45 N. E. Rep. 390, 36 L. R. A. CHAP. XXIl] ULTRA VIRES LEASES § 241 enforce its unlawful contracts. They will not assist in divert- ing corporate funds to unauthorized objects, to the detriment of stockholders and creditors and prejudice of the rights of the State. While the application of this principle may allow a corporation to repudiate its contracts and escape its obliga- tions, such result is incidental, and must be borne by the suffering party as a penalty for participating in an illegal en- terprise. Lord Mansfield thus tersely stated the position of the courts in Holman v. Johnson,^ decided in 1775: " The objection that a contract is immoral or illegal as between the plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the ob- jection is ever allowed; but is founded on general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by acci- dent, if I may say so. The principle of public policy is this: ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act." § 241. Delivery of Possession under Ultra Vires Lease. — It has been held that the principle enunciated by many courts that a party to an ultra vires contract who has received the benefit of its full performance is estopped from questioning its validity, is applicable in the case of an unauthorized lease of a railroad where possession has passed, upon the ground that delivery of possession constitutes complete execution on the part of the lessor.^ The weight of authority, however, 664); Woodruff i/. Erie R. Co., 93 ^Camden, etc. R. Co. v. May's N. Y. 609 (1883). Landing, etc. R. Co., 48 N. J. L. 530 England: East Anglian R. Co. v. (1886), (7 Atl. Rep. 523). In this Eastern Counties R. Co., 11 C. B. 775 case (two judges dissenting), the (1851) ; McGregor v. Dover, etc. R. Court allowed a recovery of rent Co., 18 Q. B. 618 (1852). accruing after an abandonment of an ' Holman v. Johnson, 1 Cowp. 341 ultra vires lease, reaching the conclu- (1775). sion that the transaction was com- Lord Mansfield, in Smith v. Brom- pleted upon the part of the lessor by ley, 2 Doug. 696 (1760), an earlier the delivery of the leased road, and case, says : "If the act is in itself im- that the other party should not be moral, or a violation of the general allowed to plead ultra vires when sued laws of public policy, then the party for not performing its part of the paying shall not have his action. " contract. The Court, however, said 435 §241 INTBRCOEPORATE RELATIONS [part III supports the view that a lease is a continuing contract, as to rent and as to occupancy, and is executory in respect of its future performance.* Upon the principles just considered, that the question is different where the State accuses a corporation of exceeding its powers, thus apparently adopting the doctrine, sometimes stated by courts, that the State alone can question ultra vires acts of cor- porations. This doctrine, however, while reasonable in many respects, is opposed to the great weight of authority. ^ In Pennsylvania Co. v. St, Louis, etc. R. Co., 118 U. S. 316 (1886), (6 Sup. Ct. Rep. 1094), Mr. Justice Miller said : " It is argued in support of the decree, that, though the contract of the lease was void, so that no action could originally have been sustained upon it, there has been for ten years such performance of it, in the use, possession and control of plaintiff's road and its franchises by the de- fendant, that they cannot now be permitted to repudiate or abandon it ; that it now presents a class of cases which hold that where a void contract has been so far executed that property has passed under it and rights have been acquired under it, the courts will not disturb the possession of such property. . We know of no well- considered case where a corporation, which is a party to a continuing con- tractj which it had no power to make, seeks to retract and refuses to proceed further can be compelled to do so." And in Oregon R,, etc. Co. v. Ore- gonian R. Co., 130 U. S. 37 (1889), (9 Sup. Ct. Rep. 409), Mr. Justice Miller said : "To say that a contract which runs for ninety-six years, and which requires of both parties to it continual and actual operations and performance under it, becomes an executed contract by such perform- ance for less than three years of the term, is carrying the doctrine much farther than it has ever been carried, 436 and is, decidedly, a misnomer. This class of cases is not governed by the doctrine of part performance in a suit in equity for specific performance, nor is this a suit for specific perform- ance. This is an action at law to recover money under a contract which is void, where for nearly three years the parties acted under it, but in which one of them refuses longer to be bound by its provisions ; and the argiunent now set up is that be- cause the defendant has paid for all the actual use it made of the road, while engaged in the actual perform- ance of the contract between the dates just given, it is thereby bound for more than ninety-three years longer by the contract which was made without lawful authority by its president and board of directors. We consider this proposition as needing no further consideration." So in Thomas v. Railroad Co. 101 U. S. 86 (1879), the Court said : "But what is sought in the case before us is the enforcement of the unexecuted part of this agreement. So far as it has been executed, namely, the four or five years of action under it, the accounts have been adjusted, and each party has received what he was entitled to by its terms. There re- mains unperformed the covenant to arbitrate with regard to the value of the contract. It is the damages pro- vided for in that clause of the con- tract that are sued for in this action. Damages for a material part of the contract never performed ; damages for the value of a contract which was void. It is not a case of a contract fully executed. The very nature of the suit is to recover damages for its non-performance. As to this it is not an executed contract." See also Central Transp. Co. v. CHAP. XXIl] ULTRA VIRES LEASES § 243 therefore, no action can be maintained upon sucii a lease for any failure to further perform it, and the lessee may surrender an unexpired term without liability for damages. § 242. Right and Duty of Disaflarmance. — As an ultra vires lease of a railroad is forbidden by considerations of public policy, and involves a continuing violation of the obligations of the corporations to the State, it is the duty, as well as the right, of the parties to rescind and abandon it at the earliest possible moment; and this duty is a continuing one which is rendered none the less imperative by delay in its performance.' This right — and corresponding duty — of rescission is generally spoken of in the decisions as belonging to the lessee. Upon principle, however, there should be no distinction be- tween the right and obligation of the lessee and of the lessor. They are both parties to an unlawful contract and owe the same duty to disaffirm it. Practically, however, the right may be said to be unilateral, owing to obstacles placed by the courts in the path of the lessor in recovering his property when the lessee has not repudiated the lease. Practically, also, the duty of rescission will rest lightly upon a lessor who risks the confiscation of his property by observing it. Thus, the Supreme Court of the United States has held that the parties to an unauthorized lease are guilty of a public wrong which precludes a court of equity from entertaining a bill by a lessor for relief from the lease and for a return of the property; and has intimated that neither a court of law nor of equity would grant a lessor, under such a lease, any relief in obtaining its Pullman Car Co., 139 U. S. 24 (1891), See also Pullman Car Co. v. Central (11 Sup. Ct. Rep. 478); Mallory v. Transp. Co., 171 U. S. 151 (18"98), (18 Hanaur Oil Works, 86 Tenn. 598 Sup. Ct. Rep. 808) : " The right of re- (1888), (8 S. W. Rep. 396). Compare covery must rest upon a disaffirmance Heims Brewing Co. v. Flannery, 137 of the contract. " Also St. Louis, etc. III. 309 (1891), (27 N. E. Rep. 286). R. Co. v. Terre Haute, etc. R. Co., 145 " A contract made by a corporation XJ. S. 393 (1892), (12 Sup. Ct. Rep. which is unlawful and void does not 953) ; Central Transp. Co. v. Pullman by being carried into execution be- Car Co., 139 U. S. 24 (1891), (11 Sup. come lawful and valid. The proper Ct. Rep. 478) ; Pennsylvania Co. v. remedy of an aggrieved party is to St. Louis, etc. R. Co., 118 U. S. 290 disaffirm the contract. Brunswick (1886), (6 Sup. Ct. Rep. 1094): Gas Light Co. v. United States, etc. Thomas v. Railroad Co., 101 TJ. S. Co., 85 Me. 532 (1893), (27 Atl. Rep. 71 (1879). 525, 35 Am. St. Rep. 385). 437 §243 INTERCOKPOEATE BELATIONS [part III property, so long as the lessee was satisfied.^ And the Su- preme Court of Texas has carried this doctrine to its logical conclusion by holding that a lessor, under an unauthorized lease, will not receive the aid of the courts in recovering its railroad, rent or a quantum meruit.^ This doctrine cannot be approved. The illegality of an ultra vires lease involves no moral turpitude, and, while a court of equity might properly decUne to disturb the posses- sion of property acquired thereunder, a court of law should always be open to a lessor corporation when it seeks to do its duty, — to abandon an illegal continuing contract and retake its property.' An action for such a purpose is not in affirm- ance, but in disaffirmance, of the lease, while the denial of a remedy permits the lessee to retain the property as long as it chooses and gives effect to an illegal lease.* § 243. Recovery of Property after Disaffirmance. — Upon the abandonment by a lessee corporation of an ultra vires lease, it is bound upon principles of natural justice to return the leased property to the lessor or make compensation for its ' In St. Louis, etc. R. Co. ti. Terre Haute, etc. R. Co., 145 U. S. 393 (1892), (12 Sup. Ct. Rep. 953), Mr. Justice Gray said : "When the parties are in pari delicto, and the contract has been fully executed on the part of the plaintiff, by the conveyance of property, or by the payment of money, and has not been repudiated by the defendant, it is now equally well settled that neither a court of law nor a court of equity will assist the plaintiff to recover back the property conveyed or money paid under the contract." This language was used with reference to an ultra vires lease which the lessor desired to cancel and under which a railroad had been transferred to and operated without objection by the lessee for seventeen years. The Court denied equitable relief and used the language above stated, which is difficult to reconcile with its language in Pull- man Car Co. V. Central Transp. Co., 171 U. S. 138 (1898), (18 Sup. Ct. 438 Rep. 808), and in Central TranSp. Co. v. Pulhnan Car Co., 139 U. S. 24 (1891), (11 Sup. Ct. Rep. 478), except upon the ground that the cases are distinguished by the lessee's repudia- tion of the lease in the latter cases. This, in effect, gives the lessee the exclusive right of repudiation, for if the lessor repudiates he is, according to the decision, without remedy. " Olcott V. International, etc. R. Co. (Tex. 1894), 28 S. W. Rep. 728. See note to § 243, post: "Recovery of Property after Disaffirmance," for further consideration of this remark- able decision. ^ That ejectment will lie to recover possession of a railroad, see St. Louis, etc. R. Co. V. Terre Haute, etc. R. Co., 33 Fed. 440 (1888) ; Railroad Co. v. Johnson, 119 U. S. 608 (1887), (7 Sup. Ct. Rep. 339). * Parkersburgh v. Brown, 106 U. S. 503 (1882), (1 Sup. Ct. Rep. 442), (case of invalid bonds): "The en- forcement of such rights is not in CHAP. XXII ] ULTRA VIRES LEASES § 243 loss.' However much the contractual powers of corporations may be Umited by their charters, there is no Umitation upon their power to make restitution of property acquired under an unlawful lease; " nor, as corporations, are they exempted from the common obligation to do justice which binds indi- viduals, for this duty rests upon all persons alike, whether natural or artificial." ^ The Supreme Court of the United States, however, in a series of cases of controlling authority, holds that " in no way and through no channels, directly or indirectly, will the courts allow an action to be maintained for the recovery of property deUvered under an illegal contract where, in order to maintain such recovery, it is necessary to have recourse to that contract. The right of recovery must rest upon a disaffirmance of the contract, and it is permitted only because of the desire of courts to do justice as far as possible to the party who has made payment or delivered property under a void agreement and which in justice he ought to recover." ^ Upon these prin- ciples, an action for the recovery of property delivered under an invalid lease cannot be maintained thereon upon its rescis- sion, but will lie upon the implied contract of the lessee to re- turn, or, failing in that, to make compensation for the property which it has no right to retain.* An action at law should also affirmance of the illegal contract, but of that which it has actually received ; is in disaffirmance of it." for, in such a case, to maintain the * "To say that a corporation can- action against the corporation is not not sue or be sued upon an ultra vires to affirm, but to disaffirm, the illegal arrangement is one thing. To say contract." Citing White v. Franklin that it may retain the proceeds thereof Bank, 22 Pick. (Mass.) 181 (1839); which have come into its possession Morville v. American Tract Soc, 123 without making any compensation Mass. 129 (1877), (25 Am. Rep. 40) ; whatever to the person from whom In re Cork, etc. R. Co., L. R. 4 Ch. it has obtained them, is something App. 748 (1869). very different, and savors very much ^ Manchester, etc. R. Co. v. Con- of an inducement to fraud." Green's cord, etc. R. Co., 66 N. H. 127 (1890), Brice's Ultra Vires (2d Am. Ed.), 721. (20 Atl. Rep. 384, 49 Am. St. Rep. Davis ». Old Colony R. Co., 131 582, 9 L. R. A. 689). Mass. 275 (1881), (41 Am. Rep. 221), » Pullman Car Co. v. Central (per Gray, C. J.) : "A corporation Transp. Co., 171 U. S. 151 (1898), may indeed be bound to refund to a (18 Sup. Ct. Rep. 808), (per Peckham, person, from whom it has received J.). See also cases cited in note fol- money or property for a purpose un- lowing, authorized by its charter, the value * Central Transp. Co. v. Pullman 439 §244 INTERCORPORATE RELATIONS [part III be available for the recovery of the specific property, as well as a suit in equity for an accounting and restitution.^ § 244. Recovery on Quantum Meruit for Past Use. — Upon the principle, just considered, that no action can be main- tained upon an unlawful contract, it is held by the Supreme Court of the United States and other courts that no recovery can be had of rent, as such, due under an ultra vires lease, although the lessee before disaffirmance has enjoyed posses- remarkable decision, permitting the absolute confiscation of the lessor's property, is the not illogical outcome of the decision of the Supreme Court of the United States in St. Louis, etc. R. Co. V. Terre Haute, etc. R. Co., 145 U. S. 393 (1892), (12 Sup. Ct. Rep. 593), to which reference was made in the last section. Car Co., 139 U. S. 24 (1891), (11 Sup. Ct. Rep. 478). See also Pennsylvania R. Co. V. St. Louis, etc. R. Co., 118 U. S. 317 (1886), (6 Sup. Ct. Rep. 1094) ; Brunswick Gas Light Co. v. United Gas, etc. Co., 85 Me. 532 (1893), (27 Atl. Rep. 525, 35 Am. St. Rep. 389). In Railway Companies v. Keokuk Bridge Co., 131 U. S. 389 (1889), (9 Sup. Ct. Rep. 770), Justice Gray said : "According to many recent opinions of this court, a contract made by a corporation, which is unlawful and void because beyond the scope of its corporate powers, does not, by being carried into execution, become lawful and valid, but the proper remedy of the party aggrieved is by disaffirming the contract, and suing to recover, as on a quantum merutt, the value of what the defendant has actually re- ceived the benefit of. " Citing Louisi- ana V. Wood, 102 U. S. 294 (1800) ; Parkersburgh v. Brown, 106 U. S. 487 (1882), (1 Sup. Ct. Rep. 442) ; Chap- man V. Douglas County, 107 U. S. 348 (1882), (2 Sup. Ct. Rep. 62); Salt Lake Qty v. HoUister, 118 U. S. 256 (1886), (6 Sup. Ct. Rep. 1055). Compare, however, Olcott v. Inter- national, etc. R. Co. (Tex. 1894), 28 S. W. Rep. 728, which holds that a lessor, party to an ultra vires lease, will not receive the aid of the courts to obtain either the return of the prbperty, rent or quantuTn meruit compensation ; that both parties are in pari delicto and that the Court will leave them where they have deliberately put themselves. This 440 * A cross bill for an accounting, etc., was allowed, under the circumstances of the case, in Pullman Car Co. v. Central Transp. Co., 171 U. S. 138 (1898), (18 Sup. Ct. Rep. 808), and there is no reason, in principle, why such a bill should not be allowed in all cases where the leased property has been lost or destroyed. In the celebrated case referred to, the Court, upon the principle stated in the text, decided : (a) That the lessor was entitled to recover from the lessee the value of the property transferred to it when the lease took effect, with interest, as that property had substantially dis- appeared and could not be returned. (6) That the market value of the lessor's shares was no measure of the value of the leased property, although it was its entire plant. (c) That the lessor was not entitled to recover anything for the breaking up of its business. For other cases as to the proper remedy, see Louisiana v. Wood, 102 U. S. 294 (1880) ; Davis v. Old Colony R. Co., 131 Mass. 258 (1881), (41 Am. Rep. 221) ; New Castle Northern R. Co. V. Simpson, 23 Fed. 214 (1885). CHAP. XXIl] ULTRA VIRES LEASES §244 sion of the property according to its terms.' The lessor, how- ever, while denied a recovery of the stipulated rent, may re- cover compensation in an action for use and occupation based upon an implied agreement on the part of the lessee to pay the value of such use.^ In such an action, on a quantum meruit • Pullman Car Co. v. Central Transp. Co., 171 U. S. 138 (1898), (18 Sup. Ct. Rep. 808); Central Transp. Co. V. PuUman Car Co., 139 U. S. 60 (1891), (11 Sup.. Ct. Rep. 478) ; Ore- gon R., etc. Co. V. Oregonian R. Co., 130 TJ. S. 1 (1899), (9 Sup. Ct. Rep. 409) ; Pennsylvania R. Co. v, St. Louis, etc. R. Co., 118 U. S. 290 (1886), (6 Sup. Ct. Rep. 1094);. Cox V. Terre Haute, etc. R. Co., 133 Fed. 371 (1904) ; Brunswick Gas Light Co. V. United Gas, etc. Co., 85 Me. 532 (1893), (27 Atl. Rep. 525, 35 Am. St. Rep. 389). See also Union Bridge Co. V. Troy, etc. R. Co., 7 Lans. (N. Y.) 240 (1872), although this case is not in accordance with later New York authorities. In Olcott V. International, etc. R. Co. (Tex. 1894), 28 S. W. Rep. 728, referred to in the last section, the Court denied a lessor compensation based either upon the lease or upon a quan- tum meruit. For reasons already pointed out, this decision is as far removed from good law as it is from just principles. ^ Brunswick Gas Light Co. v. United Gas, etc. Co., 85 Me. 532 (1893), (27 Atl. Rep. 525, 35 Am. St. Rep. 389) ; Manchester, etc. R. Co. v. Concord R. Co., 66 N. H. 100 (1890), (20 Atl. Rep. 383, 49 Am. St. Rep. 582, 9 L. R. A. 689). While the Su- preme Court of the United States has not decided the precise question whether a recovery can be had upon a quantum meruit for past use under an ultra vires lease, it is apparent from its language in Pullman Car Co. V. Central Transp. Co., 171 U. S. 150 (1898), (18 Sup. Ct. Rep. 808), and Central Transp. Co. v. Pullman Car Co., 139 U. S. 60 (1891), (11 Sup. Ct. Rep. 478), that should the case come before it such recovery would be al- lowed. Thus in the latter case the Court said: "A contract ultra vires being unlawful and void, not because it is in itself immoral, but because the corporation, by the law of its creation, is incapable of making it, the courts, while refusing to maintain any action upon the unlawful contract, have al- ways striven to do justice between the parties, so far as could be done con- sistently with adherence to law, by permitting property or money, parted with on the faith of the unlawful con- tract, to be recovered back, or com- pensation to be made for it. In such case, however, the action is not main- tained upon the unlawful contract, nor according to its terms ; but on an implied contract of the defendant to return, or, failing to do that, to make compensation for property or money which it h^ no right to retain. To maintain such an action is not to affirm, but to disaffirm, the unlawful contract." Citing Pittsburgh, etc. R. Co. V. Keokuk, etc. Bridge Co., 131 U. S. 371 (1881), (9 Sup. Ct. Rep. 770) ; Salt Lake City v. Hollister, 118 U. S. 263 (1886), (6 Sup. Ct. Rep. 1055) ; Chapman v. Douglas Co., 107 U. S. 355 (1882), (2 Sup. Ct. Rep. 62) ; Parkersburgh v. Brown, 106 U. S. 503 (1882), (1 Sup. Ct. Rep. 442) ; Louisi- ana V. Wood, 102 U. S. 299 (1880) ; Hitchcock V. Galveston, 96 U. S. 350 (1887). See also cases collected in dissent- ing opinion of Vann, J., in Bath Gas Light Co. V. Claffy, 151 N. Y. 45 (1896), (45 N. E. Rep. 390, 36 L. R. A. 664). 441 I" 244 INTERCORPORATE RELATIONS [PART III the lease may be introduced in evidence as in the nature of an admission of what is a reasonable rental, but it is held that it cannot govern or control the amount to be allowed.' On the other hand, it is held by other courts, under the leadership of the New York Court of Appeals, upon principles of estoppel, that the lessee is bound by the terms of the lease for the time he remains in possession, and that recovery of past due rent may be obtained by the lessor, in an action on the lease, although it may be void as to the public.^ As said by Chief Judge Andrews in Bath Gas Ldght Co. v. Claffy:^ " The State has not intervened, and the possession of the property has now been restored to its original proprietors. The contract has been teririinated as to the future, and all that remains undone is the payment by the lessee of _the un- paid rent. We think the demands of public policy are fully satisfied by holding that, as to the public, the lease was void, but that, as between the parties, so long as the occupation under the lease continued, the lessee was bound to pay the rent, and that its recovery may be enforced by action on the cove- nant. Public policy is promoted by the discouragement of fraud, and the maintenance of the obUgations of contracts, and to permit a lessee of a corporation to escape the payment of rent by pleading the incapacity of the corporation to make the lease, although he has had the undisturbed enjoyment of the property, would be, we think, most inequitable and unjust. . . . We think the rule which should be applied is that the lessee is bound by the contract so long as he remains in possession." ' Brunswick Gas Light Co. v. this case, Chief Judge Andrews also United Gas, etc. Co., 85 Me. 532 declared that the decisions of the (1893), (27 Atl. Rep. 525, 35 Am. St. Supreme Court of the United States, Rep. 389). already referred to, carry the doctrine ^ Bath Gas Light Co. v. Claffy, 151 of ultra vires to an unjust extent, N. Y. 24 (1896), (45 N. E. Rep. 390, "and the rank injustice which, as it 36 L. R. A. 664) ; Woodruff v. Erie seems to us, these cases sanction, R. Co., 93 N. Y. 609 (1883); Cam- justifies the observation of Lord St. den, etc. R. Co. v. May's Landing, etc. Leonards in the case of Eastern Coun- R. Co., 48 N. J. L. 530 (1886), (7 Atl. ties R. Co. v. Hawkes, 5 H. L. Cas. Rep. 523). 370 (1855), that 'the safety of men ' Bath Gas Light Co. v. Claffy, 151 in their daily contracts requires that N. Y. 34 (1896), (45 N. E. Rep. 390, the doctrine of ultra vires should be 36 L. R. A. 664). In his opinion in confined within narrow Umits.'" 442 CHAP. XXIl] ULTRA VIRES LEASES § 245 Notwithstanding this reasoning it seems to follow as a neces- sary conclusion from the premise that an ultra vires lease is void that no action of any kind can be maintained upon it, and that no principles of estoppel can give it vitality. To hold that an ultra vires lease is void, and, at the same time, that it governs the rights of the parties in the matter of rent; that it is vaUd as to the past and void as to the future, is il- logical, and gives a controlling effect to a void contract. " A void instrument governs nothing." ^ Nor is it necessary to adopt the New York rule in order to do justice to the parties. If the lessee pays, and the lessor receives, what the use of the property is reasonably worth, the result is equitable, although the one or the other may lose the benefit of the stipulations of an illegal contract. § 245. Improvements made by Lessee under Ultra Vires Lease. — As a general rule, a lessee corporation cannot re- cover from the lessor for improvements made upon the leased property during its occupancy under an unauthorized lease.^ This rule necessarily applies in every case where an action for such recovery must be based upon the illegal contract. It is clear, however, upon the principle stated by the Supreme Court of the United States that " a contract ultra vires being unlawful and void, not because it is in itself immoral, but because the corporation, by the law of its creation, is incapable of making it, the courts, while refusing to maintain any action upon the unlawful contract, have always striven to do justice between the parties," ' that exceptions to the rule may be es- tabUshed where it is not necessary to rely upon the lease. Thus, 1 Brunswick Gas Light Co. v. 6 Lea (Terni.), 369 (1880), (4 Am. & United Gas, etc. Co., 85 Me. 541 Eag. R. Cas. 95), was the case of- a (1893), (27 Atl. Rep. 525, 35 Am. lease by a receiver without authority, St. Rep. 389). and, under the circumstances stated 2 In Middlesex, etc. R. Co. ». Bos- in the opinion, the Court was justified ton, etc. R. Co., 115 Mass. 347 (1874), in saying (p. 379) : "The tenant (7 Am. Ry. Rep. 469), it was held that voluntarily takes his chances of being a lessee under an idtra vires lease could permitted to enjoy the expenditures not recover from the lessor expenses he has made upon the land of an- of renewing the road. other." See also East Tennessee, etc. R. ' Central Transp. Co. v. Pullman Co. V. Nashville, etc. R. Co. (Tenn. Car Co., 1.39 U. S. 60 (1891), (11 Sup. 1897), (51 S. W. Rep. 202). Ct. Rep. 478). State V. McMinnville, etc. R. Co., 443 § 247 INTERCORPORATE RELATIONS [PART III where improvements of a permanent nature have been made by a lessee with the approval of the lessor, who then terminates the lease on account of its ultra vires character, the courts would undoubtedly allow the lessee to set off against thfe les- sor's demand for compensation for the use of the property, compensation for improvements made upon it. § 246. Effect of Ultra Vires Lease upon Stock Subscriptions. — If a railroad company has power to lease its railroad, sub- scriptions to its capital stock must be regarded as having been made in view of the possible exercise of the power. If a lease is unauthorized it is void and without effect upon contracts of subscription. In neither case — under authorized or un- authorized lease — is a subscriber discharged upon his obUga- tion to pay calls and fulfil his contract.^ The conclusion that an ultra vires lease, being void, has no effect upon stock subscriptions is, obviously, logical. It is in marked contrast to the conclusion reached in the decisions examined in an earlier part of this treatise that an unau- thorized consolidation, although wholly void, discharges sub- scribers.^ §247. Guarantee of Ultra Vires Lease void. — Where the contracting corporations to a lease of a railroad are without authority to enter into it, an agreement by another corpora- tion guaranteeing its performance, it is equally without au- thority. A guarantee of a void contract is itself void. A con- tract to fulfil for another corporation obligations which it has no power to assume is of no legal effect.^ ' Ottawa, etc. R. Co. u. Black, 79 See also Hayes v. Ottawa, etc. R. 111. 268 (1875) : "If the company had Co., 61 111. 424 (1871) ; Troy, etc. R. no power to lease the road and its Co. v. Kerr, 17 Barb. (N. Y.) 581 franchises, then the lease is void, (1854). and the appellees can, when they " ' See ante, § 47 : "Rights and Rem- receive their stock, apply to a court edies of Dissenting Subscribers." of equity, and have the lease cancelled. ^ Pennsylvania R. Co. v. St. Louis, If, on the other hand, the charter etc. R. Co., 118 U. S. 290 (1885), (6 empowers the company to make Sup. Ct. Rep. 1094) ; Coleman v. East- such a lease, then appellees must have ern Counties R. Co., 10 Beav. 1 (1846) ; known the fact when they subscribed, Madison, etc. Plank Road Co. v. and the exercise of a power granted Watertown, etc. Plank Road Co., 7 by the charter must be presumed Wis. 59 (1858). to have been contemplated by the See also Pearce v. Madison, etc. R. appellees when they gave their note." Co., 21 How. (U. S.) 441 (1858). 444 CHAP. XXIl] ULTRA VIBES LEASES § 248 In Pennsylvania Co. y. St. Louis, etc. R. Co., Mr. Justice Miller said:' " There is no power shown in any of these com- panies to accept a lease of the complainant such as the one in the present case, and perform its conditions, and they cannot, therefore, become parties to such a contract with a road out- side the State which chartered them any more than the prin- cipal company. If these guaranteeing companies had exe- cuted the original contract of lease it would have been void for want of authority from the legislature of Indiana, or of any other State by whose laws they are incorporated or endowed with corporate power. No such power is shown in them to lease roads beyond their own States. Indeed, while there may be a just claim of authority for some kind of running arrangement between two connecting roads under the Indiana statutes, there is no connection between the plaintiff's road and any road of a guaranteeing company. The connection, even by traffic, is remote. These companies might as well have assumed the power to loan them money, or to indorse their notes, or any other commercial transaction, as to guar- antee the performance of a void contract by one company to another." § 248. Voidable Railroad Leases. — Officers of a railroad company stand in a fiduciary relation to the corporation. They cannot, themselves, take a lease of its property nor lease property to it.^ They cannot, as directors of one corporation, ' Pennsylvania Co. u. St. Louis, etc. will reliave against them whenever R. Co., 118 U. S. 314 (1885), (6 Sup. their enforcement is reasonably re- Ct. Rep. 1094). sisted. Directors of corporations, and ' In Warden v. Railroad Co., 103 all persons who stand in a fiduciary U. S. 658 (1880), the Supreme Court relation to other parties, and are of the United States laid down the fol- clothed with power to act for them, lowing general principles relating to are subject to this rule. They are not the obligations of officers of corpora- permitted to occupy a position which tiona: "It is among the rudiments of will conflict with the interests of the the law that the same person cannot parties they represent and are bound act for himself, and at the same time, to protect. They cannot, as agents with respect to the same matter, as or trustees, enter into or authorize the agent of another whose interests contracts on behalf of others for whom are conflicting. . The law, there- they are appointed to act, and then fore, will always condemn the trans- personally participate in the benefits, actions of a party on his own behalf. Hence all arrangements by directors where, in respect to the matter con- of a railroad company to secure an cerned, he is the agent of others, and undue advantage to themselves at its 445 §248 INTEECOEPOEATE RELATIONS [part III lease its railroad to another corporation to which they stand in similar relation. The rule is based upon considerations of public policy and works independently of fraud or good in- tention. Any such lease is voidable at the option of either corporation.' It is not void, and may become valid by ac- quiescence.^ The majority of the stockholders of a railroad company, in controlling its affairs, stand in a similar position of trust towards the minority stockholders.' They cannot authorize the officers of the corporation to lease its railroad to another corporation, owned or controlled by them, unless they act with the utmost expense by the formation of a new company as auxiliary to the original one, with an understanding that they, or some of them, shall take stock in it, and then that valuable contracts shall be given to it, in the profits of which they, as stockholders in the new com- pany are to share, are so many un- lawful devices to enrich themselves to the detriment of the stockholders and creditors of the original company, and will be condemned whenever properly brought before the court for con- sideration." ' Barr v. New York, etc. R. Co., 125 N. Y. 263 (1891), (26 N. E. Rep. 145) ; Jessup V. Illinois Central R. Co., 43 Fed. 483 (1890) ; Meeker v. Winthrop Iron Co., 17 Fed. 48 (1883). See also ante, § 168: "Voidable Leases." Also ante, § 114: "Voidable Sales." A complaint in a stockholder's action against >>■ railroad corporation and its directors alleging that the latter, as officers and trustees of the defendant company, took from them- selves, as trustees and officers of another company, which they practi- cally owned and managed, a lease of its raihoad to the defendant company at an exorbitant rent, and thereby depleted the latter 's funds, states a good cause of action. Sage V. Culver, 147 N. Y. 241 (1895), (41 N. E. Rep. 513). Stockholders cannot sue for the 446 profits arising from a lease of -a. rail- road to their corporation, in which the directors wrongfully participated, unless they also take steps to rescind the lease. Hitchcock v. Barrett, 50 Fed. 653 (1892). 2 Barr v. New York, etc. R. Co., 125 N. Y. 263 (1891), (26 N. E. Rep. 145) ; Jessup 17. Illinois Central R. Co., 43 Fed. 483 (1890). In Continental Ins. Co. v. New York, etc. R. Co., 187 N. Y. 225, 238 (1907), (79 N. E. Rep. 1026), the Court said with respect to an agree- ment settling a controversy arising under a railroad lease : "Assuming that the fact that the majority of the directors of the Harlem were also directors of the Central rendered the agreement made by the two boards for an apportionment of the interest reduction between the two companies voidable at the election of the Harlem stockholders, as doubtless was the case, nevertheless the agreement was not absolutely void, but could be rati- fied by the action of such stock- holders, in which case it would become binding upon the company. The right, however, to avoid a contract made by common directors is in the corporation, not in minority stock- holders. " 'See post, §300: "Trust Relation of Controlling Corporation to Minority Stockholders. " CHAP. XXII ] ULTRA VIRES LEASES §248 good faith towards the whole body of stockholders. Courts of equity will protect the interests of minority stockholders.' ' In Flynn v. Brooklyn Oty R. Co., 158 N. Y. 507 (1899), (53 N. E. Rep. 520) the New York Court of Appeals said: "As a general rule courts have nothing to do with the internal man- agement of business corporations. Whatever may lawfully be done by the directors or stockholders, acting through majorities prescribed by law, must of necessity be submitted to by the minority, for corporations can be conducted upon no other basis. All questions within the scope of the cor- porate powers which relate to the policy of administration, to the ex- pediency of proposed measures, or to the consideration of contracts, pro- vided it is not so grossly inadequate as to be evidence of fraud, are beyond the province of the courts. The mi- nority directors or stockholders can- not come into court upon allegations of a want of judgment or lack of effi- ciency on the part of the majority and change the course of administration. Corporate elections furnish the only remedy for internal dissensions, as the majority must rule so long as it keeps within the powers conferred by the charter. To these general rules, how- ever, there are some exceptions, and the most important is that founded on fraud. While courts cannot compel directors or stockholders, proceeding by the vote of a majority, to act wisely, they can compel them to act honestly, or undo their work if they act otherwise. Where a majority of the directors, or stockholders, or both, acting in bad faith, carry into effect a scheme which, even if lawful upon its face, is intended to circumvent the minority stockholders and defraud them out of their legal rights, the courts interfere and remedy the wrong. Action on the part of di- rectors or stockholders, pursuant to a fraudulent scheme designed to in- jure the other stockholders, will sus- tain an action by the corporation, or, if it refuses to act, by a stockholder in its stead for the benefit of all the injured stockholders." Wormser v. Metropolitan St. R. Co., 98 App. Div. (N. Y.) 29 (1904), (90 N. Y. Supp. 714): "Therefore, finding as we do, as matter of law, that the Metropolitan Street Railway Company had the power and capacity to make the lease, and, as matter of fact, that it was authorized by the stockholders, and that there was no fraud or wrong perpetrated upon such stockholders of the Metropolitan Street Railway Company by any persons standing in the relation to them of trustees or in any fiduciary relation, but that the acts, whether prudent or imprudent, of such persons . were performed in perfect good faith, we concur with the court at Special Term that the plaintiff was not en- titled to the relief demanded, and hence that the complaint was properly dismissed." Where the directors of » street railway company, with the approval of the majority of the stockholders, leased its property for a long term of years to another corporation in which they became interested, it was held that a court of equity would not, at the suit of a minority stockholder, annul the lease, in the absence of proof of fraud or that the lease was detrimental to the interests of the lessor corporation. Dickinson v. Consolidated Traction Co., 114 Fed. 232 (1902); affirmed, 119 Fed. 871 (1903). Where a lessee of a railroad was the owner of a majority of the stock of the lessor company and, with knowledge of that fact, the lease was approved by the holders of a large part of the minority stock and was not questioned 447 § 250 INTEECOEPORATB RELATIONS [pART III " The right of action, however, belongs to the corporation, and should be brought by it as plaintiff, but when it will not bring the suit itself, an aggrieved stockholder, after due de- mand and refusal, or unreasonable neglect to proceed, may bring it in his own name upon making the corporation a party defendant. Such an action is not for the benefit of the plain- tiff alone, but is representative in character and for the benefit of himself and all other stockholders similarly situated." ' § 249. Leases of Railroads for Purpose of suppressing Com- petition. — Combinations of railroad companies for the pur- pose of extinguishing competition are contrary to public policy. The form of combination is immaterial. That in the form of a lease is as invalid as any other. This subject is considered at length in the concluding part of this treatise.^ § 250. Remedy of State — Quo Warranto. — When a rail- road company, without legislative authority, leases its railroad and franchises for an extended term to another corporation, it thereby abandons the use of its franchises, and its charter becomes subject to forfeiture in quo warranto proceedings.' by any stockholder for more tlmn See also ante, § 168: "Voidable twenty-seven years, It v,as held that such lease would not be set aside at ' Flynn v. Brooklyn City R. Co., the suit of a, minority stockholder 1,58 N. Y. 508 (1899), (53 N. E. Rep. where the matters complained of did 520). not appear to be fraudulent or clearly The right to avoid an agreement inconsistent with the exercise of settling a question concerning the houest judgment. terms of a lease rests in the corpora- Wolf V. Pennsylvania R. Co., 195 tion, not in minority stockholders, Pa. St. 91 (1900), (45 Atl. Rep. 9:^6). unless its ratification was procured See also: Pondir d. New York, etc. by fraud or concealment, and in R. Co., 72 Hun (N. Y.), 384 (1893), ignorance of the true state of facts. (25 N. Y. Supp. 560) ; Glengary Continental Ins. Co. v. New York, Consol. Min. Co. v. Boehmer, 28 etc. R. Co., 187 N. Y. 225 (1907), (79 Colo. 1 (1900), (62 Pac. Rep. 839); N. E. Rep. 1026). McLeary o. Erie Tel. etc. Co., 38 See also Wallace v. Long Island R. Misc. (N. Y.) 3 (1902), (76 N. Y. Co., 12 Hun (N. Y.), 464 (1877). Supp. 712). Compare Shaw V. Davit, = .See po«(. Part V. . "ComMnationa 78 Md. 308 (1894), (28 Atl. Rep. 619, o/ Corporations." 23 L. R. A. 294) ; Miner i: Belle Isle ' Stats v. Atchison, etc. R. Co., 24 Ice Co., 93 Mich. 97 (1892), (53 N. W. Neb. 143 (1888), (38 N. W. Rep. 43, Rep. 218, 17 L. R. A. 412); Meeker 8 Am. St. Rep. 164); Commissioners V. Winthrop Iron Co., 17 Fed. 48 of Tippecanoe Co. v. Lafayette, etc. <1883). R. Co., 50 Ind. 85 (1875). In Ea-st 448 CHAP. XXIl] ULTRA VIRES LEASES §251 In State v. Atchison, etc. R. Co} the Supreme Court of Ne- braska said: " While a lessee in a proper case, or assignee or purchaser, will take a road burdened with the conditions, obligations and duties assumed by the original corporation, yet there can be no such transfer by lease, assignment or sale without express statutory authority, and as we find no such authority and the defendant has been guilty of mis- user and non-user of its franchises, they are subject to forfei- ture." ^ § 251. Remedy of State — Injunction. — As already shown, the remedy of- the State, in the case of ultra vires acts com- mitted by a corporation, is quo warranto, and, in the case of private corporations, this remedy is exclusive.^ Courts of equity are not open to the State for the exercise of visitorial powers over such corporations, and injunction is not a proper remedy to restrain their unauthorized acts. Lord Cowper, in Line, etc. R. Co. v. State, 75 Tex. 434 (1889), (12 S. W. Rep. 690), quo war- ranto was sustained, forfeiting the charter of the defendant railroad com- pany because of an illegal transfer of its railroad and franchises. See also State V. Minnesota Central R. Co., 36 Minn. 246 (1886), (30 N. W. Rep. 816). In Eel River R. Co. v. State, 155 Ind. 433 (1900), (57 N. E. Rep. 388), it was held that the acts of a domeistic railroad company in turning over all its property and franchises to a rival company under a lease in perpetuity, and in acquiescing in the destruction of a portion of its railroad in order to destroy competition, were sufficient grounds to authorize a forfeiture of its franchises. ' State V. Atchison, etc. R. Co., 24 Nob. 163 (1888), (38 N. W. Rep. 43, 8 Am. St. Rep. 164). In this case, however, the Court said that for- feiture would not be enforced in the first instance, and the lease was de- clared void. 2 Even the consent of the State to a transfer may not prevent forfeiture under certain circumstances. This principle is illustrated in State v. St. Paul, etc. R. Co., 35 Minn. 225 (1886), (28 N. W. Rep. 3): "The consent of the State may not prevent a forfeiture of the corporate franchise, where the corporation disposes of and abandons all its business and operating fran- chises, so that there is nothing left which it can lawftilly do, and so that there can be no reason for keeping it longer in life." ' Attorney General v. Utica Ins. Co., 2 Johns. Ch. 371 (1817). In this case Chancellor Kent declined to en- join an insurance company from doing a banking business. The equitable remedy is, however, now open to the State, in New York, under the Code of Ci^•il Procedure, in relation to the "judicial supervision" of corpora- tions. People V. Ballard, 134 N. Y. 269 (1892), (32 N. E. Rep. 54). In Attorney General v. Tudor Ice Co., 104. Mass. 239 (1870), (6 Am. Rep. 227), where an injunction to restrain an ice company from importing teas was refused, the cases bearing upon the rights of the State in a court of equity are collected and carefully considered. 449 §251 INTERCORPORATE RELATIONS [part iir a very early English case/ denied the attorney-general a remedy in equity against a corporate excess of powers upon the ground that " it would usurp too much on the king's bench"; and such is substantially the reason of the rule at the present time — adequate remedy at law. This rule is also, undoubtedly, applicable, in the case of a gwasi-public corporation, where the ultra vires act relates merely to the internal affairs of the corporation; but where it involves the relations of the corporation to the State and may injuri- ously affect the public interests, it is inapplicable, and the State may file a bill in equity and obtain an injunction re- straining the exercise of the power usurped.^ This remedy is especially available in the case of railroad companies, which exercise the power of eminent domain by delegation from the State; and an ultra vires lease of a railroad and franchises forbidden by public policy may be restrained in its execution and performance at the suit of the State. Where such a lease is not only unauthorized but is forbidden by statutory ^ or ' Attorney General v. Reynolds, 1 Eq. Cas. Ab. (3d Ed.) 131 (1705). ^ The attorney general has the right, when the property of the sov- ereign, or the interests of the public are directly concerned, to institute suit for their protection, by informa- tion at law or in equity, without a relator. Attorney General v. Dela- ware, etc. R. Co., 36 N. J. Eq. 631 (1876). In Attorney General v. Great North- ern R. Co., 1 Dr. & Sm. 154 (1860), a railroad company was restrained from trading in coal in large quantities. See also State v. Dodge, etc. R. Co., 53 Kan. 377 (1894), (36 Pac. Rep. 747, 42 Am. St. Rep. 295) ; Attorney General v. Jamaica Pond Aqueduct, 133 Mass. 361 (1882); United States V. Western Union Tel. Co., 50 Fed. Rep. 28 (1892), affirmed, 160 U. S. 53 (1895), (16 Sup. Ct. Rep. 210); At- torney General v. Chicago, etc. R. Co., 35 Wis. 425 (1874) ; Buck Mountain Coal Co. V. Lehigh Coal, etc. Co., 60 Pa. St. 91 (1865), (88 Am. Dec. 534) ; 450 Attorney General v. Mid-Kent R. Co., L. R. 3 Ch. App. 100 (1867); Ware V. Regent's Canal Co., 3 De Gex & J. 212 (1858) ; Hare v. London, etc. R. Co., 2 Johns. & Hem. 80 (1 861 ) . Com- pare, however. Attorney General v. Great Eastern R. Co., L. R. 11 Ch. D. 449 (1879). ' In Stockton v. Central R. Co., 50 N. J. Eq. 52 (1892), (24 Atl. Rep. 964, 17 L. R. A. 97), the Attorney General of New Jersey filed a bill in equity to have the lease of the Central Railroad Company of New Jersey to the Port Reading Railroad Company, a small New Jersey corporation con- trolled by the Philadelphia and Read- ing Railroad Company, declared to he lUtra mres and void, and for an injunc- tion against taking possession there- under. The Court held that the lease was, in effect, a lease to the Philadelphia and Reading Railroad Company — a foreign corporation ; that it was not only unauthorized, but forbidden by the New .lersey statute ; that its effect was to partially destroy CHAP. XXIIl] LEASES TO FOREIGN CORPORATIONS § 252 constitutional ' provisions, or tends to the creation of a monop- oly,^ the inadequacy of quo warranto as a -preventive remedy is apparent. CHAPTER XXIII LB3ASES TO FOREIGN CORPORA'TlONS § 252. Authority to lease must be derived from State where Raiboad is located. § 253. Authority to lease to Foreign Corporation. § 254. Status of Foreign Corporation leasing Railroad. § 252. Authority to lease must be derived from State where Railroad is located. — The charter of a corporation granted by a State has no binding force propria vigore outside its terri- torial limits. As said in an early case: " Every power which a corporation exercises in another State, depends for its validity upon the laws of the sovereignty in which it is exercised."' While, by the comity between States, a foreign railroad competition in the production of sale tucky, 161 XJ. S. 677, (1896), (16 Sup. of anthracite coal; that it was tdtra Ct. Rep. 714)), where the Court .said vires, and tended to monopoly; and (p. 695); " It is contended injunctioii granted the relief prayed for. It is of is not the proper remedy. But it interest to note that the Central Rail- seems to us if the Commonwealth of road Company of New Jersey is now Kentucky can sue at all for act ultra controlled by the Reading Railroad vires by a corporation, there is no room Company through the ownership of for disputing its right to a preventive stock upon which it has issued col- injunction in this case. For, according lateral trust bonds — a convenient to very reputable authority, and, we alternative to a lease. think, upon principle, a court of equity ' The State may maintain a suit to has jurisdiction, and may, in an action enjoin a railroad company from pur- by the State, enjoin a corporation; chasing the property and lines of other from exceeding its chartered powers,, companies, in violation of Kentucky or doing acts otherwise illegal and Constitution, § 201, providing that no injurious to the public." railroad company shall acquire, by ' Stockton v. Central R. Co., SO N. purchase or otherwise, any parallel or J. Eq. 52 (1892), (24 Atl. Rep. 964, 17 competing line. Louisville, etc. R. L. R. A. 97). Co., V. Commonwealth, 97 Ky. 675 ' Runyan v. Coster's Lessee, 14 Pet. (1895), (31 S. W. Rep. 476) (affirmed (U. S.) 122 (1840). sub nam. Louisville, etc. R. Co. v. Ken- 451 § 252 INTEBCOBPOKATE EELATIONS [pART III company may be permitted within a State to make contracts and exercise ordinary powers in the general transaction of business, such a corporation cannot lease or take a lease of a railroad without the consent of the State in which it is lo- cated.i The State, in authorizing the building of a railroad within its borders, reserves the right to control its transfer. The rule that a railroad lease is invalid unless each corpo- ration Is authorized thereto by the State of its creation, requires the additional provision that the State in which the railroad is situated shall give its approval. Only in a case where a railroad company owns a railroad in a foreign State will the additional requirement impose an additional obligation. This limitation upon the power of a corporation in a foreign State is not founded upon the principle of ultra vires. A cor- poration may be expressly authorized by its charter to trans- act business in foreign countries and States.^ Its articles of association — when formed under general laws — may, in terms, authorize it to lease railroads in other States. The power so granted or assumed can be exercised only by per- mission of the foreign State. It is not so much a question of corporate power as of the right to exercise it.' ' ^ Briscoe v. Southern Kansas R. Co., undertakes, by a lease of its road, to 40 Fed. 280 (1889): "It is decided in get rid of its responsibility, or liabili- Bank v. F.arle, 13 Pet. 524 (1839), that ties to the public, which it assumed c6urts of justice have always ex- when it stccepted the franchise, it pounded and executed contracts ac- would be exercising an extraordinary cording to the law of the place in power, which may be greatly preju- which they are made, provided that dicial to the public, and therefore is the law was not repugnant to the laws contrary to the known policy of a or policy of their own country. The State, and injurious to its interests court, in the above case, held the rule and cannot be exercised unless the to be ' that, by the comity of nations, State, by express authority conferred, foreign corporations are allowed to authorizes it to be done." See also make contracts under their raspectivo Howard v. Che.sapeake, etc. R. Co., limits not contrary to the known 11 App. Cas. (D. C.) 300 (1897). policy of such nations, or injurious to ^ An examination of broad charters their interests.' This gives a railroad granted by certain States will disclose corporation the right to exercise all the curious fact that corporations are its ordinary powers growing out of its often authorized to exercise most ex- franchise, such as making contracts traordinary powers, jjrovided they do in regard to the transaction of its busi- not exercise them within the limits of ness, as was the case in Railroad Com- the State granting them, pany v. Gebhard, 109 U. S. 527 (1883), « Where the incorporators under an (3 Sup. Ct. Rep. 363). But when it English Companies' Act inserted in the 452 CHAP. XXIIl] LEASES TO FOREIGN CORPORATIONS 253 § 253. Authority to lease to Foreign Corporation. — As shown in the last section, a corporation created by one State cannot take a lease of a railroad situated in another State without its permission. Many States have passed general laws granting this permission to foreign railroad companies, which have already been referred to.' Under such statutes, a lease of a railroad may be lawfully taken by a foreign corporation provided it is, itself, acting within the powers conferred by the State of its creation. Thus, under the New York statute authorizing railroad companies " to contract with each other," it was held that a New York corporation might take a lease of a railroad in Vermont, owned and operated by a corporation of that State, where such cor- poration was given by its charter power to enter into such a contract.^ Upon the principle that power to lease to a foreign corpora- tion must be clearly expressed, the Supreme Court of New Jersey held that a statute of that State authorizing a railroad and canal company to make arrangements for connection or articles of association a power to lease railroads in foreign countries, it was held that the corporation acquired thereby no authority to lease a rail- road in Oregon. Power to act in foreign countries cannot be so created bv the parties themselves. Oregon R., etc. Co. u. Oregonian R. Co., 130 U. S. I (1S89), (9 Sup. Ot. Rep. 409), revers- ing 22 Fed. 245 (18R4), and 23 Fed. 282 (1885). ' See ante, § 180: "What Railruads piay he leased. Stnivtori/ Provisions." 2 Day V. Ogdensburgh, etc. R. Co., 107 N. V. 129 (1887), (13 N. E. Rep. 765): "It is next argued for the re- spondent.'^ that the arrangement ex- pressed through these instruments, so far A3 the Ogdensburgh & Lake Champlain Railroad Company is con- cerned, is beyond the capacity and power of that corporation. We have seen that the Vermont Railroad Com- pany had corporate powers, and among those expressly given by its charter is a power to lease its road. It ha.d, therefore, contracting capacity, and was a good party to deal with. The Ogdensburgh & Lake Champlain Railroad, on its part, lacked no power expres,sly given by statute to similar corporations in this State, nor any which, as incident and necessary thereto, might enable it to carry on the objects of the incorporation. Unless we are to . . say that its operation must be confined to con- tracts with roads operating in and under the laws of this State, the lease must be held valid , between the parties. We see no reason for such restriction nor any principle of public law which requires it. We are not at liberty to create it. It would be legislation, not construction. A cor- poration given capacity to contract, may exercise that capacity with any party in or outside the limits of the State, unless the law-making power of that other State forbids." Compare Briscoe v. Southern Kan. R. Co., 40 Fed. 273 (1889). 453 §254 INTERCORPORATE RELATIONS [part III consolidation of business by agreement, contract or lease " with any other railroad or canal company in this State or otherwise " did not authorize a lease to a corporation not of that State.^ The Court said: " No power is given to lease to a company out of this State unless the word ' otherwise/ which is not an adverb of place, is held to mean ' otherwhere.' It is an inappropriate word to express such meaning." ^ A Minnesota statute providing that " any railroad corpora- tion may lease or purchase any part or all of any railroad con- structed by another corporation whose lines of road are. con- tinuous or connected with its own " has been held, in view of its title and other statutory provisions, to confer authority only for a lease between corporations of that State.^ § 254. Status of Foreign Corporation leasing Railroad. — Statutes authorizing the leasing of railroads located within the State to corporations of another State often define the status, and prescribe the rights and duties, of the foreign lessee corporation.^ * Black V. Delaware, etc. Canal Co., 24 N. .J. Eq. 475 (1873). Compare Stewart v. Lehigh Valley R. Co., 38 N. J. L. 505 (1875). The New Jersey act of 1SS5, forbid- ding any lease of a railroad to a foreign corporation without the con- sent of the legislature, could not be evaded by a, nominal lease to a do- mestic corporation whose stock was owned by a foreign corporation, which was the real lessee. Stockton v. Cen- tral R. Co., 50 N. .1. Eq. 75 (1892), (24 Atl. Rep. 964, 17 L. R. A. 97). . ^ Notwithstanding the reasoning of the Court, it seems entirely clear that the legislature did use the word ''otherwise" precisely in the sense of "otherwhere," and intended to in- clude corporations within and without the State. ' Freeman v. Minneapolis, etc. R. Co., 28 Minn. 443 (1881), (10 N. W. Rep. 594). In St. Louis, etc. R. Co. v. Terre Haute, etc. R. Co., 33 Fed. 440 (1888), affirmed 145 U. S. 393 (1S92), (12 Sup. 454 Ct. Rep. 953), it was held that a lease of a railroad, executed by an Illinois railway company to an Indiana com- pany, was invalid, because the latter company was not authorized to ac- cept a lease from an Illinois corpora- tion. * The following contains the sub- stance of several statutes relating to foreign lessee corporations: Arkansas. San. & H. Dig. 1894, § 6334: A corporation of another State being a lessee of a railroad in this State, shall likewise be held liable for violation of laws of this State, and may be sued and sue in all cases, and for the same causes and in the same manner, as a corpora- tion of this State. Kansas. G. S. 1897, ch. 70, § 96: A railroad company of another State which shall lease a railroad in this State shall possess, in this State, all the rights, powers, privileges and franchises conferred by the laws of this State upon a railroad company of this State. CHAP. XXIV] TRACKAGE CONTRACTS § 255 In the absence of express statutory provision, a corporation of another State operating a domestic railroad talces it sub- ject to all the conditions and burdens attaching to it, and to the obligations respecting the operation of railroads imposed by the laws of the State in which it is located upon railroad companies generally.' CHAPTER XXIV TRACKAGE CONTRACTS 5 255. Nature of a Trackage Contract. § 256. Express Authority not necessary for Execution of Trackage Contract. I 257. Execution of Trackage Contracts. § 258. Assignability of Trackage Contracts. § 259. Construction of Trackage Contracts. § 260. Specific Performance of Trackage Contracts. § 261 . Liability of Proprietary Company to Third Persons. § 262. Liability of Licensee Company to Third Persons. I 263. Liability to Employees. § 255. Nature of a Trackage Contract. — A trackage con- tract is an agreement by which one railway company lets an- other company into a joint use of a portion of its tracks. It is clearly distinguishable from a lease in that it conveys no Michigan. P. A. 1901, Act. No. 1768: A railroad company of another 30, page SO: "The foreign railroad State which shall lease a railroad in company so leasing shall operate and this State shall possess all rights, hold the railroad subject to all the powers, privileges and franchises duties and obligations and with all possessed by corporations of this the rights and privileges prescribed State. by the general railroad law of this South Dakota. Anno. Stat. 1901, State." § 3906: Similar to Nebraska statute, Missouri. R. S. 1899, § 1060: supra. If a, railroad company of another Wyoming. R. S. 1899, § 3206: State shall lease a railroad in this Similar to Nebraska statute, supra. State it shall be held liable for the Also confers the right of eminent violation of any laws of this State, domain. a.nd may sue and be sued for the same ' McCandless v. Richmond, etc. R. causes and in the same manner as Co., 38 S. C. 103 (1892), (16 S. E. a corporation of this State. Rep. 429, 18 L. R. A. 440). Nebraska. Comp. Stat. 1901, § 455 §255 INTERCORPORATE RELATIONS [part III estate in the property and no right to its exclusive possession.* It is in the nature of a license — although non-revocable and enforceable — or a grant of a privilege for hire.^ Trackage contracts may be made upon any basis the con- tracting corporations determine. Contracts upon a " wheel- age " or " mileage '' basis are common. In England, the right of a railway company to work its traffic over a portion of the line of another company does not, as a general rule, depend upon the ability of the two corpora- tions to agree upon a contract. Many railway acts grant the right to one company to exercise " running powers " — as they are designated — over the tracks of another and provide ' Union Pacific R. Co. v. Chicago, etc. R. Co., 163 U. S. 583 (1895), (16 Sup. Ct. Rep. 1173): "The con- tract in this regard was really an agree- ment for trackage rights, for running arrangements, a 'terminal contract' with compensation upon a 'mileage' or 'wheelage' basis . . (p. 593) The stipulations of the contract re- lating to the use of the Rock Island tracks between South Omaha and Lincoln by the Pacific Company did nol embrace the acquisition of right of way or real estate." A statutory right in one corpora- tion to use the land of another com- pany for the purpose of making con- nections has, however, been held to be an "interest in lands" within the provision of the Statute of Frauds. Port Jervis, etc. R. Co. v. New York, etc. R. Co., 132 N. Y. 445 (1892), (30 N. E. Rep. 855). A railroad company owning a rail- road between two points entered into an agreement with another com- pany called a lease by which the latter company was given the right to use the tracks between such points, the agreement providing that "said rail- road shall be operated by the parties hereto jointly." It was held that the agreement was merely a grant of trackage rights and not a merging of the business of the two companies. 456 Central Trust Co. v. Colo. Midland R. Co., 89 Fed. 560 (1898). An agreement by which one rail- road company obtains trackage rights over the road of another and a joint use of terminals, yards and other facilities, and by which a third com- pany obtains also the joint use of such yard and facilities and which is of benefit to the pubUc in facilitat- ing the transportation of freight, is valid. Georgia R., etc. Co. v. Maddox, 116 Ga. 64 (1902), (42 S. E. Rep. 315). ' In Coney Island, etc. R. Co. v. Brooklyn Cable Co., 53 Hun (N. Y.), 170 (1889), (6 N. Y. Supp. 108), the Court said: "The contract here is a mere license or privilege for hire. It is not a lease conveying an interest in the realty but an agreement con- taining mutual stipulations in the nature of a license. It is clear the intent was to permit the first licensee to run its cars over the tracks men- tioned. Had it been designed to cover any more than such a privilege other terms would have been used to indicate such an intention." See also Richmond, etc. R. Co. v. Durham, etc. R. Co., 104 N. C. 658 (1889), (40 Am. & Eng. R. Gas. 488, 10 S. E. Rep. 659). CHAP. XXIV] TRACKAGE CONTRACTS 256 that in case of disagreement as to the compensation to be paid the matter shall be submitted to arbitration/ Similar statutes compelling railroad companies to furnish facilities to intersecting roads for the purpose of making track connections, and providing for the ascertainment of com- pensation therefor, have been enacted in many American States.^ § 256. Express Authority not necessary for Execution of. Trackage Contract. — Express statutory authority is not neces- saiy to enable a railroad company to enter into a trackage contract granting to another company, in common with itself, the right to use a portion of its tracks and facilities, not re- quired for the exercise of its own franchises. The rule that a railroad company cannot, without legislative authority, ahenate its franchises or property necessary for the discharge of its duties to the public, has no application. The owner of the railroad under such a contract transfers no franchise, parts with no property and is not excluded from the use and ' For general statute see Railway Clauses Act of 1845, § 92. Where an act provided that the running powers granted were to be exercised upon terms to be agreed upon, or in default of agreement to be settled by arbitration, and the owners of the railway were to make all arrangements required by the agreement or arbitration, it was held that "terjns" included the necessary arrangements for regulating the joint traffic. Swansea, etc. R. Co. v. Swansea, etc. R. Co., 3 Ry. & C.T. Cases, 339 (1879). Where an act gave a railway com- pany running powers over part of the line of another company for "local traffic" it was held that that phrase meant "traffic from one known station to another on the line.'' Midland R. Co. v. Manchester, etc. R. Co., 22 L. T. Rep. 601 (1870). See also Plymouth, etc. R. Co. v. Great Western R. Co., 6 Ry. & C. T. Cases, 101 (1889). For other cases construing acts of Parliament granting running powers and providing for the ascertainment of compensation see Midland R. Co. V. Neath, etc. R. Co., 2 Ry. & C. T. Cases, 366 (1876); Caledonia R. Co. V. North British R. Co., 2 Ry. & C. T. Cases, 271 (1875); Taff Vale R. Co. V. Ryhmney R. Co., 2 Ry. & C. T. Cases, 176 (1875); South Devon R. Co. V. Devon, etc. R. Co., 2 Ry. & C. T. Cases, 348 (1876). " See New York statute construed in Port Jervis, etc. R. Co. v. New York, etc. R. Co., 132 N. Y. 439 (1892), (30 N. E. Rep. 855). Also Pennsylvania statute construed in Altoona, etc. R. Co. v. Beech Creek R. Co., 177 Pa. St. 443 (1896), (35 Atl. Rep. 734). An Ohio statute authorizing rail- road companies to make "running arrangements " with other companies is construed in Stanley v. Cleveland, etc. R. Co., 18 Ohio St. 552 (1869). For charter provision see Olcott v. Tioga R. Co., 27 N. Y. 546 (1863), (84 Am. Dec. 298). 457 § 256 INTEECOEPOHATE EELATIONS [PAET III enjoyment of its property and franchises. It merely grants the surplus use of its tracks.* In Union Pacific R. Co. v. Chicago, etc. R. Co.^ the Supreme Court of the United States said: " By the contract the Pacific Company parted with no franchise, and was not excluded from any part of its property or the full enjoyment of it. What it agreed to do was to let the Rock Island into such use of .the bridge and tracks as it did not need for its own purposes. This did not alien any property or right necessary to the dis- charge of its public obligations and duties, but simply widened the extent of the use of its property for the same purposes for which that property was acquired, to its own profit so far as that use was concerned, and in the furtherance of the demands of a wise public policy. If, by so doing, it may have assisted a competitor, it does not lie in its mouth to urge that as ren- dering its contract illegal as opposed to public policy. Ability to perform its own immediate duties to the public is the limi- tation on its jus disponendi we are considering, and that limitation had no application to such a use as that in question." One railroad company, however, has no implied power to grant to another company such extensive running privileges as to amount, practically, to turning over to the latter the control of its road.' ^ See ante, § 172: "Leases of Sur- 46 Fed. 909 (1893); Ohio, etc. R. plus Property." Co. v. Indianapolis, etc. R. Co., 5 Am. 2 Union Pacific R. Co. v. Chicago, L. Reg. (n. s.) 733 (1866) ; Attorney etc. R. Co., 163 TJ. S. 589 (1896), (16 General v. Great Eastern R. Co., Sup. Ct. Rep. 1173), per FuUer, C. J., L. R. 11 Ch. Div. 449 (1879); John- afjirming 51 Fed. 309 (1892). son v. Shrewsbury, etc. R. Co., 3 '"Corporations may make all De Gex, M. & G. 914 (1853) ; Gardner necessary arrangements for cheaply v. London, etc. R. Co., L. R. 2 Ch. and expeditiously developing or car- App. 212 (1867); Beman v. Ruf- rying on their particular business; ford, 6 Eng. L. & Eq. 106 (1851), but it is another thing, going beyond (15 Jur. 914). this, to enter into contracts, for in- Under the English Railway Clauses stance, by which the exclusive con- Consolidation Act (8 and 9 Vict. ch. trol or the exclusive right of working 20), it has been held that one rail- the line is handed over to other road company may make a contract parties. All such arrangements, with another for the use of its line whatever their form, however dis- and may pay tolls sufficient to make guised, are vltra vires and void." dividends upon the preference stock Green's Brice's Ultra Vires 427. of the latter. South Yorkshire R., See also Earle v. Seattle, etc. R. Co., etc. Co. v. Great Northern R. Co., 9 458 CHAP. XXIV] TRACKAGE CONTRACTS § 257 The power of a railroad company to accept a grant of run- ning privileges depends upon the limitations of its charter. It cannot exercise running powers over a railroad beyond its authorized termini. It cannot use a trackage contract as a means of extending the limits within which it may operate a railroad.^ But, within the hmits prescribed by its charter, a railroad company has implied power to acquire running privi- leges over the railroad of another company, wherever such privileges furnish it an advantageous means of reaching a desired point.^ § 257. Execution of Trackage Contracts. — The corporate power — implied or expressly conferred — involved in the authorization and execution of a trackage contract may be exercised by the board of directors of a railroad company in the management of the regular business of the corporation.' The power of the directors, however, is not so exclusive as to preclude action by the stockholders.^ The New York Court of Appeals has intimated that the right conferred by a statute authorizing a railroad company to " intersect, join and unite its railroad with any other railroad " Exch. 55 (1853). Contra, Simpson ' Elkins v. Camden, etc. R. Co., 36 V. Denison, 10 Hare, 51 (1852); N. J. Eq. 241 (1882). See also compare Green Bay, etc. R. Co. v. Nashua, etc. R. Co. v. Boston, etc. Union Steamboat Co., 107 U. S. 98 R. Co., 27 Fed. 821 (1886), reversed (1882), (2 Sup. Ct. Rep. 221). on other grounds, 136 TJ. S. 356 In Charlton v. Newcastle, etc. R. (1890), (10 Sup. Ct. Rep. 1004). Co., 5 Jur. (n. s.) 1036 (1859), a Where a trackage contract from contract for the joint use of railroads a, railroad company to a receiver of and division of profits, antecedent another company provided that any to an amalgamation, was declared purchaser of the road of the latter vltra vires and void. company at foreclosure sale might ' Naugatuck R. Co. u. Waterbury elect to continue the contract, it was Button Co., 24 Conn. 482 (1856) ; held that the use of the tracks by London, etc. R. Co. v. London, etc. a purchaser at such sale for five years, R. Co., 4 De G. & J. 362 (1859); paying the stipulated rental which Simpson v. Denison, 10 Hare, 51 was accepted, would be deemed an (1852); Ohio, etc. R. Co. v. Indian- election to continue the contract, apolis, etc. R. Co., 5 Am. L. Reg. and would bind both parties. (N. s.) 733 (1866). Terre Haute, etc. R. Co. v. Peoria, 2 Midland R. Co. v. Great Western etc. R. Co., 167 111. 296 (1897), (47 R. Co., L. R. 8 Ch. App. 841 (1873); N. E. Rep. 513). Great Northern R. Co. v. Manchester, * Union Pacific R. Co. v. Chicago, etc. R. Co., 5 De Gex & Sm. 138 etc. R. Co., 163 U. S. 564 (1895), (16 (1851). Sup. Ct. Rep. 1173). 459 § 258 INTBECORPOHATE RELATIONS [part III upon the property of the company owning the latter railroad, and requiring such company " to grant the facilities " needed for the purpose, is an interest in lands which can only be created by a written instrument.' It may well be doubted, however, apart from statutory provision whether a mere trackage con- tract running for less than a year comes within the Statute of Frauds.^ § 258. Assignability of Trackage Contracts. — A trackage contract, upon consideration, while partaking of the nature of a license, is essentially a valid and enforceable contract between the parties.^ It is, however, a license in the sense that it confers a per- sonal privilege. A railroad company in jetting another cor- poration into the use of its tracks agrees only that that par- ticular corporation may exercise the privilege. A trackage contract creates no transferable interest, and, without a stipu- lation to that effect, is not assignable.^ ' Port Jervis, etc. R. Co. v. New York, etc. R. Co., 132 Sf. Y. 439 (1892), (30 N. E. Rep. 855, 52 Am. & Eng. R. Gas. 107). ^ Where an oral agreement for trackage rights has been executed an action will lie for use and occupation. South Carolina Terminal Co. v. South Carolina, etc. R. Co., 52 S. C. 1 (1898), (29 S. E. Rep. 565). ^ Louisville, etc. R. Co. y. Ken- tucky, etc. R. Co., 95 Ky. 550 (1894), (26 S. W. Rep. 532). * Coney Island, etc. R. Co. v. Brooklyn Cable Co., 53 Hun (N. Y.), 171 (1889), (6 N. Y. Supp. 108): "The question is not whether a cor- poration can sell or assign its fran- chises, but whether the agreement in question became vested in the defendant so that it can enforce it against the plaintiff. This agreement was not a lease, and is, therefore, not a subject of subletting to different parties to be conjointly used with the original parties." South Side, etc. R. Co. v. Second Avenue R. Co., 191 Pa. St. 509 460 (1899), (43 Atl. Rep. 346): "The Pittsburgh and Birmingham Com- pany was the owner of the tracks (de facto at least for a term of years) and the Second Avenue Passenger Railway Company was a licensee, or at most a sub-lessee. The latter had no rights but those the agree- nient gave it, the former had all the rights of ownership that the agree- ment did not part with. This is explicitly recognized in the provision that if it should allow any other company as licensee to use its tracks a proportionate credit should be allowed the Second Avenue company. The allowance of another company to come in as a licensee was by virtue of the rights of ownership. The latter company had no such rights, and could not divide or share or part with its privileges, except to an a.ssignee within the terms of the agreement.'' Under a contract for the use of terminal facilities, tracks, etc., by one railroad company with another, containing a, provision that the CHAP. XXIV] TRACKAGE CONTRACTS §259 § 259. Construction of Trackage Contracts. — The term of a trackage contract is fixed by the stipulations therein. When no time is stated it seems clear, as a general rule, that the con- tract is terminable at the option of either party after reasonable notice. An intention to make a perpetual arrangement should be clearly expressed.' In an English case, however, it was held that an agreement between two railway companies wherein one was granted running powers and the other certain facilities for making shipments, and containing mutual stipulations as to the ship- ment of goods over each other's lines, but not containing any provision as to the time for which it should endure, was a per- manent and not a terminable contract, and that a notice to terminate was invalid.^ But as this contract was authorized grantee should not, by any contract with any other railroad corporation, give to such corporation the right for its trains to pass over or use the railroad of the grantor without its consent, it was held that the right to use such tracks, etc., did not pass to the successors or assigns of the grantee ■ without the consent of the grantor under the provisions of the contract. Terre Haute, etc.. R. Co. v. Peoria, etc. R. Co., 61 111. App. 405 (1895). Where a trackage contract, in terms, runs to the assignees of the parties, and both parties recognize another company as the successor in interest of one of them, "a court of equity will treat the assignee in fact as the legal assignee, possessed of the rights and charged with the obligations of the original party to the contract." Chicago, etc. R. Co. V. Denver, etc. R. Co., 143 TJ. S. 608 (1891), (12 Sup. Ct. Rep. 479), af- firming 45 Fed. 304 (1891), s. c. 46 Fed. 145 (1890). ' In Boston, etc. R. Co. v. Boston, etc. R. Co., 5 Cush. (Mass.) 375 (1850),' it was held that the right granted by the legislature to one railroad company to use the tracks of another did not become, upon its exercise, a. permanent contract be- tween the corporations, for such use, perpetual in its character, but that " it was rather in the nature of a lease for an indefinite period of time, with liability to pay as long as it might be used." It was also held that no perpetual obligation to use the tracks could be inferred from an obligation imposed upon the pro- prietary company to make expensive and permanent additions to its property to accommodate such use. See also Canal, etc. R. Co. v. St. Charles Street R. Co., 44 La. Ann. 1069 (1892), (11 So. Rep. 702). A trackage contract is not invalid because, within its prescribed dura- tion, the charter of one of the com- panies expires by limitation, pro- vision being' made in the contract for such contingency. Union Pacific R. Co. V. Chicago, etc. R. Co., 163 U. S. 592 (1895), (16 Sup. Ct. Rep. 1173). ^ I/lanelly, etc. R. Co. v. London, etc. R. Co., L. R. 7 H. L. Cas. 550 (1875), (45 L. J. Ch. D. 539, 23 W. R. 927, 32 L. T. 575). In this case Lord Cairns compared trackage con- tracts with contracts of partnership and of hiring and service in respect to their terminable nature (p. 559) : "Reference was made to the well- known cases of contracts of hiring 461 259 INTERCORPORATE RELATIONS [part III by the Railway Clauses Act, under which, in case any differ- ences arose in its working, they might be made the subject of arbitration, the decision cannot be considered of general application. Where one railroad company grants to another the right to use a portion of its line, it necessarily undertakes to furnish those facilities necessary to the exercise of the privilege granted. Thus, in an English case, where one railroad company had acquired running powers over the line of another and had equipped it with the block signal system, it was held that the latter company was bound to work the system — that it was a reasonable facility which the company was bound to afford. "^ Where two railroad companies entered into a contract wherein the use of certain tracks and terminal facilities was granted, it was held that the expenses necessary to such use and the exercise of such facilities must be borne entirely by the grantor company.^ and service and contracts of partner- ship. These cases appear to me to have no analogy whatever to the present. With regard to contracts of hiring and service, assigning to each of them certain notices by which they can be terminated; and they are, besides, engagements which depend upon the personal confidence which one of the parties reposes in the other and which in their nature cannot be supposed to be of a per- petual character. With regard to contracts of partnership they also are already ruled and settled, by law, to be capable of termination at any moment unless a definite limit is prescribed upon the face of them. And, the law being well settled, when you have a contract of that kind, you apply the understood law, and you hold that the parties knowing what the law was, must be supposed to have intended to enter into a partner- ship which could at any time be ter- minated if they did not provide upon the face of their contract that it should be a continuing partnership." In Railway Co. v. Neel, 56 Ark. 462 279 (1892), (19 S. W. Rep. 963), a trackage contract was held not to constitute a partnership between the railroad companies, and not to make one company the agent of the other for the purpose of receiving freight. The Court said (p. 287): "The con- tract between the two railway com- panies did not constitute a partner- ship between them nor did it make the Swan Lake railroad the agent of the appellant company for the purpose of receiving freight for and on its behalf. . . . The contract plainly intended to confer a license upon the Swan Lake railroad to run its trains over the appellant com- pany's track between Bob Roy and Pine Bluff. It created no other right, unless it was to limit the appellant's rights to make certain charges for freight and passengers." ' Great Western R. Co. v. Bristol Port R., etc. Co., 5 Ry. & C. T. Cases, 94 (1885). ' Elmira Rolling Mill Co. v. Erie R. Co., 28 N. J. Eq. 400 (1877), (14 Am. Ry. Rep. 199). A contract by which one company CHAP. XXIV] TRACKAGE CONTRACTS § 259 The rights of the parties under a trackage contract are measured, with respect to the use of track, by the terms of the contract, and the provisions of the Interstate Commerce Act apply to the situation and cannot authorize a different use of the track.' A stipulation in a contract between three railroad companies respecting the use of a common yard that the " necessary expenses " should be equally shared among them, did not include the extraordinary expense of a judgment obtained against one of the companies for injuries sustained by an employee, through its negligence.^ But, under an agreement granted to anothei: a running privilege Columbus, etc. R. Co. v. Pennsyl- into a city provided for the payment vania Co., 143 Fed. 757 (1906). of a certain sum for each car drawn over the first company's track, "ex- cepting only empty freight cars and such loaded freight cars as . . are hauled over said first party's line of railroad." Held, that the exemption was not ambiguous, and that the first clause covered all freight cars. Louis- ville, etc. Co. V. Louisville S. R. Co., 100 Ky. 690 (1897), (39 S. W. Rep. 42). One railroad company granted to another the joint use of its terminal property and of a short track running to it under an agreement providing that if the business required it addi- tional property should be acquired by one or both companies and in- cluded in the joint use. The licensee company subsequently purchased, ad- ditional property and a readjustment of the rental was made. In all the agreements provision was made for apportioning the cost of maintenance etc. upon a wheelage basis — the " car and engine mileage use of said prop- erty." It was held that the agree- ments contemplated the joint use of the property as a whole and that wheel- age was to be computed on cars and engines passing to the terminal prop- erty over the short track without re- gard to whether they actually used the part of the terminal property owned by the proprietary company. Two railroad companies entered into a contract by which one obtained from the other the permanent right to use, jointly with the proprietary com- pany, a portion of its tracks. This use continued until the licensee com- pany became insolvent and all its property and franchises were sold to another company, which for some time used the tracks as before. Subsequently the purchasing com- pany abandoned such use, but it was held that it had become liable for the obligations of the licensee company. South Carolina R. Co. v. Wilming- ton, etc. R. Co., 7 S. C. 410 (1875). ' The duty of a railroad company, operating its own road, to serve the local stations on its lines, does not apply to a company that has only a running privilege for through trains over a. part of the road of another company which it does not control. In such a case the company is not required to disregard the conditions of its agreement, and does not violate the provisions of the Interstate Com- merce Act by not receiving and dis- charging traffic on the tracks of the proprietary company. Alford v. Chi- cago, etc. R. Co., 2 Int. Com. Rep. 771 (1890). ' Gulf, etc. R. Co. V. Galveston, etc. R. Co., 83 Tex. 509 (1892), (18 S. W. Rep. 956, 52 Am. & Eng. R. Cas. 99). 463 260 INTERCORPORATE RELATIONS [part III between the parties to such a contract that the cost of main- taining the tracks jointly used should be jointly borne, it was held that damages paid to employees injured while engaged in the work of maintenance were a part of the cost of mainte- nance and properly chargeable to the joint account.' A provision in a trackage contract between two street rail- road companies that, in case the licensee company should use steam as a motive power, either party might terminate the contract upon six months' notice was held not to authorize such termination upon the ground that the licensee had in- stalled an electrical system.^ The practical constraction which the parties .to a trackage contract have put upon it is a safe guide to the intention of the parties when its meaning is in doubt.' § 260. Specific Performance of Trackage Contracts. — Track- age contracts are of such a nature that, as a general rule, a judgment for damages would furnish an inadequate remedy for their breach. When such a contract is not unconscionable or inequitable and the company seeking its enforcement has Under a contract by a city with a railroad company by which it per- mits the company to construct a track through its streets," on condition tliat the company permit other railroad companies to use the track, on pay- ing a pro rata share of the cost of construction, without placing any limit on the time when other roads may come in, or their number, a delay in making application of nine years after its completion, during which two other roads have come in, is no ground for excluding an applicant. Louisville, etc. R, Co. v, Mississippi, etc. R. Co., 92 Tenn. 681 (1893), (22 S. W. Rep. 920). ^ Louisville, etc. R. Co. v. Chesa- peake, etc. R. Co., 21 Ky. Law Rep. 875 (1899), (53 S. W. Rep. 277). ^ Prospect Park, etc. R. Co. v. Coney Island, etc. R. Co., 144 N. Y. 152 (1894), (39 N. E. Rep. 17, 26 L. R. A. 610). As to construction of a trackage contract in view of consolidation — 464 whether it extends to subsequently acquired lines, see Lancashire, etc. R. Co. V. East Lancashire, etc. R. Co., 5 H. L. Cas. 792 (1856), (2 Jur. (n. s.) 767, 25 L. J. Ex. 278). ^ Columbus, etc. R. Co. v. Penn- sylvania Co., 143 Fed. 757 (1906): "This not so clearly from the unaided construction of the language of the contract . but because of the con- struption which the parties for so many years of operation under the contract put upon it. This is a very safe guide in cases of doubt in finding the intention of the parties. Their con- current action in taking up the execu- tion of their contract, while their minds were still conscious of the understanding they had when mak- ing it and pursuing its execution without question, may, with confi- dence, be relied upon as indicating what they meant when they made it." See also Chicago Great Western R. Co. V. Northern Pacific R. Co., 101 Fed. 792 (1900). CHAP. XXIV] TRACKAGE CONTRACTS § 260 acted in good faith, a court of equity will decree its specific performance. It is not an objection to such a decree that it involves continuous acts and constant supervision. The court will adapt the remedy to the wrong.* In Union Pacific R. Co. v. Chicago, etc. R. Co.^ Mr. Chief Justice Fuller said: " The jurisdiction of courts of equity to decree the specific; performance of agreements is of a very ancient date, and rests on the ground of the inadequacy and incompleteness of the remedy at law. Its exercise prevents the intolerable travesty of justice involved in permitting parties to refuse performance of their contracts at pleasure by electing to pay damages for the breach. It is not contended that multiplicity of suits to recover damages for the refusal of defendants to perform would afford adequate relief, nor could it be, for such a remedy, under the circumstances, would neither be plain nor complete, nor a sufficient substitute for the remedy in equity, nor would the interests of the public be subserved thereby. But it is objected that equity will not decree specific performance of a contract requiring continuous acts involving skill, judgment and technical knowledge, nor enforce agree- ments to arbitrate, and that this case occupies that attitude. We do not think so. The decree is complete in itself, is self- operating and self-executing, and the provision for referees in certain contingencies is a mere matter of detail and not of the essence of the contract. It must not be forgotten that, ' United States: Union Pacific R. Chicago, etc. R. Co., 141 Fed. 785 Co. V. Chicago, etc. R. Co., 163 XJ. S. (1905). 564 (1895), (16 Sup. Ct. Rep. 1173), Alabama: South, etc. R. Co. v. affirming 51 Fed. 309 (1892) ; s. c. 47 Highland, etc. R. Co., 98 Ala. 400 Fed. 15 (1891); Joy v. City of St. (1893), (13 So. Rep. 682, 39 Am. St. Louis, 138 U. S. 1 (1891), (11 Sup. Ct. Rep. 74). Rep. 243) ; affirming s. c. sub nam. New York : Prospect Park, etc. R. Central Trust Co. v. Wabash, etc. R. Co. v. Coney Island, etc. R. Co., 144 Co., 29 Fed. 546 (1886); Railroad Co. N. Y. 152 (1894), (39 N. E. Rep. 17, V. Ailing, 99 U. S. 463 (1878). 26 L. R. A. 610); Lawrence v. Sara- A trackage contract for a long term toga Lake R. Co., 36 Hun, 467 of years with rental on a wheelage (1885). basis, is specifically enforceable in England: Wolverhampton, etc. R. equity upon the ground of the avoid- Co. v. London, etc. R. Co., L. R. 16 ance of a multiphcity of suits which Eq. 433 (1873). would afford inadequate relief and be ^ Union Pacific R. Co. v. Chicago, vexatious and expensive. etc. R. Co., 163 U. S. 600 (1895), (16 Grand Trunk Western R. Co. v. Sup. Ct. Rep. 1173). 465 § 261 INTERCORPORATE RELATIONS [PART III in the increasing complexities of modern business relations, equitable remedies have necessarily and steadily been expanded, and no inflexible rule has been permitted to circumscribe them. As has been well said, equity has contrived its reme- dies ' SO that they shall correspond both to the primary right of the injured party, and to the wrong by which that right has been violated;' and 'has always preserved the elements of flexibiUty and expansiveness, so that new ones may be invented, or old ones modified, in order to meet the requirements of every case, and to satisfy the needs of a progressive social condition in which new primary rights and duties are con- stantly arising and new kinds of wrongs are constantly com- mitted.' " 1 § 261. Liability of Proprietary Company to Third Persons. — Upon the principle that a corporation owing duties to the public cannot shift the responsibility for their performance without the consent of the State, a railroad company, permit- ting another company to use its tracks, remains liable for injuries to third persons — passengers, travellers at crossings and others — caused by the negligence of employees of the latter company in running its trains, to the same extent as if they were its own employees upon its own trains. The negli- gence of the licensee company is the negligence of the pro- prietary company.^ ' Pom. Eq. Jur. § 111. held liable for the negligence of the ' United States: Central Trust Co. latter company. V. Denver, etc. R. Co., 97 Fed. 239 Indiana: Indianapolis, etc. R. Co. (1899). V. Solomon, 23 Ind. 534 (1864). Georgia : Central R., etc. Co. v. Kentucky : Louisville, etc. R. Co. ». Perry, 58 Ga. 461 (1877). Breeden's admx.. Ill Ky. 729 (1901), Illinois: Pennsylvania Co. v. (64 S. W. Rep. 667). EUett, 132 lU. 654 (1890), (24 N. E. Minnesota: Heron v. St. Paul, etc. Rep. 559) ; Peoria, etc. R. Co. v. R. Co., 68 Minn. 542 (1897), (71 N. W. Lane, 83 111. 448 (1876) ; Toledo, etc. Rep. 706). R. Co. V. Rumbold, 40 111. 143 (1866) ; Missouri: Sinclair v. Missouri, etc. Pennsylvania R. Co. v. Greso, 79 111. R. Co., 70 Mo. App. 588 (1897). App. 127 (1898); Cleveland, etc. R. New Jersey: Delaware, etc. R. Co. Co. V. Bender, 69 111. App. 262 v. Salmon, 39 N. J. L. 299 (1877), (23 (1896). Am. Rep. 214). ' In Pittsburgh, etc. R. Co. i>. Camp- New York : Compare Cain v. Syra,- bell, 86 111. 443 (1877), the lessee of a cuse, etc. R. Co., 20 Misc. 459 (1897), railroad, who, by contract, permitted (45 N. Y. Supp. 538), affirmed 27 App. another company to use its road, was Div. 376 (1898), (50 N. Y. Supp. 1). 466 CHAP. XXIV] TRACKAGE CONTRACTS §261 In Pennsylvania Co. v. Ellett ' the Supreme Court of Illinois said: " The law has become settled in this State, by an un- broken line of decisions, that the grant of a franchise, giving the right to build, own and operate a railway, carries with it the duty to so use the property and manage and control the railroad as to do no unnecessary damage to the person or prop- erty of others; and where injury results from the negligent or unlawful operation of the railroad, whether by the corpo- ration to which the franchise is granted, or by another corpo- ration, or by individuals whom the owner authorizes or permits to use its tracks, the company owning the railway and fran- chise will be liable. . . . The public may look for indemnity for injury resulting from the wrongful or unlawful operation of the road, to that corporation to which they have granted the franchise, and thus delegated a portion of the public serv- ice; and for this purpose the company whom it permits to use its tracks, and its servants and employees, will be regarded as the servants and agents of the owner company." ^ North Carolina: Ayoock v. Rail- road Co., 89 N. C. 321 (1883). Com- pare Sellars v. Richmond, etc. R. Co., 94 N. C. 654 (1886), (25 Am. & Eng. R. Cas. 451) — a case in which a cor- rect result is reached through a mani- festly erroneous course of reasoning. Texas: Ray u. Pecos, etc. R. Co. 35 Tex. Civ. App. 123 (1904), (80 S. W. Rep. 112). n'^isconsin : Jefferson v. Chicago, etc. R. Co., 117 Wis. 549 (1903), (94 N. W. Rep. 289). In this case where it was sought to recover damages from the owner of a railroad caused by fire resulting from the failure of the licensee to use a proper spark arrester the Court said (pi 552) : "When a railroad company permits another to make joint use of its track, it is liable for injuries caused to persons or property for the action- able negligence of such licensee. It has received its franchises subject to certain well-defined duties as to the machinery which it uses. It cannot, while exercising their franchises allow others to come in with defective ma- chinery and use the guasi^puhlic high- way jointly with it and escape the duty laid upon it by its charter to use safe machinery." England: In England as railway companies are compelled to grant run- ning powers to other companies, an absolute liability for the negligence of the working company is manifestly inequitable. The rule of liability there is : The proprietary company is prima facie liable for injuries received upon its lines, but is entitled to show that the injury was caused by the negligence of another company in violation of the latter's agreement to provide for the safety of its trains. Ayles V. South Eastern R. Co., L. R. 3 Ex. 146 (1868), (37 L. J. Ex. 104). 1 Pennsylvania Co. v. Ellett, 132 111. 659 (1890), (24 N. E. Rep. 559). 2 The fact that a railroad company grants to another company a right to use its tracks does not furnish an owner of land over which the pro- prietary company has acquired a 467 262 INTERCORPORATE RELATIONS [part III § 262. Liability of Licensee Company to Third Persons. — A railroad company operating trains upon the tracks of another company under a trackage contract is liable for its own negli- gence.^ Its responsibility for its acts and omissions is not affected by the fact that the proprietary company is also liable. A licensee railroad company is liable for something more than the negligence of its own employees. When it obtains the right to run its trains over the tracks of another company it makes the tracks so used its own, to the extent that it is responsible to persons injured upon or by its trains for any failure to maintain the tracks in a safe condition.^ It is like- right of way, any ground ?or claiming additional damages. Miller v. Green Bay, etc. R. Co., 59 Minn. 169 (1894), (60 N. W. Rep. 1006, 26 L. R. A. 443). ' Illinois: Pennsylvania Co. v. EUett, 132 lU. 654 (1890), (24 N. E. Rep. 559); Wabash, etc. R. Co. v. Peyton, 106 111. 534 (1883), (46 Am. Rep. 705) ; Peoria, etc. R. Co. v. Lane, 83 111. 448 (1876); Toledo, etc. R. Co. V. Rumbold, 40 111. 143 (1866); St. Louis, etc. R. Co. v. Rowley, 90 111. App. 653 (1900) ; Pennsylvania R. Co. V. Greso, 79 111. App. 127 (1898); Cleveland, etc. R. Co. v. Bender, 69 lU. App. 262 (1896). The fact that the company owning a railroad track upon which a collision occurred was also negligent, does not excuse the negligence of another com- pany using such track under an agree- ment with the owner. Chicago, etc. R. Co. V. Mitchell, 70 111. App. 188 (1897). Indiana: Cleveland, etc. R. Co. v. Berry, 152 Ind. 607 (1899), (53 N. E. Rep. 415, 46 L. R. A. 33); Pitts- burgh, etc. R. Co. V. Thompson, 21 Ind, App. 355 (1898), (50 N. E. Rep. 828); Wabash R. Co. v. Williamson, 3 Ind. App. 190 (1891). Compare Cincinnati, etc. R. Co. v. Paskins, 36 Ind. 380 (1871), (5 Am. Ry. Rep. 570) ; Cincinnati, etc. R. Co. v. Town- send, 39 Ind. 38 (1872). 468 Kansas: Chicago, etc. R. Co. u. Posten, 59 Kan. 449 (1898), (53 Pac. Rep. 465); Chicago, etc. R. Co. v. Martin, 59 Kan. 437 (1898), (53 Pac. Rep. 461) ; Chicago, etc. R. Co. v. Groves, 56 Kan. 601 (1896), (44 Pac. Rep. 628). Maine : Webb v. Portland, etc. R. Co., 57 Me. 117 (1869). Missouri : Sinclair v. Missouri, etc. R. Co., 70 Mo. App. 588 (1897). New York : McGrath v. New York Central, etc. R. Co., 63 N. Y. 522 (1876); Leonard v. New York Cen- tral, etc. R. Co., 10 J. & S. (Sup. Ct.) 225 (1877). For consideration of liability of licensee company to proprietary com- pany for its negligence see Central Trust Co. V. Colorado Midland R. Co., 89 Fed. 560 (1898). ^ Where a railroad company pro- cures, by contract with another com- pany, the right of running its trains into and out of a depot over the track of the latter, it thereby makes that portion of the track so used its own, in so far that it will be responsible for all injuries resulting from negligence in keeping or permitting it to be in an unsafe condition. Wabash, etc. R. Co. V. Peyton, 106 111. 534 (1883), (46 Am. Rep. 705). In St. Louis, etc. R. Co. v. Rowley, 90 111. App. 656 (1900), the Court said: "The right of way of the track CHAP. XXIV] TRACKAGE CONTRACTS § 262 wise liable to persons so injured for the negligence of the em- ployees of the proprietary company in the operation of that portion of the road over which it has running privileges. To that extent they become its employees.' upon which plaintiff in error's train was running, belonged to the C. P. & St. L. Ry. Co., which company managed and cared for it, the de- fendant in error paying for using the rails upon a wheelage basis. This fact would not, however, excuse de- fendant in error for damages caused by the condition of the right of way. When it, as a common carrier, used the tracks upon such right of way, it became liable for damages caused by its improper condition to the same extent as if it owned or leased it." Senible that a. licensee company is liable for damages occasioned by a failure to maintain fences, Toledo, etc. R. Co. V. Rumbold, 40 III. 143 (1866). And see Pittsburgh, etc. R. Co. v. Thompson, 21 Ind. App. 355 (1898), (50 N. E. Rep. 828) (under the Indiana Statute). See also Sinclair v. Mis- souri, etc. R. Co., 70 Mo. App. 588 (1897); Louisville, etc. R. Co. v. Breeden's Admx., Ill Ky. 729 (1901), (64 S. W. Rep. 667). ' In Leonard v. New York Central, etc. R. Co., 10 J. & S. 233 (1877), the New York Supreme Court said: "When various companies run trains over the same road in a. large city intersected by the crossings of streets, the protection of citizens in the use of the streets should not depend upon inquiries to be made of the signalling flagmen of the road, as to which com- pany employs them, or whether they were duly authorized to signal' danger or safety as this or that train passes. It must be assumed in such exigencies, that when a company chooses to run trains over a road guarded by flag- men that it elects to be protected by these flagmen properly discharging their duties, and to be made liable in case they neglect them. . . . The law does not give immunity from liability to a company operating its trains negligently, because it appears that it operates them upon a road and with a signal service that belongs to another company. As far as the per- son injured in passing over the cross- ing by such company's train is con- cerned, it is immaterial to whom the ■ road or its signal service or its other appurtenances belong that are in use at the crossing. The duty primarily devolves upon the company running the train, that there shall be no negligence in respect to these matters as far as persons crossing are af- fected." See also McGrath v. New York Cen- tral, etc. R. Co., 63 N. Y. 522 (1876); Chicago, etc. R. Co. v. Posten, 59 Kan, 449 (1898), (53 Pac. Rep. 465); Wa^ bash, etc. R. Co. v. Peyton, 106 111. 534 (1883), (46 Am. Rep. 705) ; Penn- sylvania R. Co. V. Greso, 79 111. App. 127 (1898). A railroad company using the tracks of another company is liable for the negligence of its employees, although they operate the train un. Amalgamated Copper Co., 48 Atl. Rep. 159, (N. J. Ch. 1901). * In Elkins v. Camden, etc. R. Co., 36 N. J. Eq. 5 (1882), the directors of a railroad company, without any statutory authority, passed a resolu- tion to buy the stock of a competing road, and it was held: (A) That the proposed purchase was ultra vires, and hence could not be executed if ratified by stockholders. (B) That it was void and against public policy, in that its object was to prevent lawful competition. 539 293 INTEKCOKPORATE RELATIONS [part IV another company can raise the objection of ultra vires. The purchase is beyond the powers, not of his corporation, but of the purchaser.^ Irrespective of the question of ultra vires, however, minor- ity stockholders of a corporation are entitled to relief in equity against the acquisition of controlling stock interests in their corporation by a competing corporation for the purpose of ehminating competition and creating a monopoly.^ The laches of a stockholder in taking steps to prevent the ultra vires holding by his corporation of stock in another com- pany may bar him from relief in equity.^ (C) That it could be enjoined upon application of a single stockholder of the purchasing company, and the fact that he obtained his stock after the passage of the resolution, and with avowed design of preventing its con- siunmation, made no difference. * Oelbermann v. New York, etc. R. Co., 77 Hun (N. Y.), 332 (1894), (29 N. Y. Supp. 545). ^ In Dunbar U.American Telephone, etc. Co., 224 111. 29 (1906), (79 N. E. Rep. 423) the Court said: "But aside from the question as to whether the contract of purchase was tUtra vires in the sense that the contract became a nullity, we think that such equitable rights are shown in the com- plainants, though minority stock- holders, as ought to entitle them to maintain this bill. It is alleged in the bill, and admitted by the demvirrer, that in order to stifle competition in trade and create a monopoly in itself and its licensee company, and for the purpose of enabUng it to secure and maintain imreasonable and excessive rates and charges, said American Company conceived the illegal purpose of acquiring at least two-thirds of the stock of said Kellogg Company, and through such owner- ship to select and maintain a board of directors which should act in the real interests of and subservient to the American Company and free that 540 company and its licensee from the competition of the Kellogg Company and independent exchanges ; also, that its ultimate purpose was to injure and finally destroy the Kellogg Company. That such conduct on the part of the American Company was fraudulent as against the stock- holders of the Kellogg Company cannot be denied, and against which, on the plainest principles of equity, a stockholder in the Kellogg Company shoxild have the right to relief." A bill filed by a stockholder of a corporation to restrain it from per- mitting certain shares of its stock, alleged to be held by another corpora- tion in violation of law, to be voted by such corporation or on its behalf, cannot be maintained where neither the latter corporation nor its receiver is made a party defendant. Hollifield V. WrightsviUe, etc. R. Co., 99 Ga. 365 (1896), (27 S. E. Rep. 715). ' Alexander v. Searcy, 81 Ga. 536 (1888), (8 S. E. Rep. 630, 12 Am. St. Rep. 337). A purchase of stock in a corpora- tion, with knowledge that it assumes and exercises the power to hold stock in other corporations, may amount to an impUed recognition of the assumed power. Venner v. Atchison, etc. R. Co., 28 Fed. 581 (1885). This decision is contrary to sound prin- CHAP. XXVl] CORPORATION AS STOCKHOLDER 293 The State may institute proceedings to prevent corporations from exceeding their chartered powers in purchasing shares in other companies. This is especially true in the case of corpora- tions serving pubUc purposes. An injunction may be granted in behalf of the State to restrain an unlawful acquisition or holding of stock; ' and proceedings in quo warranto will lie against the corporation usurping the power.^ ciple. Laches may bar a stockholder in equity, but his recognition of, or acquiescence in, an ultra vires act cannot validate it. In McCampbell v. Fountain Head R. Co., Ill Tenn. 55 (1903), (77, S. W. Rep. 1073, 102 Am. St. Rep. 731), however, the Court said : "From the facts already stated, we have here a case where the parties complaining, by their active cooperation with all the other stockholders of the railroad company, brought about the ultra vires complication from which they now seek to be relieved. Will their complaint be listened to? In Green's Brice's Ultra Vires, p. 783, mere ac- quiescence in unauthorized and illegal transactions will be, it is said, suf- ficient to repel complaining stockhold- ers. That author uses these words : * If an act be idtra vires, a corporation may raise the objection, whether against a corporation or against a creditor or other contracting party at- tempting to enforce such act, or his alleged claims or rights resulting therefrom. But if an incorporator de- sire protection against the party who has thus dealt with the corporation, he must have been prompt and ener- getic in repudiating the transaction, as he can be bound by acquiescence. So, if he do not quickly object, and give his objection vitality, the creditor will be justified in answering that he consents. ' " In a suit in equity by a stockholder to set aside an ultra vires purchase of stock made by the directors nine years before, it was held that the com- plainant was guilty of laches, and, therefore, was not entitled to relief. CuUen V. Coal Creek, etc. R. Co. (Tenn. 1897), 42 S. W. Rep. 693. ' Pennsylvania R. Co. v. Common- wealth (Pa. 1886), 7 Atl. Rep. 368. Delay does not affect the right of the State to prevent an ultra vires holding of stock. Alexander v. Searcy, 81 Ga. 536 (1888), (8 S. E. Rep. 630, 12 Am. St. Rep. 337). ' People V. Chicago Gas Trust Co.. 130 111. 268 (1889), (22 N. E. Rep, 798, 17 Am. St. Rep. 319, 8 L. R. A; 497). Where a bank purchased stock in other corporations in violation of its charter and the statutes of the State but, upon the demand of the Secre- tary of State, immediately disposed of such holdings, it was held that such violations of the law under the circumstances were not ground for the appointment of a receiver to wind up the bank in an action by the State. State V. Peoples' United States Bank, 197 Mo. 574 (1906), (94 S. W. Rep. 953). 541 § 294 INTERCOEPOEATE RELATIONS [PAET IV CHAPTER XXVII CONTROL OF ONE CORPOEATION BY ANOTHER § 294. Meaning of Term "Control." § 295. Distinction between Control of Corporation and Control of its Property. § 296. Distinction between Control and Community of Interest. § 297. Distinction between Control and Consolidation. § 298. Power to purchase Stock to obtain Control. § 299. Status of Corporation as Controlling Stockholder. § 300. Trust Relation of Controlling Corporation to Minority Stockholders. § 301. Remedies of Minority Stockholders of Controlled Corporation. § 294. Meaning of Term "Control." — The control of a cor- poration has two phases. The ultimate power of control always lies in the stockholders. They determine, directly, matters of fundamental importance. They provide, through the election of directors, for the corporate management, and may thereby settle the corporate policy. The immediate power of control lies in the directors and officers appointed to manage the affairs of the corporation.' The term " control," as applied to a corporation in its relations with other corporations — as distinguished from its internal management — refers to the ultimate power of control and means, specifically, the o_wnership of a controlling interest in a corporation. A corporation which owns a majority of the shares of the capital stock of another corporation controls it.^ ' In Pullman Car Co. v. Missouri or executive control which is exercised Pac. R. Co., 11 Fed. 636 (1882), (a/- by the officers and agents chosen by firmed 115 TI. S. 587 (1885), (6 Sup. and acting under the direction of the Ct. Rep. 194)), Judge McCrarysaid: board of directors." "What are we to understand by the Yazoo, etc. R. Co. ». Searles, 85 word 'control' as employed in the con- Miss. 520 (1905), (37 So. Rep. 939, tract? The language is, 'all roads 68 L. R. A. 715) : "'Control' of the which it controls or may hereafter business of a corporation . means control,' which in our judgment power to dictate the corporate action means controlled by the corporation. of the corporation, not the mere man- The language does not refer to the agement of some special limited de- ultimate power of control which partment of its operations." always lies in the stockholders, and ^ Jessup v. Illinois Cent. R. Co., 36 which may be indirectly exercised by Fed. 741 (1888) : "The bill charges them at stated periods by the election that the Illinois Central Railroad of directors. It means the immediate Company has obtained control of the 542 CHAP. XXVIl] CONTROL OF ONE CORPOBATION BY ANOTHER § 295 § 295. Distinction between Control of Corporation and Con- trol of its Property. -^A distinction, analogous to that between the ultinmate and immediate control of the affairs of a cor- poration, exists between the control, by a corporation, of its property, and the control, by majority stockholders, of the corporation. The owner of shares in a corporation does not own the corporate property. The holders of controUing stock in- terests control the corporation, the corporation controls its property.' In Pullman Car Co. v. Missowi Pacific R. Co.'' Mr. Chief Justice Waite said: " It has all the advantages of stock of the Dubuque and Sioux City Railroad Company. Tliis allegation, upon the familiar rule that state- ments of this character will be taken most strongly against the pleader, only implies that the Illinois Central Railroad Company has obtained a majority of the stock of the Dubuque & Sioux City Railroad Company." ' Pullman Car Co. •». Missouri Pac. R. Co., 115 U. S. 587 (1885), (6 Sup. Ct. Rep. 194), affirming 11 Fed. 636 (1882). In Fitzgerald v. Missouri Pac. R. Co., 45 Fed. 818 (1891), Judge Cald- well said : "The owner of all the stock and bonds of a corporation does not own the corporate property. The corporate property, which includes all rights of action and claims for damages, belongs to the corporation, and is subject to the management and control of its board of directors. " In Humphreys v. McKissock, 140 U. S. 304 (1891), (11 Sup. Ct. Rep. 779) it was held where a railroad com- pany acquired stock in an elevator company that its interest in such company was that of a stockholder only, and that it had no interest in the property of such company which it could mortgage. See also Crane v. Fry, 126 Fed. 278 (1903) ; Jessup v. Illinois Cent. R. Co., 36 Fed. 741 (1883). Where one corporation owns all the stock of another corporation and elects its directors — the corporate existence being maintained — the former corporation has only the rights and powers of a, stockholder in the latter ; and is not the corporation itself either in respect of the manage- ment of the corporate business or of control of the corporate property. Shepp V. Schuylkill Valley Trac- tion Co., 17 Montgomery County (Pa.) Law Rep. 52 (1900). The decision in this case is based upon Pullman Car Co. V. Missouri Pac. R. Co., suprq.. Ownership by one corporation of all the stock of another corporation which maintains its corporate exist- ence does not make the former liable for the neghgence of the latter. Louisville Gas Co. v. Kaufman, 105 Ky. 131 (1898), (48 S. W. Rep. 434). ^ Pullman Car Co. v. Missouri Pac. R. Co., 115 U. S. 597 (1885), (6 Sup. Ct. Rep. 194). In this case, a rail- road company made a contract con- cerning all roads which it did then or might thereafter "control." It after- wards acquired a majority of the stock of another railroad company, and the question was whether it thereby controlled the road of that company within the meaning of the contract. The Court held that it did not. 543 § 296 INTBBCORPORATE RELATIONS [PART IV the control of the road, but that is not, in law, the control itself. Practically it may control the company, but the com- pany alone controls its road. In a sense, the stockholders of a corporation own its property, but they are not the managers of its business or in the immediate control of its affairs." ' § 296. Distinction between Control and Community of Inter- est. — The phrase, " community of interest," as used in rela- tion to corporations, especially railroad companies, means the acquisition and holding for a common purpose, by several corporations, of stock in other corporations; or the mutual holding by two or more corporations of each other's shares. The " community of interest idea," with reference to railroads, is that competing railroad companies, having common stock- holders or owning each other's shares, will maintain rates; that the practical pooling of interests wiU more than fill the place of the prohibited pooUng of traffic or earnings, and prevent traffic wars and ruinous competition. The element of control is not essential to a community of interest, and the one does not necessarily imply the other. '' It may be true that the two companies are acting in har- mony, and that the same persons own a majority of the stock of both; but that is something very different from the control of one by the other." ^ ^ In Pennsylvania R. Co, v. Com- company alone controls its road.' monwealth (Pa. 1886), 7 Atl. Rep. . . . This distinction seems very 368, a case involving the construction narrow, but it is certainly involved of the Pennsylvania constitutional in the conclusion reached, which can- provision (Art. 17, § 4), against the not stand unless it is recognized: acquisition by railroad corporations for it is too plain to bear arg\unent, of the control of competing companies, that the ownership of the stock of a the Court said with reference to the corporation carries with it the control case of Pullman Car Co. v. Missouri of the corporation. Indeed, this is Pac. R. Co., supra; "The decision merely a different way of stating the of the question of control was not truism, that a corporation is con- called for in the case, which was trolled by its stockholders. That already decided on another and a they do it through the agency of a fundamental point. But, waiving this, board of directors and other officers the point decided is, merely, that the does not alter the fact. " ownership of the stock does not ^ Pullman Car Co. v. Missouri Pac. necessarily give control of the road. R. Co., 11 Fed. 637 (1882), affirmed The Chief Justice says, speaking of the 115 V. S. 587 (1885), (6 Sup. Ct. stockholding company: 'Practically, Rep. 194). it may control the company, but the 544 CHAP. XXVIl] CONTROL OF ONE COEPORATION BY ANOTHER § 298 § 297. Distinction between Control and Consolidation. — The distinction between the union of stockholders and prop- erties effected by consoUdation and the continued separate existence of the corporations, controlled and controlling, has already been pointed out.' § 298. Power to purchase Stock to obtain Control. — A cor- poration having power to purchase and hold shares may exercise the power for the purpose of obtaining control of another cor- poration and of participating in its management.^ A corpora- ' See ante, § 12: "Distinction be- tween Consolidation and Control." ' United States: De la Vergne Re- frigerating Mach. Co. V. German Sav- ings Inst., 175 U. S. 54 (1899), (20 Sup. Ct. Rep. 20) ; Louisville, etc. R. Co. V. Kentucky, 161 U. S. 698 <1896), (16 Sup. Ct. Rep. 714); Nashua, etc. R. Co. v. Boston, etc. R. Co., 136 U. S. 385 (1890), (10 Sup. Ct. Rep. 1004) ; Tod v. Kentucky Union Land Co., 57 Fed. 58 (1893). Illinois: Martin v. Ohio Stove Co., 78 111. App. 105 (1898). New Hampshire: Pearson v. Con- cord R. Corp., 62 N. H. 548 (1883), (13 Am. St. Rep. 590) : "A corpora- tion cannot become a stockholder in another corporation unless such power is given to it by its charter, or is necessarily implied in it, especially if the purchase be for the purpose of controlling or affecting the manage- ment of the other corporation. " New Jersey: Elkins v. Camden, etc. R. Co., 36 N. J. Eq. 5 (1882). Ohio: One railroad company has tio power to acquire the bonds of another corporation in order to con- trol the elections of the latter, such bonds having a voting power. State -II. McDaniel, 22 Ohio St. 368 (1872). In Anglo-American Land, etc. Co. -». Lombard, 132 Fed. 721 (1904) it was held, however, that power to purchase stocks for investment does not authorize the purchase of all the stock of a corporation for the purpose of controlling its manage- ment. In this case the Court said : "The only "authority of the Missouri Company to purchase stock in an- other corporation is found in sub- division 9, § 2839, Rev. St. Mo. 1889, which reads : ' To buy and sell all kinds of government, state, munici- pal and other bonds, and all kinds of negotiable and non-negotiable paper, stocks and other investment securities.' The context shows very clearly that the purpose was not to authorize the purchase of all of the stock of another company for the purpose of controlling its manage- ment but to authorize the buying and selling of stocks as investment se- curities, in Uke manner as govern- ment bonds and the other securities named are bought and sold. Con- trolling the management of a corpora- tion of another State through the ownership of its entire stock is not buying or selling investment securities, nor is it fairly incidental thereto. The hazards of such a venture are altogether repugnant to the purposes for which the Missouri Company was formed, which include the hand- ling and investing of the money of others, executing trusts under deeds and wills, acting as guardian of infants and insane persons, and guarantjang the fidelity of persons holding places of public and private trust; all requiring the maintenance of a high standard of credit and stability on the part of that company. It is impossible to escape the con- 545 § 298 INTERCORPORATE RELATIONS [PART IV tion, without such express authority, cannot purchase for control. In De la Vergne Refrigerating Mach. Co. v. German Savings Inst. Mr Justice Brown said: ' " As the powers of corporations, created by legislative act, are limited to such as the act expressly confers and the enumeration of these implies the exclusion of all others, it follows that, unless express provision is given to do so, it is not within the general powers of a corporation to purchase the stock of other corporations for the purpose of controlling their management." This statement of^^the law while correct does not go far enough. It is not only beyond the general powers of a corpora- tion to purchase the stock of other corporations for the purpose of obtaining control, but it is beyond its general powers to make such purchases for any purpose. The only distinction is that while for certain purposes power to acquire stock may exist as incidental to other powers, there can never be an implied power to purchase for control.^ A purchase for control, with- out express authority to purchase stock, is necessarily ultra vires. A purchase for other purposes, without such authority, is also ultra vires unless the requisite power can be implied. A purchase by a foreign corporation of stock in a domestic corporation for the purpose of obtaining control of, and stifling competition with, it has been held to be ultra vires the foreign corporation regardless of the powers expressed in its charter, as well as contrary to public policy.^ elusion that the purchase of the Co. ■». German Savings Inst., 175 Kansas Company's stock was beyond XJ. S. 54 (1899), (20 Sup. Ct. Rep. the power of the Missouri Com- 20). pany." 2 "While this power [to purchase Compare, however, Robotham v. shares] may be incidental to some un- Prudential Ins. Co., 64 N. J. Eq. 673 disputed authority its exercise can (1903), (53 Atl. Rep. 842) where it was never be sustained as an incidental held that the fact that an insurance power when the object is to obtain the company, having power to invest its control and management of another funds in the shares of other corpora- corporation." Editorial note to tions, purchased a controlling interest Denny Hotel Co. v. Schram, 36 Am. in the stock of another corporation St. Rep. 137. would not make such purchase illegal ' Dunbar v. American Telephone, provided it were made in good faith etc. Co., 224 111. 9 (1906), (79 N. E. for investment purposes. Rep. 423). ^ De la Vergne Refrigerating Mach. 546 CHAP. XXVIl] CONTROL OF ONE CORPORATION BY ANOTHER § 300 § 299. Status of Corporation as Controlling Stockholder. — There is nothing in the nature of a corporation which forbids it exercising control of another corporation, if power to acquire control is conferred.' When a corporation acquires control of another corporation its rights, in law, are the same as those of any natural person holding control. The two corporations continue to exist as before and each acts through its own directors and officers.^ They are legally distinct, although acting together for a common purpose and managed in a common interest. § 300. Trust Relation of Controlling Corporation to Minority Stockholders. — When a majority of the stock of one corpora- tion is owned by another, which thereby acquires the right to control its management, the controlling corporation assumes a relation of trust towards the minority stockholders of the corporation controlled, and is under an obligation to manage its affairs for the benefit of all the stockholders and not for its own aggrandisement.' This is merely an application of ' Citizens State Bank v, Hawkins, 71 Fed. 369 (1896); Matthews v. Murcliison, 17 Fed. 760 (1883); Market Street R. Co. v. Hellman, 109 Cal. 571 (1895), (42 Pac. Rep. 225) ; White v. Syracuse, etc. R. Co., 14 Barb. (N. Y.) 559 (1853). ^ Pullman Car Co. v. Missouri Pac. R. Co., 11 Fed. 637 (1882), affirmed 115 U. S. 597 (1885), (6 Sup. Ct. Rep. 194) ; Jessup v, Illinois Cent. R. Co., 36 Fed. 735 (1888). ' Farmers Loan, etc. Co. v. New York, etc. R. Co., 150 N. Y. 410 (1896), (44 N. E. Rep. 1043, 55 Am. St. Rep. 689, 34 L. R. A. 76) ; Barr V. New York, etc. R. Co., 96 N. Y. 444 (1884); George v. Central R., etc. Co., 101 Ala. 607 (1893), (14 So. Rep. 752) ; Davis v. United States Electric Power, etc. Co., 77 Md. 35 (1893), (25 Atl. Rep. 982); Goodin V. Cincinnati, etc. Canal Co., 18 Ohio St. 169 (1868) ; Pearson v. Concord R. Corp., 62 N. H. 537 (1883), (13 Am. St. Rep. 590). In Glengary Consol. Min. Co. v. Boehmer, 28 Colo. 1 (1900), (62 Pac. Rep. 839) the Court said: "No combination of stockholders of a corporation less than the whole will be permitted to manage or con- trol its affairs in their interest alone. Minority stockholders cannot be de- prived of their rights by such a com- bination under the guise of a policy of the corporation dictated by the majority. So far as the rights of the minority are concerned, the ma- jority, in furtherance of their plan to reap a benefit to themselves through a transaction in which the minority do not participate, become the cor- poration itself, and assume the trust relation occupied by the corporation towards its stockholders. " For a different view of the obliga- tions of a corporation as a controlling stockholder, see Robotham v. Pru- dential Ins. Co., 64 N. J. Eq. 673 (1903), (53 Atl. Rep. 848) where the Court said : "Authorities have been cited to support the proposition that an individual or corporation holding a 547 300 INTERCORPORATE RELATIONS [part IV the principle that, while a majority of the stockholders may legally control the corporation's business, they assume the correlative duty of good faith, and cannot manipulate such business in their own interest to the injury of minority stock- holders.* In Farmers Loan, etc. Co. v. New York, etc. R. Co.^ Judge Martin, after considering a number of cases illustrating the general principle, said: " While the question in some of the cases cited arose between stockholders and the directors and majority of the capital stock of an- other corporation sustains, by reason of such holding, a fiduciary relation to the minority stockholders and, therefore, it is urged that the acqui- sition of a majority of Fidelity stock by the Prudential Company should be avoided [citing this section]. But these authorities only hold in effect that the fiduciary relation arises when the majority stockholder as- sumes control of the corporation and dictates the action of the directors. The majority stockholder is not made a trustee for the minority stockholder in any sense by the mere fact that he holds a majority of the stock, or by the further fact that he uses the voting power of his stock to elect a. board of directors for the corporation. The majority stockholder does not neces- sarily control the directors whom he appoints, and in fact he has no right to control them, and if they are controlled by him they may be vio- lating their duty for which he also may be liable." See also Colgate o. United States Leather Co., 67 Atl. Rep. 657 (N. J. Ch. 1907). And see Pierce v. Old Dominion Copper Min., etc. Co., 58 Atl. Rep. 319 (N. J. 1904). ' United States: Ervin v. Oregon R., etc. Co., 27 Fed. 630 (1886); Meeker v. Winthrop Iron Co., 17 Fed. 48 ( 1883) . See also Jackson v. Ludel- ing, 21 Wall. 616 (1874). Compare Rogers v. Nashville, etc. R. Co., 91 Fed. 312 (1898). 548 California: Wright v. Orville Min- ing Co., 40 Cal. 20 (1870). Maryland: In Cannon v.- Brush Electric Co., 96 Md. 446 (1903), (54 Atl. Rep. 121) an electric light company owned a controlling interest in another electric light company doing business in the same city in competition with the former com- pany. A stockholder of the latter company brought a bill against the former denying that it was fraudu- lently using the latter company for its own benefit at the expense of the latter's stockholders. The Court held, and was undoubtedly correct in holding, that none of the acts complained of established bad faith. But the case well illustrates the im- possibility of two corporations con- trolled by the same persons being real rivals in business. New York: Gamble v. Queens County Water Co., 123 N. Y. 91 (1890), (25 N. E. Rep. 201) ; Sage v. Culver, 147 N. Y. 241 (1895), (41 N. E. Rep. 513) ; Pondir v. New York, etc. R. Co., 72 Hun, 384 (1893), (25 N. Y. Supp. 560) ; Meyer v. Staten Island R. Co., 7 N. Y. St. Rep. 245 (1887). England: Menier v. Hooper's Tele- graph Works, L. R. 9 Ch. App. 350 (1874) ; Gregory v. Patchett, 33 Beav. 595 (1864). ^ Farmers Loan, etc. Co. v. New York, etc. R. Co., 150 N. Y. 430 (1896), (44 N. E. Rep. 1043, 55 Am. St. Rep. 689, 34 L. R. A. 76). CHAP. XXVIl] CONTROL OF ONE CORPORATION BY ANOTHER § 300 officers of a company, who, as such, held a position of trust as to the former, still, where, as in this case, a majority of the stock is owned by a corporation or combination of individuals, and it assumes the control of another company's business and affairs through its control of the officers and directors of the corporation, it would seem that, for all practical purposes, it becomes the corporation of which it holds a majority of the stock, and assumes the same trust relation towards the minority stockholders that a corporation itself usually bears to its stock- holders. . . . The principle of these authorities renders it quite obvious that a corporation, purchasing a majority of the stock of a competing one, cannot obtain control of its affairs, divert the income of its business, refuse business which would enable the defaulting company to pay its interest, and then institute an action in equity to enforce its obligations, for the avowed purpose of obtaining entire control of its property to the injury of the minority stockholders. Such a course of ac- tion is clearly opposed to the true interests of the corporation itself, plainly discloses that one thus acting was not influenced by any honest desire to secure such interests, but that its action was to serve an outside purpose, regardless of conse- quences to the debtor company, and in a manner inconsistent with its interest and the interest of its minority stock- holders." » The fact that the right to purchase and hold stock is expressly conferred upon a corporation by statute, in no way confers upon it power to employ the stock for inequitable purposes. With- out statutory authority, it has no power to hold stocks at all. ' The primary injury in Farmers 35 Misc. (N. Y.) 69 (1901), (N. Y. Loan, etc. Co. v. New York, etc. R. Co., Supreme Court). supra, was to the corporation fore- In De Neufville v. New York, etc. closed and the injury to stockholders R. Co., 81 Fed. 10 (1897) it was held was derivative only. Consequently that a stockholder's bill setting forth it was held in a suit brought by an facts shown in Farmers Loan, etc. Co. individual stockholder following that t. New York, etc. R. Co., «ttjwo, showed decision that the corporation was a an unlawful diversion of the funds necessary party to a suit by a stock- of the corporation in question which holder in behalf of all similarly sit- entitled it to sue for the protection uated, and that a stockholder could of its rights; and that in default o£ not maintain an individual action for such action a stockholder could sue injury to his particular shares. in its behalf. Niles V. New York, etc. R. Co., 549 §301 INTEECORPORATE RELATIONS [part IV With authority, it assumes the equitable obligations of any majority stockholder. § 301. Remedies of Minority Stockholders of Controlled Cor- poration. — While a corporation, holding a controlling inter- est in another company, so long as it fulfils the obligation of its trust relation towards minority stockholders, may exercise its legal power to determine the policy of the corporation which it controls, it will be restrained by a court of equity, at the instance of a minority stockholder, when it disregards its obli- gations and manages, or undertakes to manage, the corpora- tion for its own use rather than for the benefit of all the stock- holders.' The temptation to regulate the affairs of a competing * In MacGinnis v. Boston, etc. Mining Co., 29 Mont. 462 (1903), (75 Pac. Rep. 89) the Montana Supreme Court said : "Whenever, in the conduct of the business, the purposes of the charter of the Mon- tana Company are ignored and the rights of the minority stockholders are disregarded, the courts of this State have ample power by way of injunction, or a receivership if neces- sary, to compel it to observe its con- tract obligations with the State and stocliholders. " One railroad company, owning a majority of the stoclc of another railroad company, and controlling its affairs, has no right to vote its stoclc so as to manage the corporation for its own use rather than for the latter's benefit, to impair its earnings and prejudice the rights of its minority stoclcholders ; and equity will restrain such voting. Memphis, etc. R. Co. V. Wood, 88 Ala. 630 (1889), (7 So. Rep. 108). Where a railroad company has purchased a majority of the stock of a competing company in order to lessen competition, and, after assuming con- trol, violates its duties in respect to the property and rights of the controlled company, and commits wilful waste, a court of equity will interfere, at the suit of a minority stockholder of the 550 controlled corporation, and will re- strain the controlling corporation from further using its stock in the manage- ment of the corporation, and in the election of its officers. George v. Central R., etc. Co., 101 Ala. 607 (1892), (14 So. Rep. 752). Generally, that one corporation may be enjoined from voting the ma- jority stock held by it in another cor- poration when the two companies have conflicting interests, see Amer- ican, etc. Co. V. Linn, 93 Ala. 610 (1890), (7 So. Rep. 191); Mack v. DeBardeleben, etc. Co., 90 Ala. 396 (1890), (8 So. Rep. 150). Where the directors of an insurance company arranged for the transfer of the control of their corporation to a trust company under a scheme which would confer upon them and associates of their choosing great profits and power, it was held that they were disqualified from finally determining that the scheme would be advantageous to their corporation and that the burden was upon them to show that it would be advanta- geous. Robotham v. Prudential Ins. Co., 64 N. J. Eq.673 (1903), (53Atl. Rep. 842). Fraudulent use of its power by a corporation holding a majority of the stock of another corporation, to the CHAP. XXVIl] CONTROL OF ONE CORPORATION BY ANOTHER § 301 company in its own interest is, naturally, so great that a court of equity will zealously guard the rights of minority stockholders from actual or threatened infringement, and will restrain, by injunction, the controlling corporation from administering the affairs of the corporation in a manner injurious to the cor- poration and its stockholders as a whole. Equity will compel majority stockholders to exercise their controlling power over a corporation in its interest and not for ulterior purposes. injury of minority stockholders, may constitute ground for the appoint- ment of a receiver for the corporation. Davis V. United States Electric Power, etc. Co., 77 Md. 35 (1893), (25 Atl. Rep. 982). In Milbank v. New York, etc. R. Co., 64 How. Pr. (N. Y.) 28 (1882), the Court said : " It is against public pohcy to have, or permit, one cor- poration to embarrass and control another, and, perhaps, competing cor- poration, in the management of its affairs, as may be done if it is per- mitted to own and vote upon the stock." Compare this language with the decision in another New York case (Oelbermann v. New York, etc. R. Co., 77 Hun (N. Y.), 332 (1894), (29 N. Y. Supp. 545)), where it was Iield that a court of equity could not restrain a controUing corporation from voting on its stock upon allega- tion or proof that it intended to cause a board of directors to be elected, who, by their action or non-action, might prejudice the interests of minor- ity stockholders. Where one railroad company con- trols another, as a part of its system, through the ownership of stock, and operates the road of the latter com- pany in its own interest, and not in the interest of the controlled com- pany, a receiver, into whose hands both roads have passed, cannot re- cover from the controlled company expenses incurred in operating it. Phinizy v. Augusta, etc. R. Co., 62 Fed. 771 (1894). A stockholder has no standing to enjoin the sale of controlling interests in his corporation to another corpora- tion upon the ground that he appre- hends that the purchasing corpora- tion will use such control to the prejudice of minority stockholders. Ingraham v. National Salt Co., 72 App. Div. (N. Y.) 582 (1902), (76 N. Y. Supp. 1116), affirmed 179 N. Y. 556 (1904), (71 N. E. Rep. 1128). That laches may bar a minority stockholder of a corporation, controlled by another, from complaining of the diversion of traffic and misuse of prop- erty by the controlling corporation, see Alexander v. Searcy, 81 Ga. 536 (1889), (8 S. E. Rep. 630). 551 § 302 INTBBCOBPOUATB RELATIONS [part V PART V COMBINATIONS OF CORPORATIONS Article I COMBINATIONS AS AFFECTED BY PRINCIPLES OF CORPORATION LAW CHAPTER XXVIII NATURE AND FORMATION OF COMBINATIONS § 302. Definition of Term "Combination." § 303. Definition of Term "Association." § 304. Definition of Term "Trust." § 305. Popular Use of Word "Trust:" § 306. Definition of Piirase "Corporate Combination." § 307. Evolution of the Combination. § 308. Formation of Associations. § 309. Formation of Trusts. § 310. Formation of Corporate Combinations. § 311. Analysis of Principles determining Legality of Combinations. § 302. Definition of Term " Combination." — The word " combination " is used in this treatise as a generic term to de- scribe any union of corporations/ not amounting to consolida- ■ Industrial combinations are, practically, combinations of cor- porations. Tiie modern combination of capital is a corporate combina- tion. Combinations of individuals are, however, governed by the same rules of public policy, and anti-trust legislation — State and federal — is directed both against combinations 552 of corporations and individuals. The scope of this treatise includes only an examination of the principles relat- ing to combinations of corporations, but, in such examination, it is be- lieved to be both necessary and de- sirable to refer freely to all illustrative caHOs — whether of combinations of individuals or of corporations. CHAP. XXVIIl] NATURE AND FORMATION 303 tion, entered into by mutual agreement for supposed mutual advantage.' § 303. Definition of Term " Association." — The term " asso- ciation " is employed to describe that species of combination wherein two or more competing corporations unite, by agree- ment, for a special purpose of business, and conduct their affairs according to such agreement, but in which there is no community of financial interest and each corporation retains its own property and manages its own affairs.^ ■ "The union or association of two or more persons for the attainment of some common end," Century Dic- tionary sub noTn. "Combination." In Watson v. Harlem, etc. Nav. Co., 52 How. Pr. (N. Y.) 352 (1877), the Court thus discussed the meaning to be attached to the word "combine " as used in a statute forbidding certain companies to "combine " : "The word 'combine' is not to be found in either of the dictionaries of BurriU or Bouvier, and I do not find it defined in the edition of Jacobs to which I have access. Bouvier defines 'com- bination' as a union of men for the purpose of violating the law, and as a union of different elements. Jacobs, without specifically defining the word, states that 'combinations to do un- lawful acts are punishable before the unlawful act is executed; this is to prevent the consequences of combina- tions and conspiracies,' and he refers to the titles 'Confederacy' and 'Con- spiracy.' He defines confederacy to be 'where two or more combine to- gether to do any damage or injury to another, or to do any unlawful act.' As to the meaning of the word 'con- spiracy,' he says this word was for- merly used almost exclusively 'for an agreement of two or more persons falsely to indict one, or to procure him to be indicted of felony; now it is no less commonly used for the unlawful combination of workmen to raise their wages, or to refuse work- ing except on stipulated conditions.' Worcester defines 'combine' thus* 'To join together;' 'to coalesce;' 'to unite;' 'to be united;' 'to be joined in friendship or in design.' And he defines 'combination' to be a- 'union of persons for certain purposes,' 'association,' 'alliance,' 'coalition,' 'confederacy.' And Roget, in his Thesaurus, classifies the word 'com- bine' as synonymous with or belong- ing to the same class as ' unite, incor- porate, amalgaTnafe, embody, absorb, reimbody, blend, merge, fuse, melt into one, consolidate, coalesce, cen- tralize, to impregnate, to put together, to lump together.' ... I think that there can be no difficulty in deter- mining precisely what the legislature intended in using the word 'combine' in the twenty-seventh section of the act now under consideration. They did not intend to use, and did not use, that word in the strict technical legal sense which is maintained by the coun- sel for the defendants. The object of the legislature was to prevent coa- litions, unions, mutual agreements, blendings of the companies which might be organized and incorporated, under the act, for any purpose." See also ante, § 16 : "Distinction between Consolidation and Combina^ tion. " ' "The act of a number of persons who unite or join together for some special purpose or business. The union of a coihpany of persons for the transaction of designated affairs, or the attainment of some common ob- 553 305 INTERCORPORATE RELATIONS [part V § 304. Definition of Term " Trust." — A specific definition of the term " trust," as applied to industrial combinations, is: A combination of competing corporations formed through the transfer by the stockholders of several corporations to a common trustee of controlhng stock interests therein, in exchange for certificates issued by the trustee for each stock- holder's proportional equitable interest in all the stock so transferred.* § 305. Popular Use of Word " Trust." — The word " trust," as popularly used, has a much broader meaning than is indi- cated by its specific definition. It is applied generally to all combinations of industrial corporations formed for the pur- pose of regulating the price and supply of commodities.^ The ject." Black's Law Diet., sub nom. "Association." "As mercantile concerns under free- dom of trade have tended in our cities to be more and more vast and com- prehensive and absorb the smaller ones, so it is reasonable to suppose that the right of association will be made more and more available in manufacturing. In fact the two tendencies are, in substance, the same. If association is prevented by law different manufactories may be melted into one." Article in "Political Science Quarterly," vol. 3, p. 609, by Prof. Theodore W. Dwight. ' "An organization for the control of several corporations under one direction by the device of a transfer by the stockholders in each corpora- tion of at least a majority of the stock to a central committee, or board of trustees, who issue in return to such stockholders, respectively, cer- tificates showing in effect that, al- though they have parted with their stock and the consequent voting power, they are still entitled to dividends or to share in the profits — the object being to enable the trustees to elect directors in all the corpora- tions, to control and suspend at pleas- ure the work of any, and thus econ- omize expenses, regulate production 554 and defeat competition." Century Diet, sub nom. " Trust " (specific definition). A trust "is an arrangement by which the stockholders of various cor- porations place their stocks in the hands of certain trustees, and take in lieu thereof certificates showing each stockholder's equitable interest in all the stock so held. The result is twofold : 1. The stockholders thereby become interested in all the corporations whose stocks are tlms held. 2. The trustees elect the di- rectors of the several corporations." Pamphlet by Mr. S. C. T. Dodd, gen- eral solicitor Standard Oil Co., en- titled " Combinations ; Their Uses and Abuses." ^ Black's Law Diet', sub nom. "Trusts.'' In Queen Ins. Co. u. State (Tex. Qv. App. 1893) 22 S. W. Rep. 1048 (22 L. R. A. 492) the Court said : "The term 'trust' is not employed in a technical legal sense. By very recent commercial usage, the meaning of the word has been extended so as to comprehend combinations of corpora- tions or capitalists for the purpose of controlling the price of articles of prime necessity, or the charges of transportation, to the public." Pocahontas Coke Co. v. Powhatan Coal, etc. Co., 60 W. Va. 508 (1906), CHAP. XXVIIl] NATURE AND FORMATION 306 form of combination is immaterial. Associations for pooling products and corporations formed for the purpose of purchasing corporate properties have both — and with equal inaccuracy — been called " trusts." The words " trust " and " combination " are often used synonymously, and a definition of a combination as " a union of men for the purpose of violating the law," ' defines a trust as it has sometimes existed, possibly more in the past than in the present, in the popular imagination. This broad use of the word " trust " to describe combina- tions which are not in the trust form, producing confusion and sometimes unwarranted prejudice, should be avoided. The word is used in this treatise as applying specifically to the trust form of coinbination. § 306. Definition of Phrase " Corporate Combination." — The phrase " corporate combination " may be defined as a com- bination of corporations formed by the transfer of the control- ling stock interests, or the properties and good-will, of several corporations engaged in the same branch or connected branches (56 S. E. Rep. 269, 116 Am. St. Rep. 901, 10 L. R. A. (n. s.) 268): "A trust has been defined as a con- tract, combination, confederation or understanding, express or implied, between two or more persons to con- trol the price of a commodity or ser- vices for the benefit of the parties thereto, and to the injury of the public, and which tends to create a monopoly." See also State v. Fire- men's Fund Ins. Co., 152 Mo. 1 (1899), (52 S. W. Rep. 595, 45 L. R. A. 363). For definitions of the term " trust " in State anti-trust statutes, see -post, Ch. XLII. ' Bouvier's Law Diet. (Rawle's Ed.) sub nom. " Combinations." The following extract from the opinion in State v. Armour Packing Co., 173 Mo. 356, 387 (1903), (73 S. W. Rep. 645) presents an extreme view of the effect of trusts and com- binations ; " ' Competition is the life of trade.' Pools, trusts and conspir- acies to fix or maintain the prices of the necessaries of life, strike at the foundation of government ; instil a destructive poison into the life of the body politic ; wither the energies of competitors, blight individual invest- ments in legitimate business ; drive small and honest dealers out of busi- ness for themselves, and make them mere ' hewers of wood and drawers of water' for the trust; raise the cost of living and lower the price of wages ; take fronx the average American freeman the ability to supply his family with necessary, adequate and wholesome food; force the boys away from school, and into the va- rious branches of trade and labor, and the girls into workshops and other avenues of business, and make them breadwinners while they are yet almost infants, because the head of the house cannot earn enough to feed and clothe his family." 555 § 307 INTERCOEPOKATE RELATIONS [PART V of business to a single corporation, formed for the purpose, which by virtue of the transfer acquires a proprietary interest in such stock or properties.' § 307. Evolution of the Combination. — There have been three distinct steps in the development of the present cor- porate combination, brought about in an attempt to make effective the tendency of modern business life towards the concentration of corporate interests in the face of adverse judicial decisions: First. Associations of corporations for supposed mutual advantage were formed, having for their object, generally, the restriction of production and the regulation of prices. This form of corporate cooperation was usually exemplified by pooling agreements and selling agencies, which left the several corporations independent of each other, except as bound by a more or less informal agreement. Combinations of this character were declared illegal by the courts, as tend- ing to suppress competition and, consequently, as being con- trary to public policy. Second. The trust form of combination was resorted to in an attempt to avoid the effect of the decisions against associa- tions, apparently in the belief that the deposit by stockholders of their shares with a common trustee for a common purpose did not constitute a combination of corporations, because (1) The acts of the stockholders were not the acts of the corporations. (2) The stockholders of the several corporations had a right, if they saw fit, to deposit their stock with a trustee. These views, however, were not adopted, in their entirety by the courts, and the trust form of combination was con- demned, not only for the reasons stated in the case of associa- ' strictly speaking, any combina- "Combinations," from which the tion of corporations is a corporate phrase is taken, defines corporate combination. As used in this trea- combinations as follows (§ 583) : tise, however, the phrase has reference "Combinations formed by the sale rather to the form of the combination or lease of the properties, assets and than to its elements. The phrase good-will of the several parties or "corporate form of combination" corporations to one large corporation would be more exact but less con- organized for the purpose of acquiring venient. the several properties." Mr. Eddy in his treatise upon 5.56 CHAP. XXVIIl] NATURE AND FORMATION 308 tions, but because it violated fundamental principles of the law of corporations. Third. The corporate combination was then formed to avoid the effect of the decisions against the "trust." In the form of a corporation holding the stocks of the subsidiary companies it has not always withstood attack, even for rea- sons peculiar to corporation law. In the form of a corpora- tion purchasing the plants of the several companies, it seems invulnerable from that standpoint, but, in common with every form of combination, may be successfully attacked if formed for an unlawful purpose. § 308. Formation of Associations. (A) Railroad Pools: '■ An agreement between competing railroad or other trans- portation companies whereby, for the purpose of avoiding ' Pools. "A railroad pool is an agreement between competing rail- roads to apportion competing busi- ness. More precisely, it is an arrange- ment made by several railroads com- peting for business to allot to each a stated percentage of the whole com- petitive traffic, or of the receipts thereof, together with a mutual guaranty that each road shall receive its share. The purpose of pooling is to remove the incentive to com- petition. A road will hardly cut its rates to get away another's traffic if there is nothing to be gained by so doing. " Railroad pools are of two kinds : (1) Traffic pools. (2) Money pools. " I. A traffic or tonnage pool is an agreement whereby each member is guaranteed to receive and can receive only a stated percentage of the com- petitive traffic. Taking a series of years, the percentages of freight carried by competing and well estab- lished lines between two important points will not vary greatly. The distribution of business is fairly con- stant. It is, therefore, easy for the makers of the pool to determine the proportion of the traffic which each member should receive. A pool to be permanent should be based upon natural percentages. A traffic pool only applies to competitive traffic and sometimes only to through competi- tive traffic. Local business is un- affected. In fact, rate wars with regard to local competitive traffic have taken place between members of » through traffic pool. When the time for adjusting accounts ap- proaches, if any member has received less than its allotment of the traffic, sufficient freight is diverted from a road which has received in excess of its percentage to make up the de- ficiency. Freight diverted for this purpose is, if possible, freight not specially routed. But sometimes it is necessary to forward contrary to the preferences of shippers. This makes trouble, and was so great an objection to the traffic pool that it was largely abandoned, even before the enactment of the statute against pooling. . . . " II. A money pool is an agree- ment whereby each member is guar- anteed to receive and can receive only a stated percentage of the receipts 557 § 308 INTERCORPORATE RELATIONS [PART V competition, the joint traffic or earnings are divided between the companies in fixed proportions, constitutes " pooling." Railroad pools are of two kinds: (1) Traffic pools, wherein an agreed proportion of the traffic or business of all the companies is allotted to each cor- poration.^ (2) Money pools, wherein all the earnings or profits are placed in a common fund or pool and divided between the corporations in the proportions stated in the agreement.^ Manufacturing corporations may also, if not unlawful, " pool " their products or earnings, but the term is generally used with reference to the agreements of railroad or other transportation companies.^ (B) Industrial Associations: Associations of competing industrial corporations have for their primary object the restriction of competition. This object has been sought to be attained under agreements in various forms: (1) Agreements prescribing a scale of prices at which the products of the several companies shall be sold.^ from competitive traffic. This type of the earnings might have been at- of pool — called a joint purse — has tractive to a road in need of funds, been common in England. It may "The money paid into a money be based either upon gross or net pool is periodically distributed by the earnings. The percentages of the official in charge according to the members are, of course, determined stipulated allotments. In this type by past earnings, but they take their of pool each road takes all the business allotments entirely irrespective of offered and conducts its affairs inde- actual earnings during the pool's pendently of the other members, existence. But as one road might except as it pools its receipts in incur extra expenses in moving a far whole or part." greater bulk of traffic than its propor- From American Railroad Rates, tion of the earnings called for, it was by Walter C. Noyes, Boston, 1905, customary, during the pooling period pp. 137-141. of the American railroads, for each ' EcUpse Towboat Co. v. Pontchar- road to retain a third or a half of the train R. Co., 24 La. Ann. 1 (1872). receipts from the pooled business to ^ Hare v. London, etc. R. Co., cover the actual expenses connected 2 Johns. & H. 80 (1861), (30 L. J. Ch. therewith. The remainder of the 817, 7 Jur. (x. s.), 1145). receipts went into the pool. In some ' For consideration of the legality of cases the roads were permitted to "pooling," see post, § 364a: Asaocia^ retain but a very small percentage in tiona of Railroad Companies. — (0) order to avoid the temptation to Pools." compete for that alone. A moiety * Dolph u. Troy Laundry Mach. 558 CHAP. XXVIIl] NATURE AND FORMATION § 309 (2) Agreements limiting the amount of production of each company.' (3) Agreements appointing a common selling agent to dispose of the products of all the companies at fixed prices, or at prices adjusted by a supervising committee.^ (4) Agreements for the purchase of a company's entire production for a term of years.' (5) Agreements to give rebates to members of association.* Many other forms of agreement, modifications of those stated, have also been adopted. § 309. Formation of Trusts. — The following elements are essential to the formation and existence of the trust form of combination: (1) The deposit by the holders of a majority of the stock of the several corporations to be combined of their shares ■^th a trustee or trustee body, and the transfer of the legal title thereof to the trustee. (2) The issue and delivery by the trustee to the stockholders, in heu of the stock deposited, of trust certificates showing the proportional interest of each stockholder in all the stock de- posited. (3) The execution of a trust agreement ' defining the rights Co., 28 Fed. (553) (1886) ; De Witt Coal Co., 68 Pa. St. 173 (1871), (8 Wire Cloth Co. v. New Jersey Wire Am. Rep. 159) ; Skrainka v. Schar- ClothCo., 16Daly(N.Y.),529(1891), ringhausen, 8 Mo. App. 522 (1880); (14 N. Y. Supp. 277) ; Cohen v. Berlin Central Shade Roller Co. v. Cushman, & Jones Env. Co., 38 App. Div. (N. 143 Mass. 353 (1887), (9 N. E. Rep. Y.) 499 (1899), (56 N. Y. Supp. 588) ; 629) ; Cummings v. Union Blue Stone Nester v. Continental Brewing Co., 161 Ass'n, 15 App. Div. (N. Y.) 602 Pa. St. 473 (1894), (29 Atl. Rep. 102) ; (1897), (44 N. Y. Supp. 787). See Herriman v. Menzies, 115 Cal. 16 also Pocahontas Coke Co. v. Pow- (1896), (44 Pao. Rep. 660, 56 Am. hatan Coal, etc. Co., 60 W. Va. 508 St. Rep. 82, 35 L. R. A. 318) ; Texas (1906), (56 S .E. Rep. 273, 116 Am. St. Standard Oil Co. v. Adoue, S3 Tex. Rep. 901, 10 L. R. A. (n. s.) 268). 650 (1892), (19 S. W. Rep. 274, 29 ' Live Stock Ass'n v. Levy, 54 Am St. Rep. 690, 15 L. R. A. 598). N. Y. Super. Ct. 32 (1886) ; Pacific 'Morris Run Coal Co. v. Barclay Factpr Co. d. Adler, 90 Cal. 110(1891), Coal Co., 68 Pa. St. 173 (1871), (8 (27 Pac. Rep. 36, 25 Am. St. Rep. Am. Rep. 159); Santa Clara Valley 102). Mill, etc. Co. V. Hayes, 76 Cal. 387 • Mogul Steamship Co. v. Mc- (1888), (18 Pac. Rep. 391, 9 Am. St. Gregor, L. R. 17 App. Cas. 25 (1891), Rep. 211). (61 L. J. R. 295). 2 Morris Run Coal Co. v. Barclay. » The trust agreement in the case of 559 § 310 INTERCOKPORATE RELATIONS [pART V of the parties; providing, usually, for the election and suc- cession of trustees, their term of office and the transfer of trust certificates, and necessarily providing (A) That the trustee shall vote the stock deposited and elect the directors of the several corporations. (B) That the trustee shall receive all dividends from the several corporations and place them in a common fund. (C) That the trustee shall make dividends from this fund — when sufficient for the purpose — upon the trust certificates. § 310. Formation of Corporate Combinations. — As indi- cated by the definition, corporate combinations generally take one of two distinct forms, and are usually created in the manner following : (1) In pursuance of an agreement between persons in- terested in competing corporations, a holding corporation is organized, under the laws of a State permitting its corpora- tions to acquire and hold the stock of other corporations, with a capital stock at least equal to the aggregate capital of the several corporations. This corporation issues its own shares, upon an agreed basis, in exchange for the shares of the several corporations, being certain to obtain at least a majority of the shares of each corporation. All the corpora- tions continue in existence, and the subsidiary companies are controlled by the holding corporation, which derives its income from the dividends paid by them. In organizing this form of corporate combination the dealings are entirely between the holding corporation and the stockholders of the several com- panies.^ (2) As a part of a plan for combining competing corporate interests, a purchasing corporation is organized, with a share capital sufficiently large for the purpose, which purchases the Sugar Trust is stated at length in ' Robinson v. Holbrook, 148 Fed. People ■!). North River Sugar Ref'g Co., 109 (1906): "Ordinarily, corporate 121 N. Y. 582 (1890), (24 N. E. Rep. combinations effected through a 834, 18 Am. St. Rep. 483, 9 L. R. A. holding corporation are organized 33), and that in the case of the Stand- by dealings which are entirely between ard Oil Trust, in State v. Standard Oil the holding corporation and the share- Co., 49 Ohio St. 137 (1892), (30 N. E. holders of the several companies Rep. 279, 34 Am. St. Rep. 541, whose shares are to be held." Citing 36 Am. & Eng. Corp. Cas. 1, 15 L. R. this section. A. 145). 560 CHAP. XXVIIl] NATUKE AND FORMATION § 311 the properties — plants, stock in trade and good-will — of the several corporations and issues its own stock in payment therefor. Preferred stock is generally issued for tangible assets; common stock, for good- will. The shares are usually delivered to the vendor corporations, but may be directly distributed among their stockholders. The purchasing corporation, as the result of this process, becomes the absolute owner of the property of all the cor- porations, and may continue or suspend the business there- tofore carried on by them, and otherwise manage its affairs, without restriction or supervision except by the State and its own stockholders. This form of corporate combination is, in its creation, wholly between the two corporations, vendor and purchaser, and is least liable of all to violate any principle of corporation law. In particular instances, this form has been modified and cor- porate properties have been taken over under lease instead of sale. So, corporate combinations have been brought about by uniting the two methods — by acquiring both the stock and the property of the several corporations, or the stock of some and the property of others. § 311. Analy^sis of Principles determining Legality of Combi- nations. — The legality of a combination of corporations in any form — trust, corporate combination or simple association — ■ must be ascertained by the application of the following nega- tive principles: (1) A combination of corporations is illegal which contravenes the principles of law governing corporations. In applying this principle it is of importance to ascertain: (A) The manner of organization. (B) The powers of the companies. (2) A combination is illegal which contravenes rules of public policy} In applying this principle it is of essential importance to ascertain: (A) The purposes of the combination — as a fact. (B) The rules of public policy — as a matter of law. ' A combination amounting to a combinations of capital are seldom conspiracy is also illegal, but modern conspiracies. See post, § 328. 561 § 313 INTERCORPORATE RELATIONS [PART V (C) The bearing of the rules upon the facts. (3) A combination is illegal which contravenes any statutory •provision. The apphcation of this axiomatic principle, in any particu- lar case, may depend upon: (A) The form and object of the combination. (B) The constitutionality and construction of the statute. CHAPTER XXIX PRINCIPLES OF CORPOKATION LAW AFFECTIIJG ASSOCIATIONS AND TRUSTS § 312. Legality of Associations not generally a Question of Corporation Law. § 313. In Formation of Trust, State regards Acts of Stockholders as Acta of Corporation. § 314. Trust invalid as involving Partnership of Corporations. § 315. Trust invalid as involving Delegation of Corporate Powers. § 316. Trust invalid as involving Practical Consolidation. § 317. Rights and Liabilities growing out of Trusts. § 312. Legality of Associations not generally a Question of Corporation Law. — The association of several corporations for the promotion of their common interests is merely the ex- ercise of the general right to contract, pertaining to every corporation within the limitations of its charter. Corporations, retaining the management of their affairs, may generally — so far as principles of corporation law are concerned — enter into such agreements with other corpora- tions as they may deem expedient. Such agreements are sel- dom ultra vires, except in the broad sense that an unlawful act is always ultra vires. The test of illegality, however, lies in the application of other principles than those of corporation law. § 313. In Formation of Trust, State regards Acts of Stock- holders as Acts of Corporation. — One reason for adopting the trust form of combination was the assumption that because the corporations were not parties to the agreement between 562 CHAP. XXIX] CORPORATION LAW AFFECTING TRUSTS § 313 the stockholders and the trustee, they did not, themselves, participate in the combination. This assumption was based upon the legal fiction that a corporation is a legal entity separate and distinct from the natural persons who compose it. This fiction is necessary for the protection and enforcement of rights between the corporation, its stockholders and persons with whom it has dealings, but it has no place in the relations of a corporation with the State which created it. The State grants the charter of incorporation to the corporators and may take that charter away from them. It deals with a corporation as a collection of its members, and treats their united acts as the acts of the corporation, because, from its point of view, they are the cor- poration. A trust, formed by the stockholders of corporations, in the eyes of the State is the creation of the corporations. In the Sugar Trust Case,^ the Court of Appeals of New York said: "The abstract idea of a corporation, the legal entity, the impalpable and intangible creation of human thought,* is itself a fiction, and has been appropriately de- scribed as a figure of speech. It serves veiy well to desig- nate in our minds the collective action and agency of many individuals as permitted by the law; and the substantial in- quiry always is what, in a given case, has been that collective action and agency. As between the corporation and those with whom it deals, the manner of its exercise usually is ma- terial, but as between it and the State, the substantial inquiry is only what that collective action and agency has done, what it has, in fact, accomplished, what is seen to be its effective work, what has been its conduct. It ought not to be otherwise. The State gave the franchise, the charter, not to the impalpable, intangible and almost nebulous fiction of our thought, but to the corporators, the individuals, the acting and living men, to be used by them, to redound to their benefit, to strengthen their hands and add energy to their capital. If it is taken away, it is taken from them as individuals and corporators, and the legal fiction disappears. The benefit is theirs, the punishment is theirs, and both must attend and depend upon their conduct; ' People V. North River Sugar (24 N. E. Rep. 834, 18 Am. St. Rep. Ref'g Co., 121 N. Y. 621 (1890), 483, 9 L. R. A. 33). 563 §314 INTEECOBPOEATE RELATIONS [PAET V and when they all act, collectively, as an aggregate body, with- out the least exception, and so acting, reach results and ac- complish purposes clearly corporate in their character, and affecting the vitality, the independence, the utility, of the corporation itself, we cannot hesitate to conclude that there has been corporate conduct which the State may review, and not be defeated by the assumed innocence of a convenient fiction." I § 314. Trust invalid as involving Partnership of Corpora- tions. — The primary object in forming a trust is to concentrate the control of several competing corporations into a single board. The several corporations, through the instrumentality * In the case of State v. Standard Oil Co., 49 Ohio St. 137 (1892), (30 N. E. Rep. 279, 34 Am. St. Rep. 541, 15 L. R. A. 145, 36 Am. & Eng. Corp. Cas. 1), similar conclusions were reached by the Supreme Court of Ohio. Judge Minshall said (p. 177) : "The general proposition that a cor- poration is to be regarded a-s a legal entity, existing separate and apart from the natural persons composing it, is not disputed; but that the state- ment is a mere fiction, existing only in idea, is well understood, and not controverted by any one who pre- tends to accurate knowledge on the subject. It has been introduced for the convenience of the company in making contracts, in acquiring prop- erty for corporate purposes, in suing and being sued, and to preserve the limited liability of the stockholders, by distinguishing between the cor- porate debts and property of the com- pany, and of the stockholders in their capacity as individuals. All fictions of law have been introduced for the purpose of convenience and to sub- serve the ends of justice. It is in this sense that the maxim. In fictione juris svbsistit aequitas, is used, and the doctrine of fictions applied. But when they are urged to an intent and purpose not within the reason and policy of the fiction they have always 564 been disregarded by the courts. . . (p. 179) Now so long as a proper use is made of the fiction that a corporation is an entity apart from its shareholders, it is harmless, and because convenient, shoiild not be called in question ; but when it is urged to an end subversive of its policy, or such is the issue, the fiction must be ignored, and the question determined, whether the act in ques- tion, though done by shareholders, that is to say, by the persons united in one body, was done simply as individuals and with respect to their individual interests as shareholders, or was done ostensibly as such, but, as a matter of fact, to control the corpora- tion and affect the transaction of its business, in the same manner as if the act had been clothed with all the for- malities of a corporate act. This must be so, because the stockholders, having a dual capacity, and capable of acting in either, and a possible interest to conceal their character when acting in their corporate ca- pacity, the absence of the formal evi- dence of the character of the act cannot preclude judicial inquiry on the subject. If it were otherwise, then, in one department of the law, fraud would enjoy an immimity awarded to it in no other." CHAP. XXIX] CORPORATION LAW AFFECTING TRUSTS § 314 of the trustees, are managed for a common purpose, and their stockholders divide the profits of a joint enterprise. The whole arrangement constitutes a partnership of corporations.' As said by the Supreme Court of Tennessee in the Cotton Seed Oil Trust Case: ^ " A careful examination of this agree- ment discloses every material element of the contract of partner- ship. The absolute ownership of the corporate property, the mills, machinery, etc., is not conveyed to the partnership, nor is this necessary. The beneficial use of all such property is surrendered to the common purpose. The provisions for the complete possession, control and use of the properties of the several corporations by the partnership or syndicate is perfect. Nothing is left to the several corporations but the right to re- ceive a share of the profits and participate in the management and control of the consolidated interests as members of the new association. The contract is, both technically and in its essential character, a partnership in so far as it is possible for corporations to form such an association." A trust, therefore, constituting a partnership of corpora- tions, must depend for its validity upon the power of the cor- porations to form a partnership. No such implied power exists. A partnership is inconsistent with the scope, object, powers and obligations of a corporation. It interferes with the management of the affairs of a corporation by its own officers, impairs the authority of the stockholders, involves > Trusts have been held to amount St. Rep. 317). In the last case the to partnerships of corporations in the Court said : "It will thus be seen that following leading cases : Mallory v. the agreement in question makes pro- Hanaur Oil Works, 86 Tenn. 598 vision for welding together all the (1888), (8 S. W. Rep. 396, 20 Am. & interests engaged in the business Eng. Corp. Cas. 478) ; People v. North named in the agreement into one River Sugar Ref 'g Co., 121 N. Y. 582 giant combination or partnership, (1890), (24 N. E. Rep. 834, 18 Am. under the absolute dominion and con- st. Rep. 483, 9 L. R. A. 33) ; State v. trol of a board of nine trustees. . . . Standard Oil Co., 49 Ohio St. 137 The agreement was illegal as pro- (1892), (30 N. E. Rep. 279, 34 Am. viding for a partnership among cor- St. Rep. 641, 15 L. R. A. 145, 36 Am. porations. It is a violation of the & Eng. Corp. Cas. 1) ; American law for corporations to enter into Preservers Trust v. Taylor Mfg. Co., partnership." 46 Fed. 152 (1891) ; Bishop v. Amer- ^ Mallory v. Hanaur Oil Works, 86 ican Preservers Co., 157 111. 284 Tenn. 602 (1888), (8 S. W. Rep. 396, (1895), (41 N. E. Rep. 765, 48 Am. 20 Am. & Eng. Corp. Cas. 478). 565 §315 INTERCOEPOEATE EELATIONS [PAET V the corporation in outside enterprises, and is opposed to public policy.' In the absence of express legislative authority to enter a partnership, it is ultra vires of a corporation to enter a trust.^ § 315. Trust invalid as involving Delegation of Corporate Powers. — Statutes relating to the organization and manage- ment of corporations contain provisions for their control, primarily, by their stockholders, and, immediately, by their directors, and indicate the policy of the State that the affairs of corporations should be conducted, really as well as formally, by their own officials. The formation of a trust substitutes the trustees as the governing body and makes the directors merely tools.^ It involves the delegation of corporate powers. ' United States: American Pre- servers Trust V. Taylor Mfg. Co., 46 Fed. 152 (1891). Alabama : Central R., etc. Co. v. Smith, 76 Ala. 572 (1884), (52 Am. Rep. 353). Georgia: Gunn v. Central R., etc. Co., 74 Ga. 509 (1885). Illinois: Bishop v. American Pre- servers Trust, 157 111. 284 (1895), (41 N. E. Rep. 765, 48 Am. St. Rep. 317) ; Marine Bank v. Ogden, 29 111. 248 (1862). Massachusetts : Whittendon Mills V. Upton, 10 Gray, 582 (1858), (71 Am. Dec. 681). New York : People v. North River Sugar Ref g Co., 121 N. Y. 623 (1890), (24 N. E. Rep. 834, 18 Am. St. Rep. 483, 9 L. R. A. 33) : "It is a violation of the law for corporations to enter into n partnership. The vital characteristics of the corporation are of necessity drowned in the para- mount authority of the partnership." See also New York, etc. Canal Co. v. Fulton Bank, 7 Wend. 412 (1831). Ohio : State v. Standard Oil Co., 49 Ohio St. 137 (1892), (30 N. E. Rep. 279, 34 Am. St. Rep. 541, 15 L. R. A. 145, 36 Am. & Eng. Corp. Cas. 1). Tennessee : Mallory v. Hanaur Oil Works, 86 Tenn. 598 (1888), (8 S. W. 566 Rep. 396, 20 Am. & Eng. Corp. Cas 478). ' Southern Electric Securities Co. V. State (Miss. 1907), 44 So. Rep. 786 : "A combination of two or more cor- porations for a legitimate purpose, and which is unobjectionable as a combination, may be subject to attack if a trust form is adopted, on the ground that each constituent cor- poration has violated some provision of its charter or some principle of the laws of its creation." ' In Gould V. Head ("American Cattle Trust" Case), 38 Fed. 888 (1889), (reversed on appeal, 41 Fed. 240 (1890)), Judge Hallett said : "The corporations thus a-ssociated re- nounced autonomy, but not their existence. They committed their affairs into the hands of the trust, because they could be better managed by the trust than by themselves. They still lived and owned their property, but the trust was a regency of their own creation, with absolute and irrevocable power over all their concerns. Ten corporations are men- tioned in the affidavits as thus united in the trust, not by the direct act of the corporations, but by transfer of their stock to the trust, or to persons holding in its interest. And it is CHAP. XXXl] CORPORATION LAW AFFKCTING TRUSTS § 316 is against public policy, and is inconsistent with the purposes for which corporations are created. In the Case of the Standard Oil Trust,^ the Supreme Court of Ohio said: " The law requires that a corporation should be controlled and managed by its directors in the interests of its own stockholders, and conformable to the purpose for which it was created by the laws of its State." This principle underlies the objection that trusts amount to corporate partnerships, but is applicable, with equal force, if any element necessary to constitute a partnership be lacking.^ § 316. Trust invalid as involving Practical Consolidation. — A combination of corporations by means of a trust amounts to a practical consolidation. The actual results of a union of corporate interests are obtained without subjection to the restraints imposed by the State when authorizing corpora- tions to consolidate. Under consolidation statutes, the re- sult may be a new corporation, owing obligations to the State and with limitations imposed upon the amount of its stock. The result of the formation of a trust is an irresponsible board of trustees, and a virtual doubling of paper capital by the issue of trust certificates for shares. Consolidation, without statutory authority, is opposed to public policy. Substantial consolidation is equally against urged that by some general expression 279, 34 Am. St. Rep. 541, 36 Am. & in the articles of association the trust Eng. Corp. Cas. 1, IS L. R. A. was given absolute authority to sell 145). and dispose of the stock in its dis- ^ State v. Standard Oil Co., 49 cretion. But this interpretation is Ohio St. 185 (1892), (30 N. E. Rep. not in accord with the purpose for 279, 34 Am. St. Rep. -541, 36 Am. & which the trust was organized. The Eng. Corp. Cas. 1, 15 L. R. A. 145) : stock was transferred to the trust *'That the nature of the agreement not for the purpose of being sold, is such as to preclude the defendant but to give control of the corporation ; from becoming a party to it, is, we to make the oflBcers puppets in the think, too clear to require much con- hands of the trust, and thus substi- sideration by us. In the first place tute the latter as the governing body whether the agreement should be of the corporation." regarded as amounting to a partner- See also People v. North River ship between the several companies, Sugar Ref 'g Co., 121 N. Y. 582 (1890), limited partnerships and individuals, (24 N. E. Rep. 834, 18 Am. St. Rep. who are parties to it, it is clear that 483, 9 L. R. A. 33). its observance must subject the de- ' State V. Standard Oil Co. 49 fendant to a control inconsistent with Ohio St. 185 (1892), (30 N. E. Rep. its character as a corporation." 567 § 316 INTERCORPORATE RELATIONS [PART V public policy, for it involves a failure in the performance of cor- porate duties. Judge Finch, in the Siigar Trust Case,^ stated, in very vigorous language, his opinion of the tendencies of trusts and similar combinations and their effect upon the public interests: "As corporate grants are always assumed to have been made for the public benefit, any conduct which destroys their normal functions, and maims and cripples their separate activity, and takes away their free and independent action, must so far disappoint the purpose of their creation as to affect unfavorably the public interest; and that to a much greater extent when, beyond their own several aggregations of capital, they compact them all into one combination, which stands outside of the ward of the State, which dominates the range of an entire industry, and puts upon the market a capital stock proudly defiant of actual values, and capable of an unlimited expansion. It is not a sufficient answer to say that similar results may be lawfully accomplished; that an individual having the necessary wealth might have bought all these re- fineries, manned them with his own chosen agents, and managed them as a group at his sovereign will; for it is one thing for the State to respect the rights of ownership and protect them out of regard to the business freedom of the citizen, and quite another thing to add to that possibility a further extension of those consequences by creating artificial persons to aid in pro- ducing such aggregations. The individuals are few who hold in possession such enormous wealth, and fewer still who peril it all in a manufacturing enterprise; but if corporations can combine, and mass their forces in a solid trust or partner- ship, with little added risk to the capital already embarked, without limit to. the magnitude of the aggregation, a tempt- ing and easy road is opened to enormous combinations, vastly 'exceeding in number and in strength, and in their power over industry, any possibilities of individual ownership; ^ and the ' People V. North River Sugar reasoning, however, is inconclusive. Ref'g Co., 121 N. Y. 625 (1890), (24 The State may properly limit the N. E. Rep. 834, 18 Am. St. Rep. capital of corporations and may re- 483, 9 L. R. A. 33). strain their combination. But, in ^ This language seems prophetic, the absence of such limitation or viewed in the light of the present day restraint, the tendency of combina- of billion-dollar combinations. The tiona to produce "enormous" "aggre- 568 CHAP. XXIX] CORPORATION LAW AFFECTING TRUSTS §317 State, by the creation of the artificial persons constituting the elements of the combination, and failing to limit and restrain their powers, becomes itself the responsible creator, the volun- tary cause of an aggregation of capital which it simply endures in the individual as the product of his free agency. What it may bear is one thing, what it should cause and create is quite another." § 317. Rights and Liabilities growing out of Trusts. — While the rights and liabilities of trustees and certificate holders, and the nature of trust certificates and privileges attaching thereto, have received judicial consideration,^ — especially in the embryonic stage of the trust, — it must be borne in mind, in examining the decisions, that trusts have now been generally declared invalid, and that the courts may decline to lend their aid to any of the parties to an illegal enterprise.^ The holders of trust certificates are the equitable owners of shares deposited.' The certificates represent property, and it has been held that although the trust is illegal the rights of certificate holders will be respected by the courts ; * that they gations " of capital in no way indi- cates their illegality. The words are merely relative, and no principle of the common law limits the amount of property to be held by a person or private corporation. ^ I. Rights of trustees. The trustees hold the stock in the several corporations as trustees and not as vendees. People v. North River Sugar Ref 'g Co., 121 N. Y. 582 (1890), (24 N. E. Rep. 834, 18 Am. St. Rep. 483, 9 L. R. A. 33). Their right to sell the shares so held depends upon the terms of the trust agreement. Trustees authorized by the agreement "to acquire, receive, hold and dispose of" such shares have power to sell them to third persons. Gould v. Head, 41 Fed. 240 (1890), reversing 38 Fed. 886 (1889). Compare People v. North River Sugar Ref 'g Co., 54 Hun (N. Y.), 354(1889), (3 N.Y. Supp. 401). II. Transferability of certificates. Trust certificates are transferable like shares of stock. Cameron v. Havemeyer, 25 Abb. N. C. 438 (1890), (12 N. Y. Supp. 126). See also Gould V. Head, 41 Fed. 240 (1890). Where trust certificates are made transferable upon the books of the trust, a trustee can be compelled to make the transfer and to issue a new certificate to the transferee. Rice v. Rockefeller, 134 N.Y. 174 (1892), (31 N. E. Rep. 907,' 30 Am. St. Rep. 658, 17 L. R. A. 237). See also as to the nature of trust certificates, State v. American Cotton Oil Trust, 40 La. Ann. 8 (1888), (3 So. Rep. 409). ' Bishop V. American Preservers Co., 157 111. 284 (1895), (48 Am. St. Rep. 317, 41 N. E. Rep. 765); American Biscuit, etc. Co. v. Klotz, 44 Fed. 721 (1891). ' People V. North River Sugar Ref 'g Co., 121 N. Y. 582 (1890), (24 N. E. Rep. 834, 18 Am. St. Rep. 483, 9 L. R. A. 33). * State V. American Cotton Oil Trust, 40 La. Ann. 8 (1888), (3 So. Rep. 409) : "If, as alleged, these cer- 569 § 318 INTEECORPOBATE RELATIONS [PAET V are entitled to have the property and business of the trust placed in the hands of a receiver for the purpose of winding up its affairs.' CHAPTER XXX PBINCIPLES OF CORPORATION LAW AFFECTING CORPORATE COMBINATIONS § 318. Corporate Combinations by Means of Purchasing Corporations — In General. § 319. Issue of Stock for Property in Formation of Corporate Combination. § 320. Issue of Stock for Good-will in Formation of Corporate Combination. § 321. Over- valuation of Property acquired by Issue of Stock. § 322. Power of Vendor Corporations to sell Properties for Stock of Purchasing Corporation. § 323. Corporate Combinations through Formation of Holding Corporations. § 318. Corporate Combinations by Means of Purchasing Cor- porations — In General. — Any purchase by one corporation of the plants and properties of other companies involves, in a sense, a combination of interests. The separate properties are united, and the business theretofore carried on by the different corporations is conducted by one. The result may be the same whether the several plants are purchased from time to time as incidental to the development and extension of the business of the purchasing corporation, or whether they are t^ken over at one time by a corporation formed for that express purpose. The phrase " corporate combination" is, however, only applicable in the latter case. The methods adopted in forming corporate combinations of this character vary in detail, but usually follow the forms out- lined in a preceding section.^ tificates have been taken as the price on of any illegal business, yet they or in exchange for ten million dollars undoubtedly do represent an interest of property transferred to the trust, in the property referred to, and, as then, whatever be their validity and such, have a legal and real value.'' effect as shares of stock, whether or * Cameron v. Havemeyer, 25 Abb. not they confer on the holders the N. C. (N. Y.) 438 (1890), (12 N. Y. privileges of corporate stockholders, Supp. 126). or whether or not they confer the 2 See ante, § 310: "Formation of right to participate in the carrying Corporate CombiruUiona." 570 CHAP. XXX] LAW AFFECTING CORPORATE COMBINATIONS § 319 The principles of corporation law, applicable in the forma- tion of corporate combinations, relate, generally, to the power of the purchasing corporation to issue stock for property, including good- will, and the method of valuing such property; and to the power of the selling corporations to exchange their property for stock in another corporation. § 319. Issue of Stock for Property in Formation of Corporate Combination. — In the formation of a corporate combination, payment for the plants and properties taken over is nearly always made in the stock of the purchasing corporation. The available cash is often required for a working capital and, moreover, the payment of cash for plants would elimi- nate the vendor corporations from the transaction. A cor- porate combination, while in the form of a purchase and sale of properties, in reality is a union of interests, and the issue of stock of the purchasing corporation, directly or indirectly, to the stockholders of the several companies, accomplishes the double purpose of paying for the plants acquired and of retain- ing the interests of the old stockholders in the new corporation. The transfer of property for an original issue of stock is, strictly spea.king, a payment of an infonmal subscription, the term " sale " applying more exactly to the transfer of stock alread}' issued. The terms "purchase" and "sale" are, how- ever, in common usage, applied to the acquisition by one cor- poration of the properties of others in exchange for its stock. The right to issue stock for any property which a corpora- tion has power to acquire is clearly established.* Questions ' The following cases are merely Coe v. East & West R. Co., 52 Fed. 531 illustrative of the current of author- (1892). ity : Alabama : Frenkel v. Hudson, 82 United States: Washburn v. Na- Ala. 158 (1887), (2 So. Rep. 758, 60 tional Wall Paper Co., 81 Fed. 17 Am. Rep. 736). (1897) ; Northwestern Mutual Life Georgia : Hayden v. Atlanta Cotton Ins. Co. i;. Exchange Real Est. Co., Factory, 61 Ga. 233 (1878). 70 Fed. 155 (1895); Foreman v. Illinois: FarweU v. Great West. Bigelow, 4 Cliff. 508 (1878). See Tel. Co., 161 111. 522 (1896), (44 N. E. also Loud V. Pomona, etc. Co., 153 Rep. 891) ; Reichwald v. Commercial U. S. 564 (1894), (14 Sup. Ct. Rep. Hotel Co., 106 lU. 439 (1883). 928); Coit v. Gold Amalgamating Indiana: Coffin v. Ransdell, 110 Co., 119 U. S. 343 (1886), (7 Sup. Ct. Ind. 417 (1887), (11 N. E. Rep. 20) ; Rep. 231) ; Branch v. Jesup, 106 U. S. Bruner v. Brown, 139 Ind. 600 (1894), 468 (1882), (1 Sup. Ct. Rep. 495) ; (38 N. E. Rep. 318). 571 §319 INTERCORPORATE RELATIONS [part V may arise as to the valuation of property taken, but the power of a corporation to agree with a subscriber to receive property in payment for stock cannot be questioned at the present day. Only where the governing statute expressly requires payment in money is money's worth insufficient.' In form, the transaction is direct. The property is trans- ferred to the corporation, and the stock is issued in exchange therefor. The formaUty of paying a subscription in money and immediately paying back the money for property is entirely unnecessary.^ Statutes have been passed in many States authorizing corporations, under prescribed conditions, to purchase prop- erty by the issue of stock, and to accept property in payment Kansas: Walbum v. Chenault, 43 Kan. 352 (1890), (23 Pac. Rep. 657). Kentucky: Phillips v. Covington, etc. Bridge Co., 2 Mete. 219 (1859). Louisiana: Edwards v. Bringier Sugar Ext. Co., 27 La. Ann. 118 (1875). Maryland: Brant v. Ehlen, 59 Md. 1 (1882). Massachusetts: New Haven, etc. Co. u. Linden Spring Co., 142 Mass. 349 (1886), (7 N. E. Rep. 773); Wyman v. American Powder Co., 8 Cush. 168 (1851). Michigan : Young v. Erie Iron Co., 65 Mich. Ill (1887), (31 N. W. Rep. 814). Minnesota: Hastings Malting Co. ■o. Iron Range Brewing Co., 65 Minn. 28 (1896), (67 N. W. Rep. 652). Missouri: Woolfolk v. January, 131 Mo. 620 (1895); Chouteau v. Dean, 7 Mo. App. 210 (1879). Nebraska: Troup v. Horback, 53 Neb. 795 (1898), (74 N. W. Rep. 326). New Jersey : Weatherby v. Baker, 35 N. J. Eq. 501 (1882). See New Jersey statute in a following note. New York : Van Cott v. Van Brunt, 82 N. Y. 535 (1880); Barr v. New York, etc. R. Co., 125 N. Y. 263 (1891), (26 N. E. Rep. 145) ; Gamble 572 V. Queens County Water Co., 123 N. Y. 91 (1890), (25 N. E. Rep. 201). North Carolina: Clayton v. Ore Knob Co., 109 N. C. 385 (1891), (14 S. E. Rep. 36, 9 L. R. A. 669). Ohio : Goodin v. Evans, 18 Ohio St. 150 (1868). Pennsylvania: Shannon v. Steven- son, 173 Pa. St. 419 (1896), (34 Atl. Rep. 218) ; Johnston v. Markle Paper Co., 153 Pa. St. 189 (1893), (25 Atl. Rep. 560). Tennessee: Shield v. Clifton Hill Land Co., 94 Tenn. 123 (1894), (28 S. W. Rep. 668, 45 Am. St. Rep. 700, 26 L. R. A. 509) ; Searight v. Payne, 6 Lea, 283 (1880). Washington: Kroenert v. Johns- ton, 19 Wash. 96 (1898), (52 Pac. Rep. 605). England: Re Wragg, 1 Ch. Div. 796 (1897), Spargo's Case, L. R. 8 Ch. App. 407 (1873) ; Larocque v. Beau- chemin, App. Cas. 358 (1897) ; Burk- inshaw v. Nichols, L. R. 3 App. Cas. 1004 (1878). ' In Connecticut, until 1901, the statute required that twenty per cent of the subscriptions to all joint stock companies should be paid in in cash. ' Chouteau v. Dean, 7 Mo. App. 214 (1879) : "It is not now questioned that a corporation may issue its stock CHAP. XXX] LAW AFFECTING CORPORATE COMBINATIONS §320 of subscriptions.^ The conditions of such statutes are limi- tations upon the powers of the corporations. § 320. Issue of Stock for Good-will in Formation of Cor- porate Combination. — In combining the interests of different business establishments into a single corporation, it is essential that they should be taken over as going concerns. The pur- chasing corporation is organized for the purpose of acquiring, not only the plants and tangible assets of the several companies, but also their business, and issues its stock — usually the com- mon shares — for the purchase of their good- will. The good-will of a business is property for which stock may lawfully be issued, either at common law or under stat- utes authorizing the issue of stock " for property actually received " ^ by the corporation ' It has a value independent by way of pajrment in the purchase of property. This is on the principle that there is no need tor the round- about process of first issuing the stock for money and then paying the money for the property. " See also Liebke v. Knapp, 79 Mo. 22 (1883), (49 Am. Rep. 212) ; Spargo's Case, L. R. 8 Ch. App. 407 (1873). ' New Jersey. Corporation Act of 1896, § 49, p. 293 : "Any corporation formed under this act may purchase mines, manufactories or other prop- erty necessary for its business, or the stock or any company or companies owning, mining, manufacturing or producing materials, or other property necessary for its business, and issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be full-paid stock and not liable to any further call, neither shall the holder thereof be liable for any further payment under any of the provisions of this act; and, in the absence of actual fraud in the transaction, the judg- ment of the directors as to the value of the property purchased shall be conclusive. " The provision of the English Com- panies Act of 1867, 30 and 31 Vict. ch. 131, I 25, is as follows: "Every share in any company shall be deemed and taken to have been issued and to be subject to the payment of the whole amount thereof in cash, unless the same shall have been otherwise determined by a contract duly made in writing, and filed with the registrar of joint stock companies at or before the issue of such shares." ' New York Stock Corporation Law 1892, ch. 688, § 4, as amended by Laws 1901, ch. 354 (Birdseye's R. S. 1901, p. 3418, § 42). ^ Washburn v. National Wall Paper Co., 81 Fed. 17 (1897). See also Beebe v. Hatfield, 67 Mo. App. 609 (1897) ; Pell's Case, L. R. 5 Ch. App. 11 (1869). But compare Camden v Stuart, 144 U. S. 115 (1892), (12 Sup. Ct. Rep. 585), where the Supreme Court of the United States said : "The experience and good-will of the partners, which it is claimed were transferred to the corporation, are of too unsubstantial and shadowy a nature to be capable of pecuniary estimation in this connection. It is not denied that the experience and good-will of a business may be the subject of barter and sale as between the parties to it, but in a case of 573 § 320 INTERCORPORATE RELATIONS [PART V of the tangible assets of the vendor corporation, may be conveyed separately from them and for a different class of stock, and its value may be fixed by appraisal. The question whether a particular method of appraisal is proper cannot be raised by a party to a combination who has approved of, and participated in, the application of such method in the sale of the good-will of his own business. In Washburn v. National Wall Paper Co} Judge Lacombe said: "The first of these propositions suggests the questions whether stock is issued for 'property actually received,' within the meaning of the statute, when it is issued for good-will only; and whether . . . the good- will taken in this case was taken at its actual value. . . . Good-will has been defined as ' all that good disposition which customers entertain towards the house or business identified by the particular name or firm, and which may induce them to continue giving their custom to it.' There is nothing marvellous or mysterious about it. When an individual or a firm or a corporation has gone on for an unbroken series of years conducting a particular busi- ness, and has been so scrupulous in fulfilling every obligation, so careful in maintaining the standard of the goods dealt in, so absolutely honest and fair in all business dealings that customers of the concern have become convinced that their experience in the future will be as satisfactory as it has been in the past, while such customers' good report of their own experi- ence tends continually to bring new customers to the same con- cern, there has been produced an element of value quite as im- portant — in some cases, perhaps, far more important — than the plant or machinery with which the business is carried on. . . . Since good-will is property, and since, in some cases, it is valuable property, it would follow that, in some way or other, it must be practically possible to determine what that value is. Whether the particular method employed in the case at bar to ascertain such value is or is not a proper one, ... we are under no obligation to inquire upon the complainants' request. The method of valuation was one which they fully approved, and this kind there is no proper basis ' Washburn v. National Wall for ascertaining its value, and the Paper Co., 81 Fed. 19 (1897). claim is evidently an afterthought." 574 CHAP. XXX] LAW AFFECTING CORPORATE COMBINATIONS § 321 which was appUed in fixing the value of their own property. . . . They certainly, participating in the transaction, and reaping its benefits, are in no position now to claim that the good-will bought by the defendant company with common stock was overvalued." § 321. Over-valuation of Property acquired by Issue of Stock. — The formation of every corporate combination is in the nature of an experiment, entered into for the anticipated benefit of the owners of the several establishments entering the combina- tion. The stock of the new corporation is, necessarily, of un- certain value. The valuation to be placed upon the various plants and the good-will of the business of each company can- not be reached by the application of any hard and fast rule. In determining the amount of stock to be issued for prop- erty, including good-will, under such circumstances, the only requirement is that the contracting parties shall act in good faith in the transaction. As said by Judge Bunn in Dicker- man V. Northern Trust Co.:^ "Assuming that the stock of the new company was of par value, and that the plants were worth only the prices fixed upon them in the several options, of course there would appear to be an over-valuation in the sale. But this is an assumption that would scarcely be war- ranted. Probably there was not much market value for the stock, especially the common and unpref erred stock. It was supposed that the new enterprise would make the plants more valuable, so that the value of any plant before the transfer would not be evidence of its value after the consolidation should be completed. Every one interested proceeded with his eyes open, and it was entirely competent to make such a contract as they might agree upon. There was no compulsion practised and no evidence of fraud. The mill owners could set such valuation upon their plants as they chose, or as they could agree upon with those taking the options. The holders of options and the new company, in the absence of fraud, could do the same thing and make such bargain for the transfer as they saw fit." When stock has been issued as fully paid up, in exchange for property acquired, the weight of authority supports the ' Dickerman v. Northern Trust Co., 80 Fed. 453 (1897). 575 §321 INTERCORPORATE RELATIONS [part V view that mere over-valuation is not sufficient to invalidate the issue, and that fraud, actual or constructive, must be shown; ^ and the same rule is sometimes provided by statute.^ ^ I. Cases holding thq/, urUess the overvaluation of the property is inten- tional and, consequenUyj fraudiUentf the issue of stock cannot be attacked or the stock treated as only partially paid up. United States : Coit v. Gold Amal- gamating Co., 119 U. S. 345 (1886), (7 Sup. Ct. Rep. 231) ; Dickerman v. Northern Trust Co., 80 Fed. 450 (1897) ; Northwestern Mut. Life Ins. Co. I). Exchange Real Est. Co., 70 Fed. 157 (1895) ; Du Pont v. Tilden, 42 Fed. 87 (1890) ; Phelan v. Hazard, 5 Dill. 45 (1878). Indiana: Bruner v. Brown, 139 Ind. 600 (1894), (38 N. E. Rep. 318) ; Coffin V. Ransdell, 110 Ind. 417 (1887), (11 N. E. Rep. 20). Maryland: Brant v. Ehlen, 59 Md. 1 (1882). Michigan: Young v. Erie Iron Co., 65 Mich. Ill (1887), (31 N. W. Rep. 814). Minnesota: Hastings ' Malting Co. V. Iron Range Brew. Co., 65 Minn. 28 (1896), (67 N. W. Rep. 653). Nebraska: Troup v. Horbach, 53 Neb. 795 (1898), (74 N. W. Rep. 326). Compare Gilkie, etc. Co. v. Dawson, etc. Co., 46 Neb. 333 (1895), (64 N. W. Rep. 978). New Jersey: Bickley v. Schlag, 46 N. J. Eq. 533 (1890), (20 Atl. Rep. 250). See, however, Weatherby v. Baker, 35 N. J. Eq. 501 (1882). New York: Seymour v. Spring Forest Cem. Ass'n, 144 N. Y. 333 (1895), (39 N. E. Rep. 365, 26 L. R. A. 859) ; Sohenok v. Andrews, 57 N. Y. 133 (1874); Powers v. Knapp, 85 Hun, 38 (1895), (32 N. Y. Supp. 622). North Carolina: Clayton v. Ore Knob Co., 109 N. C. 385 (1891), (14 S. E. Rep. 36). Pennsylvania : American Tube, etc. Co. V. Hays, 165 Pa. St. 489 576 (1895), (30 Atl. Rep. 936) ; Carr v. Le Fevre, 27 Pa. St. 413 (1856). Tennessee: Kelley v. Fletcher, 94 Tenn. 1 (1895), (28 S. W. Rep. 1099) ; Jones V. Whitworth, 94 Tenn. 602 (1895), (30 S. W. Rep. 736). Washington : Kroenert v. Johnston, 19 Wash. 96 (1898), (52 Pac. Rep. 605). England: In re Wragg, 1 Ch. Div. 796 (1897) ; Curries Case, 3 De Gex, J. & S. 367 (1863). Canada: In re Hess Mfg. Co., 23 Can. S. C. 644 (1894). II. Cases holding that proof of over- valuation, even without fraud, leaves the stock only paid up to the extent of the true vahie. United States: Altenburgh v. Grant, 85 Fed. 345 (1897), construing peculiar provision of Kentucky con- stitution. Alabama: Roman i). Dimmick, 115 Ala. 233 (1897), (22 So. Rep. 109). Illinois : Sprague v. National Bank, 172 lU. 149 (1898), (50 N. E. Rep. 19, 64 Am. St. Rep. 17). Missouri: Van Cleve v. Berkey, 143 Mo. 109 (1898), (44 S. W. Rep. 743, 42 L. R. A. 593). Ohio: Gates v. Tippecanoe Stone Co., 57 Ohio St. 60 (1897), (48 N. E. Rep. 285, 63 Am. St. Rep. 705). Utah: Salt Lake Hardware Co. v. Tintic Mill. Co., 13 Utah, 423 (1896), (45 Pac. Rep. 200). ^ New Jersey Corporation Act of 1896, § 49, p. 293. See note to § 319, ante. A wilful disregard of the rule prescribed by this statute, involving an intentional over-valuation of prop- erty acquired by a corporation, is fraud within the meaning of the statute and the issuing of stock with- out an appraisal of the actual cost value of such property is illegal. CHAP. XXX] LAW AFFECTING CORPORATE COMBINATIONS § 323 Gross and obvious over-valuation would, however, make the transaction presumptively fraudulent.' Constitutional provisions have been adopted and statutes enacted, in many States, against the fictitious issue of stock. A consideration of these provisions, and of the remedies of creditors or stockholders in the case of watered stock, belongs more appropriately in a treatise upon general corporation law. § 322. Power of Vendor Corporations to sell Properties for Stock of Purchasing Corporation. — The general principles of law governing the exchange of corporate property for stock in other corporations, which have already been fully considered, are applicable in the case of the formation of a corporate com- bination and do not require further examination.^ § 323. Corporate Combinations through Formation of Hold- ing Corporations. — Corporate combinations have sometimes been created by the formation of a corporation to acquire control of several competing corporations, through the ownership of a majority of their respective shares. Upon principles elsewhere considered, such holding cor- porations can only be organized under laws permitting corpo- rations to acquire and hold stock in other corporations. A corporate combination by means of a holding corporation, therefore, depends for its validity upon the power of such cor- poration to hold the shares of the several subsidiary companies. In the absence of such power, the combination is invalid, and the holding corporation is liable to be proceeded against in quo warranto, entirely irrespective of the question whether the combination is opposed to public policy.' Strickland v. National Salt Co., § 281 : "Power to take Stock in Ex- 64 Atl. Rep. 982 (N. J. Ch. 1906). change for Corporate Assets." ' Coit V. Gold Amalgamating Co., ' People v. Chicago Gas Trust Co., 119 V. S. 343 (1886), (7 Sup. Ct. Rep. 130 111. 268 (1889), (22 N. E. Rep. 798, 231) ; Lloyd v. Preston, 146 U. S. 630 17 Am. St. Rep. 319, 8 L. R. A. 497), (1892) ; Coleman v. Howe, 154 111. is, perhaps, the leading case illus- 458 (1895), (39 N. E. Rep. 725, trating the principles governing this 45 Am. St. Rep. 133) ; Hastings form of corporate combination. Malting Co.-«. Iron Range Brew. Co^, For examination of this case, see 65 Minn. 28 (1896), (67 N. W. Rep. post, § 346: "Basis of RiUe — (,E) 652). Case of the Chicago Gas Trust." ' Seeante, subdiv. II. ch. 11 : "Ex- See also ante, § 264 : " Necessity for change of Property of One Corporation Statutory Authority to purchase Stock, for Stock of Another. " See also ante. Rule in United States. " 577 §324 INTEHCORPORATB RELATIONS [part V Article II COMBINATIONS AS AFFECTED BY PRINCIPLES OF COMMON LAW AND PUBLIC POLICY CHAPTER XXXI APPLICATION OF LAW OF CONSPIRACIES § 324. Definition and Classification of Conspiracies. § 325. Criminal and Civil Conspiracies distinguished. § 326. Applicability of Law of Conspiracies to Corporations. § 327. What Combinations are Conspiracies. § 327a. Remedies and Procedure in Case of Conspiracies. § 328. Modem Combinations of Capital seldom Conspiracies. § 324. Definition and Classification of Conspiracies. — A con- spiracy is a species of the genus combination, and may be broadly defined as a combination to effect an illegal object, as an end or means ; or, in the language of Lord Denman,^ "to do an unlawful act, or a lawful act by unlawful means." * Case, 4 B. & Ad. 349 ^ Jones (1832). ' United States. Pettibone v. United States, 148 XJ. S. 203 (1893), (13 Sup. Ct. Rep. 542): "A con- spiracy is sufficiently described as a combination of two or more persons, by concerted action, to accomplish a, criminal or unlawful purpose, or some purpose not in itself criminal or unlawful, by criminal or unlawful means." See also United States v. Cassidy, 67 Fed. 698 (1895). Georgia. Brown v. Jacobs' Phar- macy Co., 115 Ga. 429, 433 (1902), (41 S. E. Rep. 553, 90 Am. St. Rep. 126, 57 L. R. A. 547) : "A con- spiracy has been defined as a com- bination either to accomplish an unlawful end, or to accomplish a lawful end by unlawful means." 578 Illinois. Smith v. People, 25 111. 17 (1860), (76 Am. Dec. 780). Maine. State v. Bartlett, 30 Me. 134(1849) : " A conspiracy at common law consists in the unlawful agree- ment of two or more persons to com- pass or promote some criminal or illegal purpose, or in the unlawful agreement to compass or promote a purpose not in itself criminal or un- lawful, by criminal or unlawful means." Maryland. Klingel's Pharmacy v. Sharp, 104 Md. 230 (1906), (64 Atl. Rep. 1029): "A combination is a conspiracy in law whenever the act to be done has a necessary tendency to prejudice the public, or oppress individuals by unjustly subjecting them to the power of th^ confedera- tion and giving effect to the purposes CHAP. XXXl] APPLICATION OP LAW OF CONSPIRACIES 324 Conspiracies are of two kinds, criminal and civil. A criminal conspiracy is a combination of two or more persons to accom- plish, by concerted action, a criminal or unlawful object; or a lawful object, by criminal or unlawful means.' of the latter, whether of extortion or mischief." Massachusetts. Commonwealth v. Waterman, 122 Mass. 57 (1877) : A* conspiracy is "the combination of two or more [persons] to do some- thing unlawful, either as a means or as an ultimate end." Michigan. Alderman v. People, 4 Mich. 414 (1857), (69 Am. Dec. 321). West Virginia. There can be no conspiracy to do that which is lawful by lawful means. Porter v. Mack, 50 W. Va. 581 (1901), (40 S. B. Rep. 459). See also West Virginia Trans. Co. V. Standard Oil Co., 50 W. Va. 611 (1902), (40 S. E. Rep. 591, 88 Am. St. Rep. 895). The Texas anti-trust statute of 1903 (§3) contains a definition of a conspiracy in restraint of trade. ^ See definitions in preceding note. In Commonwealth v. Hunt, 4 Met. (Mass.) 123 (1842), Chief Justice Shaw thus defined a criminal con- spiracy : "A conspiracy must be a combina,tion of two or more persons, by some concerted action, to accom- plish some criminal or unlawful pur- pose, or to accomplish some purpose, not criminal or unlawful, by criminal or unlawful means." The term "unlawful," in addition to the term "criminal," was used, said the Chief Justice, because "it is manifest that many acts are unlawful which are not punishable by indict- ment or other public prosecution; and yet there is no doubt, we think, that a combination by numbers to do them would be an unlawful con- spiracy, and punishable by indict- ment." As to the use of the phrase "by concerted action," see United States V. Cassidy, 67 Fed. 698 (1895) ; Alder- man V. People, 4 Mich. 424 (1857), (69 Am. Dec. 321). The manifest difiiculty of stating a rule for determining what acts, un- lawful but not criminal when com- mitted by an individual, constitute a criminal offence when committed by a combination of individuals, was considered by the Supreme Court of Errors of Connecticut in State v. GUdden, 55 Conn. 70 (1887), (8 Atl. Rep. 890): "It has often been said that a conspiracy to effect an unlawful purpose, or a lawful purpose by unlaw- ful means, is an offence. But this is said to be a limitation rather than a definition. It cej^ainly lacks definite- ness. Many acts are said to be un- lawful which would not be the sub- ject of a criminal conspiracy. Other acts are unlawful because they are in violation of the criminal law or some penal statute. If the end or means are criminal in themselves, or contrary to some penal statute, the conspiracy is clearly an offence. Between these two extremes a great variety of cases may arise, many of which ought not to be regarded as criminal. ... If we were to at- tempt to give a rule applicable to this branch of the subject, we should say that it is a criminal offence for two or more persons, corruptly or maliciously to confederate and agree together to deprive another of his liberty or property. Such a rule is proximately correct and practically just." The theory that acts merely unlaw- ful may become criminal when done in concert is supported by the authorities to such an extent that the writer has 579 § 325 INTERCORPORATE RELATIONS [part V A civil coaspiracy is a combination of two or more persons to accomplish, by concerted action, an unlawful or oppress- ive object; or a lawful object, by unlawful or oppressive means — resulting in damage.' § 325. Criminal and Civil Conspiracies distinguished. — A criminal and a civil conspiracy, aside from the element of criminality, may be distinguished from the fact that the gist of the action in case of the one is merely an act of aggravation in the other.^ The gist of the offence of criminal conspiracy is the com- bination. The offence is complete when the confederacy is made, and no overt act is necessary. Any act in pursuance of the combination is matter of aggravation.' felt obliged to follow it in formulating a definition of a crinainal conspiracy. It is difficult, however, to support it upon principle. Mere concert of action — except when involving force or false statement — is not, in itself, criminal ; and if neither the object nor means are crinanal wherein lies the criminality? See, in this con- nection, Bohn Mfg. Co. v. Hollis, 54 Minn. 223 (1893), (55 N. Rep. 119) ; Rourke v. Elk Drug Co., 75 App. Div. (N. Y.) 145 (1902), (78 N. Y. Supp. 1135). It is not necessary that the object of a criminal conspiracy should con- stitute a criminal offence. Chicago, etc. Coal Co. v. People, 214 111. 421 (1905), (73 N. E. Rep. 770). ' The same combination, of course, naay amount to a criminal as well as a civil conspiracy. Acts constituting a criminal conspiracy, if accompanied with damage, may also subject the conspirators to a civil action. For consideration of the element of damage in civil conspiracies, see next section. " In Van Horn v. Van Horn, 52 N. .7. L. 286 (1890), (20 Atl. Rep. 485, 10 L. R. A. 184), the Court said: " It is not necessary to consider the office of the ancient writ of conspiracy, 580 and the process by which, in time, it was superseded by the later and more efficacious action on the case for con- spiracy, and the still more modern action for malicious prosecution.- Nor will it now be advantageous to show how long and difficult it was to separate the idea of a criminal con- spiracy at common law, where the agreement or conspiracy was the gravamen of the offence, from the real complaint in a, civil action, that the combination of two or more persons has enabled them to inffict a great wrong on the plaintiff. The combination or conspiracy in the latter case was, therefore, a matter of aggravation or inducement only, of which one or all might be found guilty, while in the former it was essential to show that two or more had joined in an agreement to do an unlawful act, or to do a lawful act in an unlawful manner. The dis- tinction is now well established, that in civil actions the conspiracy is not the gravamen of the charge." 3 Commonwealth v, Judd, 2 Mass. 329 (1807), (3 Am. Dec. 54) (per Parsons, C. J.) : "The gist of a con- spiracy is the unlawful confederacy to do an iinlawful act, or even a lawful act for unlawful purposes; the offence is complete when the con- CHAP. XXXl] APPLICATION OF LAW OP CONSPIRACIES 326 Damage is essential to a right of action for civil conspiracy. It is the gravamen of the charge, and the combination is only a matter of aggravation.' § 326. Applicability of Law of Conspiracies to Corporations. — The law of civil conspiracies is equally applicable to cor- porations and to individuals. A combination of corporations for an unlawful or oppressive object — as an end or means — federacy is made ; and any act done in pursuance of it is no constituent part of the offence, but merely an aggrava- tion of it. The rule of the common law is to prevent unlawful combina- tions. . . The unlawful confed- eracy is, therefore, punished to pre- vent the doing of any act in execution of it." People V. Sheldon, 139 N. Y. 264 (1893), (34 N. E. Rep. 785, 36 Am. St. Rep. 690, 23 L. R. A. 221) : "The gravamen of the offence of conspir- acy is the combination. Agreements to prevent competition in trade are, in contemplation of law, injurious to trade, because they are liable to be injuriously used." Both of these opinions refer to criminal conspiracies and are indica- tive of the uniform current of author- ity that, unless expressly provided by statute (as is sometimes the case), proof of an overt act is not necessary in a prosecution for consipracy ; nor is it necessary to set forth such act in the indictment. ' Robertson v. Parks, 76 Md. 135 (1892), (24 Atl. Rep. 413) : "It is a general rule, that a conspiracy cannot be made the subject of a civil action, unless something is done which, with- out the conspiracy, would give a right of action. The damage done is the gist of the action, not the conspiracy. Where the mischief contemplated is accomplished, the conspiracy becomes important, as it may affect the means and measures of redress. The party wronged may look beyond the actual participants in committing the in- jury, and join with them as defend- ants all who conspired to accom- plish it; and the fact of conspiracy may aggravate the wrong; but the simple act of conspiracy does not furnish a substantial ground of action." Doremus v. Hennessey, 62 111. App. 402 (1895) : "A civil action will not lie for a mere conspiracy. It is the damage done in pursuance of the conspiracy which gives the right of action. It is now well established that, in civil actions, the conspiracy is not the gravamen of the charge, but may be pleaded and proved in aggravation of the wrong of which the plaintiff complains, and as enabling him to recover against all the con- spirators, as joint tortfeasors." The damage and not the wrongful confederation is the gist of the action for civil conspiracy. In order to state a cause of action for such a con- spiracy the facts from which the damage has resulted must be alleged as well as the confederation and con- spiracy. Commercial Union Ins. Co. v. Shoe- maker, 65 Neb. 173 (1901), (88 N.W. Rep. 156). See also Adler v. Fenton, 24 How. (U. S.) 407 (1860) ; Van Horn v. Van Horn, 52 N. J. L. 284 (1890), (20 Atl. Rep. 485, 10 L. R. A. 184) ; Kimball V. Harman, 34 Md. 407 (1871), (6 Am. Rep. 340) ; Stevens v. Rowe, 59 N. H. 578 (1880), (47 Am. Rep. 231); Hutchins v. Hutchins, 7 Hill, 104 (1845). 581 § 326 INTERCORPORATE RELATIONS [part V is a conspiracy, if a similar combination of natural persons would amount to a conspiracy; and the converse of the propo- sition is equally true. In Buffalo Lubricating Oil Co. v. Standard Oil Co,^ the Court said: "We entertain no doubt that an action against a corporation may be maintained to recover damages caused ■ by conspiracy. ... If actions can be maintained against corporations for malicious prosecution, libel, assault and battery, and other torts, we can perceive no reason .for holding that actions may not be maintained against them for con- spiracy. It is well settled by the authorities cited, that the malice and wicked intent needful to sustain such actions may be imputed to corporations." ^ Upon similar principles, it seems clear that a combination of corporations for a criminal object would amount to a criminal conspiracy, if such would be the result of a combination of in- dividuals for the same purpose. In several States, the anti- trust laws expressly provide that corporations, as well as natural persons, violating their provisions, shall be guilty of the crime of conspiracy.' ' Buffalo Lubricating Oil Co. v. Standard Oil Co., 106 N. Y. 670 (1887), (12 N. E. Rep. 826). ^ In West Virginia Trans. Co. v. Standard Oil Co., 50 W. Va. 611 (1902), (40 S. E. Rep. 591), 88 Am. St. Rep. 895, the Court said : " It is very clear that a corporation can be guilty of a combination or conspiracy ■with other corporations or persons aimed at and accomplishing the in- jury of other corporations or persons. It is a mere legal entity and itself is incapable of so doing; but it is moved by human beings, is operated by human agents, and is thus an active person not only for damage done in the breach of contracts, but for torts doing others harm." ^ The Missouri anti-trust act (see post, ch. XLI.) provides in its first section that any corporation, individ- ual or other association of persons, entering into any combination in 582 violation of its provisions, "shall be deemed and adjudged guilty of a conspiracy to defraud." In National Lead Co. v. Grote Paint Store Co., 80 Mo. App. 247 (1899), the Missouri Court of Appeals, referring to this statute, said; "By the language of the first section of that enactment a violation of its provisions is made a crime, i.e. 'a conspiracy to defraud.'" And in discussing the liability of a corporation for its violation the Court said (p. 269) : "A corporation can only act through its members or their agents. The corporate entity with which the law clothes it for special purposes is not self-acting, hence there was no thought of its action alone in the mind of the framers of the statute. The evident purpose of the legislature was to specify certain acts, which, if done by its stockholders or governing bodies, should constitute a crime on the part of the corporation. CHAP. XXXl] APPLICATION OF LAW OF CONSPIRACIES §327 § 327. What Combinations are Conspiracies. — A combina- tion amounts to a criminal conspiracy only when the end or means are criminal or unlawful. A combination amounts to a civil conspiracy only when the ends or means are un- lawful or oppressive, and the legal rights of others are infringed. Whether a particular combination is a conspiracy depends, therefore, upon its object, and the means adopted for accom- plishing it. The question of motive may also be of importance.'. Thus in the celebrated Mogul Steamship Case ^ Lord Chief It did not contemplate the commission of an offence by an impalpable ab- straction, which could neither think nor act ; but it intended to bind this corporate entity by the imputed actions of its human agencies. '' In State v. Firemen's Fund Ins. Co., 152 Mo. 37 (1899), (52 S. W. Rep. 595, 45 L. R. A. 363), the Supreme Court of Missouri dis- cussed the applicability of the same law to insurance companies: "It could not be tolerated for a mo- ment that an insurance company could hide under the skirts of its agents and violate the anti-trust laws of our State with impunity. . . The company can and must control its agents, and must see, at its peril, that its agents do not violate the law while attending to the business of the company. This is the rule as to libels, assaults, malicious torts by agents of incorporated companies, and there is greater reason for it being the true rule in cases involving the anti-trust laws. " That a corporation cannot be indicted for making an unlawful agree- ment in restraint of competition does not stand in the way of counting it as a party to such a conspiracy. Standard Oil Co. v. State (Tenn., 1907), 100 S. W. Rep. 705. ' In Hawarden v. Youghiogheny, etc. Coal Co., Ill Wis. 545 (1901), (87 N. W. Rep. 472, 55 L. R. A. 828) the Court held that while persons have a right to combine in a legiti- mate way yet that where the object of a combination is to inflict injury upon others and injury results, a wrong is committed for which the injured person may recover damages. In this case the business of a retail coal dealer had been destroyed by combination between wholesale deal- ers and certain retail dealers for the purpose of forcing out of business all retailers not parties thereto. ' Mogul Steamship Co. v. Mc- Gregor, L. R. 21 Q. B. 552 (1888). This is the leading case upon the law of conspiracies as applied to trade competition, and, in its various stages, is reported in L. R. 15 Q. B. 476 (1885), L. R. 21 Q. B. 544 (1888), L. R. 23 Q. B. 598 (1889), L. R. 17 App. Cas. (1891) 25. In this case certain owners of steam vessels trad- ing between China and England, for the purpose of obtai'ning a monop- oly of the homeward tea trade and maintaining the rates of freight thereon, formed an association, and offered to all shippers of tea who used exclusively the vessels of members of the association a rebate of five per cent on all freights. The plaintiffs, who were rival ship owners, were excluded from the benefits of the association to their damage, as al- leged, and they instituted an action for the recovery of damages and for an injunction. The gist of the plaintiffs' case, as stated, was a conspiracy on the part of the respondents to pre- vent the plaintiffs from obtaining 583 § 327 INTEHCORPORATE RELATIONS [PART V Justice Coleridge said: " I do not doubt the acts done by the defendants here, if done wrongfully and maliciously, or if done in furtherance of a wrongful and mahcious combination, would be ground for an action on the case at the suit of one who has suffered injury from them. The question comes at last to this: What was the character of those acts, and what was the motive of the defendants in doing them ? " A combination entered into for the malicious purpose of injuring a person in his business may amount to a conspiracy, and furnish a ground of action for the damage sustained. The essential element of a conspiracy — the unlawful end or means — may be the intentional doing of acts detrimental to the business of a competitor, without justification or excuse. But combinations without such ulterior object, and merely for the purpose of promoting, by lawful means, the common interests of the parties, are not conspiracies. A trader or manufacturer has the right to push his trade or business in a lawful manner, although his success may necessarily involve loss to his competitors. So, several traders and manufacturers may combine for mutual advantage and, so long as the motive is not malicious, the object not unlawful or oppressive, and the means neither deceitful nor fraudulent, the result is not a con- spiracy, although it may necessarily work injury to other persons engaged in the same business. The essential question is whether the object of a combination is to do harm to others or to exer- cise the rights of the association for its own benefit.* cargoes for their steamers. A motion by a majority of its members, held for a preliminary injunction was that the association, being formed denied (L. R. 15 Q. B. 476) (1885), by the defendants merely for the upon the ground that, although a purpose of winning trade and without conspiracy to obtain a monopoly of any malice or ill-will towards the a carrying trade might constitute plaintiffs or with the intention of an actionable conspiracy, irreparable ruining their trade, did not constitute damage warranting an injunction had a conspiracy, and rendered judgment not been shown. The case then came for the defendant. The case was then before Lord Coleridge (C. J.), who taken to the House of Lords and the held (L. R. 21 Q. B. 544) (1888), that judgment affirmed upon the same the essential element of "unlaw- grounds (L. R. 17 App. Cas. (1891) fulness" in the combination had not 25). be^n shown and rendered judgment ' In the Mogul Steamship Case for the defendants. The case then (L. R. 2.3, Q. B. 614) (1889), Lord went to the Court of Appeal, which, Justice Bowen of the Court of Appeal 584 CHAP. XXXl] APPLICATION OF LAW OF CONSPIRACIES §327 Whether the purpose of a combination is unlawful or op- pressive does not wholly depend upon whether such purpose if formed and carried out by an individual would be unlaw- ful or oppressive. The doing of an act by a number of per- sons may give it an impulse and injurious effect far beyond that which could possibly result from the act of a single considered at length the principles stated in the text: "What, then, are the limitations which the law imposes on a trader in the con- duct of his business as between him- self and other traders 7 There seems to be no burdens or restrictions in law upon a trader which arise merely from the fact that he is a trader, and which are not equally laid on all other subjects of the crown. His right to trade freely is a right ■ which the law recognizes and encourages, but it is one which places him at no special disadvan- tage as compared with others. No man, whether trader or not, can, however, justify damaging another in his commercial business by fraud or misrepresentation. . . . But the defendants have been guilty of none of these acts. They have done no more against the plaintiffs than pursue to the bitter end a war of competition waged in the interest of their own trade. ... I can find no authority for the doc- trine that such a commercial motive deprives of 'just cause for excuse' acts done in the course of trade which would but for such motive be justified. So to hold would be to convert into an illegal motive the instinct of self- advancement and self-protection, which is the very incentive to all trade. ... It is urged, however, on the part of the plaintiffs, that even if the acts complained of would not be wrongful had they been com- mitted by a single individual, they become actionable when they are the result of concerted action among sev- eral. In other words, the plaintiffs, it is contended, have been injured by an illegal conspiracy. Of the general proposition, that certain kinds of conduct not criminal in any one individual may become criminal if done by combination among several, there can be no doubt. The dis- tinction is based on sound reason, for a combination may make oppressive or dangerous that which if it proceeded only from a single person would be otherwise, and the very fact of the combination may show that the object is simply to do harm, and not exercise one's own just rights. . . , The question to be solved is whether there has been any such [illegal] agreement here. Have the defendants com- bined to do an illegal act ? Have they combined to do a lawful act by an unlawful means? A mo- ment's consideration will be sufficient to show that this new inquiry only drives us back to the circle of defini- tions and legal propositions which I have already traversed in the pre- vious part of this judgment. The unlawful act agreed to, if any, between the defendants must have been the intentional doing of some act to the detriment of the plaintiffs' business without just cause or excuse. Whether there was any such justifica- tion or excuse for the defendants is the old question over again, which, BO far as regards an individual trader, has been already solved. The only differentia that can exist must arise, if at all, out of the fact that the acts done are the joint acts of several capitalists, and not of one capitalist only." 585 §327 INTERCOBPOKATE RELATIONS [part V person.' Thus the mere refusal by one person to sell to an- other is not actionable whatever his motive may be.^ But where the wholesale and retail dealers in a commodity in a given locality enter into a combination not to deal with retailers who do not join with them, the combination may amount to a conspiracy and persons injured may recover damages from the conspirators.' ' Hawarden v. Youghiogheny, etc. Coal Co., Ill Wis. 545 (1901), (87 N. W. Rep. 472, 55 L. R. A. 828). See also extract from opinion in Mogul Steamship case in last note. 2 Wills V. Central Ice, etc. Co., (Tex. av. App. 1905), 88 S. W. Rep. 265. Brewster v. Miller's Sons Co., 101 Ky. 368 (1897), (41 S. W. Rep. 301) : "It is part of every man's civil rights that he be left at liberty to refuse business relations with any person whomsoever, whether the refusal rests upon reason, or is the result of whim, caprice, prejudice, or malice. With his reasons neither the public nor third persons have any legal con- cern, and the exercise by him of his legal rights cannot be a legal wrong to another. Appellant brought this action against certain members of the Funeral Directors Association to recover damage, alleging that they and other members of that associa- tion had refused to furnish him the articles, or render the services neces- sary for the burial of his wife, said refusal being based upon the ground that appellant was indebted to some member of the said association for the burial services of his father, and that, therefore, under the rules of said association no member thereof was permitted to furnish such services until said indebtedness was satisfied. And it is held that while the members of the association might be guilty of a public offence, and a violation of the provisions of ch. 101, of the Ken- tucky Statutes, if proceeded against by an indictment, yet appellant 586 having asserted no claim for damages to personal character or » business reputation resulting from such al- leged acts of conspiracy, cannot main- tain his action." ' Hawarden v. Youghiogheny, etc. Coal Co., Ill Wis. 545 (1901), (87 N. W. Rep. 472, 55 L. R. A. 828). A combination between indepen- dent producers to regulate and fix the price at which coal should be sold in a certain territory, and to prevent competition in its sale, amounts to a common law conspiracy. Chicago, etc. Coal Co. v. People, 214 111. 421 (1905), (73 N. E. Rep. 770), affirming 114 111. App. 75 (1904). Where wholesale and retail drug- gists in a city formed a combination to maintain prices, and in pursuance thereof, refused to sell to a retail dealer who had declined to join the combination, and threatened and intimidated other wholesale dealers into refusing to deal with him, it was held that the combination was a con- spiracy. Klingel's Pharmacy v. Sharp, 104 Md. 218 (1906), (64 Atl. Rep. 1029, 7 L. R. A. (n. s.) 976). See also Ferd Heim Brewing Co. V. Belinder, 97 Mo. App. 64 (1903), (71 S. W. Rep. 691). An agreement between a brick- layers' union, a builders' association and a brick nxanufacturers' associa- tion, that they will not buy or lay brick made by any manufacturer not subscribing to the rules of the builders' association, with the object of injuring the business of such man- ufacturer, is a conspiracy and unlaw- CHAP. XXXl] APPLICATION OF LAW OF CONSPIRACIES §327a § 327a. Remedies and Procedure in Case of Conspiracies. — •Corporations and individuals entering into a combination amounting to a criminal conspiracy are subject to indictment and punishment in the same manner as if guilty of other of- fences. The only limitation with respect to corporations — and this obviously applies to all offences — is that they cannot be imprisoned. An indictment charging certain corporations with conspiracy, and alleging that its object was unlawful sufficiently charges a conspiracy at common law without setting out the means by which the conspiracy was to have been accomplished.^ In order to establish a criminal conspiracy to fix the price of a commodity it is not necessary to show that the combination was formally entered into or evidenced by a written agreement. An understanding among the conspirators to work a common ful and the parties are liable for all damages resulting therefrom. And it is not necessary to show that the particular acts complained of, were done directly by a,U the conspirators. If done by some of them after the formation of the combination, or by agents in carrying out its objects, all are liable. Purington v. Uinchliff, 219 HI. 159 (1905), (76 N. E. Rep. 47), affirming 120 111. App. 523 (1905). A complaint charging a combina- tion between certain railroad com- panies and an association of elevator owners in pursuance of which the railroad companies refuse to carry grain sent through the plaintiff's elevator which is well located except at an advance over the rate charged for grain sent through the elevators of members of the association, and by which certain shippers have been prevented from shipping a certain amount of grain through the plain- tiff's elevator, states a cause of action for civil conspiracy. Kellogg V. Lehigh Valley R. Co., 61 App. Div. (N. Y.) 35 (1901), (70 N. Y. Supp. 237). For consideration of combinations of bidders at pubUc sales amounting to conspiracies in restraint of trade see In re Blake, 150 Fed. 279 (1906). For consideration of trade agree- ments amounting to conspiracies see National Fire Proofing Co. v. Master Builders' Ass'n, 145 Fed. 263 (1906) ; Curran v. Galen 152 N. Y. 33 (1897), (46 N. E. Rep. 296, 57 Am. St. Rep. 496, 37 L. R. A. 802), and cases cited. ' Chicago, etc. Coal Co. v. People, 214 111. 421 (1905), (73 N. E. Rep. 770), affirming 114 111. App. 75 (1904). An indictment for criminal con- spiracy in pooling, and fixing the price of an article of commerce, must state the names of all the parties to such conspiracy known to the prosecution, but all the parties need not be jointly indicted. State V. Dreany, 65 Kan. 292 (1902), (69 Pac. Rep. 182). It must be borne in mind in con- sidering this section that the subject under consideration is common law conspiracies and that most of the recent prosecutions for trade con- spiracies have been under State anti- trust statutes. See post, oh. XLIII. 587 § 327a INTBRCORPOHATE RELATIONS [part V purpose is all that is necessary. And the evidence should be directed toward showing what has been actually accomplished under the understanding rather than its professed object.' The offence of criminal conspiracy is committed when the unlawful combination is formed, and after it is formed the acts of the different members which tend to further its purposes bind all the members.^ With respect to civil conspiracies — "No person or com- bination of persons can legally, by direct or indirect means, obstruct or interfere with another in the conduct of his lawful business, and any loss wilfully caused by such interference will give the party injured a right of action for all damages sustained. All parties to a conspiracy to ruin the business of another because of his refusal to do some act against his will or judgment are liable for all overt acts illegally done pursuant to such con- spiracy and for the subsequent loss, whether they were active participants or not." ^ ' Chicago, etc. Coal Co. v. People, 214 lU. 421 (1905), (73 N. E. Rep. 770), affirming 114 111. App. 75 (1904). It was also held in this case that the common law relating to criminal conspiracies has not been superseded in Illinois by the Statutes upon the subject. See also Sanford v. People, 121 lU. App. 619 (1905) ; People v. Aachen, etc. Fire Ins. Co., 126 111. App. 640 (1906). In order to convict a defendant upon a charge of criminal conspiracy, it must be clearly shown that he knew of, and participated in, the con- spiracy. State V. Dreany, 65 Kan. 292 (1902), (69 Pac. Rep. 182). ' Chicago, etc. Coal Co. ». People, 214 lU: 421 (1905), (73 N. E. Rep. 770), affirming 114 lU. App. 75 (1904). See also Ford v. Chicago Milk Shippers' Ass'n, 155 III. 166 (1895), (39 N. E. Rep. 651, 27 L. R. A. 298). ' Purington v. Hinchliff, 219 HI. 159 (1905), (76 N. E. Rep. 47). A person who has been a member of an illegal combination and has 588 participated in making rules for carry- ing out its purposes, but who has been suspended for violating such rules, may maintain an action against the combination and its members for damages caused by boycotting him after his suspension. It was held that he was not in -pari delicto because the acts complained of were committed after his suspension. Ertz V. Produce Exch. Co., 82 Minn. 173 (1901), (84 N. W. Rep. 743). Compare Gladish v. Kansas City Live Stock Exch., 113 Mo. App. 726 (1905), (89 S. W. Rep. 77) where it was held that a member expelled from an association was not entitled to an injunction to restrain the as- sociation from declining to have any further business relations with him. See also Froelich v. Musicians' Mut. Ben. Ass'n, 93 Mo. App 383 (1902; O'Brien v. Musical, etc. Union, 54 Atl. Rep. 150 (N. J. Ch. 1903). Where wholesale and retail dealers in a certain city formed a combina- tion to maintain prices and, in pur- suance of the plan, refused to sell to CHAP. XXXl] APPLICATION OF LAW OF CONSPIRACIES § 327a In addition to an action for the recovery of damages caused by a conspiracy the corporation or person threatened with in- jury may obtain an injunction against the members of the combination to restrain them from carrying into effect the objects of the conspiracy.' These remedies which are available to persons injured by a conspiracy mark an important distinction between combi- nations which amount to conspiracies and those which are opposed to public policy only. As we shall see, the courts treat combination agreements of the latter class as void and the plaintiff, a retailer who had refused to join the combination, and coerced other dealers to refuse to deal with him it was held that the members of the corporation were liable to the plaintiff for the resulting injury to his business, Klingel's Pharmacy v. Sharp, 104 Md. 218 (1906), (64 Atl. Rep. 1029, 7 L. R. A. (N. s.) 976). In Wills V. Central Ice, etc. Co., 88 S. W. Rep. 265 (Tex. 1905) it was held that a conspiracy cannot be made the subject of a civil action, notwith- standing damages may have resulted, unless some act is done which, with- out the conspiracy, would give a right of action. ' Leonard v. Abner-Drury Brewing Co., 25 App. D. C. 161 (1905) ; Brown V. Jacobs Pharmacy Co., 115 Ga. 429 (1902), (41 S. E. Rep. 553, 90 Am. St. Rep. 126, 57 L. R. A. 547). Union Pressed Brick Co. v. Chicago Hydraulic Pressed Brick Co., 31 Chicago Legal News 428 (1899) : "A court of equity ought not to be permitted to enjoin crime as crime, because it has no criminal jurisdiction, and because the machinery of the criminal law is supposed to be ade- quate to prevent the same. But if the commission of such crime involves the loss of private property, the owner thereof should and can obtain redress for his loss in a court' of common law where that relief is adequate^ Where the commission of such crime will entail property loss to a private citizen for which he has no adequate relief at common law, courts of equity should give redress to the person who may be made to suffer such irrep- arable injury." Walsh V. Ass'n. of Master Plumbers, 97 Mo. App 280, 293 (1902), (71 S. W. Rep. 455) : "Applying the doctrine of these cases to the allega- tions of the petition, there can be no question that the agreement between the respondents is an illegal conspir- acy and that its effect is to inflict a civil wrong upon appellant, and that this wrong is a continuing one and, according to all authorities, entitles the appellant to injunctive relief so far as a court of equity is authorized to administer it within the bounds of equitable jurisprudence. We think it is competent for the court to declare the agreement complained of illegal and void and to restrain the parties to the agreement from keeping its terms or demanding that they be kept, and thus leave the respondent corporations and each of them free to deal or not to deal with appellant as they may choose." But it is held that a, combination of brewers, forming an association, fixing the price of its products and controlling their disposition, cannot be declared void in equity at the suit of retail dealers having no contract with the association and selling the product of a brewing company sought 589 §328 INTERCORPORATE RELATIONS [part V unenforceable, but not as illegal, in the sense of giving a right of action to third persons.^ § 328. Modern Combinations of Capital seldom Conspiracies. — A combination of industrial corporations for the promotion of their common interests, manifestlj'^ can possess the element of criminality only when entered into in violation of some penal statute, or when criminal means are employed; and such a combination becomes a conspiracy, in its civil aspect, only when the element of illegality or oppression is present.^ to be compelled to join the association. Such result can be only obtained through a suit by the government. Leonard v. Abner-Drury Brewing Co., 25 App. D. C. 161 (1905). In this case it was also held that while the federal anti-trust statute makes a conspiracy in restraint of trade a criminal offence and pres- cribes a punishment therefor, it does not substitute its remedy for ordinary equitable remedies where the acts complained work irreparable property damage. ' Brown v. Jacob's Pharmacy Co., 115 Ga. 433 (1902), (41 S. E. Rep. 553, 90 Am. St. Rep. 126, 57 L. R. A. 547) : "The next position of the defendants, and the one which, on first presentation, seems to be the strongest defence on this part of the case, is that, at common law, contracts or agreements in general or unreasonable restraint of trade were merely void and unen- forceable ; that either party could defend against an action based on them ; but that they were not illegal in such sense as to give a right of action to third parties. While there may be conflict among the author- ities, it seems to us that some con- ■ fusion might have been avoided by bearing in mind the distinction be- tween a contract or agreement merely in restraint of trade as between the parties, and a comibination or con- tract to stifle competition, or a con- spiracy to ruin a competitor." 590 ' Morris Run Coal Co. v. Barclay Coal Co., 68 Pa. St. 173 (1871), (8 Am. Rep. 159), is the leading case holding a combination of corporations for the suppression of competition a conspiracy. The reasoning of the Court, however, clearly places the illegality of the combination upon grounds of public policy rather than upon principles of the law of con- spiracies. In this case five Pennsylvania coal companies, which controlled the entire production of two mining regions, entered into an agreement relating to production and prices and appointed a supervising com- mittee and a common sales agent. The committee had power to adjust prices and the amount of production of each company was limited. The Court held that the agreement was invalid and amounted to a conspiracy, saying (p. 186) : "The effects pro- duced on the pubUc interests lead to the consideration of another feature of great weight in determining the illegality of the contract, to wit : the combination resorted to by these five companies. Singly, each might have suspended deliveries and sales of coal to suit its own interests, and might have raised the price, even though this might have been detri- mental to the public interest. There is a certain freedom which must be allowed to every one in the manage- ment of his own affairs. When com- petition is left free, individual error CHAP. XXXl] APPLICATION OP LAW OP CONSPIRACIES §328 A combination of corporations may have for its ultimate or immediate object injury to the business of a competitor, or it may be brought about by fraudulent or deceitful means injuri- ously affecting the public' Such a combination may be a conspiracy, but such combinations have little place in modern business life. Combinations of capital — whether in the form of associa- tions, trusts or corporate combinations — are formed for the supposed advantage of the associates. The object of the parties is to benefit themselves, not to injure others. The attainment of this object may injuriously affect competitors, but the combination does not, for that reason, become a con- spiracy. " The truth is," said Lord Justice Bowen in the Mogul Steamship Case,^ " that the combination of capital for or folly will generally find a correction in the conduct of others. . . . This combination has a power in its con- federated form which no individual action can confer. The public inter- est must succumb to it, for it has left no competition free to correct its baleful influence. When the supply of coal is suspended the demand for it becomes importiAate, and prices must rise. Or, if the supply goes forward, the price fixed by the con- federates must accompany it. The domestic hearth, the furnaces of the ironmaster, and the fires of the manu- facturer, all feel the restraint, while many dependent hands are paralyzed, and hungry mouths are stinted. The influence of a lack of supply or a rise in the price of an article of such prime necessity cannot be measured. It permeates the entire mass of the com- munity, and leaves few of its members untouched by its withering blight. Such a combination is more than a contract, it is an offence. . . In all such combinations, where the pur- pose is injurious or unlawful, the gist of the offence is the conspiracy. Men can often do by the combina- tion of many what severally no one could accomplish, and even what, when done by one, would be innocent." See also People v. Sheldon, 139 N. Y. 251 (1893), (34 N. E. Rep. 785, 36 Am. St. Rep. 690, 23 L. R. A. 221). ' Fairbanks v. Leary, 40 Wis. (643) (1876) : "The law does not and did not require that these parties should compete in the purchase of produce. Individually each had an undoubted right to bid therefor as low as he pleased. Collectively, they had the same right, unless deception was prac- tised on the public. But if they held themselves out as competing pur- chasers, and knew that the people who sold in the market where they oper- ated relied upon such competition (as well they might), as a guaranty that they were obtaining the full market value of their produce, while, at the same time, the purchasers were not in competition, but in a secret league to depress the market, the agreement under which the latter operated is illegal and void, and no court will lend its aid to enforce any of its stipulations." See also Craft v. McConoughy, 79 111. 346 (1875), (22 Am. Rep. 171). " Mogul Steamship Co. v. McGregor, L. R. 23 Q. B. 617 (1889). 591 § 328 INTEECOEPOEATE EELATIONS [PAET V purposes of trade and competition, is a very different thing from such a combination of several persons against one, with a view to harm him, as falls under the head of an indictable con- spiracy. There is no just cause or excuse in the latter class of cases. There is such a just cause or excuse in the former. There are cases in which the very fact of a combination is evi- dence of a design to do that which is hurtful, without just cause, — is evidence — to use a technical expression — of malice. But it is perfectly legitimate, as it seems to me, to combine capital for all the mere purposes of trade for which capital may, apart from combination, be legitimately used in trade. To limit combinations of capital, when used for pur- poses of competition, in the manner proposed by the argument of the plaintiffs, would, in the present day, be impossible — would be only another method of attempting to set boundaries to the tides." The fact that a combination, after its formation, may become a party to a conspiracy — may intentionally injure or oppress others — does not relate back to and invalidate the original combination agreement. The combination will be liable for the subsequent conspiracy, but the validity of its organization will depend solely upon the contract as mad^, and the facts and circumstances attending its execution. The fact that a combination is against public policy does not make it a conspiracy. If contravening the rules of public policy it is invalid, and it is made no more invalid by desig- nating it a conspiracy. The inexact use of terms in judicial decisions has occasioned much of the confusion attending the law of combinations. 592 CHAP. XXXIl] APPLICATION OP LAW OF MONOPOLIES § 330 CHAPTER XXXII APPLICATION OP LAW OF MONOPOLIES I 329. Primary Meaning of Term " Monopoly." § 330. Growth of Monopolies — Tlieir Illegality. § 331. No True Monopolies in United States. Patents and Other Quasi- monopolies. § 332. Modern Use of Term " Monopoly." § 333. Direct Test of Validity of Combination not whether it is a Monopoly. § 329. Primary Meaning of Term " Monopoly." — The mean- ing of the term " monopoly," used in a historic and exact sense, is best expressed in the early definition of Lord Coke: " A monopoly is an institution, or allowance by the king by his grant, commission, or otherwise, to any person or persons, bodies politicque, or corporate, of, or for, the sole buying, selUng, making, working, or using of anything, whereby any person or persons, bodies politicque or corporate, are sought to be restrained of any freedome, or liberty that they had before, or hindred in their lawful trade." ' § 330. Growth of Monopolies — Their Illegality. — Monopo- lies of the character described by Lord Coke were grants from the crown of exclusive rights to control the manufacture or sale of commodities and, while employed by earlier English sov- ereigns, reached their extreme development in the reign of Queen Elizabeth. She husbanded her own resources at the expense ' 3 Coke's Inst. 181. This defini- ledge allowed by the king for the sole tion of Lord Coke was quoted with buying and selling, making, working, approval by Justice Story in his or using of anji^hing whatsoever; dissenting opinion in the Charles whereby the subject in general is River Bridge Case, 11 Pet. (U. S.) restrained from that liberty of manu- 606 (1837), and by Justice Field in facturing or trading which he had his dissenting opinion in the Slaughter before." 4 Blackst. Com. 159. House Cases, 16 Wall. 102 (1872). Leeper v. State, 103 Tenn. 500 See also arguments of Holt and Treby, (1899), (53 S. W. Rep. 962, 48 afterwards Chief Justices of the King's L. R. A. 170): "A 'monopoly' has Bench, as counsel, in the celebrated been defined to be an exclusive right case of East India Co. v. Sandys, 10 granted to a few of something which How. State Tr. 371 (1684). was before a conamon right." A monopoly is "a license or privi- 593 § 330 INTEHCOnPORATIO IIBLATIONS [part V of hni' iieoplc, and rewarded lier favorites by grants of innumer- able patoiitH for monopolies. The natural result was an incroas(! in price of the rie('c;sHario.s of life. " There was scarcely a fiunily in the realm," says Lord Macaulay,' " that did not feel itself aggrieved ))y the oppression and extortion which the abuse naturally caused. Iron, oil, vinegar, coal, lard, starch, yarn, leather, glass, could be bought only at exorbitant prices." Relief first came from the courts, and in the great Case of the Monopolies^ decided during the reign of Queen IClizabeth, grants of monopolies were held to be void. The common law against monopolies, thus established, was reenforcod, after the death of Elizabeth, by the Statute 21 James I. ch. 3, which provided that all grants of monojjolies, with a few exceptions, were " altogether contrary to the laws of this realm and so are and shall be utterly void and of none effect and in no wise to be put in use or execution." The English common law, including the Statute of James I. against monopolies, is the basis of American jurisprudence,' ' Macaulay's History of England, vol. 1, p. 58. ^ Daroy v. AUein, Coke, Part 11, 86b (1002), (Noy, 173). In this case it was declared that a patent from (^ii benefits of which W(^re thus claimed, the statute of James I. against monopolies was one CHAP. XXXIl] APPLICATION OF LAW OP MONOPOLIES § 331 and a monopoly, in the sense in which the term has been used — if ever granted — would be illegal and void in this country, independent of statutory enactment. § 331. No true Monopolies in United States. Patents and other Quasi-Monopolies. — A monopoly in its primary sense is, stating essential elements, (a) a grant from the State of (b) an exclusive privilege whereby (c) a class of persons are de- prived of privileges previously enjoyed. There are no monopolies of this character in the United States. Combinations of corporations for the purpose of suppressing competition may possess the last two elements. They may obtain for themselves the absolute control of the market for an article of necessity, and thus restrain others " from that liberty of manufacturing and selling which they had before." Such combinations may be against public policy and illegal, but they are not monopolies, strictly speaking, because the essential element — a legislative grant — is lacking. Patents, copyrights and grants of exclusive franchises are denominated monopolies, and a patent is sometimes selected as an illustration of a_ true monopoly.' They have the first two elements of a monopoly, but not the last. They are legislative grants of exclusive privileges, but they do not of the most important. And when the ' Edison Electric Light Co. v. Saw- Colonies separated from the mother yer-Man Electric Co., 53 Fed. 598 country no privilege was more fully (1892) : "The present complainants recognized or naore completely in- are entitled, by the patent laws, to a corporated into the fundamental monopoly, for the term of the patent, law of the country than that every of the manufacture and sale of the free subject in the British empire was lamps made under it. The right to entitled to pursue his happiness by this monopoly is the very foundation following any of the known established of the patent system." trades and occupations of the country. Letters patent for new inventions subject only to such restraint as for limited periods were expressly equally affected all others. The excepted from the operation of the immortal document which proclaimed statute against monopolies. 21 James the independence of the country I., ch. 3 (1624). declared as self-evident truths that For consideration of the ap- the Creator had endowed all men plication of the federal anti-trust 'with certain inalienable rights, and statute to combinations in respect that among these are life, liberty, and of patents and copyrights see post, the pursuit of happiness, and that to ch. XXXIX. secure these rights governments are instituted among men.'" 595 §331 INTERCORPORATE RELATIONS [part V necessarily encroach upon existing rights. Patents are granted for new inventions, and copyrights for new books. Grants of exclusive franchises for the operation of public utilities not previously existing, do not deprive any class of persons of privileges possessed. Patents, copyrights and exclusive fran- chises are, however, in the nature of monopolies, and may properly be designated gMasi-monopolies.' used in its original sense which, as shown in the text, would have ex- cluded altogether grants of exclu- sive privileges for the operation of public utilities not previously exist- ing. The broader meaning given to the term in construing such grants is indicated by the following illustra- tive cases; the majority of which relate to municipal, rather than to legislative, grants : ' Grants op Exclusive Privi- leges AS Constituting Monopolies. The term "monopoly" as applied to grants of exclusive prvileges is, in a sense, the antithesis of the term as applied to combinations. A cor- poration enjoying a grant of exclusive privileges is a monopoly within itself. A number of corporations uniting for the elimination of competition become a monopoly only through the act of combining. The term "monop- oly" as applied to the combination — its modern use — relates to inter- corporate relations, and combina- tions amounting to monopolies are considered at length in this treatise. On the other band, grants of exclusive privileges involve no such relations and their consideration is, strictly speaking, outside the scope of this work. The subject, however, being necessarily opened up, it is thought desirable to extend the examination slightly farther. As shown in the text monopolies in the original sense were illegal at common law and are unlawful and void in this country without con- stitutional or statutory enactment. Constitutional provisions have, how- ever, been adopted in a number of States similar to that of Arkansas which provides that, "Perpetuities and monopolies are contrary to the genius of a republic, and shall not be allowed." (See constitutional pro- visions in ch. XLI., post). In con- struing these provisions as well as in applying the common law with re- spect to grants of exclusive privileges the term "monopoly" has not been 596 Cases holding grants of exclusive 'privileges invalid as creating or tend- ing to create monopolies. An ordinance granting an exclu- sive privilege for the construction of water works and the use of city streets comes within the North Caro- lina constitutional prohibition against monopolies, notwithstanding such ex- clusive grant is made as an inducement to the establishment of such works. Thrift V. Elizabeth City, 122 N. C. 31 (1898), (30 S. E. Rep. 349, 44 L. R. A. 427). A grant by a county of an exclu- sive right of way to lay piping for supplying a town with water has been held to tend to create a monopoly in violation of the Texas constitu- tional provision. Edwards County v. Jennings, 89 Tex. 618 (1896), (35 S. W. Rep. 1053). See also Brenham v. Water Co. 67 Tex. 542 (1887), (4 S. W. Rep. 143). An ordinance granting a franchise to an electric light company coupled with a street lighting contract con- taining a condition that it should not be binding unless the grantee obtained CHAP. XXXIl] APPLICATION OP LAW OP MONOPOLIES 332 § 332. Modem Use of Term " Monopoly." — The principal injury to the public resulting from the grant of monopolies the exclusive right to use the streets for lighting purposes has been held invalid as constituting an attempt to create a monopoly. Monroe County 111. Co. v. Village of Mt. Gilead, 10 Ohio S. & C. P. Dec. 235 (1900). A grant of an exclusive privilege to operate gas and electric light plants in a city for a limited time con- fers a practical monopoly and must be strictly construed against the grantee. Capital City Light, etc. Co. v. City of Tallahassee, 42 Fla. 462 (1900), (28 So. Rep. 810). An ordinance granting privileges to some persons and refusing them on the same terms to others is void as tending to create a monopoly as well as being oppressive and unreasonable. aty of Danville v. Noone, 103 111. App. 290 (1902). A statute authorizing a residence park association to make regulations regarding the pursuits to be carried on in its park does not authorize the creation of a monopoly. Thousand Island Park Ass'n v. Tucker, 173 N. Y. 203 (1903), (65 N. E. Rep. 975). An ordinance making the use of an article within the control of a single corporation an essential to the per- formance of a city contract tends to create a monopoly in favor of such corporation and is void. Fishbum v. City of Chicago, 171 111. 338 (1898), (49 N. E. Rep. 532; 39 L. R. A. 482). See also Boon v. City of Utica, 5 Misc. Rep. 391 (1893), (36 N. Y. Supp. 932). Compare Field V. Barber Asphalt Co., 194 U, S. 618 (1904), (24 Sup. Ct. Rep. 784). II Cases holding grants of privileges not invalid as creating or tending to create monopolies. An ordinance granting to a water company, for a certain period, the privilege of establishing and oper- ating a system of waterworks in a city, but not granting it in terms the exclusive privilege, does not create a monopoly in violation of the Texas constitutional provision. Bartholemew v. City of Austin, 85 Fed. 359 (1898). See also Waco Water, etc. Co. v. City of Waco, (Tex. Civ. App. 1894), (27 S. W. Rep. 675). The grant of an exclusive privilege to a municipality to establish and op- crate water works does not constitute a monopoly in violation of the Ten- nessee constitutional provision. An ■ exclusive right in a municipal cor- poration is distinguished from such a right in a private corporation in that in the one case it'is held for the public benefit and in the other for private gain. City of Memphis v. Memphis Water Co., 5 Heisk (Tenn.) 495 (1871). See also Brenham v. Water Co. 67 Tex. 542 (1887), (4 S. W. Rep. 143). The lease by a city of its gas works coupled with an agreement to do nothing by way of ordinance or other- wise to interfere with the exclusive right of the lessee does not confer a, monopoly upon the lessee. Bailey v. Philadelphia, 184 Pa. St. 594 (1898), (39 Atl. Rep. 494). The grant by harbor commissioners for a term of years of the exclusive use of certain wharves, for the purpose of erecting grain elevators thereon, and providing for equal facilities to the public in the use of such ele- vators, does not create an unlawful monopoly. Taylor v. Montreal Harbor Com- mrs, 17 Rep. Jud. Que. C. S. 275 (1899). See also Northwestern Ware- house Co. V. Oregon R., etc. Co., 32 597 §332 INTERCORPORATE RELATIONS [part V arose from the exercise of the power to control and, conse- quently, to enhance the prices of commodities of commerce — especially, of the necessaries of life. This power, however, may be practically acquired by agreement, as well as by grant. When, by a combination between manufacturers or traders, the control of the market for a commodity is concentrated in the hands of a single company or association of companies, the evils attending the unrestrained control of prices may result. The possible effect of combinations being, therefore, the same as the effect of the early monopolies, the term " monop- oly," in modern times, is used to describe such combinations, and has acquired a much broader meaning than that origi- nally attaching to it.' As so used, it may be broadly defined Wash. 218 (1903), (73 Pao. Rep. 388). The legislature has the right to grant exclusive privileges in the charter of a turnpike • company and such charter, when accepted by the company, becomes a contract with the State, the obligation of which cannot be impaired. Nashville etc. Turnpike Co. v. Davidson County, 106 Tenn. 2.58 (1901), (61 S. W. Rep. 68). See also St. Joseph Plank Road Co. v. Kline, 106 La. Ann. 325 (1901), (30 So. Rep. 854). The constitution of Alabama pro- vides that the legislature shall pass ■no act "making any irrevocable grants of special privileges or im- munities " and, consequently, the legislature may revoke such grants at its pleasure. Bienville Water Supply Co. v. aty of Mobile, 186 U. S. 212 (1902), (22 Sup. Ct. Rep. 820). A municipal ordinance giving the exclusive privilege of collecting all refuse within a city to a particular person and prohibiting all other persons from engaging in that busi- ness, is not void as creating a mo- nopoly. State V. Robb, 100 Me. ISO (1905), (60 Atl. Rep. 874). 598 A statute authorizing a railroad company owning more than three- fourths of the stock of another rail- road company to condemn outstand- ing stock interests does not confer exclusive privileges in violation of the Connecticut constitutional provision that "no man or set of men are en- titled to exclusive public emoluments or privileges from the community." New York, etc. R. Co. v. Offield, 77 Conn. 417 (1904), (59 Atl. Rep. 510). See ante, § 51: "The Right to condemn Stock." For consideration of other ordi- nances and municipal contracts held not to grant exclusive privileges tending to create monopolies, see Vincennes v. Gas Light Co., 132 Ind. 114 (1892); (31 N. E. Rep. 573, 16 L. R. A. 485) ; Qty of Denver v. Hubbard 17 Colo. App. 346 (1902), (68 Pac. Rep. 993) ; Reid v. Trow- bridge, 78 Miss. 542 (1901), (29 So. Rep. 167). ' The meaning now attached to the word "monopoly" is indicated by the following extracts from judicial deci- sions in different States : California. Herriman v. Menzies, 115 Cal. 16 (1896), (44 Pac. Rep. 660, 56 Am. St. Rep. 82, 35 L. R. A. 319) : "A monopoly exists where all, or nearly all, of an article of trade or CHAP. XXXIl] APPLICATION OF LAW OF MONOPOLIES 332 as the concentration of business in the hands of a few. In the initial decision in the Sugar Trust Case,^ Judge Barrett said: commerce within a community or district is brought within the hands of one man or set of men so as to practically bring the handling or production of the conunodity or thing within such single control, to the exclusion of competition or free traffic therein. Anything less than this is not monopoly. Webster de- fines it as the sole power 'of dealing in any species of goods, and Bouvier as the abuse of free commerce, by which one or more individuals have procured the advantage of selling all of a par- ticular kind of merchandise. And these definitions accord with that given by later writers. Spelling, Trusts, § 133. An agreement, the purpose or effect of which is to create a monopoly, is unlawful if it relate to some staple commodity, or thing of general requirement and use or of necessity, and not some thing of mere luxury or convenience.'* Illinois. People v. Chicago Gas Trust Co., 130 111. 294 (1889), (22 N. E. Rep. 798, 17 Am. St. Rep. 319, S L. R. A. 497) : "Contracts creating monopolies are null and void as being contrary to public policy." (Quot- ing from 2 Addison on Cont. 743.) Craft V. McConoughy, 79 111. 349 (1875), (22 Am. Rep. 171) : "In other words, the four firms, by a shrewd, deep laid, secret combination, at- tempted to control and monopolize the entire grain trade of the town and surrounding country." Iowa. Chapin v. Brown, 83 Iowa, 162 (1891), (48 N. W. Rep. 1074, 12 L. R. A. 428) : "The agreement is against public policy. It plainly tends to monopolize the butter trade at Storm Lake and destroy competi- tion in that business. " Michigan. Richardson v. Buhl, 77 JVIich. 658 (1889), (43 N. W. Rep. 1102, 6 L. R. A. 457), ("Diamond Match Case"): "All combinations among persons or corporations for the purpose of raising or controlling the prices of merchandise, or any of the necessaries of life, are monopolies and intolerable, "and ought to receive the condemnation of all courts." New York. Lough v. Outen- bridge, 143 N. Y. 271, 282 (1894), (38 N. E. Rep. 292, 42 Am. St. Rep. 712, 25 L. R. A. 674) : "The mo- nopoly which the law views with disfavor is the manipulation of a business in which the public are interested, in such a way as to entible one or a few to regulate it in their own interest, and to the detriment of the public by exacting unreason- able charges." De Witt Wire Cloth Co. v. New Jersey Wire Cloth Co., 16 Daly, 529 (1891), (14 N. Y. Supp. 279) : "Neither need the agreement or com- bination, in order to expose it to the denunciation of the law, constitute a complete monopoly or effect a total suppression of competition." Ohio. Central Ohio Salt Co. v. Guth- rie, 35 Ohio St. 672 (1880): "The clear tendency of such an agreement is to establish a monopoly, and to destroy competition in trade, and for that reason, on grounds of public policy, courts will not aid in its en- forcement." Pennsylvania. Nester v. Conti- nental Brewing Co., 2 Dist. R. 177 (1894) : "Where a pool or combina- tion reserves the right to regulate prices, they can, by the manipulation of prices, drive their competitors out of business, 'create a monopoly, arid enhance at their pleasure the prices to consumers." Texas. The constitution of Texas ' declares: "Perpetuities and monop- ' People V. North River Sugar Ref. Co., 54 Hun (N.Y.), 377 (1889), note. 599 § 332 INTERCORPORATE RELATIONS [part V " The monopoly with which the law deals is not limited to the strict equivalent of royal grants or people's patents. Any combination, the tendency of which is to prevent competition in its broad and general sense and to control, and thus it will enhance, prices to the detriment of the public,, is a monop- oly." olies are contrary to ;the genius of a free government, and shall never be allowed." Const. 1876, Art. I. § 26. In construing this provision it was said by a. federal court (Laredo v. International Bridge, etc. Co., 66 Fed. 246) (1895) : "There are classes of exclusive privileges which certainly do not amount to ' monopolies,' within the meaning of the common law or of the Texas constitution. Courts of last resort have generally refrained from propounding an au- thoritative affirmative definition of the ' monopoly ' so odious to the com- mon law and to the genius of a free government. It would try the power of expression of most judges, if not of human speech, to frame such a definition, outside of which a grant or contract mtist wholly and clearly rest to escape the stroke of nullity." And in construing the same provi- sion the Texas Court of Civil Appeals in Jones v. Carter (Tex. Civ. App. 1907), 101 S. W. Rep. 515, said: "Plaintiff advances the proposition that the term ' monopoly ' as used in the con- stitution of this State means a license or privilege allowed by some sover- eign authority for the sale, buying, selhng or manufacture of some article or commodity whereby the subjects are restrained of a liberty they there- tofore had with respect to the matter affected by the franchise. This defi- nition is technically correct. But the term as now understood is not confined to the above narrow limits. It embraces any combina- tion or contract, the tendency of which is to prevent competition in its broad and general sense and to 600 control prices to the detriment of the public, and the form assumed is immaterial." The Texas anti-trust statute of 1903 contains a definition of the "monopoly" therein prohibited. West Virginia. Pocahontas Coke Co. V. Powhatan Coal, etc. Co., 60 W. Va. 508 (1907), (56 S. E. Rep. 269, 116 Am. St. Rep. 901, 10 L. A. R. (N. 8.) 268): " Monopoly in its original sense was an exclusive right granted by the State to one or a few which was before of common right. As now used and understood monopoly embraces any combination the tendency of which is to prevent competition in its broad and general ' sense and to control prices to the detriment of the public." In this case the Court quoted with approval the following extract from Pingrey on Industrial and Interstate Contracts (| 320) : "MonopoUes may be divided into three classes : (1) All sources of supply may be put into the hands of one company, so no other source of supply is available. Such a monopoly is absolute and can sell its products at any price limited to the necessities of commerce. (2) The monopoly may have the best and most economical source of supply but competition still be possible, when competition can be suppressed by selling so low by the monopoly that competition is impossible. (3) The monopoly may use its general control of the market to require all parties to buy of it alone, under penalty of being denied further supplies. This method is generally practised by the monopoly." CHAP. XXXIl] APPLICATION OF LAW OF MONOPOLIES § 333 § 333. Direct Test of Validity of Combination not whether it is a Monopoly. — As already shown, grants of monopolies were invalid at common law even before the enactment of the Statute 21 James I., and — the common law being the basis of American law — such monopolies are illegal and void in the United States. A modern combination of capital, however, for the purpose of controlling the market for a commodity, is not founded upon legislative concession and does not amount to a monopoly, according to the common law use of that term. It may, how- ever, fall within the broad definition of a monopoly already stated; but in that case the test of its validity is a rule of public policy, rather than common law principles applicable to monop- olies of an essentially different nature. Such a combination is invalid, not because it is a monopoly but because it is against public policy. The statement in judicial decisions that " what- ever tends to create a monopoly is unlawful as being con- trary to public policy," ' merely states an intermediate and unnecessary standard of validity. The essential question is whether a combination — the result of certain agreements and acts — is against public policy; and no useful purpose is served in determining whether it may not also properly be denominated a monopoly, according to the modern use of that term. In view of the confused state of the law upon the question of the validity' of combinations, it is necessary in formulating any rule to reduce the legal principles involved to their simplest and most exact terms, and in so doing the use of the term " monopoly," although commonly employed in modern deci- sions, seems undesirable. ' People V. Chicago Gas Trust Co., 497) ; Stanton v. Allen, 5 Denio 130 111. 293 (1889), (22 N. E. Rep. 798, (N. Y.), 434 (1848). 17 Am. St. Rep. 319, 8 L. R. A. 601 § 334 INTERCOEPORATE REIATIONS [PART V CHAPTER XXXIII APPLICATION OF LAW OF CONTEACTS IN RESTRAINT OF TRADE § 334. Definition and Nature of "Contract in Restraint of Trade.'' § 335. Connection between Contracts in Restraint of Trade and Corporate Combinations. § 336. Modern Use of Phrase "Contract in Restraint of Trade." § 337. Direct Test of Validity of Combination not whether it is in Restraint of Trade. § 334. Definition and Nature of " Contract in Restraint of Trade." — The phrase " contract in restraint of trade," ac- cording to its primary and historic meaning, may be defined as a contract entered into by a person, — ancillary to a prin- cipal contract to which he is a party,' — wherein he binds himself, for a consideration, not to engage in a particular trade, business or occupation, for a stated term, within a prescribed territory.^ Contracts of this nature are usually entered into by vendors upon the sale of a business, property or practice, with the good- will attaching thereto, and are necessary in order to make the transfer of the good-will effective. They may, however, when conformable to governing principles, lawfully be entered into as ancillary to various other contracts. In United States v. Addyston Pipe, etc. Co/ Judge Taft, speaking for the Circuit Court of Appeals, said: " Covenants in partial restraint of trade are generally upheld as valid when they are agreements (1) by the seller of property or business, not to compete with the buyer in such a way as to derogate ' Chappell V. Brookway, 21 Wend. ' " Strictly speaking, a contract in (N. Y.) 162 (1839) : "A man cannot restraint of trade is any contract for money alone, where he has no whereby any party binds himself not other interest in the matter, purchase to follow some particular occupation, a valid contract in restraint of trade, trade, calling or profession, or engage however hmited may be the circle in some particular business or enter- of its operation." prise for a period within a particular See also Fox, etc. Steel Co. v. territory." 2 Eddy on Combina- Schoen, 77 Fed. 29 (1896) ; United tions, § 688. States V. Addyston Pipe, etc. Co., " United States v. Addyston Pipe, 85 Fed. 271 (1898), (46 L. R. A. etc. Co., 85 Fed. 281 (1898), (46 122). L. R. A. 122). 602 CHAP. XXXIIl] C0NTBACT8 IN RESTRAINT OF TRADE § 335 from the value of the property or business sold; (2) by a retiring partner not to compete with the firm; (3) by a partner, pending the partnership, not to do anything to interfere, by competi- tion or otherwise, with the business of the firm; (4) by the buyer of property not to use the same in connection with the business retained by the seller; and (5) by an assistant, servant, or agent not to compete with his master or employer after the expiration of his time of service." § 335. Connection between Contracts in Restraint of Trade and Corporate Combinations. — Contracts in restraint of trade, as defined in the preceding section, have but an incidental connection with combinations of corporations. A vendor corporation, and the persons interested in it, as ancillary to the contract of sale, might agree with the purchasing corpo- ration, in the formation of a corporate combination, not to engage in the same business again. Such an agreement, if within the limitations applicable to such contracts, would be, strictly, a contract in restraint of trade. But the prin- cipal contract between the corporations — even though de- signed to suppress competition — could only be referred to as a contract in restraint of trade by ignoring the meaning origi- nally attaching to that phrase. While conventional contracts in restraint of trade are only of adventitious interest in considering the legal principles governing combinations of corporations, it may be noted that the law concerning such contracts, as laid down by the courts, has undergone a process of relaxation — from strict disapproval to liberal enforcement. As said by Lord Macnaghten in the leading case of Nordenfelt v. Maxim-N ordenfelt Co. : ' " In the age of Queen Elizabeth, all restraints of trade, whatever they were, general or partial, were thought to be contrary to public policy, and therefore void.^ In time, however, it was found that a rule so rigid and far-reaching must seriously interfere with transactions of every-day occurrence. Traders could hardly venture to let their shops out of their own hands; the purchaser ' Nordenfelt v. Maxim-Nordenfelt ' Citing Colgate o. Bacheler, 1 Co., App. Cas. (1894), 564 (63 L. J. Croke, 872 (1602). Ch. 923). See also Wright v. Rider, 36 Cal. 342 (1868), (95 Am. Dec. 186). 603 § 335 INTERCORPORATE RELATIONS [part V of a business was at the mercy of the seller; every apprentice was a possible rival. So the rule was relaxed. It was relaxed as far as the exigencies of trade for the time being required, gradually and not without difficulty, until it came to be recog- nized that all partial restraints might be good, though it was thought that general restraints, that is, restraints of general application extending throughout the kingdom, must be bad." There has never been a departure from the principle that contracts restraining a person from engaging in any business or occupation are absolutely void. In other directions, how- ever, the early rule has been modified, and the courts have uniformly enforced contracts in partial restraint of trade, limited as to duration and the territory embraced, and have stated various arbitrary rules for determining what limita- tions of time and place are required by considerations of public policy.' While the American courts have not followed the most ' The development of the law con- cerning contracts in restraint of trade, in their primary sense, is illustrated in the following list of early and recent cases, selected with reference to such contracts in restraint of trade as might naturally be incidental to the transfer of a business in the formation of a cor- porate combination : United States: Navigation Co. v. Winsor, 20 WaU. 64 (1873) ; Fowle v. Parke, 131 U. S. 88 (1889), (9 Sup. Ct. Rep. 658); Chicago, etc. R. Co. v. Pullman Southern Car Co., 139 U. S. 79 (1891), (11 Sup. a. Rep. 490); United States v. Addyston Pipe, etc. Co., 85 Fed. 271 (1898), affirmed 175 U. S. 211 (1899), (20 Sup. Ct. Rep. 96) ; United States Chemical Co. v. Provident Chemical Co., 64 Fed. 946 (1894) ; Harrison v. Glucose Sugar Refining Co., 116 Fed. 304 (1902), (58 L. R. A. 916) ; National Enamel- ing, etc. Co. V. Haberman, 120 Fed. 415 (1903). An agreement by a patentee in connection with the sale of a patent that he will not, during the life of the patent, become connected with any corporation manufacturing articles 604 similar to those covered by the patent is not a contract in restraint of trade and competition and is valid. American Brake Beam Co. v. Pungs, 141 Fed. 923 (1905). California : Wright v. Rider, 36 Cal. 342 (1868), (95 Am. Dec. 186) ; Callahan v. DonnoUy, 45 Cal. 152 (1872), (13 Am. Dec. 172). Indiana: Beard v. Dennis, 6 Ind. 200 (1855), (63 Am. Dec. 380) ; Eisel V. Hayes, 141 Ind. 41 (1895), (40 N. E. Rep. 119). Maine: Whitney v. Slayton, 40 Me. 224 (1855). Massachusetts: Pierce v. Fuller, 8 Mass. 223 (1811), (5 Am. Dec. 102) ; Alger V. Thacher, 19 Pick. 51 (1837), (31 Am. Dec. 119) ; Taylor v. Blan- chard, 13 Allen, 370 (1866); Game- well Fire Alarm Tel. Co. v. Crane, 160 Mass. 50 (1893), (35 N. E. Rep. 98, 39 Am. St. Rep. 458, 22 L. R. A. 673) ; Anchor, etc. Mfg. Co. v. Hawkes, 171 Mass. 101 (1898), (50 N. E. Rep. 509, 68 Am. St. Rep. 403, 41 L. R. A. 189). Michigan: Hubbard v. Miller, 27 Mich. 15 (1873), (15 Am. Dec. 153) ; Real V. Chase, 31 Mich. 490 (1875). CHAP. XXXIIl] CONTRACTS IN RESTRAINT OF TRADE § 336 recent English decisions ' in holding that a contract in restraint of trade may, under certain circumstances, be enforced, although unlimited both in regard to time and territory, there is a ten- dency both in England and America, in determining the validity of such a contract, to apply the reasonable test stated by Lord Chief Justice Tindall in Horner v. Graves: ^ " We do not see how a better test can be applied to the question, whether reasonable or not, than by considering whether the restraint is such only as to afford a fair protection to the interests of the party in favour of whom it is given, and not so large as to inter- fere with the interests of the public. Whatever restraint is larger than the necessary protection of the party, can be of no benefit to either, it can only be oppressive; and if oppressive, it is, in the eye of the law, unreasonable." § 336. Modern Use of Phrase " Contract in Restraint of Trade." — The phrase " contract in restraint of trade," in the absence of an acquired meaning, would have a broad applica- tion. " Competition is the life of trade," and any contract having for its object the restriction of competition might ap- propriately be described as a contract in restraint of trade.' New Jersey : Trenton Potteries ing Cases, 7 Eng. Ed. 407, 8 Am. Ed. Co. V. Olyphant, 58 N. J. Eq. 507 756) ; Ward v. Byrne, 5 M. & W. 548 (1899), (43 Atl. Rep. 723, 78 Am. St. (1839) ; Whittaker v. Howe, 3 Beav. Rep. 612, 46 L. R. A. 255). 383 (1841) ; Jones v. Lees, 1 H. & N. ATeui Korfc ; Lawrence I). Kidder, 10 189 (1856); Leather Cloth Co. v. Barb. 641 (1851); Diamond Match Lorsont, L. R. 9 Eq. 345 (1869); Co. V. Roeber, 106 N. Y. 473 (1887), Rousillon v. Rousillon, L. R. 14 Ch. (60 Am. Rep. 464, 13 N. E. Rep. 419) ; Div. 351 ; Nordenfelt o. Maxim- Tode V. Gross, 127 N. Y. 480 (1891), Nordenfelt Co., App. Cas. (1894) 535 (28 N. E. Rep. 469, 24 Am. St. Rep. (63 L. J. Ch. 908). » 475, 13 L. R. A. 652) ; Leslie v. ' Nordenfelt v. Maxim-Nordenfelt Lorillard, 110 N. Y. 519 (1888), (18 Co., App. Cas. (1894) 535 (63 L. J. Ch. N. E. Rep. 363, 1 L. R. A. 456)'; 908) ; Badisohe Anilin und Soda Wood V. Whitehead Bros. Co., 165 Fabrik v. Schott, 61 L. J. Ch. 698 N. Y. 545 (1901), (59 N. E. Rep. (1892) ; Underwood o. Barker, 1 Ch. 357) ; Brett v. Ebel, 29 App. Div. 300 (1899), (68 L. J. Ch. 201). 256 (1898), (51 N. Y. Supp. 573). ^ Homer v. Graves, 7 Bing. 743 Ohio: Lange v. Werk, 2 Ohio St. (1831). 519 (1853). ' Ferd. Heim Brewing Co. v. Wisconsin: Berlin Machine Works Belinder, 97 Mo. App. 64 (1903), V. Perry, 71 Wis. 495 (1888), (38 (71 S. W. Rep. 691) : "'Competition' N. W. Rep. 82, 5 Am. St. Rep. 236). is the struggle between rivals for the England: Mitchel v. Reynolds, same trade at the same time. It 1 P. Wms. 181 (1711), (Smith's Lead- is self-evident that there can not be 605 336 INTERCORPORATE RELATIONS [part V In this sense, the phrase is used in many modern statutes and judicial decisions.^ competition unless there is trade, and so, though the popular saying is that ' competition is the life of trade,' yet it is quite certain that trade is the mother of competition, for the latter springs from the former, so, therefore, whatever restrains trade restrains competition in exact degree. " ' In Anderson v. Shawnee Com- press Co., 17 Akl. 231 (1906), (87 Pac. Rep. 315) (affi/rmed sub nom. Shawnee Compress Co. v. Anderson by the U. S. Supreme Court, April 13, 1908) the Court said : "The public welfare is the first consideration to which the courts will look, and then the question of whether the restraint upon the one party is or is not greater than the protection of the other requires. It is now the general holding that when one engaged in any business or occu- pation sells out his stock in trade and good-will, he may make a valid con- tract with the purchaser binding himself not to engage in the same business in the same place for a time named, and this is about as far as con- tracts in restraint of trade have been upheld by the courts in this country or . in England. But when, by the principal operation of any contract, it encroaches upon the rights of the public and transgresses the liberty of free competition, consideration then for the public welfare and for society becomes paramount, and must predominate over any individual right to contract. It is immaterial in determining the legality of such contracts whether or not it was en- tered into with any evil intent, but the material consideration is its in- jurious tendency, and the power thereby given to control prices. Nor, in order to vitiate a contract, is it essential that its result should be a complete monopoly. It is sufficient if it really tends to that end, and to 606 deprive the public of the advantages derived from free competition." In Addyston Pipe, etc. Co. v. United States, 175 U. S. 244 (1899), (20 Sup. Ct. llep. 96), Mr. Justice Peckham said : "We have no doubt that where the direct and immediate effect of a contract or combination among particular dealers in a com- modity is to destroy competition between them and others, so that the parties to the contract or combination may obtain increased prices for them- selves, such contract or combination amounts to a restraint of trade in the commodity, even though contracts to buy such commodity at the en- hanced price are continually being made." In Nester v. Continental Brewing Co., 161 Pa. St. 481 (1894), (29 Atl. Rep. 102, 41 Am, St. Rep. 894), the Supreme Court of Pennsylvania said of an agreement among brewers to regulate the price of beer: "The test question, in every case like the present, is whether or not a contract in restraint of trade exists which is injurious to the public interests. If injurious, it is void as against public policy." State V. Smiley, 65 Kan, 240, 257 (1902), (69 Pac. Rep. 199, 67 L. R. A. 903), affirmed 196 U. S. 447 (1905), (25 Sup. Ct. Rep. 289) : " From very early times it was the policy of the common law to encourage com- petitive trade, and to discourage contract restraints upon it. The courts refused to enforce stipulations between parties looking to the im- position of such restraints. The rule of policy remains to this day, and to this day the courts continue their refusal to countenance con- tracts of the character mentioned. . . . A great array of decisions, Eng- lish and American, will be found CHAP. XXXIIl] CONTRACTS IN RESTRAINT OF TRADE 336 Such use of the phrase should be condemned. The phrase has acquired a well-defined meaning. As already shown, for three hundred years it has been applied to ancillary con- tracts to refrain from engaging in a particular business, and other contracts of that nature; and there is no apparent rea- son why confusion should be occasioned by its use, at the present time, to describe contracts of an essentially different nature, however appropriate in the choice of words such use may be. But the more serious objection to the modern use of the phrase is that it offers a false standard for determining . all tending to the establishment of the proposition that combinations having for their object the restraint of trade by the prevention of com- , petition are inimical to public policy, their contracts in furtherance of their object non-enforceable, and their agreements of confederacy, followed by acts in prosecution of their pur- pose, rightful subjects of restrictive and penal legislation." American Biscuit, etc. Co. v. Klotz, 44 Fed. 725 (1891) : "So far, therefore, as the complainant's busi- ness is a combination in restraint of trade, . . . the law stamps it as vmlawful, and the courts should not encourage it. " John D. Park & Sons Co. v. Nat. Wholesale Druggists Ass'n, 50 N. Y. Supp. 1665 (1896) : "It is in restraint of trade and unlawful for such manu- facturer to become a party to a com- bination which shall prevent any of his customers from obtaining other goods of other manufacturers," etc. India Bagging Ass'n v. Kock, 14 La. Ann. 164 (1849) : "The agree- ment between the parties [not to sell cotton bagging except under certain conditions] was palpably and unequiv- ocally IX combination in restraint of trade, and to enhance in the market an article of ordinary necessity to cotton planters." Distilling, etc. Co. v. People, 156 ni. 486 (1895), (41 N. E. Rep. 188) : "No one . . can . . . doubt that it was designed to be, and was in fact, a combination in restraint of trade, and that it was organized for the purpose of getting control of the manufacture and sale of all distillery products, so a^ to stifle competition." See also State v. Nebraska Distilling Co., 29 Neb. 700 (1890), (46 N. W. Rep. 155). Klingel's Pharmacy v. Sharp, 104 Md. 230 (1906), (64 Atl. Rep. 1029) : "Where the direct and immediate effects of a contract or combination among particular dealers in a com- modity is to destroy competition between them and others, so that the parties to the contract or combina- tion may obtain increased prices for themselves, such contract or com- bination amounts to a restraint in trade of the commodity, even though contracts to buy such commodity at the enhanced price are constantly being made. Total suppression of trade in the commodity is not neces- sary in order to make the contract one in restraint of trade." The federal anti-trust statute also uses the phrase "contract in restraint of trade" in the broad sense and its meaning is more fully examined in connection with the construction of that statute. See ■post, § 387, "Use of Phrase 'Con- tract in Restraint of Trade. ' " 607 § 337 INTERCORPORATE RELATIONS [part V the validity of industrial combinations. The validity of a combination for the suppression of competition depends upon rules of public policy relating to the control of markets. The well established principles governing conventional contracts in restraint of trade, although likewise founded upon considera- tions of public policy, have little application. And yet, an examination of reported cases will show that the courts, in de- termining the validity of such combinations, repeatedly refer to those principles, and, in some cases, that contracts manifestly against such rules of public policy have been declared lawful be- cause limitations in regard to time and space were reasonable.' § 337. Direct Test of Validity of Combination not whether it is in Restraint of Trade. — Even if the modern use of the 'phrase " contract in restraint of trade " were unobjectionable, it is unnecessary. ' "The utter inadeguacy of the doctrine condemning contracts in restraint of trade, as a basis to which to refer that against restrictions upon competition seems to us to be made clear by illustration. At least until very recently, the doc- trine against contracts in restraint of trade would have been so applied as to hold illegal the withdrawal (without limit as to time or space) of one out of »■ thousand trade com- petitors in a given city, notwith- standing that the continuance of the other nine hundred and ninety- nine would have effectually pre- vented the danger of » monopoly. On the other hand, the same doc- trine would (as modified as to space) have been ordinarily so apphed as to hold legal the withdrawal, by agreement, of the nine hundred and ninety-nine, though such with- drawal would seem to be ordinarily within the condenmation of the pres- ent doctrine against restriction upon competition." Article in 33 Am. Law Rev. 68, entitled "Anti- Trust Legislation and the Doc- trine against Contracts in Restraint of Trade." See also note to 608 Harding v. American Glucose Co., 74 Am. St. Rep. 235. Pocahontas Coke Co. v. Powhatan Coal, etc. Co., 60 W. Va. 508 (1907), (56 S. E. Rep. 271, 116 Am. St. Rep. 901, 10 L. R. A. (N.S.) 268): "Many of the late authorities draw a distinc- tion between contracts which were in 'restraint of trade' as that phrase was understood in the early history of the common law, and contracts which are in 'restraint of competi- tion' and which are also in restraint of trade as understood in modem times. Both classes of contracts when unreasonable and to the injury of the public are alike illegal and against public policy. The illegality of a contract or combination for the restraint of competition does not lie in the agreement not to compete but in its reflex injury to the public. One way to control prices is to destroy or restrain competition. It has been said that many of the cases decided in America holding contracts valid as not being in unreasonable restraint of trade would have been held other- wise if the modern doctrine as to restraint of competition had been properly applied." CHAP. XXXIV] FORMULATION OF KULES § 338 Contracts and combinations in restraint of trade are de- clared to be contrary to public policy and, therefore, invalid. But the test of the validity of a combination, as pointed out in reference to monopolies,* is whether the particular acts and agreements of the parties in forming it are of such a nature, and for such a purpose, as to be against public policy. If so, the combination is invalid; and, if not against public policy, it is immaterial whether it is in restraint of trade. The syllogism: All contracts in restraint of trade are against public policy; this combination is a contract in restraint of trade; therefore, it is against public policy, formulates the reasoning in many decisions. This reasoning, while logical, is circuitous. The essential question is whether the combina- tion, itself, is opposed to public policy. The determination of this question is not promoted by the intervention of another standard. CHAPTER XXXIV FORMULATION OF RULES OP PUBLIC POLICY § 338. Definition and Nature of Public Policy. § 339. Necessity for Rules of Public Policy. S 340. Difficulty of formulating Rules of Public Policy concerning Combi- nations. § 341. Formulation of Rules. Basis in Judicial Decisions. § 342. Basis of Rules — (A) Case of the Sugar Trust. § 343. Basis of Rules — (B) Case of the Standard Oil Trust. § 344. Basis of Rules — (C) Whiskey Trust Cases. § 345. Basis of Rules — (D) Case of the Preservers Trust. I 346. Basis of Rules — (E) Case of the Chicago Gas Trust. § 347. Basis of Rules — Ante, § 333 : "Direct Test of Validity of Combination not whether it is u, Monopoly." 609 § 338 INTBRCORPOHATB RELATIONS [part V which holds that no subject can lawfully do that which has a tendency to be injurious to the pubUc, or against the public good." ' A more precise definition cannot well be stated. Although the fundamental principles are unchangeable,^ public policy, in its very nature, is uncertain and fluctuating.^ It varies with the- times.* The growth of trade and commerce ^ Egerton v. Brownlow, 4 H. L. Cas. 196 (1853). See also People v. Chicago Gas Trust Co., 130 111. 268 (1889), (22 N. E. Rep. 798, 17 Am. St. Rep. 319, 8 L. R. A. 497). 2 Brooks V. Cooper, 50 N. J. Eq. 769 (1893), (26 Atl. Rep. 981, 35 Am. St. Rep. 793, 21 L. R. A. 617), per Lippin- cott, J. ; "It has been declared that public policy is a variable quality, but the principles to be applied have always repiained unchanged and un- changeable, and public policy is only variable in so far as the habits, capaci- ties and opportunities of the public have become more varied and com- plex. The relations of society become from time to time more complex ; statutes defining and declaring public and private rights multiply rapidly, and public policy often changes as the laws change, and therefore new applications of old principles are required. Whatever tends to in- justice and oppression, restraint of liberty, restraint of legal right ; what- ever tends to the obstruction of justice, a violation of a statute, or the obstruction or perversion of the administration of the law; whatever tends to interfere with or control the administration of the law, as to executive, legislative or other official action, whenever embodied in and made the subject of a contract, the contract is against public policy, and therefore void, and not susceptible of enforcement. All contracts preju- dicial to the interests of the public, such as contracts tending to prevent competition, whenever the statute or any known rule of law require it, are void." 610 ' In Richardson v, Mellish, 2 Bing. 252 (1824), Mr. Justice Burrough said : "I, for one, protest, as my Lord has done, against arguing too strongly upon public policy ; it is a very unruly horse, and when once you get astride it you never know where it will carry you." * In Koehler v. Feurbach, 2 Mo. App. 14 (1876), the Court said : "What constitutes public policy is not, perhaps, exactly de- terminable ; it is indefinite in its nature, changing with the habits, wants, and opinions of society. Fore- stalling, regrating, and engrossing were prohibited by statute in Eng- land three hundred years ago, and were considered to be against public policy so late as the time of Blackstone. They are now the great basis of profits ; are not only prac- tised every day, but are recog- nized as the very life of trade, and without them it may be said that commerce, as known amongst us, would be at an end. . Contracts in total restraint of trade, or of marriage, against the prohibitions of statutes, to infringe a. copyright, to defraud the government or third parties, to oppress third parties or prevent the due course of justice, or induce a violation of public duty, that tend to encourage unlawful or immoral acts, or that are founded on trading with an enemy, are all against public policy, and void. And, probably, this is a complete enumeration of the several classes to which contracts against public policy may be reduced." CHAP. XXXIV] FORMULATION OP RULES § 339 has made acts and contracts which formerly were in conflict with public policy, recognized and approved methods of doing business. It is as impossible to give an exact definition of the phrase as it is to define fraud. The rule stated by Judge Story,' however, may safely be applied: " Whenever any con- tract conflicts with the morals of the time, and contravenes an established interest of society, it is void, as being against public policy." The public policy of a State is manifested, primarily, by its statutes and, secondarily, by its judicial decisions.^ Ques- tions of public policy, however, generally arise in connection with contracts which are neither mala prohibita nor mala in se. The former are expressly prohibited and the latter are mani- festly unlawful. In testing the validity of this middle class of contracts by the standard of public policy, the right of the individual to contract — a fundamental right — is liable to be impaired, and such contracts should be set aside only when clearly inimical to established interests of society.^ § 339. Necessity for Rules of Public Policy. — As already shown, the application of the law of monopolies and of con- ' 1 story on Contracts, 649. Rep. 577, 74 Am. St. Rep. 235, 64 2 United States v. Trans-Missouri L. R. A. 738). Freight Ass'n, 166 XJ. S. 340 (1897), " Kellogg v. Larkin, 3 Pin. (Wis.) (17 Sup. Ct. Rep. 559) : "The public 136 (1851), (56 Am. Dec. 164) : "I by policy of the government is to be no means intend to deny the right or found in its statutes, and when they propriety of jiidicially determining have not directly spoken, then in the that a contract that is actually at war decisions of the courts and the con- with any established interest of society stant practice of the government is void, however individuals may officials ; but when the law-making suffer thereby, because the interest power speaks upon a particular sub- of individuals must be subservient ject, over which it has constitutional to the public welfare. But I insist power to legislate, public policy in that before a court should determine such a case is what the statute enacts. a contract which has been made in If the law prohibit any contract or good faith, stipulating for nothing combination in restraint of trade or that is malum in se, nothing that is' commerce, a contract or combination made malum prohibitum, to be void made in violation of such law is void, as contravening the policy of the whatever may have been theretofore State, it should be satisfied that the decided by the courts to have been advantage to accrue to the public the public policy of the country on from so holding is certain and sub- that subject." ' stantial, not theoretical or problem- See also Harding u. American Glu- atical." cose Co., 182 111. 551 (1899), (55 N. E. 611 § 340 INTERCORPORATE RELATIONS [PART V tracts in restraint of trade in determining the validity of a particular combination, only leads to the result that if it is against public policy, it is illegal. ■ The same consequence follows the application of other tests which have been stated by the courts and text writers. Thus, it has. been said that the test of the illegality of a combination is the injury to the public. It is undoubtedly true that the law condemns only those combinations which are injurious to the public, but, as an effective test of the validity of a combina- tion, the statement is valueless. In applying it, the only result obtainable is that if a particular combination injures the public it is illegal; but the essential question, whether it is injurious, can only be determined by the application of a rule of public policy. So, in a more definite form, it is stated that a com- bination of competing producers is illegal which has for its object the maintenance of prices and restriction of production. But agreements to maintain prices and limit production are only means of restraining competition, and power to control prices and restrict production is only an incident of the suppres- sion of competition. To what extent combinations in restraint of competition are invaUd depends upon the appUcation of a rule of public policy. The formulation of rules of public policy is, therefore, neces- sary in order to obtain definite standards for determining the legality or illegaUty of any combination. § 340. Difficulty of formulating Rules of Public Policy con- cerning Combinations. — When public policy is manifested by statute, the statute is itself the rule; ^ when it is manifested by judicial decisions, based upon a uniform course of reason- ing, the formulation of a rule of public policy requires only the classification of governing principles. But whatever rules of public policy may exist for determining the validity of a combination of corporations have been evolved coinciden- tally with the development of the combination itself, and the process of evolution has been circuitous. The courses of reasoning by which different courts have arrived at the same ' When a combination is authorized policy. Stewart v. Erie, etc. Transp. or prohibited by statute, that fact is Co., 17 Minn. 372 (1871). conclusive upon the question of public 612 CHAP. XXXIV] FORMULATION OF RULES § 342 conclusion have varied widely; and, upon the same state of facts, different conclusions have been reached. The formulation of rules from conflicting decisions upon a subject uncertain in its nature is, obviously, attended with difficulties. § 341. Formtiiation of Rules. Basis in Judicial Decisions. — While the framing of rules of public policy concerning com- binations is difficult, both by reason of the subject and con- flicting decisions, certain broad principles may be gathered from the current of authority. Combinations of a certain nature are clearly against public policy and void. Other combina- tions are clearly valid. Concerning still others, there is an irreconcilable diversity of judicial opinion. In ascertaining these principles, an extended examination of the decisions of the courts is necessary. Judicial decisions form the basis of any rule of public policy not established by statute, and leading cases must be carefully examined to ascer- tain their underlying principles. In presenting the result of such an examination in a treatise, general propositions may be misleading. The law, in cases of combinations, is closely interwoven with the facts. An exact appreciation of the prin- ciples of public policy enunciated can only be obtained by examining the reasons and reasoning of the court, in connection with the facts of the case. It, therefore, seems advisable to state the conclusions of the courts — extracts from the opinions — in the leading cases upon combinations of corporations, together with facts sufficient to indicate the scope of the deci- sions — as indicating the basis of rules of public policy.' § 342. Basis of Rules — (A) Case of the Sugar Trust. — The two leading cases upon the validity of combinations are, un- ' It can hardly be said that the in the following pages, from which formulation of rules of public policy the rules of public policy are for- is so necessary now as it was before mulated, appeared, with few excep- the adoption of the federal, and the tions, in the first edition of this trea- many State, anti-trust statutes. These tise. Rules of public policy are, statutes manifestly furnish the most however, necessary in States having effective tests of the validity of com- no anti-trust statutes. And even in binations, and the recent cases upon the States having such statutes, they the subject of combinations have are, as a general rule, held to sup- nearly all been brought under such plement and add to, but not to statutes. In tact, the cases examined supersede, common law remedies. 613 §342 INTERCOBPORATE RELATIONS [part V doubtedly, the cases of the Sugar and Standard Oil Trusts. In the Sugar Trust Case,^ the trial court, Judge Barrett, said: " Any combination, the tendency of which is to prevent competition in its broad and general sense, and to control, and thus at will enhance, prices to the detriment of the public, ' People V. North River Sugar Bef'g Co., 121 N. Y. 582 (1890), (24 N. E. Rep. 834, 18 Am. St. Rep. 843, 9 L. R. A. 33), B. c. 54 Hun, 354 (1889), (3 N. Y. Supp. 401). (The latter report includes both the gen- eral and special term decisions.) The Sugar Trust was a combina- tion of sugar refineries, formed in 1887, under the name of the Sugar Refineries Company. Individuals and firms took the form of corporations before entering the combination. All the stock of the several corporations, was transferred to a board of eleven trustees, who issued in lieu thereof "trust certificates" for cor- responding proportionate amounts. The object of the "trust," as stated in the agreement, was as follows : "(1) To promote economy of administration and reduce the cost of refining, thus enabling the price of sugar to be kept as low as is con- sistent with reasonable profit. "(2) To give to each refinery the benefit of all appliances, known or used by the others, and useful to improve the quality and diminish the cost of refined sugar. "(3) To furnish protection against unlawful combinations of labor. "(4) To protect against induce- ments to lower the standard of refined sugars. "(5) Generally to promote the interests of the parties hereto in all lawful and suitable ways." The trustees received the profits from all the plants and distributed them as dividends upon the "trust certificates." Directors of the several corporations were chosen, but had 614 no power. Quo warranto proceedings were instituted by the attorney- general of New York against the North River Sugar Refining Company, a constituent corporation, upon the ground that it was a. party to an unlawful combination, and, also, had exceeded its chartered powers. The case was first heard before Judge Bar- rett, at special term, who held that the combination was a monopoly, and that the defendant corporation had forfeited its charter by ultra vires acts injurious to the .public. Upon appeal to the general term, the former decision was sustained upon similar grounds. The Court of Appeals, while affirming the judgment, placed its decision solely upon the ground that the corporation had forfeited its charter by entering into an unlaw- ful partnership of corporations, and by attempting to practically consoli- date with other corporations without following the consolidation statute. The decision in this case was, how- ever, without practical effect. The trust was reorganized under the laws of New Jersey in the form of a cor- porate combination, and has done business ever since. For other cases relating to the Sugar Trust, see People v. American Sugar Ref'g Co. (Cal.), 7 Ry. & Corp. L. J. 83 (1890); Cameron v. Have- meyer, 25 Abb. N. C. 438 (1890), (12 N. Y. Supp. 126) ; Gray v. De Castro, etc. Sugar Ref'g Co., 57 Hun (N. Y.), 592 (1890), (10 N. Y. Supp. 632) ; United States v. E. C. Knight Co., 156 U. S. 1 (1895), (15 Sup. Ct. Rep. 249). CHAP. XXXIV] FORMULATION OP RULES § 342 is a legal monopoly. And this rule is applicable to every mo- nopoly, whether the supply be restricted by nature or susceptible of indefinite production. The difficulty of affecting the unlaw- ful purpose may be greater in one case than in the other, but it is never impossible. Nor need it be permanent or complete. It is enough that it may be even temporarily and partially suc- cessful." Upon appeal, the general term, Judge Daniels, said: "In this case it was a leading object to combine together the dif- ferent corporations and individuals engaged in this business, not only in and about the City of New York, but throughout the country, and to secure that control by a substantial organi- zation for an indefinite period of time. This was not to be done, and was not, in fact, done for an idle purpose, or merely to furnish the means of protection against unlawful combina- tions or for any mere economical object, but it was, manifestly, to place this business within the control, and subject to the dictation, of this association, and of the board selected for the government of its affairs. And, after putting forth the efforts necessary to secure the end, it would not only be idle, but ab- surd, to indulge in the supposition that it was not intended to wield the authority, in this manner secured, for the pecuniary advantage of the associates. And the direct and usual way in which that is accomplished, following out the common im- pulses of practical business men, is by the advancement of the prices of the commodities manufactured and sold, in the course of the business whose control may be in this way secured. When the opportunity to do that is provided, human selfish- ness is sure to turn it to a profitable account. A jury certainly would be fully justified in concluding, from the agreement and the other facts in evidence in the case, that the governing object of the association was to promote its interests and advance the prosperity of the associates, by limiting the supply, when that could properly be done, and advancing the prices of the products produced by the companies. To conclude otherwise would be to violate all the observations and experiences of practical life. This is a controlling feature in this controversy. And that it was intended to be secured by the organization provided for, and which actually took place, is reasonably free 615 §343 INTERCOEPOHATE RELATIONS [part V from doubt. And where that appears to be the fact, the agree- ment, ^association, combination or arrangement, or whatever else it may be called, having for its objects the removal of com- petition and the advancement of prices of necessaries of life, is subject to the condemnation of the law, by which it is de- nounced as a criminal enterprise." The Court of Appeals, however, finally decided the case upon grounds peculiar to corporation law, saying: " We have reached our conclusion, and it appears to us to have been established that the defendant corporation has violated its charter and failed in the performance of its corporate duties, and that in respects so material and important as to justify a judgment of dissolution. Having reached that result, it becomes needless to advance into the wider discussion over monopolies and competition and restraint of trade and the problems of political economy. Our duty is to leave them until some proper emergency compels their consideration." § 343. Basis of Rules — (B) Case of the Standard Oil Trust. — In the Case of the Standard Oil Trust ' the Supreme Court of Ohio, by Judge Minshall, said: ' state 17. Standard Oil Co., 49 Ohio St. 137 (1892), (30 N. E. Rep. 379, 34 Am. St. Rep. 541, 15 L. R. A. 145, 36 Am. & Eng. Corp. Cas. 1). The celebrated Standard Oil Trust, a combination of corporations en- gaged in the production and sale of petroleum and its products, was formed in 1882 by a trust agreement, substantially in the following form ; (1) "As soon as practicable, a cor- poration shall be formed in each of the following States under the laws thereof, to wit : Ohio, New York, Permsylvania and New Jersey. ..." (2) "The purpose and powers of said corporation shall be to mine for, produce, manufacture, refine, and deal in petroleum and all its products, and aU the materials used in such businesses, arid transact other business collateral thereto. . . " (3) "At any time hereafter, . . . similar corporations may be formed in other States and Territories." 616 (4) "Each of said corporations shall be known as the Standard Oil Co. of [name of State]." (5) "The capital stock of each of said corporations shall be fixed at such an amount as may seem necessary. (6) "The shares of stock of each corporation shall be issued only for money, property, or assets, equal at a fair valuation to the par value of the stock delivered therefor." (7) "All of the property, real and personal, assets and business of each and all of the corporations . . . men- tioned in class first . . . in or of each particular State, shall be transferred to and vested in the Standard Oil Company of that particular State. (8) "The individuals embraced in class second . . . agree . . to sell, assign, transfer, convey and set over all the property, real and personal, assets and business mentioned and CHAP. XXXIV] FOKMULATION OF RULES §343 "By this agreement, indirectly it is true, but none the less effectually, the defendant is controlled and managed by the Standard Oil Trust, an association with its principal place of business in New York City, and organized for a purpose con- trary to the policy of our laws. Its object was to establish a virtual monopoly of the business of producing petroleum, and of manufacturing, refining and dealing in it and all its products, throughout the entire country, and by which it might not merely embraced in schedules accompanying such sale and transfer to the Standard Oil Company, or Companies, of the proper State or States. . . " (9) "The parties embraced in class third . . . agree to assign and trans- fer all the stock held by them in the corporations . . . herein named to the trustees herein provided for. . . . And whenever and as often as all the stocks of any corporation . . . are vested in said trustees, the proper steps may then be taken to have all the money, property, real and per- sonal, of such corporation . . . con- veyed to the Standard Oil Company of the proper State, . . in which event the trustees shall receive stocks of the Standard Oil Companies equal to the value of the money, property, and business assigned. . . " (10) "The consideration for the transfer ... to each or any of the Standard Oil Companies, shall be the stock of the respective . . . com- pany to which such transfer or con- veyance is made. . . . Said stock shall be delivered to the trustees. It (11) "The consideration for any stocks delivered to said trustees . . . shall be the delivery ... to the per- sons entitled thereto of trust cer- tificates . . . equal at par value to the par value of the stock of the said Standard Oil Companies so received by said trustees." This agreement was signed by all the officers and stockholders of the Standard Oil Co. of Ohio, — the defendant in the case, — but its cor- porate name and seal were not affixed. Quo warranto proceedings were instituted by the attorney-general of Ohio upon the ground that the defendant corporation had misused its franchises by becoming a party to an agreement opposed to public policy. The Supreme Court of Ohio held upon demurrer to the defendant's answer : 1. That the defendant company entered into the agreement in its corporate capacity. 2. That the agreement subjected the defendant to a control inconsist- ent with its character as a corpora- tion. 3. That it provided for an associa- tion contrary to public poUcy. Judgment of absolute ouster was denied on account of the statute of limitations, but it was decreed that the defendant be ousted "from the power to make and perform " said agreement. This judgment was rendered in 1892, and at the present time (1908) the same combination — perhaps in a different form — is carrying on a busi- ness of far-reaching and ever-increas- ing magnitude. For consideration of rights of holders of Standard Oil " trust cer- tificates," see Rice v. Rockefeller, 134 N. Y. 174 (1892), (31 N. E. Rep. 907, 30 Am. St. Rep. 658, 17 L. R. A. 237). 617 § 344 INTERCORPORATE RELATIONS [PART V control the production, but the price, at its pleasure. All such associations are contrary to the policy of our State and void. . . . Much has been said in favor of the objects of the Standard Oil Trust, and what it has accompUshed. It may be true that it has improved the quality and cheapened the cost of petroleum and its products to the consumer. But such is not one of the usual or the general results of a monopoly; and it is the policy of the law to regard, not what may, but what usually happens. Experience shows that it is not wise to trust human cupidity when it has the opportunity to aggrandize itself at the expense of others. . . . " A society in which a few men are the employers, and the great body are merely the employees or servants, is not the most desirable in a republic; and it should be as much the policy of the laws to multiply the numbers engaged in independent pursuits or in the profits of production, as to cheapen the price to the consumer. Such policy would tend to an equality of fortunes among its citizens, thought to be so desirable in a republic, and lessen the amount of pauperism and crime." § 344. Basis of Rules — (C) Whiskey Trust Cases. — In the Case of the Distillers and Cattle Feeders Trust ^ (" Whiskey ' State V. Nebraska Distilling Co., tillery plant is situated is deeded to 29 Neb. 700 (1890), (46 N. W. Rep. some one member of the company 155). The Distillers and Cattle as trustee for the stockholders, and Feeders Trust, an unincorporated the trustee then leases said real es- association, was formed in 1887 by tate to the company for the term of the owners of nine distilleries located twenty-five years. The capital stock north and west of the Ohio River, of the company is cancelled and new for the purpose of restricting the stock issued to said nine trustees of output, regulating prices, and sup- the trust, for which the trustees give pressing competition in the manu- the agreed amount of certificates of facture and sale of alcohol, high the trust. The board of directors wines, and other liquors. The object of the company resigns and a new of the trust was accomplished by its board is elected, a majority of which getting control of as many distilleries are taken from the nine trustees of as possible, and the method adopted the trust. . . The trustees of the is stated in the report as follows : trust have almost unlimited power "An arrangement or agreement is and control over all distilleries that made by which the company is to enter it. They can limit their produc- transfer its capital stock to the trus- tion or suspend their operation alto- tees of the Distillers and Cattle gether. . . . The trustees confine Feeders Trust, for which said trustees the production of the distilleries under are to issue certificates of the trust. their control to the large houses sit- The real estate upon which the dis- uated in favorable localities, which 618 CHAP. XXXIV] FOEMTJLATION OP RULES §344 Trust "), the Supreme Court of Nebraska said: " The findings in this case, to which no objection is made, clearly show that the object of the DistilUng Company in entering into the illegal combination was to destroy competition and create a monopoly, not only by limiting the production of alcohol, but, by disman- tling as many distilleries as the trust saw fit, absolutely prevent the manufacture of the article except in the few establishments controlled by the trust, and thus it would be enabled to control prices, prevent production, and create a monopoly of the most offensive character." In a later case against the Distilling and Cattle Feeding Company,^ successor to the Distillers and Cattle Feeders Trust, the Supreme Court of Illinois said, concerning the latter combination: " There can be no doubt, we think, that the Distillers and Cattle Feeders Trust, which preceded the can be run at less expense than small houses located in unfavorable places. . The said trustees can, and do, at will restrict and limit the produc-. tion and supply of alcohol, spirits, and other liquors, and thereby enhance their value." The Nebraska Distilling Company became a party to the trust in the manner described. Quo warranto pro- ceedings were instituted against that corporation, and, upon the facts stated, the Supreme Court of Nebraska held that the trust agreement was contrary to public policy and void, and that the defendant corporation had forfeited its charter. The Distillers and Cattle Feeders Trust being thus attacked, a corpora- tion, called the Distilling and Cattle Feeding Company, was formed, in 1890, for the purpose of taking over the assets of the trust and it issued its certificates of stock in lieu of the old trust certificates. Quo warranto proceedings against the new corporation were instituted by the attorney-general of Illinois upon the ground that it was a mere continuation, in corporate form, of an illegal trust, and the Supreme Court of Illinois, in Distilling and Cattle Feeding Co. v. People, 156 III. 448 (1895), (41 N. E. Rep. 188, 47 Am. St. Rep. 200), held that the conveyance from the trust to the cor- poration was merely a form ; that (p. 491) "the trust, . . being re- pugnant to public policy and illegal it is impossible to see why the same is not true of the corporation which succeeds to it and takes its place." Judgment of ouster was thereupon pronounced against the company. Prior to final decree, however, a receiver of the corporation had been appointed by the United States Circuit Court (Olmstead v. Distilling and Cattle Feeding Co., 73 Fed. 44 (1895)), and the property of the cor- poration was subsequently sold, and, through a reorganization plan, an- other corporation, The American Spirits Manufacturing Company, or- ganized under the laws of New Jersey, acquired the assets and business. Various reorganizations have taken place since that time. ' Distilling and Cattle I'eeding Co. V. People, 156 111. 486 (1895), (41 N. E. Rep. 188, 47 Am. St. Rep. 200). 619 §345 INTERCORPORATE RELATIONS [part V incorporation of the defendant, was an organization which contravened well-estabUshed principles of pubUc poUcy, and that it was, therefore, illegal. No one who intelligently con- siders the scheme of this trust, as detailed in the information, can for a moment doubt that it was designed to be, and was, in fact, a combination in restraint of trade, and that it was organized for the purpose of getting control of the manufacture and sale of all distillery products, so as to stifle competition, and to be able to dictate the amount to be manufactured and the prices at which the same should be sold, and thus to create, or tend to create, a virtual monopoly of the manufacture and sale of products of that character." § 345. Basis of Rules — (D) Case of the Preservers Trust. — In Bishop v. American Preservers Co} the Supreme Court of ' Bishop V. American Preservers Co., 157 111. 311 (1895), (41 N. E. Rep. 765, 48 Am. St. Rep. 317), per McGruder, J. The American Preservers Trust Tvas a voluntary association formed, originally, by the stockholders of seven corporations located in different States, and engaged in the business of preserving fruit. The trust agree- ment provided for the creation of a board of nine trustees, to whom the parties agreed to transfer their stock in exchange for trust certificates. The trustees were to hold in trust the stocks transferred to them, receive the dividends thereon, and distribute the same in the form of dividends upon the certificates. The trustees were also authorized to purchase the stock, or the plants and property, of other corporations by the issue of trust certificates. They were also empowered to organize other corpo- rations, to carry on the business of the trust, and to acquire and hold .the stock of such corporations. The trust was to continue twenty-five years, unless sooner terminated by the act of a certain number, in excess of a majority, of the certificate holders. 620 In accordance with the provisions of the trust agreement, the trustees formed a corporation called the Amer- ican Preservers Company. This com- pany instituted an action of replevin against one Bishop to recover pos- session of certain property which he had agreed to tranfer to the corpora- tion, and of which he had given a bill of sale and for which trust certificates had been issued to him. Bishop had previously tendered his certificates back, retained possession of the prop- erty, and defended the suit upon the ground that the corporation was merely an instrument of an unlawful trust and without standing in court to enforce the agreement. The Su- preme Court of Illinois held that the trust agreement was an illegal con- tract and refused to grant relief, saying (p. 316) : "The law will not aid the appellee to recover the property, but will leave both it and the appel- lant where they were when the suit was begun." In American Preservers Trust v. Taylor Mfg. Co., 46 Fed. 152 (1891), this trust was also held to be invalid upon principles of corporation law. Judge Thayer said: "The question now before the court is, whether a CHAP. XXXIV] FORMULATION OF RULES § 346 Illinois said: " The agreement recites that it is designed by its signers to form a trust for the purpose of securing cooperation in the business of manufacturing preserves, etc., and of seUing and dealing in the same in home and foreign markets. This cooperation, to be secured through the extraordinary powers conferred upon the nine trustees named in the agreement, six of whom are designated by name and authorized to elect three others, could not result otherwise than in a grinding monopoly, controUing all trade in the business specified, and raising or depressing prices therein at the will of the trustees. ... It will thus be seen that the agreement in question makes provision for welding together all the interests engaged in the business named in the agreement, into one giant combination or partnership under the absolute dominion and control of a board of nine trustees. Its illegal purpose is apparent upon its face, and, therefore, under the decisions above referred to, it must be held to be void, as being injurious to the public interest." § 346. Basis of Rules — (E) Case of the Chicago Gas Trust. — In People v. Chicago Gas Trust Co} the Supreme Court of Illinois said: business corporation, organized under operate any gas works, but sought to the laws of this State, has the right exercise the power claimed under the to become a member of such an second clause and acquired a major- association with such extensive power, ity of the capital stock of four inde- and that inquiry must be answered pendent gas companies then doing in the negative." business in Chicago, thereby con- ' People V. Chicago Gas Trust Co., trolling them. 130111. 294 (1889), (22 N. E. Rep. 798, Quo warranto proceedings against 17 Am. St. Rep. 319, 8 L. R. A. 497). the Trust Company were instituted The Chicago Gas Trust Company was by the attorney-general of Illinois organized in 1887, under the general upon the ground that it had usurped incorporation act of Illinois, for two and exercised "powers, liberties, privi- purposes, as stated in its articles of leges and franchises not conferred by Incorporation : First, to erect and law. " The defendant pleaded that it operate gas works for the manufacture acted within the powers conferred by and sale of gas in the City of Chicago, its charter. and other places in Illinois. Second, A demurrer to the plea was over- to purchase, hold and sell the capital ruled by the lower court, but sus- stock, or purchase or lease the prop- tained by the Supreme Court of erty, plants, good-will, rights and Illinois upon the following grounds : franchises of other gas companies in (1) That the corporation had no ex- Chicago or elsewhere in Illinois. press power to hold the stock of other The corporation did not erect or corporations. (2) That It did not 621 § 346 INTERCOEPOEATE RELATIONS [pART V " Public policy is that principle of the law which holds that no subject or citizen can lawfully do that which has a tendency to be injurious to the public or against the public good. This principle owes its existence to the very sources from which the common law is supplied.' The common law will not permit individuals to oblige themselves by a contract either to do or not to do anything when the thing to be done or omitted is in any degree clearly injurious to the public. ... ' Contracts creating monopolies are null and void as being contrary to public policy.' ' All grants creating monopolies are made void by the common law.^ In the Case of the Monopolies * it was decided as long ago as the forty-fourth year of the reign of Queen Elizabeth, that a ' grant to the plaintiff of the sole mak- ing of cards within the realm was utterly void, and that for two reasons: 1. That it is a monopoly and against the common law. 2. That it is against divers acts of parliament.' ... Of what avail is it that any number of gas companies may be formed under the general incorporation law, if a giant trust company can be chartered with the power of buying up and holding the stock and property of such companies, and, through the con- trol thereby attained, can direct all their operations and weld them into one huge combination? The several privileges or franchises intended to be exercised by a number of companies are thus vested exclusively in a single corporation. To create one corporation for the express purpose of enabling it to control all the corporations engaged in a certain kind of business, and particularly a business of a public character, is not only opposed to the public policy of the State, but is in contravention of the spirit, if not the letter, of the constitution. That the exercise of the power attempted to be conferred upon the appellee company must result in the creation of a monopoly, results from the very nature of the power itself." acquire such power by claiming it iu monopolize the gas business of its articles of association; (3) That Chicago." it had no such incidental power; ' Citing Greenhood on Public Pol- (4) That its exercise of such power icy, pp. 2, 3. was unlawful ; (5) That the stock of ^ Citing 2 Addison on Contracts, the four companies was acquired by 743. the Trust Company with the design ^ Citing 7 Bacon's Abridgment, 22. of bringing them "under its control, * Gting Case of the Monopolies, and by crushing out competition to Part 11, Coke, 86 b (1602). 622 CHAP. XXXIV] FORMULATION OP RULES §347 § 347. Basis of Rules — (F) Case of the Diamond Match Company. — In Richardson v. Buhl (" Diamond Match Com- pany Case"),' the Supreme Court of Michigan (per Judge Sher- wood) said: " The organization is a manufacturing company. The business in which it is engaged is making friction matches. Its articles provide for the aggregation of an enormous amount of capital, sufficient to buy up and absorb all of that kind of business done in the United States and Canada, to prevent any other person or corporation from engaging in or carrying on the same, thereby preventing all competition in the sale of ' Richardson v. Buhl, 77 Mich. 657 (1889), (43 N. W. Rep. 1102, 6 L. R. A. 457). The following facts were stated in the opinions: "It appeared from the testimony that the Diamond Match Company was organized for the pur- pose of controlling the manufacture and trade in matches in the United States and Canada. The object was to get all the manufacturers of matches in the United States to enter into a combination and agreement, by which the manufacture and out- put of all the match factories should be controlled by the Diamond Match Company. Those manufacturers who would not enter into the scheme were to be brought out, those who proposed to enter into the business were to be bought off, and a strict watch was to be exercised to discover any person who proposed to engage in such busi- ness, that he might be prevented, if possible. All who entered into the combination, and all who were bought off, were required to enter into bonds to the Diamond Match Company that they would not, directly or indirectly, engage in the manufacture or sale of friction matches, nor aid nor assist, nor encourage any one else in said business, where, by doing so, it might conflict with the business interests, or diminish the sales, or lessen the profits, of the Diamond Match Company. These restrictions varied in individual cases, as to the time it was to continue, from ten to twenty years. Thirty-one manu- facturers, being, substantially, all the factories where matches were made in the United States, either went into the combination or were purchased by the Diamond Match Company, and out of this number all were closed except thirteen." An action involving the construc- tion of a contract entered into in con- nection with the formation of the combination came before the Supreme Court of Michigan. No questions as to the validity of the contract or com- bination upon grounds of public policy, or otherwise, were raised by the parties; but the Court, of its own volition, held both the com- bination and the contract unlawful and refused to grant relief, saying : "A court of equity will leave the parties . . . where it finds them, outside the rules of courts of justice, *in pari delicto,* and they must settle their own grievances and unlawful transactions. " Compare, however, Diamond Match Co. V. Roeber, 106 N. Y. 473 (1887), (13 N. E. Rep. 419, 60 Am. Rep. 464), where the New York Court of Appeals enforced one of the bonds above referred to without raising any ques- tion as to the validity of the com- bination. 623 § 347 INTERCOKPOHATE RELATIONS [pART V the article manufactured. This is the mode of conducting the business and the manner of carrying it on. The sole object of the corporation is to make money, by having it in its power to raise the price of the article, or diminish the quantity to be made and used, at its pleasure. Thus, both the supply of the article and the price thereof are made to depend upon the action of a half-dozen individuals, more or less, to satisfy their cupidity and avarice, who may happen to halve the controlling interest in this corporation, an artificial person, governed by a single motive or purpose, which is to accumulate money re- gardless of the wants or necessities of over sixty milUon of people. The article thus completely under their control, for the last fifty years has come to be regarded as one of necessity, not only in every household in the land, but one of daily use by almost every individual in the country. It is difficult to con- ceive of a monopoly which can affect a greater number of people, or one more extensive in its effect on the country, than that of the Diamond Match Company. It was to aid that company in its purposes, in carrying out its object, that the contract in this case was made between these parties, and which we are now asked to aid in enforcing. Monopoly in trade or in any kind of business in this country is odious to our form of government. It is sometimes permitted to aid the government in carrying on a great public enterprise, or public work under government control, in the interest of the public. Its tendency is, however, destructive of free institutions, and repugnant to the instincts of a free people, and contrary to the whole scope and spirit of the federal Constitution, and is not allowed to exist under express provision in several of our State constitu- tions. Indeed, it is doubtful if free government can long exist in a country where such enormous amounts of money are allowed to be accumulated in the vaults of corporations, to be used at discretion in controlling the property and business of the couiitry against the interest of the public and that of the people, for the personal gain ■ and aggrandizement of a few individuals. It is always destructive of individual rights, and of that free competition which is the life of business, and it revives and per- petuates -one of the great evils which it was the object of the framers of our form of government to eradicate and prevent. 624 CHAP. XXXIV] FORMULATION OP EULES § 348 It is alike destructive to both individual enterprise and individual prosperity, whether conferred upon corporations or individuals, and therefore public pohcy is, and ought to be, as well as public sentiment, against it. All combinations among persons or corporations for the purpose of raising or controlling the prices of merchandise, or any of the necessaries of life, are monopolies, and intolerable; and ought to receive the condemnation of all courts." Judge Champlin said in concurring: "Such avast combina- tion as has been entered into under the above name is a menace to the public. Its object and direct tendency is to prevent free and fair competition, and control prices throughout the national domain. It is no answer to say that this monopoly has, in fact, reduced the price of friction matches. That policy may have been necessary to crush competition. The fact exists that it rests in the discretion of this company at any time to raise the price to an exorbitant degree. Such combinations have frequently been condemned by the courts as unlawful and against public policy." § 348. Basis of Rules — (G) Case of the Glucose Combination. — In the case of Harding v. American Glucose Company,^ ' Harding v. American Glucose Co., company wherein it agreed to sell 182111. 615(1899), (55 N.E. Rep. 577, all its real and personal property, 74 Am. St. Rep. 189, 64 L. R. A. 738). good-will, trademarks, etc., to a trust The following is a brief summary of company or its transferee, if requested the facts in this important case : within a reasonable time. These Prior to 1897, seven competing cor- contracts provided that payment porations alone were engaged in the for the properties transferred should manufacture of glucose — a com prod- be in stock of the new company, or, uct — in the com belt of the United sometimes, partly in cash and partly States, which is the only territory in in stock. The options were exercised, which it can be successfully manu- and the plants and other property factured. In that year, a scheme of the companies were transferred was entered into for the purpose of or about to be transferred to the new combining the properties of these corporation. corporations in a single corporation, Thereupon a stockholder of one of and all of said companies, except one said companies — the American Glu- — the smallest — became parties to cose Company, a New Jersey corpora- such arrangement. Accordingly, the tion — who objected to the transfer, Glucose Sugar Refining Company filed a bill for an injunction to restrain was organized under the laws of New the transfer of the property of his Jersey for the purpose of acquiring corporation to the combination upon the plants of the several companies. the ground that the whole arrange- Option contracts were signed by each ment was for the purpose of control- 625 § 348 INTEKCORPORATE RELATIONS [PART V the Supreme Court of Illinois reaffirmed its earlier deci- sions that trusts and combinations, for the prevention of com- petition, are against public policy: " Any combination of competing corporations for the purpose of controlling prices, or limiting production, or suppressing competition, is contrary to public policy, and is void. ... In the present case each of six corporations, engaged in the manufacture of glucose, made a contract to sell its plant to a new corporation to be organized, and agreed not to engage in such manufacture for a term of years, and then conveyed all its property to the new corporation organized to conduct the same kind of business; and it did all this with the knowledge and understanding that each of five other competing corporations was making the same kind of contract, and executing the same kind of conveyance in respect to their own respective properties, all to be consum- mated and delivered at the same time, and under the direction and management of agents or promoters employed by all the corporations. If the transactions referred to in the bill in this case did not amount to an absolute agreement made in advance between the six corporations, they at least constituted a scheme understood by all the corporations, and participated in by them all. The carrying out of the scheme, thus understood and participated in, would necessarily result in the suppression of competition in the manufacture of glucose, and in the creation of a monopoly in that business. . . . The material considera- tion in the case of such combinations is, as a general thing, not that prices are raised, but that it rests in the power and dis- cretion of the trust or corporation, taking all the plants of the several corporations, to raise prices at any time, if it sees fit to do so. It does not relieve the trust of its objectionable features that it may reduce the price of the articles which it manufac- tures, because such reduction may be brought about for the ex- press purpose of crushing out some competitor or competitors." ling prices, suppressing competition, The case is also of importance in and creating a monopoly. determining the rights and statjis of The Supreme Court of Illinois, for corporations and their stockholders — the reasons stated in the text, and parties to unlawful combinations — others, sustained the claim of the in foreign States, with reference to complainant, and granted the relief property there situated, prayed for. 626 CHAP. XXXIV] FORMULATION OF RULES § 348a § 348a. Basis of Rules — (h) Case of the Pocahontas Coke Company. — In the very recent case of Pocahontas Coke Co. V. Powhatan Coal and Coke Co} the Supreme Court of West "Virginia said: "We now come to a consideration of the contract upon the principles of the common law. For the purpose of determining whether or not the contract is illegal under the rules of the common law, we consider, not only the ' Pocahontas Coke Co. v. Powhatan Coal and Coke Co. 60 W. Va. 508 (1906), (56 S. E. Rep. 264 116 Am. St. Rep. 901, 10 L. R. A. (n. s.) 268). In this case several producers and manufacturers of coke, among whom was the appellant in said action — the Powhatan Company — entered into a contract agreeing to form a corporation for the stated purpose of regulating, improving and standard- izing the quality of coke manufactured by them and providing that upon the formation of such corporation, each producer or manufacturer should enter into a three years' contract for the sale by such corporation of all coke produced by it upon a stipulated commission, and that provision should be made for a penalty or liquidated damages in case such producer should sell its coke through any other agency, or to any person other than such corporation. When the corporation — the Pocahontas Company — was organized (it being the appellee in said action) the parties to the above contract entered into a "uniform contract" whereby the appellee was appointed their sole sales agent. The following year the appellee received notice from the appellant whereby the latter undertook to terminate its contract with it, and gave notice that it would no longer deliver coke to the appellee. The appellee then brought a suit in which an injunction was awarded restraining the appellant from selling, through any agent or agencies other than appellee, or in any other way, any of the coke cov- ered by the terms of such contract and from refusing to carry out the contract by withdrawing its coke from the appellee as its sole agent, until the further order of the court. The appellant then moved to dissolve the injunction, which motion was denied by a judge in vacation, from which the appellant appealed. The appellant sought to have said contract set aside on the ground that it was in r^traint of trade and tended to monopoly and was against public policy. Under this ground it con- tended (1) that the contract was illegal under the federal anti-trust law ; (2) that the contract was illegal under the rules of the common law. It was held that, upon the facts before the court, it did not appear that the contract contemplated inter- state or international commerce in the coke which constituted the sub- ject-matter of the contract — that the contract was capable of being fully performed within a State and, therefore, was not illegal under the federal act. But it was further held that the combination established by the con- tract was in unreasonable restraint of trade and against public policy; that when all the powers conferred by the contract were exercised, the direct and necessary or natural effect was to restrain competition and con- trol prices, and that such effect was not merely incidental, commensurate, or necessary to the protection of the parties in the enjoyment of the legiti- mate fruits of a lawful undertaking. 627 § 348a INTERCORPORATE RELATIONS [PART V contract, but its subject-matter, the situation of the parties, and all the circumstances surrounding the transaction, so far as they are disclosed by the allegations of the bill. " Coke, the subject-matter of the contract, is a legitimate article of trade and commerce, a commodity of extensive use. Under the recent decisions, it is immaterial whether it is an article of prime necessity or not. If a contract concerning an article of prime necessity would be illegal as in unreasonable restraint of trade, it is likewise illegal if its subject-matter be any other article of legitimate trade or commerce. If the question were material, we would have little difficulty in arriv- ing at the conclusion that coke, like coal, is properly classified under the head of necessaries. " Twenty separate and independent coke manufacturing and producing corporations, operating in the same coal field, entered into contract A, and afterwards each entered into contract B. Do thfise contracts, under the circumstances appearing, effectuate and consummate an arrangement, com- bination, or trust in unreasonable restraint of trade, tending to monopoly, and against public policy, under the common law? If so, every contract whereby such combination or trust was effectuated and established is void and unenforceable between the parties, and the courts will refuse to assist them in enforcing its performance. We approach the determination of this ques- tion, realizing the great change that has taken place in indus- trial conditions and in business methods from those prevailing in the early history of the common law, and that courts are constantly called upon to apply the principles of that law to such new conditions, in view of many decisions, diverse and ofttimes conflicting, and amid an evolution of the application of old principles, rather than the announcement of new prin- ciples, and to reach conclusions guided by what they deem the best considered cases and authorities on the subject. " Monopoly, in its original sense, was an exclusive right granted by the State to one or a few of something which was before of common right. As now used and understood, mo- nopoly embraces any combination the tendency of which is to prevent competition in its broad and general sense, and to control prices to the detriment of the public. A trust has been 628 CHAP. XXXIV] FORMULATION OF RULES § 348a defined as a contract, combination, confederation, or under- standing, express or implied, between two or more, persons, to control the price of a commodity or services for the benefit of the parties thereto, and to the injury of the public, and which tends to create a monopoly. :<: ^|! 4: 4: 4: 4: H: " It may be said in this connection that the determination of the question whether or not a contract is in restraint of trade is to be arrived at in exactly the same way and under exactly the same rules, whether the case falls under the pro- visions of the act of Congress or under the rules of the common law. The difference between the act and the common law does not lie in the manner of ascertaining whether or not re- straint exists, but in the degree of restraint required to render the contract illegal. Under the act of Congress any restraint is illegal, while under the common law only unreasonable re- straint is illegal. " It is deducible from the authorities that, if the direct and necessary or natural effect of a contract or combination among producers and sellers of a commodity is to restrain competition and control prices, to the injury of the public, when all the powers of the contract or combination shall have been exercised, the contract or combination is in unreasonable restraint of trade and against public policy. . . . " It is no defence to the illegality of a contract or combination which is in unreasonable restraint of trade to show that in the particular case a complete monopoly has not been formed, or that no control of prices has been exercised, or that prices have been lowered and not raised. If a contract or combination in unreasonable restraint of trade could not be attacked until a complete monopoly had been formed, then the law against monopolies would be unavailing. In this country it would be almost impossible to combine all the interests in any line of industry into a single and complete monopoly. If only com- plete monopolies could be reached under the law, a combination could then be formed tending to monopoly and embracing sub- stantially all the evil results of a complete monopoly, intention- ally leaving out of the combination some one or more of those 629 § 348a INTERCORPORATE RELATIONS [pART V engaged in the industry, for the very purpose of rendering the combination legal. "A contract which is charged to be in restraint of trade is not to be tested by what has been done under it, but by what may be done under it; not by its performance, but by its powers of performance when fully exercised. Many of the later au- thorities draw a distinction between contracts which were in ' restraint of trade,' as that phrase was understood in the early history of the common law, and contracts which are in 're- straint of competition,' and which are also in restraint of trade, as understood in modern times. Both classes of contracts, when unreasonable and to the injury of the public, are alike illegal and against public policy. The illegality of a contract or combination for the restraint of competition does not lie in the agreement not to compete, but in its reflex injury to the public. One way to control prices is to destroy or restrain competition. It has been said that many of the cases decided in America, holding contracts valid as not being in unreasonable restraint of trade, would have been held otherwise if the modern doctrine as to restraint of competition had been properly applied. " In passing upon a contract claimed to be in restraint of trade, whether the parties agree to refrain from trade or from competition, the courts have endeavored to concede the greatest liberty of contract consistent with the public good. Yet the constitutional liberty of contract has never been held to give parties the right to contract contrary to public policy and to have that contract respected by the courts. ******* " Conceding, for the sake of argument, that the purpose stated is lawful, we are not limited, in ascertaining the real purpose of the contract, to a consideration of the purpose stated. If all that was necessary, in order to render legal a contract other- wise illegal because in unreasonable restraint of trade, were to state in the contract a legal main purpose, such statement would furnish an easy evasion of the law. ******* " We are clearly of the opinion that it was not necessary, in order to arrange for the improvement of conditions in the manufacture, inspection, and shipment of coke, and in order 630 CHAP. XXXIV] FORMULATION OP RULES § 349 to regulate and improve the quality of coke, manufactured by said corporation or in said field, for the said corporations to form a trust or combination, the direct effect of which is to destroy all competition among them, to pool their combined production and cause them to enter the market for the sale of the produc- tion of all as a single concern, and which tends to restrain com- petition between them and others engaged in the same business." § 349. Basis of Rules — (I) Miscellaneous Cases. — I. American Biscuit Combination. In American Biscuit, etc. Co. V. Klotz ' the Court said: " We are not satisfied that the complainant's business is legitimate. While the nominal purpose of the complainant corporation, as stated in its charter, is the manufacture and sale of biscuit and confectionery, its real scope and purpose seem to be to combine and pool the large competing bakeries throughout the country into practi- cally what is known and called a ' trust,' the effect of which is to partially, if not wholly, prevent competition, and enhance prices of necessary articles of food, and secure, if not a mo- nopoly, a large control of the supply and prices in leading articles of breadstuffs." II. National Lead Trust. In National Lead Co. v. Grote Paint Store Co.? the Court of Appeals in Missouri said: " That ' American Biscuit, etc. Co. v. on the basis of the stock assigned to Klotz, 44 Fed. 723 (1891). The each bakery " (p. 724) . American Biscuit and Manufacturing Klotz & Co. sold their biscuit and Company was formed for the nominal confectionery business to the com- purpose of manufacturing and selling bination for stock at an agreed val- biscuit and confectionery. In its uation. One Klotz, of the firm of actual operation it had acquired, Klotz & Co., continued to manage at the time of this decision, control the business as agent for the company of thirty-five of the leading bakeries for some time, when he repudiated in twelve different States of the West the transfer and resumed possession and South. The stock of the com- of the property in behalf of Klotz & pany was parcelled out in payment Co. The American Biscuit and Manu- for the plants acquired "on an agreed facturing Company then brought value of the property and a large suit for an injunction, accounting estimate of good-will. Each bakery and receiver. The Court declined when secured to be carried on by its to appoint a receiver in interlocutory former managers, subject, however, proceedings for the reasons stated in as to control of funds, territory, prices, the text. and competition to the central ' National Lead Co. v. Grote Paint management; all profits pooled, and Store Co., 80 Mo. App. 266 (1899). of course, division thereof to be made The question involved in this case 631 § 349 INTERCOEPORATB RELATIONS [pART V the predecessor of the plaintiff, the ' National Lead Trust,' was an unlawful combination, both in purpose and fact, is sufficiently established by the nature of the agreement under which it was created and the methods and practices resorted to in furtherance of that agreement. The agreement can only be construed as a contract to suppress competition, fix the price of commodities and limit their production, and to restrain trade. Unless some one or all of these purposes had been entertained by the signers of the trust agreement, it would not have con- tained provisions looking to the acquisition by the trustees of the entire lead business of the country, nor would it have united, in the accomplishment of that end, a majority of the stockholders of the largest corporations dealing in that product. . . . While the conclusion of the illegal purpose of the trust agree- ment is irresistible upon a consideration of its several provisions and the manner in which they were carried out, it will appear from an examination of the cases that this result has been declared by every court called upon to review that agreement, or others substanti'ally like it." III. Cases of Associations. Of an association of manu- facturers for the purpose of regulating the price of wire cloth, a New York court' said: " The people have a right to the necessaries and conveniences of life at a price determined by the relation of supply and demand, and the law forbids any agreement or combination whereby that price is removed beyond the salutary influence of legitimate competition." Of an association for the purpose of controlling the manu- facture and sale of salt, the Supreme Court of Ohio ^ said: " Public policy, unquestionably, favors competition in trade, to the end that its commodities may be afforded to the con- sumer as cheaply as possible, and is opposed to monopolies, which tend to advance market prices to the injury of the general public." was whether the plaintiff corpora- ' De Witt Wire Cloth Co. v. New tion, successor to the "Trust," was Jersey Wire Cloth Co., 16 Daly a party to an illegal combination in (N. Y.), 529 (1891), (14 N.Y. Supp. violation of the Missouri anti-trust 278). act. See post, ch. XLII. : "Construe- 2 Central Ohio Salt Co. v. Guthrie, tion and Application of State Anti- 35 Ohio St. 672 (1880). trust Statutes." 632 CHAP. XXXV] RULES OF PUBLIC POLICY § 3^0 And in the leading case of Morris Run Coal Co. v. Bar- clay Coal Co.,^ already referred to at length, the Court said of an association of five coal companies: " This combination has a power in its confederated form which no individual action can confer. The public interest must succumb to it, for it has left no competition free to correct its baleful in- fluence." CHAPTER XXXV RULES OF PUBLIC POLICY § 350. In General. § 351. Distinction between Rules of Public Policy applicable to Private and Qiwwi-public Corporations. § 352. Rules. § 353. Rules Conservative Standards. § 354. Analysis of Rule governing Private Corporations — (A) Form of Com- bination Immaterial. § 355. Analysis of Rule — (B) Objects and Tendencies of Combinations. § 356. Analysis of Rule — (C) Control of the Market. § 357. Analysis of Rule — (D) Extent of Territory. § 358. Analysis of Rule — (E) Useful Commodities. § 359. Analysis of Rule applicable to Quaai-puhlio Corporations. § 350. In General. — In formulating the rules of public policy stated in this chapter from the decisions of the courts which form their bases, the cases have been examined with a view of ascertaining and harmonizing, so far as possible, their underlying principles. No attempt has been made to follow the language, or to use the particular' expressions employed in the opinions. Thus, the phrase " control of the market," in the rule governing private corporations, appears in few cases, but it is made use of because it appears to embody, in a con- cise expression, the conception of the courts in the phrases " destruction of competition," " establishment of a virtual monopoly," " control of supply and prices," " control of all trade in the business " and others of a similar nature. So the 'Morris Run Coal Co. v. Barclay (8 Am. Rep. 159). See ante, § 328, Coal Co., 68 Pa. St. 173, 186 (1871), note. 633 § 353 INTERCORPORATE RELATIONS [PABT V phrase " useful commodity," in the rule, has seldom been em- ployed by the courts, but it includes " the necessaries of life " mentioned in many cases, and places only a slight — though necessary — limitation upon the " commodities of commerce " referred to in others. § 351. Distinction between Rules of Public Policy applicable to Private and Quasi-public Corporations. — A rule of public policy governing industrial combinations applies alike to private corporations and individuals. The right of trading and pro- ducing companies to combine is not affected by their corporate character, except so far as principles of corporation law are involved. In framing a rule for determining the validity of such combinations, regard must be had, on the one hand, to the right to contract, and, on the other, to the effect of the exercise of the right upon the public welfare. Qwasi-public corporations, in consideration of the grant of special privileges and franchises, assume the performance of public duties. In formulating a rule of public policy respecting such corporations, it is of primary importance to regard the corporation as a party to a contract with the State, and to con- sider the effect of a combination upon its ability to perform, in a manner most beneficial to the public, the obligations it has assumed. The State has an indirect interest in combinations of private corporations to see that nothing is done prejudicial to the public welfare. It has a direct contractual interest to see that the grantee of public franchises properly fulfils its covenants. § 352. Rules. — (1) Any combination of corporations or individuals the object of which is, or the necessary or natural consequence of the operation of which will be, the control of the market for a useful commodity, is against public policy and unlawful. (2) Any combination of quasi-public corporations the object of which is, or the necessary or natural consequence of the opera- tion of which will be, the increase of charges beyond reasonable rates, or the curtailment of facilities afforded the jmblic, is against public policy and unlawful. § 353. Rules Conservative Standards. — The mles state conservative standards. That relating to private corporations 634 CHAP. XXXV] RULES OF PUBLIC POLICY § 354 furnishes rather a test of illegality than of legality. There are, undoubtedly, combinations contrary to public policy, which do not contravene its provisions, but, on the other hand, it is believed that every combination which does come within its provisions is against public policy and invalid. Combinations for the restriction of competition, not amounting to a control of the market, have, in many cases, been declared invalid. But conflicting decisions are equally numerous, and the line between lawful and unlawful restriction is not readily drawn. Unlawful combinations may be in such form that it is impossible to say that their object is to control the market for a commodity, but these are exceptions and will often be found to be within the rule applicable to gitasi-public corporations. The latter rule was more readily formulated and is more easily applied. The nature of the qzcasi-pnhlic corporation enters into the rule. Any combination which interferes with the performance, in the most advantageous manner, of its obligations to the State is against public policy. § 354. Analysis of Rule governing Private Corporations — (A) Form of Combination Immaterial. — The test of the legality of a combination lies in its object and not in its form. The view that a combination by means of a purchasing cor- poration is less vulnerable than other forms of combination is well founded only with reference to questions of corporation law. An association of corporations may be ultra vires of its members; a trust contravenes elementary legal principles; a corporate combination, per contra, may be formed through the exercise of the ordinary corporate powers of purchase and sale. But the same principles of pubHc policy are ap- plicable. That which pubUc pohcy forbids in the case of an association or trust cannot lawfully be done by a corporate combination, and vice versa} ' Harding v. American Glucose Co., of trustees, and to receive trust cer- 182 111. 615 (1899), (55 N. E. Rep. 577, tificates therefor from the trustees. 74 Am. St. Rep. 235, 64 L. R. A. But the question in the present case 738): "A trust has usually appeared is whether a trust is created where in the form of an agreement between a majority of stockholders consolidate stockholders in many corporations their interests by conveying all their to place all their stock in the hands property to a corporation, organized 635 § 354 INTERCOEPORATE RELATIONS [PART V A distinction has been drawn between contracts of inde- pendent manufacturers, for the purpose of restricting com- petition, and the purchase by one corporation, under the power contained in its charter, of the properties and busi- ness of competing corporations, which may have the effect of suppressing competition. The suppression of competition, in the former case, is said to be opposed to public policy ; while, in the latter case, it is declared to be only the necessary result of the exercise of an express statutory power. Thus, in Trenton Potteries Co. v. Olyphant,^ the Supreme Court of New Jersey said: " Contracts by independent and uncon- nected manufacturers or traders looking to the control of the prices of their commodities, either by limitation of production, or by restriction on distribution, or by express agreement to maintain specified prices, are, without doubt, opposed to public poUcy. . . . Corporations, however, may lawfully do any acts within the corporate powers conferred on them by legislative grant. . . . Under such powers, it is obvious that a corporation may purchase the plant and business of competing individuals and concerns. The legislature might have withheld such powers, or imposed hmitations upon their use. In the absence of prohibition or limitation on their powers in this respect, it is impossible for the courts to pro- nounce acts, done under legislative grants, to be inimical to public policy. The grant of the legislature authorizing and per- mitting such acts must fix for the courts the character and limit of public policy in that regard. It follows that a corpora- tion, empowered to carry on a particular business, may lawfully purchase the plant and business of competitors, although such purchases may diminish, or for a time at least, destroy, competi- tion. Contracts for such purchases cannot be refused enforce- ment." ^ for the purpose of taking their prop- ' Trenton Potteries Co. v. Olyphant, erty. Any combination of com- 58 N. J. Eq. 507 (1899), (43 Atl. Rep. peting corporations for the purpose 728, 78 Am. St. Rep. 612, 46 L. R. A. of controlling prices, or limiting pro- 255). duction, or suppressing competition, ^ So in State t). Continental Tobacco, is contrary to public policy, and is 177 Mo. 1 (1903), (75 S. W. Rep. void." See also Yazoo, etc. R. Co. 737), it was held that a purchase by V. Searles, 85 Miss. 520 (1905), (37 one corporation of the plants of other So. Rep. 939, 68 L. R. A. 723). corporations of a similar nature to 636 CHAP. XXXV] RULES OF PUBLIC POLICY §354 These conclusions may be well founded in their application to an actual sale, as distinguished from a combination in the form of a sale.* A corporation, having general power to dispose of its property, may, like an individual, sell, in good faith, to a competing corporation without violating the rule of public policy.^ There is no combination in such a purchase. But if its own, if made in good faith in the legitimate pursuit of its business, was in the exercise of a legal right. The Court said, in effect, that the cor- poration had the same power as an individual to make such purchases. And in Dittman v. Distilling Co., 64 N. J. Eq. 537 (1903), (54 Atl. Rep. 576), where it was charged that a corpora- tion organized for the express purpose of acquiring and holding stocks in other corporations was unlawful as constituting a monopoly, it was held that as such monopoly, if it existed, arose from the exercise of the power conferred upon the corporation by its charter to purchase stocks., the exercise of such power would not be enjoined in the suit of a stockholder . — that the question could only be determined in qtw warranto proceed- ings instituted by the Attorney- general to oust the corporation from its franchises. See also Metcalf v. American School Furniture Co., 122 Fed. 115 (1903). ' In Shawnee Compress Co. v. An- derson, 28 Sup. Ct. Rep. 572 (1908), the Supreme Court of the United States said : "This case presents somethiiig more than a, lease of prop- erty by the Shawnee Company, induced or made necessary by finan- cial embarrassment. It presents something more than the acquisition by the Gulf Company of another compress — of a mere addition to its business. It presents acts in said monopoly.'' Davis V. A. Booth & Co., 131 Fed. 37 (1904) : "There is a clear dis- tinction, which seemis to be lost sight of in the argument here, between the aggregation of properties by purchase when the seller no longer retains an interest in the property, and a combi- nation of owners and properties under one management where such owners' interest is continued in the combina- tion. " See also cases cited in note to § 360, post: *' Associations of ManU' facturers and Producers. " National Lead Co. v. Grote Paint Store Co., 80 Mo. App. 267 (1899) : '*The record in the case under review shows that the beneficial owners of the property were the subscribers to the National Lead Trust and holders of its certificates, and that these same per- sons remained the beneficial owners of the same property after it was con- verted into the capital of the plaintiff corporation, the only difference being that each holder of a trust certificate received, in lieu thereof, shares of stock in the new corporation at an agreed rate of exchange, and the further fact that the legal title to the property was put into a corporate entity of a body of nine trustees appointed under the trust agreement. The sale itself was titular rather than real." ' In Carter-Crume Co. ». Peurrung, 86 Fed. 439 (1898), the plaintiif entered into contracts with several manufacturers of butter-dishes for the purchase of their products. Its purpose was to control the market for these articles, but the manufac- turers had no knowledge of, and did not participate in, such unlawful purpose. In sustaining one of these contracts the Court said: "The transaction with Peurrung Brothers 637 §354 INTERCORPORATE RELATIONS [part V the sale is for the purpose of forming a corporate combination, in which the vendor corporation or its stockholders participate, the same rule of public policy is applicable as in the case of any combination of corporations. As already stated, the object of a combination, or the necessary or natural consequence of its operation, determines its legahty. The form — trust, cor- porate combination or association — will not serve as a cloak for conspiracy nor prevent the application of the rule of public policy.' Corporate power to purchase no more authorizes the exer- cise of such power for purposes opposed to public policy, & Co. was, on its faeo, legitimate, and it cannot be impeached simply by evidence tiiat tiio Carter-Crumo Company understood and intended it as one step in a general illegal scheme for monopolizing the trade in wooden butter-dishes and controlling prices." * In considering this subject these propositions must be clearly borne in mind : (1) A corporation authorized to purchase the properties or shares of other corporations has no greater power than an individual — that which is unlawful on the part of the latter is unlawful on the part of the former. (2) Whether a transaction is a sale or a combination depends pri- marily upon whether the vendor cor- poration or its stoclcholders retain an interest in the united properties. The fallacy of the argument in Trenton Potteries Co. v. Olyphant, supra, lies in the assumption that general corporate power to purchase is equivalent to express power to form a corporate combination. Power conferred upon a corporation to purchase the properties or shares of other corporations gives it the same power — and no more — posses.se d by an individual. An individual manufacturer might purchase the plant of a competing corporation. 638 If there wore no element of combina- tion present the purchase would be valid. So a corporation, witli power to purchase, might make a similar acquisition. But tlio individ- ual would have no right to enter into a combination with the rompeting corporation in the form of a sale. Nor would its charter powers authorize the corporation to do so. The grant by the legislature of the power to purchase fixes the public policy of the State with respect to a purchase. Express statutory autliority to form a combination would bo necesHary to fix the policy regarding a corporate combination. As we have fleeii, the statutes of many States authorize the consolida- tion of corporations. These statutes determine the policy of the States where they are enacted regarding the particular union of stocks and properties therein authorized. Hut no State has enacted statutes au- thorizing the combination of corpo- rations in looser form. Until such statutes shall have been adopted the rules of public policy regarding com- binations must be considered as applying in the same degree to cor- porations as to indiviihials. Whether a transaction between eorporations or between individuals amounts to a sale or to a combination depends upon whetlier the vendor CHAP. XXXV] RULES OP PUBLIC POLICY §355 than a general power to make contracts authorizes the execution of agreements conflicting with the public inter- ests.' § 355. Analysis of Rule — (B) Objects and Tendencies of Combinations. — Where the objects and purposes of a com- bination of corporations, as stated in the instruments of its formation, are, upon their face, contrary to public policy, the combination is, manifestly, void. But an affirmation of pur- poses inimical to public policy is hardly to be expected from the organizers of a combination, and the law does not place a premium upon evasion by making the test of vahdity the ob- ject stated.^ On the contrary, the court, in determining the validity of a combination, upon grounds of public policy, should place itself in the position of its members at the time of its formation, and, from that point of view. actually parts with all interest in the property sold or merely changes the form of the investment. A bona fide sale of a plant for cash or its equiva- lent possesses none of the elements of combination. On the other hand, an exchange of one plant for an in- terest in united plants possesses all the elements of combination. How this exchange is effected is immaterial. An ordinary method is to pay the purchase price in the shares of the corporate combination. Sometimes these shares are dehvered to the vendor corporation ; sometimes they are distributed directly among its stockholders. It is not material which course is taken. In such a transaction the stockholders — the ultimate owners — stand for their corporation. ' As to the power of a corporation to purchase competing plants for the pur- pose of suppressing competition, see Distilling, etc. Co. v. People, 156 111. 448, 491 (1895), (41 N. E. Rep. 188, 47 Am. St. Rep. 200), where the Court said : "But it is urged that the defendant, by its charter, is authorized to purchase and own distillery prop- erty, and that there is no limit placed upon the amount of property which it may thus acquire. By its cer- tificate of organization, it is author- ized to engage in a general distillery business in Illinois and elsewhere, and to own the property necessary for that purpose. The de- fendant is authorized to own such property as is necessary for carrying on its distillery business, and no more. Its power to acquire and hold property is limited to that purpose ; and it has no power, by its charter, to enter upon a scheme of getting into its hands and under its control all, or substan- tially all, the distillery plants and the distillery business of the country, for the purpose of controlling pro- duction and prices, of crushing out competition, and of establishing a virtual mionopoly in that business. " 2 Pocahontas Coke Co. o. Powhatan Coal, etc. Co., 60 W. Va. 508 (1906), (56 S. E. Rep. 264, 116 Am. St. Rep. 901, 10 L. R. A. (N. S.) 268) : "Conceding for the sake of the argu- ment that the purpose stated is law- ful, we are not limited in ascertaining the real purpose of the contract, to a consideration of the purpose stated." (Citing this section.) 639 355 INTERCOHPORATB RELATIONS [part V determine the real, and not the ostensible, purpose of the combination.' As said by Judge Daniels in the Siigar Trust Case:' " The law does not require that instruments of this description, before they may be declared to be illegal, shall, in plain language affirm the intention to be to prevent competition and control the market, or advance the prices of necessary commodities. . . . But the courts, as in other cases, are permitted to place themselves in the position of the parties entering into the agreement or arrangement to discover the objects or designs by which they may have been actuated." Moreover, in determining the validity of a combination upon principles of public policy, its actual effect when put into operation is immaterial. The question is not what has been done under the combination but what might have been done, or might be done, under it.' The inquiry is whether a natural ' Detroit Salt Co. v. National Salt Co., 134 Mich. 120 (1903), (96 N. W. Rep. 1) : "It is obvious that, so long as combinations in restraint of trade are profitable, there will be found those whose desire for gain will over- come their reverence for law, and even lead them to dare the dangers of criminal prosecution ; and it is not unreasonable to suppose that in their contracts they wiU endeavor to give the appearance of lawful transactions. In making this contract before us the parties had difficulty in avoiding illegal provisions, -and, if defendant is right about the case, the safeguards of the contract are to be found in the provisions contemplating its breach. In a question of this kind it is proper to show the circumstances attending the making of the contract, the object and purpose in view, and the construc- tion placed upon it by the parties, as evidenced by their dealings under it." Wilson V. Morse, 117 Iowa, 581, 584 (1902), (91 N. W. Rep. 823): "The contract being legal on its face, the burden was on defendants to show its illegality by satisfactory and 640 convincing evidence. If made to prevent competition, or to fix the price to be paid for grain in the ter- ritory where it was to be operative, it was, of course, contrary to public policy and void. . . . Whether the parties had in mind either of these purposes is a question of fact to be determined from the evidence." See also Southern Electric Se- curities Co. V. State (Miss. 1907), 44 So. Rep. 785 ; D.unbar v. American Telephone, etc. Co., 224 111. 9 (1906), (79 N. E. Rep. 423, 115 Am. St. Rep. 132) ; Pocahontas Coke Co. v. Powhatan Coal, etc. Co., 60 W. Va. 508 (1906), (56 S. E. Rep. 264, 116 Am. St. Rep. 901, 10 L. R. A. (N.S.) 268). ^ People V. North River Sugar Rf 'g Co., 54 Hun (N. Y.), 376 (1889), (3 N. Y. Supp. 401). ' People V. Sheldon, 139 N. Y. 251 (1893), (34 N. E. Rep. 785, 36 Am. St. Rep. 690, 23 L. R. A, 221) : "The question here does not turn on the point whether the agreement between the retail dealers in coal did, as a matter of fact, result in injury to the public, or to the community in Lock- CHAP. XXXV] RULES OF PUBLIC POLICY §355 result of the operation of the combination would be prejudicial to the public interests.* The courts have generally held that a combination is void as being against pubUc pohcy, the tendency of which is injurious to the public.^ Testing the vaUdity of acts or contracts by port. The question is, Was the agree- ment one, in view of what might have been done under it and the fact that it was an agreement, the effect of which was to prevent competition among the coal dealers, one upon which the law fastens the brand of condemnation ? ' ' Judd V. Harrington, 139 N. Y. 105 (1893), (34 N. E. Rep. 790) : "Courts "will not aid parties seeking to enforce such an agreement, irrespective of the question whether, in fact, it produced "the evil results to which it tended, or was harmless. . . . The illegal char- acter of the agreement appeared upon its face, and was a necessary legal conclusion from its provisions." Harding v. American Glucose Co., 182 lU. 615 (1899), (55 N. E. Rep. 577, 74 Am. St. Rep. 189, 64 L. R. A. 738) : "The material consideration in the case of such combinations is, as a general thing, not that prices are raised, but that it rests in the power and discretion of the trust or com- bination, taking all the plants of the several corporations, to raise prices at any time, if it sees fit to do so." See also Pocahontas Coke Co. v. Powhatan Coal, etc. Co., 60 W. Va. 508 (1906), (56 S. E. Rep. 273, 116 Am. St. Rep. 901, 10 L^ R. A. usiness of this State, to control the fixing of premium rates to be charged on insurance, to regulate and prevent rebates, to fix compensation for in- surance, to regulate premium collec- tions, and to appoint agencies; that seven-eighths of the insurance com- panies authorized to transact business in the State are members of this con- federation. ... It will not be neces- sary to enter into a discussion of the facts thus presented for the purpose ■of determining the legality of the Board of Underwriters in this action, or to ascertain how far its acts are opened to just criticism. It is mani- fest that, if such a controversy is dis- «losed, it is foreign to the one now before the court. The maxim that lie who comes into equity must come with clean hands has its limitations. It does not apply to every uncon- scientious or inequitable conduct on the part of the complainants. The inequity which deprives a suitor of a right to.justice in a court of equity is not general iniquitous conduct uncon- nected with the act of the defendant which the complaining party states as his ground or cause of action, but it must be evil practice or wrong con- duct in the particular matter or trans- action in respect to which judicial pro- tection or redress is sought." The objection that a corporation is an unlawful combination cannot be made by a party who has entered into a contract with it wholly inde- pendent of its alleged illegal purpose. Harrison v. Glucose Sugar Refg. Co., 116 Fed. 304 (1902), (58 L. R. A. 915). The question whether an asso- ciation of railroad companies amounts to an unlawful combination cannot be determined in an action to enjoin the sale of non-transferable tickets issued by one of the members of such association. Kinner v. Lake Shore, etc. R. Co., 23 Ohio dv. Ct. Rep. 294 (1902). A person who has entered into a combination agreement contrary to public policy may, upon repudiating it, enforce a cause of action existing independently of it. The maxim in pari delicto is inappUcable under such circumstances. Brennan v. United Hatters, 73 N. J. 729 (1906), (65 Atl. Rep. 165, 118 Am. St. Rep. 727). See also National Distilling Co. v. Cream City Importing Co., 86 Wis. 356 (1893), (56 N. W. Rep. 864, 39 Am. St. Rep. 902) ; Anheuser-Busch Brewing Ass'n v. Houck (Tex. 1894), 27 S. W. Rep. 692 ; Amot v. Pittston, etc. Coal Co., 68 N. Y. 558 (1877), (23 Am. Rep. 190). 673 369 INTERCORPORATE RELATIONS [part V demand is clearly stated by Judge Lacombe in the case of The Charles E. Wiswall: '■ "The test, whether a demand connected with an illegal transaction is capable of being enforced at law, is whether the plaintiff requires the aid of the illegal transac- tion to estabhsh his case. If he cannot open his case, with- out showing that he has broken the law, a court will not assist him. But if he does riot claim through the medium of the illegal transaction, but upon a new contract bottomed on an independent consideration, he may recover." ^ The sale of goods by a combination to a purchaser, in the course of its business, is not connected with the illegal char- acter of the combination, but is based upon an essentially different consideration. It is an independent contract, and the purchaser cannot avoid his contract obUgation by setting up the invahdity of the plaintiff combination.' Upon simi- ■ The Charles E. Wiswall, 86 Fed. 674 (1898). ' Citing Swan v. Scott, 11 Serg. & R. 155 (1824) ; Armstrong v. Toler, 11 Wheat. (U. S.) 258 (1826); McBlair v. Gibbes, 17 How. (U. S.) 236 (1854). ' In Connolly v. Union Sewer Pipe Co., 184 U. S. 545 (1902), (22 Sup. Ct. Rep. 431), the Supreme Court of the United States said : " Assum- ing, as defendants contend, that the alleged combination was illegal if tested by the principles of the com- mon law.' still it would not foUow that they could, at common law, refuse to pay for pipe bought by them under special contracts with the plaintiff. The illegality of such combination did not prevent the plaintiff corpora- tion from selling pipe that it obtained from its constituent companies, or either of them. It could pass title by a sale to any one desiring to buy, and the buyer could not justify a re- fusal to pay for what he bought and received by proving that the seller had previously, in the prosecution of its business, entered into an illegal combination with others in reference generally to the sale of Akron pipe. 674 (p. 549). This is not an action to enforce, or which involves the en- forcement of, the alleged arrangement or combination between the plaintiff corporation and other corporations, firms and companies in relation to the sale of Akron pipe. As already sug- gested, the plaintiff, even if part of a combination illegal at common law, was not, for that reason, forbidden to sell property it acquired or held for sale. The purchases by the defend- ants had no necessary or direct con- nection with the alleged illegal com- bination ; for the contracts between the defendants and the plaintiff could have been proven without any refer- ence to the arrangement wherebj' the latter became an illegal combination. If, according to the principles of com- mon law, the Union Sewer Pipe Com- pany could not have sold or passed title to any pipe it received and held for sale, because of an illegal arrange- ment previously made with other corporations, firms or companies, a different question would be presented. But we are aware of no decision to the effect that a sale similar to that made by the present plaintiff to the de- fendants respectively would, in itself. CHAP. XXXVIl] RIGHTS AND REMEDIES 369 lar principles, an insurance company cannot escape responsi- bility upon its contract of insurance by alleging that the plain- tiff has joined an unlawful combination; ' and infringers of patents cannot evade liability for their own wrongs by pleading that the plaintiff has entered into a combination to control the market for the patented article.^ The principles stated in this section are, however, mate- rially modified in the anti-trust statutes of many States, which expressly provide that the illegality of a combination may be pleaded as a defence to suits upon its independent contracts.' be illegal and void under the princi- ples of the common law." And in National Distilling Co. v. Cream City Importing Co., 86 Wis. 356 (1893), (56 N. W. Rep. 864, 39 Am. St. Rep. 902), the Supreme Court of Wisconsin said : "The argu- ment, if any the case admits of, is that, as the plaintiff was a member of the so-called 'trust' or 'combina- tion, ' the defendant might voluntarily pvu-chase the goods in question of it at an agreed price, and convert them to its own use, and be justified in a court of justice in its refusal to pay the plaintiff for them, because of the con- nection of the vendor with such trust or combination. The plaintiff's cause of action is, in no legal sense, de- pendent upon or affected by the alleged illegality of the trust or com- bination, because the illegality, if any, is entirely collateral to the trans- action in question, and the court is not called upon, in this action, to en- force any contract tainted with ille- gality, or contrary to public policy. The mere fact that the plaintiff is a member of a trust or combination, created with the intent and for the purposes set forth in the answer, will not disable or prevent it at law from selling goods, and recovering their price or value." A sale and conveyance of its assets and good-will by one corporation to another cannot be repudiated by the purchaser upon the ground that the vendor acquired the property sold with the object of forming an unlaw- ful combination. Metcalf V. American School Fur- niture Co., 122 Fed. 115 (1903). See also Wiley v. National Wall Paper Co., 70 111. App. 543 (1896); Chicago Wall Paper Mills v. General Paper Co., 147 Fed. 491 (1906). ^ Springfield Fire, etc. Ins. Co. v. Cannon (Tex. Gv. App. 1898), 46 S. W. Rep. 376 : "The evidence in the case hardly raises the question, but we are of the opinion that, even if it did, it would not prevent the owner of the bagging from insuring it, although he may have been a mem- ber of a trust with respect to control- Ung the prices of bagging in the State of Texas." 2 National Folding Box, etc. Co. v. Robertson, 99 Fed. 985 (1900) ; Bon- sack Mach. Co. V. Smith, 70 Fed. 383 (1895) ; American Soda Fountain Co. V. Green, 69 Fed. 333 (1895) ; Edison Electric Light Co. v. Sawyer-Man Electric Co., 53 Fed. 592 (1892); Strait V. National Harrow Co., 51 Fed. 819 (1892) ; Columbia Wire Co. V. Freeman Wire Co., 71 Fed. 306 (1895) ; Contra, National Harrow Co. V. Quick, 67 Fed. 130 (1895). 'See post, ch. XLIII.: "Rights, Remedies and Procedure under State Anti Trust Statutes. " 675 § 370 INTERCORPORATE RELATIONS [pART V § 370. Rights of Creditors. — The legality of a combination cannot be made the subject of collateral attack in enforcing its independent demands. A fortiori, the combination cannot, itself, set up its illegality as a defence to demands against it. It cannot take advantage of its own wrong-doing. That a combination is unlawful, tested by the rule of pubhc policy, is no defence to actions by its creditors.' The fact that the creditor knew the character of the com- bination when the debt was incurred, does not affect his right to recover, unless he in some way participated in the illegal project. In Arnot v. Pittston, etc. Coal Co.,^ the Court of Appeals of New York said: "He had a right to dispose of his own goods, and (under certain limitations) a vendor of goods may recover for their price, notwithstanding that he knows that the vendee intends an improper use of them, so long as he does nothing to aid in such improper use, or in the illegal plans of the purchaser. This doctrine is estabUshed by authority, and is sufficiently liberal to vendors. But — and this is a very important distinction — if the vendor does anything beyond making the sale, to aid the illegal scheme of the vendee, he renders himself particeps criminis, and cannot recover for the price." An agreement for the sale of all its products, entered into by a manufacturing company, in good faith, and in ignorance of any ulterior purpose on the part of the purchaser, is not rendered unenforceable by the fact that the latter has made similar contracts with other manufacturers — each in igno- rance of the other — for the purpose of controlling the market for the commodity.' ' Globe Tobacco Warehouse Co. i>. ' In Carter-Crume Co. v. Peurrung, Leach, 19 Ky. L. Rep. 1287 (1897), 86 Fed. 439 (1898), Judge Lurton (43 S. W. Rep. 423); Pittsburgh said: "Another question might arise Carbon Co. v. McMillan, 119 N. Y. if all or a large proportion of all the 46 (1890), (23 N. E. Rep. 520, 7 L. producers of a, particular article R. A. 46); Arnot o. Pittston, etc. should agree to sell their entire product Coal Co., 68 N. Y. 558 (1877), (23 to one buyer, who would thereby be Am. Rep. 190) ; Catskill Bank v. enabled to monopolize the market. Gray, 14 Barb. (N. Y.) 479 (1851). But if each independent producer 2 Arnot V. Pittston, etc. Coal Co., contract to sell his product or to sell 68 N. Y. 558 (1877), (23 Am. Rep or lease his plant, without concert 190). with others, or knowledge of or pur- 676 CHAP. XXXVIl] EIGHTS AND REMEDIES §371 § 371. Rights and Remedies of Stockholders of Combining Corporations. — An unlawful act is an ultra vires act. A cor- poration has no legal power to enter a combination against public policy. Equity will enjoin the formation or continued operation of an illegal combination, at the instance of any stockholder of a constituent corporation ^ who has not par- ticipated in the illegal scheme and who acts with diligence.^ pose to participate in the plana of the buyer, he cannot be said to have con- spired against freedom of commerce, or to have made a contract in illegal restraint of trade. . . . The proof must show that the illegal purpose was mutual. " ' In Stewart v. Erie, etc. Transp. Co., 17 Minn. 395 (1871), the Supreme Court of Minnesota said: "We agree with the plaintiff's counsel, and with the cases by him cited, that it is against the general policy of the law to destroy or interfere with free com- petition. . . . An unauthorized mo- nopoly is, therefore, against public policy as destroying or interfering with free competition. ... (p. 398). If a corporation is employing its statu- tory powers, funds, etc. for purposes not within the scope of its institution, a court of equity will, upon the appU- cation of a single dissentient stock- holder, interfere by injunction. . The right of a stockholder to this inter- ference seems to be placed upon the ground that, from the fact that the corporation was created for certain purposes there is an implied contract that it shall not divert its powers or funds to other purposes, and that such diversion would be a species of breach of trust ... as well as a violation of law which might endanger the exist- ence of its charter. But it is to a dissentient stockholder that the relief is granted, and to a stockholder who comes with diligence to assert his rights. " See also Harding v. American Glu- cose Co., 182 111. 551 (1899), (55 N. E. Rep. 677, 74 Am. St. Rep. 189, 64 L. '&,. A. 738) ; Leslie v. Lorillard, 110 N. Y. 519 (1888), (18 N. E. Rep. 363, 1 L. R. A. 456) ; Central R. Co. v. ColUns, 40 Ga. 582 (1869). See also ante, § 46 : "Rights and Remedies of Dissenting Stockholders " (consolida- tion) ; ante, § 114: " Remedies of Dis- senting Stockholders in Case of Invalid or Unfair Sales"; ante, § 151: "Rights and Remedies of Dissenting Stockholders " (sales of railroads) ; ante, § 191 : "Remedies of Dissenting Stockholders " (leases) ; ante, § 293 : "Remedies in Case of Ultra Vires Stockholding. " ' Levin v. Chicago Gas Light, etc. Co., 64 111. App. 400 (1896) : "He alleges that he acquired the certifi- cate without knowledge that the same was tainted with any conspiracy or combination ; but that is not enough. . . . Every inference deducible from his bill is, that he not only knew of, but participated in, all that he com- plained of. One who has participated in illegal acts and conspiracies, and partaken of the fruits thereof, may not tear down the structure he has helped ,to rear simply because he did not know that he had been engaged in illegaUty and conspiraay. ... (p. 402). To entitle stockholders to the sum- mary interference of a court, they must apply so recently after the doing of the acts complained of that the court may stop or undo the wrong to them without doing equal or greater wrong to some other person; or, in other words, if a stockholder wants protection against the consequences 677 §371 INTERCORPORATE RELATIONS [part V It has been contended that the illegality of a corporate combination is the illegality of that corporation; that stock- holders of a vendor corporation can maintain a bill for an injunction only when their pecuniary interests are affected, and not for the protection of the general public, and, conse- quently, that they are without standing to complain of the unlawful character of the purchasing corporation. The defect of the argument is in its assumptions. The pecuniary interests of a stockholder of a vendor corporation are affected by a trans- fer of its property to an illegal combination. The combina- tion, if carried out, may lead to a forfeiture of the charter of the vendor corporation, and consequent loss of the stockholder's shares. Moreover, the pecuniary status of a stockholder is changed by the transfer of the property and business of his cor- poration to another corporation, although he may receive his share of the proceeds. He has the right to object to such a change in the form of his investment, especially where the pro- ceeds of the sale are tainted with the illegality of the combina- tion.' of an zdtra vires act, he must ask for it with sufficient promptness to en- able the court to do justice to him without doing injustice to others." See also Coquard v. National Lin- seed Oil Co., 171 111. 480 (1898), (49 N. E. Rep. 563) ; Stewart v. Erie, etc. Transp. Co., 17 Minn. 395 (1871). See also ante, § 49 : "Laches of Stock- holders" (consolidation); ante, §116: "Defences to Stockholders' Actions. Estoppel" (sales); §192: "Acqui- escence aTid Laches of Stockholders" (leases) . ' In Harding v. American Glucose Co., 182 111. 625 (1899), (55 N. E. Rep. 577, 74 Am. St. Rep. 189, 64 L. R. A. 738), the Supreme Court of Illinois said : "The position of counsel is that a stockholder can only file a bill to prevent the corporation from dis- posing of its properties, upon the ground that it will affect his pecuniary interests and because of the necessity of protecting his property rights and because of the necessity of protecting 678 himself from pecuniary loss or injury ; and that a stockholder in a vendor corporation has no right to enjoin a sale and transfer of a factory, owned by such vendor, upon the ground that the vendee corporation proposes to create a monopoly. ... It is idle to say that a stockholder in a corpora- tion would suffer no injury from a for- feiture of its charter rights and from its dissolution. In such a case, the corporation being destroyed, his stock therein would be completely wiped out and be made of no effect. The stockholder has a right to protest against such use of its property by the managing officers of a corporation as will lead to such forfeiture and disso- lution. ... (p. 628). What was there attempted was an abandonment of the business and sale of the assets without legal termination or dissolu- tion of the company. It makes no difference that the stockholder is to be allowed to receive his proportionate share of the proceeds of the sale of the CHAP. XXXVIl] EIGHTS AND REMEDIES §371 A stockholder may maintain a bill in his own name against the corporation and its officers, whenever it is reasonably certain that a demand upon the officers to bring the suit in the name of the corporation would be unavailing.' property. He has a right to hold his investment in the form of stock, and a change of such investment against his consent is a change which affects his pecuniary or financial interests. He has the right to be the judge whether such change in his pecuniary status shall be made or whether he shall continue his investment in the form of stock." Compare, however, MacGinnis v. Boston, etc. Mining Co., 29 Mont. 446 (1903), (75 Pac. Rep. 89), where the Supreme Court of Montana said : "The plaintiff sues as a private citizen. He is not as such authorized to present, through the medium of a civil action, and try the issue whether the defend- ant Amalgamated Company is doing business in this State in violation of law. A determination of this issue as an independent ground of relief must be had, if at all, by the State, and in its own behalf through the attorney-general. It is no concern of the plaintiff if the State neglects or waives its right to call the defendant to account. In general the same may be said as to the issue whether the combination formed by the defendant Amalgamated Company through its officers and the stock- holders of the Montana Company and other corporations is a monopoly in violation of the Penal Code of the State, rendered the defendant Mon- tana Company liable to punishment and a forfeiture of its franchises and property. . . Nor do we know any provision of law authorizing a court of equity, at the instance of a minority stockholder, to decree a forfeiture of the stock of any stockholder in the same corporation to the corporation, on the ground that the title of such stockholder has been acquired and is held in violation of the charter of the corporation. Nevertheless, so far as the participation of the Montana cor- poration and its officers in an unlaw- ful combination to create a monopoly subjects its property and franchises to a forfeiture and thus imperils the property rights of the minority stock- holder he has a cause of complaint against it and them, and may, through the medium of a court of equity, com- pel it and them to abandon such un- lawful connection and return to a, performance of their obligations under the charter contract of the company, to wit : to accomplish, through its board of directors, the purpose for which it was formed, and by lawful means. " In Dittman v. Distilling Co., 64 N. J. (Eq.537(1903), 54 Atl.Rep.570), where it was charged that a corporation had created a monopoly and it appeared that such monopoly, if it existed, arose from the exercise by the corporation of the power conferred by its charter to purchase the shares of other cor- porations, the vice-chancellor held that the question of a monopoly could not be determined by a court of equity in a suit by a stockholder, and could only be considered in quo warranto proceedings instituted by the attorney-general to oust the corporation from its franchises. ' In Harding v. American Glucose Co., 182 111. 628 (1899), (55 N. E. Rep. 577, 74 Am. St. Rep. 189, 64 L. R. A. 738), the Court further said : "The bill in this case recites that the complainants therein filed it, not only in their own behalf, but in behalf of all other stockholders, who might see fit to come into the suit and join therein. Where the officers of a cor- poration wrongfully deal with its 679 §372 INTERCORPOBATE RELATIONS [part V Foreign corporations are subject to the same rules of public policy, within the State, as domestic companies. A court of equity will grant relief, touching property within the State, to a stockholder of a foreign corporation which is participat- ing in an unlawful combination.' § 372. Remedies of State — (A) Quo Warranto against Cor- porate Combination. — The scope of the remedy of qiu) warranto — applied to corporations — is the forfeiture of the franchises of a corporation for non-user or misuser. The object of the writ is the protection of the public and not the redress of private wrongs. In order to secure a judgment of ouster, misuser must be shown working or threatening injury to the property to the injury of the stock- holders, the latter may maintain a bill against the company and its officers for relief against such misap- propriations. Originally, the rule was that such a suit should be brought by the corporation itself; but equity permits a stockholder, either indi- vidually or in behalf of other stock- holders similarly situated, to bring such a suit, where the corporation itself either refuses to do so, or where the facts show that the wrong-doing defendants constitute a majority of the managing body, or where it is reasonably certain that a demand made upon the proper officers of the corporation to bring the action would be unavailing." See also ante, § 48 : "Procedure in Stocktiolders* Actions" (consolidation) ; ante, § 115 : " Procedure in Stockhold- ers^ Actions" (sales). ^ In Harding v. American Glucose Co., 182 lU. 635 (1899), (55 N. E. Kep. 577, 74 Am. St. Rep. 189, 64 L. R. A. 738) the Court also said : " It is the settled doctrine of this State, established by many decisions of this court, that foreign corporations do not come into this State as a matter of legal right, but only by comity, and that said corporations are subject to the same restrictions and duties 680 as corporations formed in this State, and have no other or greater powers. . . . Foreign corporations cannot be permitted to come into this State for the purpose of asserting rights in contravention of our laws. . . . Cit- izens of Illinois cannot evade the laws of Illinois passed against trusts and combines by going into a foreign State and chartering a corporation to do business in this State in violation of its laws. When these foreign cor- porations come into this State they must conform to the laws and policy of this State. . . If real estate in Illinois, owned by domestic corpora- tions, cannot be used for the purpose of carrying out the business of an illegal trust or combination, real estate in Illinois, owned by a foreign cor- poration, cannot be used for such a purpose." Compare, however, the extract from MacGinnis v. Boston, etc. Mining Co., 29 Mont. 428 (1903), (75 Pac. Rep. 89) in a preceding note to this section. Compare also Small v. Minneapolis, etc. Co., 57 Hun (N. Y.), 587 (1890), (10 N. Y. Supp. 456), where an in- junction was refused in a stockholder's suit because both corporations — vendor and purchaser — were foreign corporations. CHAP. XXXVIl] BIGHTS AND REMEDIES §372 public, or violating fundamental conditions attached to the grant of the franchise.' The formation of a combination of competing corporations by means of a holding or purchasing corporation, in violation of a rule of public policy, constitutes a misuser of the franchises of the latter corporation — the corporate combination — and subjects them to forfeiture in quo warranto proceedings.^ The combination is injurious to public welfare because it is inimical to pubhc policy. If involving quasi-puhlic corporations it breaks the primary contract with the State. * state V. Minnesota Thresher Mfg. Co., 40 Minn. 213 (1889), (41 N. W. Rep. 1020, 3 L. R. A. 510). In People v. North River Sugar Refg. Co., 121 N. Y. 608 (1889), (24 N. E. Rep. 834, 18 Am. St. Rep. 843, 9 L. R. A. 33), Judge Finch said; **The judgment sought against the defendant is one of corpo- rate death. The State which created asks us to destroy, and the penalty invoked represents the extreme rigor of the law. Its infliction must rest upon just cause and be warranted by material misconduct. The life of a corporation, is, indeed, less than that of the humblest citizen, and yet it en- velops great accumulations of prop- erty, moves and carries in large vol- ume the business and enterprise of the people, and may not be destroyed without clear and abundant reason. It appears to be settled that the State, as prosecutor, must show on the part of the corporation accused some sin against the law of its being which has produced, or tends to pro- duce, injury to the public. The transgression must not be merely formal or incidental but material and serious, and such as to harm the public welfare; for the State does not con- cern itself with the quarrels of private litigants. " 2 Distilling, etc. Co. v. People, 156 lU. 448 (1895), (41 N. E. Rep. 188, 47 Am. St. Rep. 200) ; People v. Chicago Gas Trust Co., 130 111. 268 (188'9), (22 N. E. Rep. 798, 17 Am. St. Rep. 319, 8 L. R. A. 497). Also People v. Chicago Live Stock Exch., 170 111. 556 (1897), (48 N. E. Rep. 1062, 62 Am. St. Rep. 404, 39 L. R. A. 373); Coquard v. National Linseed Oil Co., 171 111. 480 (1898), (49 N. E. Rep. 563) ; People V. Milk Exch., 145 N. Y. 267 (1898), (39 N. E. Rep. 1062, 45 Am. St. Rep. 609, 27 L. R. A. 437); Stockton V. American Tobacco Co., 55 N. J. Eq. 52 (1897), (36 Atl. Rep. 971). Where several corporations form a combination by means of a holding corporation for the elimination of competition, the State may pro- ceed against the holding corporation whether it be a domestic or foreign corporation. Southern El. Securities Co. u. State, (Miss. 1907), (44 So. Rep. 785). A combination between several corporations entered into for the purpose of suppressing competition, fixing prices, and controlling produc- tion, cannot be declared void in a suit in equity brought by an outside dealer having no contractual relations with it but claiming to be injured, as such result can only be accomplished at the suit of the Government. An injunction, however, may be obtained against the continuance of wrongful acts of intimidation. Leonard v. Abner-Drury Brewing Co., 25 App. D. C. 161 (1905). 681 § 373 INTERCORPORATE RELATIONS [I'ART V The fact that a corporation, under its charter, has power to purchase and hold property necessary for its business, does not authorize it to acquire competing phxnts in order to obtain control of the market for a t'ommodity, contrary to the rule of public policy. In DistiUing, etc. Co. v. Peopled the Supreme Court of Illinois said: "The defendant is authorized to own such property as is necessary for carrying on its distillery business and no more. Its power to acquire and hold property is limited to that purpose, and it has no power by its charter to enter upon a scheme of getting into its hands, and under its control, all, or substantially all, the distilling plants and the distillery business of the country, for the purpose of controlling production and prices, of crushing out competition and of establishing a virtual monopoh- in that business. Such purposes are foreign to the powers granted by the charter. Acquisitions of property to such extent and for such purpose, do not come within the authoritj'^ to own the property necessary for the purpose of carrying on a general distillery business. In acquir- ing distillery properties, in the manner and for the purposes shown by the information, the defendant has not only mis- used and abused the powers granted by its charter, but has usurped and exercised powers not conferred by, but which are wholly foreign to, that instrument. It has thus rendered itself liable to prosecution by the State by quo warranto." A stockholder is without authority to institute proceedings to forfeit the franchises of a corporation, upon the ground that it constitutes an unlawful combination. The remedy of quo warranto can only be enforced by the State.' § 373. Remedies of State — (B) Quo Warranto against Com- ' Distilling, etc. Co. i>. People, 156 the complainant for the forfeiture of 111. 44S (189.5), (41 N. E. Rep. 188, 47 the charter. Only the State ciui corn- Am. St. Rep. 200). plain of injury to the public, or that ^ Coquard v. National Linseed Oil public rights are being intorforod with, Co., 171 111. 484 (1898), (49 N. E. Rep. and enforce .i forfeiture of ilcfond- 563) : "The facts pleaded are insuffi- ant's frivmliiso for that reason." cient to show the existence of a trust, See also MaoGinnis v. Boston, etc. but if they met the requirements in Mining Co., 29 Mont. 440 (1903), that regard, yet, so far as the pubUo (75 Pao. Rep. 89) ; Dittman v. Dis- right is concerned which is the subject tilhng Co., 64 N. J. Eq. 537 (1903), of so much argument, that fact would (54 Atl. Rep. 570). not authorize the filing of the bill by 682 CHAP. XXXVIl] BIGHTS AND REMEDIES §373 bining Corporations. — Upon the principles considered in the last section, a corporation which becomes a member of an illegal association, or participates in the formation of an un- lawful trust or corporate combination, is guilty of a misuser of its franchises, and they are subject to forfeiture in pro- ceedings in quo warranto instituted by the State. ^ A private corporation in entering such a combination exceeds its powers in a manner prejudicial to the public interest; a gwasi-public corporation fails in the discharge of its public obligations and transgresses the law of its creation.^ ' Califomin. Havemeyer v. Supe- rior Court, 84 Cal. 378 (1890), (24 Pac. Rep. 121, 18 Am. St. Rep. 192, 10 L. R. A. 641) : "The doctrine is that cor- porate charters are granted upon the implied condition that the privileges conferred will be used for the advan- tage, or at least not to the disadvan- tage, of the State. If this condition is broken, the charter which the State has given is taken back by the State." See also People v. American Sugar Refg. Co. (Super. Ct. San Francisco, 1890), 7 Ry. & Corp. L. J. 83. Indiana. State v. Portland Nat- ural Gas, etc. Co., 153 Ind. 483 (1899), (53 N. E. Rep. 1089, 74 Am. St. Rep. 314, 53 L. R. A. 413). Mississippi. Where several cor- porations form an unlawful combina- tion for the purpose of stifling com- petition by means of a holding cor- poration to which controlling stock interests are transferred, the State may proceed against any of the domestic constituent companies. Southern Electric Sec. Co. v. State (Miss. 1907), (44 So. Rep. 785). Nebraska. State v. Nebraska Dis- tilling Co., 29 Neb. 719 (1890), (46 N. W. Rep. 155) : "The findings in this case, to which no objections are made, clearly show that the object of the distilling company, in entering into the illegal combination, was to destroy competition and create a monopoly not only by limiting the production of alcohol, but, by dismantling as many distilleries as the trust saw fit, abso- lutely prevent the manufacture of the article except in the few establish- ments controlled by the trust, and thus it would be enabled to control prices, prevent production and create a monopoly of the most offensive character. Any contract entered into with such an object in view^ is, under the laws of this State, null and void, and the conveyance from the distilling company to the trust was in contra- vention of the authority conferred by the statute on that company, in excess of the powers granted by its charter and against public policy and void, and no title passed by such conveyance. . As there has been an abuse of the corporate franchise, it will be dissolved and annulled." In this case it was also held that a transfer of property pending quo war- ranto proceedings would not serve to evade the efPect of the judgment. New York. People v. North River Sugar Refg. Co., 121 N. Y. 582 (1889), (24 N. E. Rep. 834, 18 Am. St. Rep. 843, 9 L. R. A. 33). Ohio. State v. Standard Oil Co., 49 Ohio St. 137 (1892), (30 N. E. Rep. 279, 34 Am. St. Rep. 541, 15 L. R. A. 145). Texas. San Antonio Gas Co. v. State, 22 Tex. Civ. App. 118 (1899), (54 S. W. Rep. 118), (with especial reference to the Texas anti-trust statute). ' In State v. Portland Natural Gas, 683 §374 INTEECOEPOEATE EELATIONS [PAET V Upon proof in quo warranto proceedings that a defendant corporation has entered into an illegal agreement for a com- bination, the courts may declare a forfeiture of its corporate franchise; or, it is held, may render a judgment of ouster from the right to make or carry out the combination agreement.' § 374. Remedies of State — (C) Injunction. — The State may file a bill for an injunction to restrain any ultra vires act of a corporation of a nature to produce public injury. It may en- join the formation of an unlawful combination — association, trust or corporate combination. It is not obliged to wait until the organization has been completed, and all the injury possible is in process of infliction.^ etc. Co., 153 Ind. 491 (1899), (53N.E. Rep. 1089, 74 Am. St. Rep. 314, 53 L. R. A. 413), the Supreme Court of Indiana said: "While appellee, by the agreement in controversy, cannot be said to have fully renounced autonomy, still it did so to the extent, at least, that it thereby disabled itself from supplying persons with gas who were patrons of the other company. By entering into this agreement, and carrying it into execution, appellee violated the principles of public policy, and clearly abused the rights and powers conferred upon it by the State, and may be said to have of- fended against the laws of its creation. Such an illegal act or agreement, upon the part of a corporation like appellee, cannot be permitted to override the law, and it was the manifest duty of the State to interpose as it has done, and call it to account ; and if the charge made is established, a deserv- ing penalty ought to be inflicted.'' See also. People v. Chicago Gas Trust Co., 130 111. 268 (1889), (22 N. E. Rep. 798, 17 Am. St. Rep. 319, 8 L. R. A. 497). ' In State v. Portland Natural Gas, etc. Co., 153 Ind. 491 (1899), (53 N. E. Rep. 1089, 74 Am. St. Rep. 314, 53 L. R. A. 413), the Court further said : "The rule is well settled that a court, in cases in quo warranto pro- 684 ceedings like this, if the facts justify, may, in the exercise of its discretion, render a judgment against the de- fendant declaring a forfeiture of its corporate franchises, or the judgment may be a forfeiture or ouster only of the right of the defendant to carry out or continue the illegal act or acts charged and established." See also, State V. Standard Oil Co., 49 Ohio St. 137 (1892), (30 N. E. Rep. 279, 34 Am. St. Rep. 541, 15 L. R. A. 145). In quo warraTito proceedings against a corporation upon the ground that it is a party to an unlawful combination, the respondent corporation cannot object that the other members of the combination are not joined as de- fendants. Attorney-General v. A. Booth & Co., 143 Mich. 89 (1906), (106 N. W. Rep. 868). 2 In Trust Co. v. State, 109 Ga. 747 (1900), (35 S. E. Rep. 323), the Su- preme Court of Georgia said : "We have reached the conclusion that the sounder reasoning is in favor of allow- ing to the State relief by injunction whenever it is proceeding in the in- terest of the public to prevent a threatened injury. As harsh as the remedy by injunction is generally considered, it is certainly not as severe as would be a proceeding in the nature of quo warranto, instituted for the CHAP. XXXVll] EIGHTS AND REMEDIES §374 If the State waits until the combination has been perfected, it may be partially deprived of its equitable remedy. An injunction will undoubtedly lie to restrain the continued operation of an association or trust, but it cannot be employed, as a substitute for quo warranto proceedings, to attack the corporate existence of a corporate combination. When a corporate combination has been formed, has acquired the plants of other companies and is transacting business, — ■ all in the exercise of its apparent powers, — an injunction restraining it from the exercise of those powers, upon the ground that it was formed for an unlawful purpose, would be equivalent to an annulment of its charter. In such a case, quo warranto is the only remedy.* purpose of forfeiting the charter of a corporation. The one is instituted, not for the purpose of causing a de- struction of the corporation, but to prevent it from entering into trans- actions violative of the public policy of the State, and to protect the inter- est of the public against a threatened wrong. The other remedy, if en- forced, would cause the death of the corporation, thus forever preventing it from serving the public interests, or meeting the public demands upon its business, and often result in a wreckage of the property of its owners. We can, therefore, see no reason why, if the remedy for the wrongs threatened can be as well pre- vented by injunction, it would not be the more readily and properly ap- plied than the harsher one of for- feiture or confiscation. " See also, Stockton v. Central R. Co., ,50 N. J. Eq. 52 (1892), (24 Atl. Rep. 964, 17 L. R. A. 97) ; People v. Aachen, etc. Fire Ins. Co., 126 111. App. 636 (1906) ; Queen Ins. Co. v. State (Tex. av. App, 1893), 22 S. W. Rep. 1048; Attorney-General v. Great Northern R. Co., 1 Drew & S. 154 (1860), (6 Jur. (n. s.), 1009). As to injunction against unincorporated combination, see State v. American Cotton Oil Trust, 40 La. Ann. 8 (1888), (3 So. Rep. 409, 19 Am. & Eng. Corp. Cas. 448). ' Stockton V. American Tobacco Co., 55 N. J. Eq. 368 (1897), (36 Atl. Rep. 971) : "The first question which con- cerns us is whether these attacks upon the manner of creating the company do not directly challenge the existence of the corporation itself, for if this be so, it is entirely settled, in this State, that a court of equity has no juris- diction to consider the matter at all. ... (p. 370.) Now, in the case at bar it is charged that the purpose of the five concerns, the, owners of which projected a scheme of incor- poration, was to coalesce their sepa- rate competing business into one organization, for the purpose of de- stroying competition and controlling the trade in cigarettes. Whether the contracts preceding the act of incorporation . . . were inimical to public policy, I shall not stop to con- sider. If so, the agreement or agree- ments would have been unenforceable in any court, and it may be that upon a bill filed by the attorney-general such contract would have been an- nulled. But that contract has been executed. As a contract it has ceased to have any efficacy what- ever. All that can be said of it in this case is that its provisions exhibit the 685 §375 INTERCORPORATE RELATIONS [part V § 375. Evidence. — The existence of an unlawful combina- tion must be shown by evidence. Proof that a combination exists is not proof of its illegality.' In establishing the illegal character of a combination, how- ever, direct evidence of an unlawful object is not necessary.^ purposes for which the corporation was organized, and the sole question here is whether, if such purpose appears to have been to establish a. monopols" through the instrumentality of this corporate organization, this court can, upon that ground, restrain any act done by the corporation itself within its corporate power. Now that such an exertion of power by a court of equitj^ would strike at the authority of the corporation to act at all as a corporation is perfectly clear. The corporation must be either a legal or an illegal entity. If legal, then, as I have already observed, it possesses the right to dispose of its goods in its adopted manner. If illegal, it has no right to transact any business at all as a corporation. An injunction which would, in the lan- guage of the prayer of the bill, restrain the company from using the corporate organization in the conduct of their business of making and selling paper cigarettes, and from carrying on any portion of their business in the name of the American Tobacco Company, would be as efficient an annulment of their franchise as would be a judgment against them upon qico warranto." ' Herriman v. Menzies, 115 Cal. 16 (1896), (44 Pac. Rep. 660, 56 Am. St. Rep. 82, 35 L. R. A. 319) : "We are not at liberty to indulge in inferences which would restrict the parties in their right to combine their interests. Parties are to be given the widest latitude to make contracts with ref- erence to their private interests, and the invalidity of such contracts is never to be inferred, but must be clearly made to appear." See also Leslie v. Lorillard, 110 686 N. Y. 533 (1888), (18 N. E. Rep. 363, 1 L. R. A. 456) ; Central Shade Roller Co. v. Cushman, 143 Mass. 353 (1887), (9 N. E. Rep. 629). Where in an action upon a lease the defence is set up that it is invaUd as being part of a scheme to create an unlawful combination, the question whether it was made for such purpose is for the jury. Hartz V. Eddy, 140 Mich. 479 (1905), (103 N. W. Rep. 852). But if all the evidence concerning a. contract — the circumstances at- tending its execution, the result to be accomplished and the practical construction of the parties — is con- sistent only with an unlawful purpose, the question of illegality should not be submitted to the jury. And this is true notwithstanding the contract is not illegal upon its face. Detroit Salt Co. v. National Salt Co., 134 Mich. 103 (1903), (96 N. W. Rep. 1). 2 Harding v. American Glucose Co., 182 lU. 635 (1899), (55 N. E. Rep. 577, 74 Am. St. Rep. 189, 64 L. R. A. 738) : " It makes no difference that the agreement for the illegal combi- nation is not a formal written agree- ment. It may be a verbal agreeinent or understanding, or a scheme not embodied in writing, but evidenced, by the action of the parties." See also Pocahontas Coke Co. v. Pow- hatan Coal, etc. Co., 60 W. Va. 508 (1906), (56 S. E. Rep. 269, 116 Am. St. Rep. 901, 10 L. R. A. (n. s.) 268). In quo warranto proceedings to oust certain corporations from the State as constituting an unlawful combination, statements of the au- thorized representatives of such cor- CHAP. XXXVIl] RIGHTS AND REMEDIES §375 The purpose of a combination to control the market is seldom evidenced by a single instrument, or expressly stated in any instrument. It is shown by a series of acts and transactions. Similarly, an illegal combination of gMasi-public corporations may be of the most innocent character in its stated purpose. It is the duty of the court to view the agreement of the parties in the light of all the surrounding circumstances, and to receive any evidence tending to show the true situation and real purposes of the parties to the combination. This course has been followed by the courts in the leading cases of quo warranto which have already been adverted to.' porations with respect to the methods of transacting business are admissible in evidence against such corporations. State V. Armour Packing Co., 173 Mo. 356 (1903), (73 S. W. Rep. 645, 96 Am. St. Rep. 515). ' People V. North River Sugar Refg. Co., 121 N. Y. 582 (1889), (24 N. E. Rep. 834, 18 Am. St. Rep. 843, 9 L. R. A. 33); State v. Standard Oil Co., 49 Ohio St. 137 (1892), (30 N. E. Rep. 279, 34 Am. St. Rep. 541, 15 L. R. A. 145) ; Distilling, etc. Co. V. People, 156 111. 448 (1895), (41 N. E. Rep. 188, 47 Am. St. Rep. 200) ; People v. Chicago Gas Trust Co., 130 111. 268 (1889), (22 N. E. Rep. 798, 17 Am. St. Rep. 319, 8 L. R. A. 497) ; State v. Nebraska Dis- tilling Co., 29 Neb. 700 (1890), (46 N. W. Rep. 155). 687 376 INTEBCORPORATE RELATIONS [PAET V Article III LEGISLATION AFFECTING COMBINATIONS I Federal Anti-tkitst Statute CHAPTER XXXVIII THE STATUTE AND ITS CONSTITUTIONALITY § 376. The Statute. § 377. Analysis of Statute. § 378. Object of Statute. § 379. Constitutionality of Act — (A) Power of Congress under Commerce Clause to legislate concerning Private Contracts affecting Interstate Commerce. § 380. Constitutionality of Act — (B) Power of Congress under Commerce Clause to legislate concerning Contracts and Combinations vinder State Laws. § 381. Constitutionality of Act — ^ (C) Power of Congress under Commerce Clause to prohibit Combinations of Competing Railroads. I 382. Constitutionality of Act — (D) Act is Constitutional. § 383. Legislation supplementing the Statute — (1) Anti-trust Provisions of Wilson Tariff Act. § 384. Legislation supplementing the Statute — (2) The Expedition Act. § 385. Legislation supplementing the Statute — (3) The Immunity Proviso. § 376. The Statute. — The federal anti-trust act, generally called the " Sherman Act," and entitled " An Act to protect trade and commerce against unlawful restraints and monopo- lies," was approved July 2, 1890. It is printed in fuU in the footnote.' ' "§ 1. Every contract, combi- is hereby declared to be illegal, nation in the form of trust or other- Every person who shall make any wise, or conspiracy, in restraint of such contract, or engage in any such trade or conmierce among the sev- combination or conspiracy, shall be eral States, or with foreign nations, deemed guilty of a misdemeanor, and, 688 CHAP. XXXVIIl] STATUTE AND ITS CONSTITUTIONALITY §377 § 377. Analysis of Statute. — The sections of the act may be classified, primarily, into (I) Sections declaring what " restraints and monopolies " the act is directed against, and prescribing penalties — sec- tions 1, 2, and 3. on conviction thereof, shall be pun- ished by fine not exceeding five thou- sand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion- of the court. " § 2. Every person who shall monopoUze, or attempt to monopo- lize, or combine or conspire with any other person or persons, to monopo- lize any part of the trade or com- merce among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor, , and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not ex- ceeding one year, or by both said punishments, in the discretion of the court. " § 3. Every contract, combination in form of trust or otherwise, or con- spiracy, in restraint of trade or com- merce in any Territory of the United States or of the District of Coliimbia, or in restraint of trade or commerce be- tween any such Territory and another, or between any such Territory or Ter- ritories and any State or States or the District of Columbia, or with foreign nations, or between the District of Columbia and any State or States or foreign nations, is hereby declared illegal. Every person who shall make any such contract or engage in any combination or conspiracy, shall be deemed gtiilty of a misdemeanor, and, on conviction thereof, shall be pun- ished by fine not exceeding five thou- sand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court. " § 4. The several circuit courts of the United States are hereby invested with jurisdiction to prevent and re- strain violations of this act; and it shall be the duty of the several dis- trict attorneys of the United States, in their respective districts, under the direction of the Attorney-General, to institute proceedings in equity to prevent, and restrain such viola- tions. Such proceedings may be by way of petition setting forth the case and praying that such violation shall be enjoined or otherwise pro- hibited. Wlien the parties com- plained of shall have been duly noti- fied of such petition, the court shall proceed, as soon as may be, to the hearing and determination of the case; and pending such petition and before final decree, the court may at any time make such temporary restraining order or prohibition as shall be deemed just in the premises. " § 5. Whenever it shall appear to the court before which any proceeding under section four of this act may be pending, that the ends of justice re- quire that other parties should be brought before the court, the court may cause them to be sununoned, whether they reside in the district in which the court is held or not ; and subpoenas to that end may be served in any district by the marshal thereof. "§ 6. Any property owned under any contract or by any combination, or pursuant to any conspiracy (and being the subject thereof) mentioned in section one of this act, and being in the course of transportation from one State to another, or to a foreign country, shall be forfeited to the United States, and may be seized 689 § 377 INTERCORPORATE RELATIONS [PART V (II) Sections relating to remedies and procedure — sec- tions 4, 5, 6 and 7} (III) Section declaring rule of construction — section 8. The last section — forming Class III and providing that the word " person " or " persons " shall include corporations and associations — requires no analysis. Class II — the sections relating to remedies and procedure — will be the subject of consideration in another chapter. The several sections in Class I may be subdivided into (1) Definitions of offences. (2) Statements of penalties. The penalties prescribed in the act will be considered in connection with remedies and procedure. The offences de- scribed in the several sections of Class I are as follows: Under section 1 : Every (a) contract, (6) combination in the form of trust or otherwise, or (c) conspiracy, in restraint of trade or commerce among the several States or with foreign nations, is illegal. Under section 2: Every person who shall (a) monopolize, or (&) attempt to monopohze, or (c) combine or (rf) conspire with any other person or persons, to monopolize, any part of the trade or commerce among the several Sintes or with foreign nations, shall be deemed guilty of a misdemeanor. Under section 3: The acts and agreements described in section 1, if in restraint of trade or commerce in any Terri- tory (including the District of Columbia) , or between Territories and other Territories, States and foreign nations, are illegal. and condemned by like proceedings threefold the damages by him sus- as those provided by law for the for- tained, and the costs of suit, including feiture, seizure, and condemnation of a reasonable attorney's fee. property imported into the United " § 8. That the word 'person' or States contrary to law. ' persons, ■ wherever used in this act, " § 7. Any person who shall be in- shall be deemed to include corpora- jured in his business or property by tions and .associations existing under any other person or corporation by or authorized by the laws of either the reason of anything forbidden or de- United States, the laws of any of the clared to be unlawful by this act, may Territories, the laws of any State, or sue therefor in any circuit court of the laws of any foreign country." the United States in the district in ' Section 6 also provides an ad- which the defendant resides or is ditional penalty of forfeiture, and found, without respect to the amount section 7, of treble damages, in controversy, and shall recover 690 CHAP. XXXVni] STATUTE AND ITS CONSTITUTIONALITY § 378 From this analysis the following conclusions follow : 1. The " restraints and monopolies " referred to in the title to the act are (A) Contracts, combinations and conspiracies in restraint of interstate (including territorial and interterritorial) and foreign trade or commerce. (B) Monopolizing, or attempting, combining or conspiring to monopolize, interstate or foreign trade or commerce. 2. Such " restraints and monopolies " are illegal. § 378. Object of Statute. — The statute is aimed at all re- strictions upon interstate commerce. Its purpose is to per- mit trade and commerce, between the States and with foreign nations, to flow in their natural channels, " unrestricted by any combinations, contracts, conspiracies, or monopolies whatsoever." * In United States v. Coal Dealers Association,^ Judge Morrow said : " The clear and positive purpose of the statute must be understood to be that trade and commerce, within the jurisdiction of the federal government, shall be absolutely free, and no contract or combination will be tolerated that impedes or restricts their natural flow and volume." The purpose of a statute must be gathered, primarily, from its language; and, as will be shown, this act has been con- strued to apply to combinations of competing carriers, as well as to industrial combinations. An examination of the "history of the times," moreover, — using a phrase of the Supreme Court of the United States, — will show that while the principal object of Congress, in enacting the statute, may have been the suppression of combinations of industrial cor- porations in restraint of interstate commerce, the prevention of combinations between competing railroad companies was not outside its purpose.^ ' United States v. Hopkins, 82 Fed. of the act in question ; that a number 537 (1897). of combinations in the form of trusts ' United States v. Coal Dealers and conspiracies in restraint of trade Ass'n, 85 Fed. 261 (1898). were to be found throughout the ' United States v. Trans-Missouri country, and that it was impossible Freight Ass'n, 166 U. S. 319 (1897), for the State governments to success- (17 Sup. Ct. Rep. 540): "It is said fully cope with them, because of their that Congress had very different commercial character, and of their matters in view, and very different business extension through the dif- objects to accomplish in the passage ferent States of the Union. Among 691 §379 INTERCORPORATE RELATIONS [part V § 379. Constitutionality of Act — (A) Power of Congress under Commerce Clause to legislate concerning Private Con- tracts affecting Interstate Commerce. — The Constitution of the United States provides that Congress shall have power " to regulate commerce with foreign nations, and among the several States and with the Indian Tribes." ' Under this grant of these trusts it was said in Congress, were the Beef Trust, the Standard Oil Trust, the Steel Trust, the Barbed Wire Fence Trust, the Sugar Trust, the Cordage Trust, the Cotton Seed Oil TruHt, the Whislcey Trust, and many others, and these trusts, it was stated, had assumed an importance and had accjuired a power which were dangerous to the wiiole country, and that their existence was directly antagonistic to its peace and pros- perity. To combinations and con- spiracies of this kind, it is contended that the act in question was directed, and not to the combinations of com- peting railroads to keep up their prices to a reasonable sum for the transpor- tation of persons and property. It is true that many and various trusts were in existence at the time of the passage of the act, and it was probably sought to cover them by the provisions of the act. Many of them had rendered themselves offensive by the manner in which they exercised the great power that combined capital gave them. But a further investiga- tion of 'the history of the times' shows also that those trusts were not the only associations controlling a great combination of capital which had caused complaint at the manner in which their business was conducted. There were many and loud complaints from some portions of the public regarding the railroads and the prices they were charging for the service thtty rendered, and it was alleged that the prices for the transportation of per- sons and articles of commerce wen; unduly and improperly enhanced by combinations among the different 692 roads. Whether these complaints were well or ill founded we do not presume at this time and under those circumstances to determine or discuss. It is simply for the purpose of answer- ing the statement that it was only to trusts of the nature above sot forth that this legislation was directed, that the subject of the opinions of the people in regard to the actions of the railroad companies in this particular is referred to. A reference to this history of the times does not, as we think, furnish us with any strong reason for believing that it was only trusts that were in the minds of the members of Congri^ss, and that rail- roads and tlieir manner of doing business were wholly excluded there- from." ' Constitution of the United States, Art. I, § 8 : "The Congress shall have Power ... to regulate commerce with foreign nations, and among the several States and with the Indian Tribes." By the adoption of this clause in its grant of legislative powers the Con- stitutional Convention created the federal commercial power and pre- scribed for commercial regulation. And yet no member of the Convention appreciated the posHibiliti(;s of the language used. There is nothing to indicate that anything further was intended than the uniform regulation of foreign commerce and the preven- tion of imposts at State linos. The widening scope of the commerce clause — the development of the essentially nationalizing power — has been brought about through its inter- pretation, in the light of history CHAP. XXXVIIl] STATUTE AND ITS CONSTITUTIONALITY § 379 power, Congress may enact laws declaring illegal and prohibit- ing the performance of contracts between individuals or corpo- rations, the natural and direct — as distinguished from the incidental and collateral — effect of the operation of which will be to regulate, to any extent, interstate or foreign com- merce.' The provision in the Constitution regarding the liberty of the citizen,^ although including liberty of contract, does not limit the power of Congress, under the commerce clause, to legislate upon the subject of contracts affecting, in any degree, commerce among the States. In Addyston Pipe, etc. Co. v. United States,^ Mr. Justice Peckham said: " It is insisted by the appellants, at the thresh- old of the inquiry, that, by the true construction of the Con- stitution, the power of Congress to regulate interstate com- merce is hmited to its protection from acts of interference by State legislation ot by means of regulations made under the authority of the State by some political subdivision thereof, . . . but that it does not include the general power to interfere with or prohibit private contracts between citizens, even though such contracts have interstate commerce for their object, and result in a direct and substantial obstruction to or regulation of that commerce, . . . The power to regulate interstate commerce is, as stated by Chief Justice Marshall, full and com- plete in Congress, and there is no limitation in the grant of the power which excludes private contracts of the nature' in question from the jurisdiction of that body. Nor is any such limitation contained in the other clause of the Constitution, which pro- vides that no person shall be deprived of life, liberty or property without due process of law. . . . The provision in the Con- and the nation's growth, by the Su- shall be . . . deprived of life, liberty preme Court of the United States. or property without due process of The series of decisions marking that law; nor shall private property be development mark also American taken without just compensation." commercial progress. ' Addyston Pipe, etc. Co. v. United > Addyston Pipe, etc. Co. o. United States, 175 U. S. 226 (1899), (20 Sup. States, 175 U. S. 226 (1899), (20 Sup. Ct. Rep. 96). Ct. Rep. 96) ; United States v. Joint See also opinion of Mr. Justice Traffic Ass'n, 171 U. S. 571 (1898), Harlan in Northern Securities Co. v. (19 Sup. Ct. Rep. 25). ■ United States, 193 U. S. 197, 342 2 The Fifth Amendment of the Con- (1994), (24 Sup. Ct. Rep. 436). stitution provides that "no person 693 § 380 INTEHCORPOEATE RELATIONS [PART V stitution does not, as we believe, exclude Congress from legis- lating with regards to contracts of the above nature, while in the exercise of its constitutional right to regulate commerce among the States. On the contrary, we think the provision regarding the liberty of the citizen is, to some extent, limited by the commerce clause of the Constitution, and that the power of Congress to regulate interstate commerce comprises the right to enact a law prohibiting the citizen from entering into those private contracts which directly and substantially, and not merely indirectly, remotely, incidentally and collaterally, regu- late, to a greater or less degree, commerce among the States." ^ § 380. Constitutionality of Act — (B) Power of Congress under Commerce Clause to legislate concerning Contracts and Combinations under State Laws. — The power of Congress, under the commerce clause of the Constitution, to legislate concerning contracts and combinations affecting commerce among the States is not affected by the fact that they may have been entered into under State laws. The States have no power to place restraints upon interstate commerce nor to authorize corporations or individuals to do so. State legislation can never serve as a shield against the assertion of federal authority over such commerce. It is no violation of the reserved rights of the States for Con- gress to enact that no persons, natural or artificial, shall enter ^ Compare this decision with that in the citizens of the States, in the acqui- In re Greene, 52 Fed. 112 (1892), sition, control, and disposition of where the constitutional limitations property. Neither can Congress regu- upon the power of Congress are also late or prescribe the price or prices considered. Judge Jackson said : at which such property, or the prod- ** Congress may place restrictions and ucts thereof, shall be sold by the limitations upon the right of corpora- owner or owners, whether corpora- tions created and organized under its tions or individuals. It is equally authority to acquire, uiie, and dispose clear that Congress has no jurisdiction of property. It may also impose such over, and cannot make criminal, restrictions and limitations upon the the aims, purposes, and intentions citizen in respect to the exercise of of persons in the acquisition and con- a public privilege or franchise by the trol of property, which the States United States. But Congress, cer- in their residence or creation sanction tainly, has not the power or authority and permit. It is not material that under the commerce clause, or any such property, or the jjroducts thereof, other provision of the Constitution, may become the subject of trade and to limit and restrict the right of cor- commerce among the several States or porations created by the States, or with foreign nations." 694 CHAP. XXXVIIl] STATUTE AND ITS CONSTITUTIONALITY 380 'into a contract or combination in restraint of interstate com- merce. The States have no power to charter corporations to break such a law. No corporation can rely upon its chartered powers to justify breaking such a law. The federal anti-trust statute is not unconstitutional as trenching upon the powers of the States. Mr. Justice Harlan considers at length these questions in his opinion in the Northern Securities Case, extracts from which are printed in the footnote.' ' The Northern Securities Case (193 U. S. 197 (1904), (24 Sup. Ct. Rep. 436) is examined at length in ■post, § 397a. The following extracts from Mr. Justice Harlan's opinion relate to the question of constitu- tionality: "Now, the court is asked to adjudge that, if held to embrace the case before us, the Anti-trust Act is repugnant to the Constitution of the United States. In this view we are tmable to concur. The con- tention of the defendants covild not be sustained without, in effect, over- ruling the prior decisions of the court as to the scope and validity of the Anti-trust Act. ... If private parties may not, by combination among themselves, restrain interstate and international commerce in violation of an act of Congress, much less can such restraint be tolerated when imposed or attempted to be imposed upon commerce as carried on over public highways. Indeed, if the con- tentions of the defendants are sound, why may not all the railway com- panies in the United States, that are engaged, under State charters, in interstate and international com- merce, enter into a combination such as the one here in question, and by the device of a holding corporation obtain the absolute control through- out the entire country of rates for passengers and freight, beyond the power of Congress to protect the public against their exactions? . . . All, we take it, will agree, as estab- lished firmly by the decisions of this court, that the powers of Congress over commerce extend to all the in- strumentahties of such commerce, and to every device that may be employed to interfere with the free- dom of commerce among the States and with foreign nations. Equally, we assume, all will agree that the Con- stitution and the legal enactments of Congress are, by express words of the Constitution, the supreme law of the land, anything in the consti- tution and laws of any State to the contrary notwithstanding. Never- theless, the defendants, strangely enough, invoke in their behalf the Tenth Amendment of the Constitu- tion which declares that 'the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively or to the People,' and we are confronted with the suggestion that any order or decree of the federal court, which will prevent the Northern Securities Company from exercising the power it acquired in becoming the holder of the stocks of the Great Northern and Northern Pacific Railway com- panies will be an invasion of the rights of the State under which the Securities Company was chartered, as well as the rights of the States creating the other companies. In other words, if the State of New Jersey gives a charter to a corpo- ration, and even if the obtaining of 695 I 381 INTEKCOKPOEATB RELATIONS [PAET V § 381. Constitutionality of Act — (C) Power of Congress under Commerce Clause to prohibit Combinations of Competing Railroads. — In the exercise of the power conferred in the commerce clause of the Constitution, Congress may enact legislation, appUcable to railroad companies, declaring illegal all contracts and combinations which, in its opinion, restrain or impede interstate or foreign commerce by restricting or extinguishing competition.' It is for Congress to determine what contracts and combinations are prejudicial to the public welfare, and the courts may not declare an act of Congress unconstitutional on account of such determination, except, possibly, in a case of gross abuse of power. In United States v. Joint Traffic Association/' the Supreme Court of the United States said: " Has not Congress, with re- gard to interstate commerce and in the course of regulating it, in the case of railroad corporations, the power to say that no contract or combination shall be legal which shall restrain trade and commerce by shutting out the operation of the general laws of competition ? We think it has. . . . The busi- ness of a railroad carrier is of a public nature, and, in perform- such charter is in fact pursuant to this court as to the powers of the a coTnbination under which it becomes National Government over matters the holder of the stocks of shareholders committed to it. No State can, by in two competing parallel railroad merely creating a corporation, or in companies engaged in interstate com- any other mode, project its authority merce in other States, whereby com- into other States, and across the petition between the respective roads continent, so as to prevent Congress of those companies is to be destroyed from exerting the power it possesses and the enormous commerce carried under the Constitution over inter- on over them restrained by suppress- state and international commerce, ing competition. Congress must stay or so as to exempt its corporation its hand and allow such restraint to engaged in interstate commerce from continue to the detriment of the obedience to any rule lawfully estab- public because, forsooth, the cor- lished by Congress for such com- porations concerned, or some of them, merce." are State corporations. . . We re- ' United States v. Joint Traffic ject any such view of the relations of Ass'n, 171 U. S. 505 (1898), (19 Sup. the National Government and the Ct. Rep. 25) ; United States v. Trans- States composing the Union, as that Missouri Freight Ass'n, 166 U. S. for which the defendants contend. 290 (1897), (17 Sup. Ct. Rep. 540). Such a view cannot be maintained ' United States v. Joint Traffic without destrojring the just author- Ass'n, 171 U. S. 566 (1898), (19 Sup. ity of the United States. It is in- Ct. Rep. 25). consistent with all the decisions of 696 CHAP. XXXVIIl] STATUTE AND ITS CONSTITUTIONALITY § 382 ing it, the carrier is also performing, to a certain extent, a func- tion of government which, as counsel observed, requires them to perform the service upon equal terms to all. This public service, that of transportation of passengers and freight, is a part of trade and commerce, and when transported between States such commerce becomes what is described as interstate, and comes, to a certain extent, under the jurisdiction of Congress, by virtue of its power to regulate commerce among the several States. Where the grantees of this public franchise are com- peting railroad companies for interstate commerce, we think Congress is competent to forbid any agreement or combination among them by means of which competition is to be smoth- ered. Although the franchise, when granted by the State, becomes by the grant the property of the grantee, yet there are some regulations respecting the exercise of such grants which Congress may make under its power to regulate commerce among the several States. This will be conceded by all, the only question being as to the extent of the power. We think it extends, at least, to the prohibition of contracts relating to interstate commerce, which would extinguish all competition between otherwise competing railroad corporations, and which would, in that way, restrain interstate trade or commerce. . . . The prohibition of such contracts may, in the judgment of Congress, be one of the reasonable necessities for the proper regulation of commerce, and Congress is the judge of such neces- sity and propriety, unless, in case of a possible gross perversion of the principle, the courts might be applied to for reUef." § 382. Constitutionality of Act — (D) Act is Constitutional. — It follows, as a corollary to the conclusions reached in the preceding sections, that the federal anti-trust statute, having been enacted by Congress in the exercise of the power conferred upon it by the commerce clause of the Constitution, and having for its object the elimination of all contracts, com- binations and conspiracies for restraining or monopolizing interstate or foreign commerce, is constitutional; and it has been so held by the Supreme Court of the United States.' ' Addyston Pipe, etc. Co. v. United Traffic Ass'n, 171 U. S. 505 (1898), States, 175 U. S. 211 (1899), (20 Sup. (19 Sup. Ct. Rep. 25). Ct. Rep. 96) ; United States u. Joint See also United States v. Trans- 697 §384 INTERCORPORATE RELATIONS [part V §383. Legislation supplementing the Statute — (i) Anti- trust Provisions of Wilson Tariff Act. — The anti-trust pro- visions of the Wilson Tariff Act of August 27, 1894 — relating to combinations to which an importer is a party — are printed in the subjoined note.^ These provisions, in respect of their subject-matter, follow the lines of the federal anti-trust statute and are even broader in their terms. They declare illegal every combination, trust, agreement or contract entered into by two or more persons or corporations, either of whom is an importer, when intended to operate in restraint of trade or free competition, or to increase the market price in the United States of any imported article or manufacture into which such article enters.^ The jurisdictional provisions and those relating to procedure and penalties are substantially identical with those of the federal anti-trust statute. § 384. Legislation supplementing the Statute — (2) The Expedition Act. — The federal anti-trust statute provides that the circuit courts shall proceed " as soon as may be " to the Missouri Freight Ass'n, 166 TJ. S. 290 (1897), (17 Sup. Ct. Rep. 540) ; United States V. Jellico Mountain Coal, etc. Co., 46 Fed. 432 (1891). ' "§ 73. That every combination, conspiracy, trust, agreement, or con- tract is hereby declared to be con- trary to public policy, illegal, and void, when the same is made by or between two or more persons or cor- porations either of whom is engaged in importing an article from any foreign country into the United States, and when such combination, con- spiracy, trust, agreement, or contract is intended to operate in restraint of lawful trade, or free competition in lawful trade or commerce, or to increase the market price in any part of the United States of any article or articles imported or intended to be imported into the United States, or of any manufacture into- which such imported article enters or is intended to enter. Every person 698 who is or shall hereafter be engaged in the importation of goods or any commodity from any foreign country in \'iolation of this section of this act, or who shall combine or conspire with another to violate the same, is guilty of a misdemeanor, and, on conviction thereof in any court of the United States, such person shall be fined in a sum not less than one hun- dred dollars and not exceeding five thousand dollars, and shall be further punished by imprisonment, in the discretion of the court, for » term not less than three months nor ex- ceeding twelve months." §§ 74, 75, 76 and 77 of the Wilson Act are practically the same as §§ 4, 5, 6 and 7 respectively of the Sherman Act. ' These provisions were continued in force by the Dingley Tariff Act of 1897. They have never been construed by the Supreme Court of the United States. CHAP. XXXVIIl] STATUTE AND ITS CONSTITUTIONALITY 385 hearing and determination of causes brought under it. Such causes for some thirteen years after the enactment of the statute were appealable to the circuit courts of appeals and thence as other causes to the Supreme Court. In 1903, however, a statute was passed making further pro- vision for expediting the hearing of causes brought under the anti-trust statute, as well as under the Interstate Commerce Act, and giving the sole right of appeal directly from the circuit court to the Supreme Court. This expedition statute is printed in the footnote.' § 385. Legislation supplementing the Statute — (3) The Immunity Proviso. — The appropriation act of February 25, 1903,^ made an appropriation for the enforcement of the provisions of the federal anti-trust statute and contained the following provisions: " Provided, That no person shall be ' " § 1. In any suit in equity pend- ing or hereafter brought in any cir- cuit court of the United States under the Act entitled 'An Act to protect trade and commerce against unlawfxil restraints and monopolies, ' approved July second, eighteen hundred and ninety, 'An Act to regulate com- merce,' approved February fourth, eighteen hundred and eighty-seven, or any of the Acts having a Uke pur- pose that hereafter may be enacted, wherein the United States is com- plainant, the Attorney-General may jBle with the clerk of such court a certificate that, in his opinion the case is of general public importance, a copy of which shall be immediately furnished by such clerk to each of the circuit judges of the circuit in which the case is pending. There- upon such case shall be given pre- cedence over others and in every way expedited, and be assigned for hearing at the earliest practicable day, before not less than three of the circuit judges of said circuit, if there be three or more ; and if there be not more than two circuit judges, then before them and such district judge as they may select. In the event that the judges sitting in such case shall be divided in opinion, the case shall be certified to the Supreme Court for review in like manner as if taken there by appeal as hereinafter provided. "§ 2. That in every suit inequity pending or hereafter brought in any circuit court of the United States under any of said Acts, wherein the United States is complainant, in- cluding cases submitted but not yet decided, an appeal from the final decree of the circuit court will lie only to the Supreme Court and must be taken within sixty days from the entry thereof : Provided, That in any case where an appeal may have been taken from the final decree of a circuit court to the circuit court of appeals before this Act' takes effect, the case shall proceed to a final decree therein, and an appeal may be taken from such decree to the Supreme Court in the manner now provided by law." 2 32 Stat, at Large, Part 1, p. 903. For construction of this proviso see post, § 413, "Interpretation of Immu- nity Proviso." 699 § 386 INTERCORPORATE RELATIONS [PART V prosecuted or be subjected to any penalty or forfeiture for or on account of any transaction, matter, or thing concerning which he may testify or produce evidence, documentary or otherwise, in any proceeding, suit, or prosecution under said acts: Provided further, that no person so testifying shall be exempt from prosecution or punishment for perjury committed in so testifying." CHAPTER XXXEX CONSTKUCTION AND APPLICATION OF FEDERAL STATUTE § 386. Title of Statute. § 387. Use of Phrase " Contract in Restraint of Trade." Application of Statute to Ancillary Contracts. § 388. Statute not limited to Unreasonable Restraint of Trade. § 389. Use of Terms "Monopolize" and "Monopolies." § 390. Meaning of Phrase "Trade or Commerce among the Several States." § 391. Statute applies only to Restraints upon Interstate or International Commerce. § 392. Restraint upon Interstate Conunerce must be Direct — (A) In Gen- eral. § 393. Restraint upon Interstate Commerce must be Direct — (B) Com- binations relating to Manufacture and of Manufacturers and Pro- ducers. § 394. Restraint upon Interstate Commerce must be Direct — (C) Restraints upon Facilities for Commerce. § 395. Restraint upon Interstate Commerce must be Direct — (D) Exchanges and Similar Associations. § 396. Restraint may be imposed upon those engaged in Interstate Commerce by those not engaged therein. § 397. Form of Combination Immaterial. Illegality of Corporate Device. § 397a. The Northern Securities Case. § 398. Application of Statute to Combinations of Railroads and Other Car- riers. Combinations of Railroad Employees. § 399. Application of Statute to Combinations under Patents. § 400. Application of Statute to Combinations under Copyrights. § 401. Application of Statute to Combinations under Secret Processes. § 402. Application of Statute to Contracts concerning Market Quotations. § 403. AppUcation of Statute to State's Monopoly and State Regulations. § 404. Statute not Retroactive but applies to Continuing Combinations. § 386. Title of Statute. — The title of the federal anti-trust statute is "An Act to protect trade and commerce from un- lawful restraints and monopolies." 700 CHAP. XXXIX] CONSTRUCTION AND APPLICATION § 387 The body of the act declares illegal " every contract ... in restraint of trade or commerce," etc., but does not use the word " unlawful." It seems manifest that the word " unlawful " in the title applies to the acts declared illegal in the body of the act, with- out regard to their previous illegaUty at common law or under State statutes. In the Trans-Missouri Freight Association Case, however, it was contended that the title indicated an intention to include only those contracts which were unlawful at common law, but which would require a federal statute to be dealt with in a federal court. In answer to this contention, Mr. Justice Peckham said: ' " It is said that when terms which are known to the common law are used in a federal statute, those terms are to be given the same meaning that they received at common law, and that when the language of the title is to ' protect trade and commerce against unlawful restraints and monopolies,' it means those restraints and monopoUes which the common law regarded as unlawful, and which were to be prohibited by the federal statute. We are of opinion that the language used in the title refers to and includes, and was in- tended to include, those restraints and monopolies which are made unlawful in the body of the statute. It is to the statute itself that resort must be had to learn the meaning thereof, though a resort to the title here creates no doubt about the meaning of, and does not alter, the plain language' contained in its text." ^ § 387. Use of Phrase " Contract in Restraint of Trade." Application of Statute to Ancillary Contracts. — If competition develops trade, that which limits competition restrains trade. So the phrase " contract in restraint of trade," without any judicial history, would naturally be given a broad meaning corresponding to the signification of the words composing it. But, as we have seen, the phrase many years ago acquired a well- defined meaning as describing contracts, ancillary to a principal ' United States v. Trans-Missouri ' Compare, however, the language Freight Ass'n, 166 XJ. S. 327 (1897), of Mr. Justice Brewer in his concurring (17 Sup. Ct. Rep. 540). opinion in the Northern Securities See also United States v. Coal Deal- Case, 193 U. S. 197, 361 (1904), (24 ers Ass'n, 85 Fed. 261 (1898). Sup. Ct. Rep. 436). 701 § 387 INTERCOHPOHATE RELATIONS [PART V contract, — generally of sale, — whereby a person agrees to refrain from engaging in some trade, business or occupation. And still, as we have also seen, notwithstanding this early usage and the development of legal rules governing such ancillary contracts, the meaning of the phrase in more recent years has broadened, and it was used in a comprehensive sense at the time of the enactment of the federal anti-trust statute.' It is clear that the phrase " contract in restraint' of trade " is used in its broad sense in the federal statute. It in- cludes " all kinds of those contracts which in fact restrain or may restrain trade." ^ " The natural effect of competition is to increase commerce, and an agreement whose direct effect is to prevent this play of competition restrains instead of pro- motes trade and commerce." ^ Broadly speaking, therefore, the phrase embraces all agreements which restrain or tend to restrain competition in any degree. Total suppression of trade in a commodity as a result of an agreement is not necessary to make it a contract in restraint of trade.* This broad use of the phrase " contract in restraint of trade " is, manifestly, necessary to give any practical effect to the statute. Its purpose is to protect interstate trade and com- merce and its appHcation could hardly be confined to a class of contracts which, except in the instance of a collateral agree- ment to refrain from engaging in the transportation business, » See anie, § 336, "Modem Use (20 Sup. Ct. Rep. 96), the Supreme of Phrase 'Contract in Restraint of Court said : "We have no doubt but Trade.'" that where the direct and immediate The objection to such broad use effect of a contract or combination of the phrase is that pointed out in among particular dealers in a com- the section referred to — testing the modity is to destroy competition vaUdity of contracts of an essentially between them and others so that the different nature from those ancillary parties to the contract or combination agreements to which the phrase may obtain increased prices for them- originally apphed by the legal prin- selves, such contract or combination ciples governing those agreements. amounts to a restraint of trade in the ' United States v. Trans-Missouri commodity, even though contracts Freight Ass'n, 166 V. S. 329 (1897), to buy such commodity at the en- (17 Sup. Ct. Rep. 540). hanced price are continually being ' Northern Securities, Co. v. United made. Total suppression of the States, 193 U. S. 197 (1904), (24 Sup. trade in a commodity is not necessary Ct. Rep. 436). in order to render the combination * In Addyston Pipe, etc. Co. v. one in restraint of trade." United States, 175 U. S. 244 (1899), 702 CHAP. XXXIX] CONSTRUCTION AND APPLICATION 387 could hardly have any effect upon interstate commerce at all. In fact, the curious anomaly is presented of a statute directed broadly against contracts in restraint -of trade which is inap- plicable to the very class of contracts which were 'primarily in restraint of trade. In the Trans-Missouri Freight Association Case ' Mr. Justice Peckham said: "A contract which is the mere accompaniment of the sale of property, and thus entered into for the purpose of enhancing the price at which the vendor sells it, which, in effect, is collateral to such sale, and where the main purpose of the whole contract is accomplished by such sale, might not be included within the title or the spirit of the statute in ques- tion." And in the recent opinion of Mr. Justice Holmes in Cincinnati Packet Company v. Bay ^ it seems to be definitely ' United States v. Trans-Missouri Freight Ass'n, 166 U. S. 329 (1897), (17 Sup. Ct. Rep. 540). See also concurring opinion of Mr. Justice Brewer in the Northern Securities Case, 193 U. S. 197, 361 (1904), (24 Sup. Ct. Rep. 436). ' Cincinnati Paclcet Co. v. Bay, 200 U. S. 179 (1906), (26 Sup. Ct. Rep. 208). In this case the vendors in a con- tract for the sale of vessels agreed, as a part of the consideration, to with- draw from the business of operating vessels between Certain points for a specified period. In a suit upon the contract it was set up that this cove- nant in the contract was in restraint of trade in violation of the federal anti-trust statute. But Mr. Justice Holmes said (p. 184) : "It is argued, to be sure, that the last mentioned covenant is independent and not connected with the sale of the vessels. The contrary is manifest as a matter of good sense, and is proved even technically by the words 'it is also agreed as a part of the consideration of this agreement.' By these words the covenant not to do business between Cincinnati and Portsmouth for five years is im_ported into the sale of the ships, and made one of the conventional inducements of the pur- chase. The price is paid, not for the vessels alone, but for the vessels with the covenant. So, still more clearly, the parallel instalments for five years are paid for the covenant, at least in part. It is said that there is no sale of good- will. But the cove- nant makes the sale. Presumably all that there was to sell, beside cer- tain instruments of competition, was the competition itself, and the pur- chasers did not want the vendors' names. This being our view of the covenant in question, whatever differ- ences of opinion there may have been with regard to the scope of the act of July 2, 1890, there has been no intimation from any one, we believe, that such a contract, made as part of the sale of a business and not as a device to control commerce, would fall within the act. On the contrary, it has been suggested repeatedly that such a, contract is not within the letter or spirit of the statute (United States v. Trans-Missouri Freight Association, 166 U. S. 290 (1897), (17 Sup. Ct. Rep. 540); United States v. Joint TraflSc Associa- tion, 171 U. S. 505 (1898), (19 Sup. 703 §387 INTERCORPORATE RELATIONS [part V decided that such ancillary contracts " made as a part of the sale of a business and not as a device to control commerce " are not within the statute.' But if an agreement, although in the form of an ancillary contract, goes further than is neces- sary for the purposes of such a contract and " presents acts in aid of a scheme of monopoly," it is unlawful.^ Ct. Rep. 25)) ; and it was so decided in the case of a patent (Bement v. National Harrow Co., 186 U. S. 70 (1902), (22 Sup. Ct. Rep. 747). It would accomplish no public purpose, but simply would provide a loop- hole of escape to persons inclined to elude performance of their under- takings it the sale of a business and temporary withdrawal of the seller necessary in order to give the sale effect, were to be declared illegal in every case where a nice scrutiny could discover that the covenant possibly might reach beyond the State line. We are of opinion that the agreement before us is not made illegal by either of the provisions thus far discussed." 1 In Brett v. Ebel, 29 App. Div. (N. Y.) 256 (1898), (51 N. Y. Supp. 573) a party sold "all his interest and good-will in the business of freighting vessels" for a certain port and covenanted for a specified period to refrain from doing any business with such port. It was held that the covenant was not in viola^ tion of the federal statute: "It was clearly aimed at the so-called 'trusts' or monopolies now so familiar in this country, whose main object was the restraint of trade. The intention was undoubtedly to declare every contract illegal which was in the line of these evils. But it certainly was not intended to prohibit a man from selling his business in the ordinary way and from thereupon obtaining the full value thereof, through the instrumentality of an incidental cove- nant not to compete with the pur- chaser within some limited area." 704 Compare Monongahela River Con. Coal, etc. Co. v. Jutte, 210 Pa. St. 288 (1904), (59 Atl. Rep. 1088, 105 Am. St. Rep. 812). Where a corporation in the fish business sold out its property and good-will, and its stockholders, who dealt in fish at different places, agreed not to enter into competition with the purchaser for a period of ten years it was held that the agreement was not in violation of the federal stat- ute. Davis V. Booth, 127 Fed. 875 (1904), affirmed 131 Fed. 31 (1904). 2 Shawnee Compress Co. v. Ander- son, 28 Sup. Ct. Rep. 572 — decided by U. S. Supreme Court, April, 1908. In this case a corporation sought to obtain control of the business of compressing cotton in a certain terri- tory by purchasing or leasing local plants. It exacted from a lessor an agreement not to engage in the com- press business for a specified period within fifty miles of any of its plants and to render "every assistance in discouraging unreasonable and un- necessary competition." The Su- preme Court of Oklahoma (17 Okl. 231 (1906), (87 Pac. Rep. 315)) held the contract void and the U. S. Supreme Court affirmed its de- cision. Where a contract for the sale of a business contained an agreement that the vendor for a specified period should not engage in a, competing business, and it appeared that the agreement was obtained as a part of a scheme to form An illegal combina- tion by which a monopoly of a par- ticular business .was obtained, it was CHAP* XXXIX] CONSTRUCTION AND APPLICATION § 388 § 388. Statute not limited to Unreasonable Restraint of Trade. — The meaning of the phrase "contract in restraint of trade " has never been confined to contracts in unreasonable restraint of trade. As already shown, contracts to which the phrase in its primary sense was applicable were valid at common law if reasonable; invaUd, if unreasonable.^ But in each case they were called " contracts in restraint of trade." So, using the phrase in its more modern sense as equivalent to " agreement restraining competition," its appUcation has never been de- pendent upon the invalidity of the contract. And, equally true, the test of the legality of the contract has not been whether it was in restraint of trade, but whether the restraint had been carried so far as to be injurious. After the enactment of the federal anti-trust statute it was contended that it applied only to contracts in unreasonable restraint of trade, and this contention was sustained in several decisions of the lower federal courts.^ But when the question came before the Supreme Court of the United States that Court pointed out that the phrase " contract in restraint of trade " applied equally well to contracts lawful and unlawful at com- mon law and was used in the statute without qualification. Thus the Court said in the Trans-Missouri Freight Association Case : ' " By the simple use of the term ' contract in restraint held that the agreement was in vio- argument urged that the statute, lation of the federal statute. in declaring illegal every combination McConnellc. Camors-McConnellCo., in the form of trust or otherwise, or 152 Fed. 321 (1907). conspiracy in restraint of trade or '^ See ante, Ch.. XXXlll :" Applied- commerce, does not mean what the tion of Law of Contracts in Restraint language used plainly imports, but of Trade." that it only means to declare illegal ^ Prescott,"etc. R. Co. v. Atchison, any such contract which is in un- eto. R. Co., 73 Fed. 438 (1896) ; reasonable restraint of trade, while Dueber Watch Case Mfg. Co. v. leaving all others unaffected by the Howard Watch, etc. Co., 66 Fed. 637 provisions of the act ; that the com- (1896); In re Greene, 52 Fed. 104 mon law meaning of the term 'con- (1892); In re Nelson, 52 Fed. 647 tract in restraint of trade' includes ^1892). only such contracts as are in unrea- ^ United States v. Trans-Missouri sonable restraint of trade, and when Freight Ass'n, 166 U. S. 328 (1897), that term is used in the federal (17 Sup. Ct. Rep. 540). In reaching statute, it is not intended to include the conclusion stated in the text all contracts in restraint of trade, Mr. Justice Peckham said : " It is but only those which are in unrea- now with much amplification of sonable restraint thereof. The term 705 § 388 INTERCORPORATE RELATIONS [part V of trade ' all contracts of that nature, whetheii valid or other- wise, would be included, and not alone that kind of contract which was invalid and unenforceable as being in unreasonable restraint of trade. When, therefore, the body of an act pro- nounces as illegal every contract or combination in restraint of trade or commerce among the several States, etc., the plain and ordinary meaning of such language is not limited to that kind of contract alone which is in unreasonable restraint of trade, but all contracts are included in such language, and no excep- tion or limitation can be added without placing in the act that which has been omitted by Congress." The statute, therefore, makes every contract or combination in restraint of interstate trade or commerce, without limitation or qualification, illegal. The extent of the restraint imposed is immaterial. The essential question in every case is whether the contract under consideration directly imposes any restraint whatsoever. If it does, no matter how slight, it comes within the prohibition of the statute.' is not of such limited signification. Contracts in restraint of trade have been known and spoken of for hundreds of years, both in England and this country, and the term in- cludes all kinds of those contracts which in fact restrain or may restrain trade. Some of such contracts have been held void and unenforceable in the courts by reason of their restraint being unreasonable, while others have been held valid because they were not of that nature. A contract may be in restraint of trade and still be valid at common law. Although A'alid, it is nevertheless a contract in restraint of trade and would be so described either at common law or elsewhere. " Mr. Justice White delivered an elaborate dissenting opinion in this case, concurred in by Justices Field, Gray and Shiras, in which he reached the conclusion that the act applied only to contracts in unreasonable restraint of trade. ' In Shawnee Compress Co. v. 706 Anderson, 28 Sup. Ct. Rep. 572, decided by the Supreme Court April, 1908, the Court said : "The Sherman law provides that, 'Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce in any terri- tory of the United States or of the District of Columbia . . is hereby declared illegal.' And it has been decided that not only unreasonable, but all direct, restraints of trade are prohibited, the law being thereby distinguished from the common law. " Northern Securities Co. v. United States, 193 U. S. 331 (1904), (24 Sup. Ct. Rep. 436) : "The act is not limited to restraints of interstate and international trade or commerce that are unreasonable in their nature, but embraces all direct restraintu imposed by any combination, con- spiracy or monopoly upon such trade or commerce." In Pocahontas Coke Co. v. Pow- hatan Coal, etc. Co., 60 W. Va. 508 (1907), (56 S. E. Rep. 270, 116 Am. CHAP. XXXIX] CONSTEXJCTION AND APPLICATION 388 This construction of the statute gives it the broadest possible application. It includes contracts and combinations perfectly St. Rep. 901, 10 L. R. A. (n. s.) 268), the Court said : " It may be said in this connection that the determination of the question whether or not a con- tract in restraint of trade is to be ar- rived at in exactly the same way and under exactly the same rules whether the case falls under the act of Congress or under the rules of the common law. The difference between the act and the common law does not lie in the manner of ascertaining whether or not restraint exists but in the degree of restraint required to make the contract illegal. Under the act of Congress any restraint is illegal while under the common law only unreasonable restraint is illegal.'* Prior to the decision in the Trans- Missouri case agreements by dealers to purchase all of a certain product used by them from » producer con- trolling the greater part of such product, in consideration of rebates, had been held not to be contracts in - restraint of trade within the meaning of the federal statute. United States V. Greenhut, 51 Fed. 213 (1892). In re Corning, 51 Fed. 205 (1892); In re Terrill, 51 Fed. 213 (1892); In re Greene, 52 Fed. 104 (1892). But such agreements would now undoubtedly be held to violate the statute. Agreements of somewhat similar nature have repeatedly been held to be contracts in restraint of trade in violation of the statute. Thus in Montague i/. Lowry, 193 U. S. 38 (1904), (24 Sup. Ct. Rep. 307), affirming 115 Fed. 27 (1902), the Supreme Court held an agreement creating an association between manu- facturers and dealers in tiles, whereby the latter agreed not to purchase materials from manufacturers not members, and not to sell unset tiles to any one other than members ex- cept at much higher prices than to members, and whereby the manu- facturers agreed to sell only to dealers who were members, to be a contract in restraint of trade in contravention of the statute. So an agreement between a corporation and a number of producers of coal and coke consti- tuting an association, whereby the former agrees to take the entire out- ■ put of such producers intended for "Western shipment"; to sell the same at prices fixed by the executive committee of the association ; to account for the proceeds above a fixed compensation and to refrain from selling the product of any com- peting producer, and whereby the amount to be furnished by such producer is also fixed by such execu- tive committee — each producer re- ceiving payment at the same rate — has been held to be a contract in restraint of trade contrary to the federal statute. Chesapeake, etc. Fuel Co. V. United States, 115 Fed. 610 (1902), affirming 105 Fed. 93 (1900). It was also held in this case that it was no defence to an action upon the statute that the combina- tion had not operated injuriously to the public, or even that, by opening up a wider field for competition, its operation had actually been beneficial to the public. An agreement between the whole- sale dealers in window glass controlling a large part of the business in that article in the United States and a, manufacturer producing the greater part of such article sold in this country whereby the dealers agree to buy wholly from the manufacturer — except at materially reduced prices — -and the manufacturer agrees to sell only to the dealers — except at materially enhanced prices — and which fixes the amount to be received by each dealer and the prices at which 707 §388 INTEECORPORATE RELATIONS [part V valid according to rules of public policy. It undoubtedly renders unlawful agreements which would actually be beneficial to the public. An amendment to the statute relaxing its pro- visions and making it applicable only to contracts and com- binations in unreasonable restraint of trade has been urged by the highest authority. It cannot be denied, however, that such an amendment would necessarily deprive the statute of the glass is to be sold, is a contract in restraint of trade in conflict with the federal statute. Wheeler-Stenzel Co. v. National Glass Jobbers' Ass'n, 152 Fed. 864 (1907). See also United States u. Joint Traffic Ass'n, 171 U. S. 505 (1898), (19 Sup. Ct. Rep. 25) ; United States V. Swift, 122 Fed. 529 (1903), modified and affirmed 196 U. S. 375 (1905), (25 Sup. Ct. Rep. 276) ; United States V. Coal Dealers Ass'n, 85 Fed. 261 (1898) ; Getz v. Federal Salt Co., 147 Cal. 115 (1905), (81 Pac. Rep. 416, 109 Am. St. Rep. 114). Compare the agreements in these cases with the contract in Ceballos v. Munson Steam- ship Line, 93 App. Div. (N. Y.) 593 (1904), (87 N. Y. Supp. 811). A contract by which a corporation agreed to buy all its materials from, and sell all its manufactured products to, another corporation, however, has been held not to violate the fed- eral statute. Heimbucher v. Goff, 119 111. App. 373 (1905). And a contract by which a manu- facturer agreed to sell his entire out- put to a party who agreed to take it at a specified price and to purchase such product from no other person in the State has been held, under the circumstances, to foster legitimate business and not to violate the fed- eral statute. Lanyon v. Garden City Sand Co., 223 111. 616 (1906), (79 N. E. Rep. 313). In its opinion in this case (p. 621) the Court said of the federal and the Illinois anti-trust statutes : "The 708 object of these statutes, is to pro- hibit the formation of trusts and combinations and remove all ob- structions in restraint of trade and free competition. It is not the pur- pose of either law to hinder or pro- hibit contracts on the part of corpora- tions or individuals made to foster or increase trade or business. But a contract may incidentally restrain competition or trade without violating the statutes if its chief purpose is to promote and increase the business of those who enter into it." This decision is, of course, decisive as to the purposes of the Illinois statute, but it seems quite at variance with the decisions of the Supreme Court interpreting the federal statute as applying to all contracts restraining competition whether reasonable or unreasonable. When it is claimed that a combi- nation is in violation of the federal anti-trust statute it is immaterial that the agreement in question might have been valid at common law. Continental Wall Paper Co. u. Voight, 148 Fed. 939 (1906). The combination in this case, how- ever, which was by means of a cor- poration selling agent, would seem to have been illegal at common law. In determining whether a contract or combination is in restraint of trade within the meaning of the statute the test is whether it directly re- strains trade to an appreciable ex- tent, and it is immaterial what other results may flow from it. Ellis the price and to the Supreme Court of the United awarded the contract by an " auction States, this decree, modified and pool " — the members of the associa- limited to that portion of the com- tion agreeing to pay the largest bonus bination which was interstate in char- to be divided among the others re- acter, was affirmed, ceivlng the contract. In the "free 722 CHAP. XXXIX] CONSTRUCTION AND APPLICATION § 393 before us involves contracts of the nature last mentioned, not incidentally or collaterally, but as a direct and immediate result of the combination engaged in by the defendants. . . . If, therefore^ an agreement or combination directly restrains, not alone the manufacture, but the purchase, sale or exchange of the manufactured commodity among the several States, it is brought within the provisions of the statute. The power to regulate such commerce, that is, the power to prescribe the rules by which it shall be governed, is vested in Congress, and when Congress has enacted a statute such as the one in question, any agreement or combination which directly operates, not alone upon the manufacture, but upon the sale, transportation and delivery of an article of interstate commerce, by preventing or restricting its sale, etc., thereby regulates interstate commerce to that extent, and to the same extent trenches upon the power of the jiational legislature and violates the statute." It follows, therefore, from these principles that there is a marked distinction between a combination relating to manu- facture and a combination of manufacturers. The former falls without the statute because it can affect interstate commerce only indirectly. The latter may be of wider scope and contra- vene the statute by directly restraining interstate commerce. In fact, Mr. Justice Harlan in the Northern Securities Case ' states as settled " that combinations even among private manu- facturers or dealers whereby interstate or international com- merce is restrained are equally embraced by the act." Combinations or agreements between manufacturers or pro- ducers in which an attempt is made to directly control the dis- position of the manufactured article or product are within the statute. Thus, as we have seen, where the combination directly restrains not only manufacture, but the sale and the transpor- tation of the manufactured product across State lines it is vio- lation of the act.^ So, the statute appUes to a combination between manufacturers in one State and dealers in another State relating to the purchase and sale of a manufactured ' Northern Securities Co. v. United ' Addyston Pipe, etc. Co. v. United States, 193 U. S. 331 (1904), (24 Sup. States, 175 U. S. 239 (1899), (20 Sup. Ct. Rep. 436). See post, § 397a: Ct. Rep. 96), supra. " The Northern Securities Case." 723 393 INTERCORPORATE RELATIONS [part V article.' Indeed, the recent decisions of the Supreme Court of the United States seem to warrant the broad statement that any combination of manufacturers, producers or dealers the direct object of which is to place restraints upon,' or to monopolize, inter- state commerce is in contravention of the federal statute.^ ' In Montague v. Lowry, 193 U. S. 38, 47 (1904), (24 Sup. Ct. Rep. 307), the Supreme Court said: "The pur- chase and sale of tiles between the manufacturers in one State and dealers therein in Cahfornia was inter- state commerce within the Addyston Pipe case, 175 U. S. 239 (1899), (20 Sup. Ct. Rep. 90). It was not a, combination among manufacturers simply but one between them and dealers in the manufactured article, which was an article of commerce between the States. United States v. E. C. Knight Co., 156 V. S. 1 (1895), (15 Sup. Ct. Rep. 249) did not there- fore cover it." In Montague v. Lowry, supra, an association had been formed in Cali- fornia by manufacturers of, and dealers in, tiles and mantels. The dealers who resided in California agreed to purchase materials only from manufacturers who were mem- bers and not to sell unset tiles to any one other than members except at materially higher prices than to the members. The manufacturers resided in other States than California and agreed not to sell to any persons not members. The action which reached the Supreme Court was brought for the recovery of damages under the federal anti-trust statute. The Court held that, although some of the transactions covered by the combination agreement were of a local nature, the scheme as " whole constituted a combination in restraint of interstate trade and commerce. The decisions of the lower federal courts in this case are reported in 106 Fed. 38 (1900) ; 115 Fed. 27 (1902). An association of manufacturers 724 and dealers formed for the purpose of controlling the production of articles made only in a particular State, but principally used in i other States, and which has reduced pro- duction and arbitrarily raised prices, directly affects interstate commerce and violates the federal statute. Gibbs Olsen D. Smith, 195 U. S. 332, 345 upon Independent Contracts." Ref- (1904), (25 Sup. Ct. Rep. 52). erence should be had to this section ' In re Greene, 52 Fed. 112 (1892). for consideration of the general prin- ^ United States v. Trans-Missouri ciples applicable as well to combina- Freight Ass'n, 166 U. S. 342 (1897), tions in violation of the federal stat- (17 Sup. Ct. Rep. 540). ute as to those inimical to public * See ante, § 369: "Collateral At- pohcy. tack upon Cowhination. Remedies 746 CHAP. XL] EIGHTS, REMEDIES AND PROCEDURE 405 to affect, in any manner, its independent contractual obliga- tions or rights.* Parties dealing with the combination cannot set up its illegality as a defence to- demands not connected with the illegal transaction and not dependent upon it for enforcement. Conversely, when the combination must establish its claim through the illegal transaction, it will fail. Clean hands are essential in a court of equity, and a combination in violation of the anti-trust law cannot invoke the aid of a court of equity ' In Connolly v. Union Sewer Pipe Co., 184 XJ. S. 550 (1902), (22 Sup. Ct. Rep. 431), the Supreme Court of the United States said : " If the contract between plaintiff corporation and the other named corporations, persons and companies, or the combination thereby formed, was illegal under the act of Congress, then all those, whether persons, corporations or associations, directly connected therewith, became subject to the penalties prescribed by Congress. But the act does not declare illegal or void any sale made by such combination, or by its agents, of property it acquired or which came into its possession for the pur- pose of being sold, such property not being, at the time, in the course of transportation from one State to another or to a foreign country. The buyer could not refuse to comply with his contract of purchase upon the ground that the seller was an illegal combination which might be re- strained or suppressed in the mode prescribed by the act of Congress; for Congress did not declare that a combination illegally formed under the act of 1890 should not, in the conduct of its business, become the owner of property which it might sell to who soeve- wished to buy it. So that there is no necessary legal con- nection here between the sale of pipe to the defendants by the plaintiff corporation and the alleged arrange- ment made by it with other corpora- tions, companies and firms. The contracts under which the pipe in question was sold were, as already said, collateral' to the arrangement for the combination referred to, and this is not an action to enforce the terms of such arrangement. That combination may have been illegal, and yet the sale to the defendants was valid." The federal anti-trust statute does not prevent a recovery for the breach of a collateral contract for the sale of goods although entered into by a member of a combination formed in violation of its provisions. Hadley Dean Plate Glass Co. ■ii. Highland Glass Co., 143 Fed. 242 (1906) ; see also Harrison v. Glucose Sugar Ref. Co., 116 Fed. 304 (1902), (58 L. R. A. 915). That a complainant is a member of a combination in violation of the federal anti-trust act is no defence to suit for the infringement of a pat- ent (General Electric Co. u. Wise, 119 Fed. 922 (1903)) or copyright (Scribner v. Straus, 130 Fed. 389 (1904). One who requests and accepts the services of a tug for towage purposes cannot escape paying the reasonable value of the services rendered by setting up that the owners of the tug were members of a combination in violation of the anti-trust statute. The Charles E. WiswaU, 86 Fed. 671 (1898), affirming 74 Fed. 802 (1896). 747 §405 INTEKCOKPOKATE RELATIONS [PABT V for the protection of its rights under contracts entered into as the direct result of the unlawful combination.^ ' In Bement v. National Harrow Co., 186 U. S. 70 (1902), (22 Sup. Ct. Rep. 754), the Supreme Court said: "The plaintiff contends in the first place that only the Attorney-General of the United States can bring an action under the statute, excepting that by section 7 of the act any per- son injured in his business or property, as provided for therein, may himself sue in any circuit court of the United States in the district in wliich the defendant resides or is found. As- suming that the plaintiff is right so far as regards any suit brought under that act, we are nevertheless of opinion that any one sued upon a contract may set up as a defence that it is a violation of the act of Congress, and, it found to be so, that fact will con- stitute a good defence to the action." In Delaware, etc. R. Co. v. Franli, 110 Fed. 689 (1901), a suit by a rail- road company to enjoin the defend- ants, who were ticket brokers, from dealing in special pon-transferable limited railroad tickets, it appeared upon a preliminary hearing that the complainant was a member of a com- bination known as the "Trunk Line Association," formed by a number of railroads operating in different States for the purpose of preventing com- petition and that the special rates upon such tickets and their terms were prescribed by such association. Judge Hazel held that the association was in violation of the federal anti- trust law and said: "The defendants do not deny the charges of wrong- doing. . . But can the aid of a fed- eral tribunal be invoked to protect the complainant in the issuance of a ticket over its railroad, which, as far as it appears to the court, is the culmination as well as the evidence of an agreement between railroad cor- porations specificany forbidden by an 748 act of Congress which has been sus- tained by the Supreme Court of the United States? . . . The complain- ant contends that this charge made by the defendant does not avail, as the wrong-doing, if any exists, does not relate to the subject-matter. I am not convinced as to the soundness of this contention. Can tlie railroad complainant conspire unlawfully to fix rates, and then come into a court of equity and invoke its aid to pro- tect those rates which are represented by the ticket presented to the court, and which is wrongfully used by the defendants? The evil practice which stands admitted by the papers is the very practice for which the court's protection is invoked." Compare, however, Pennsylvania Co. •». Bay, 138 Fed. 204 (1905), where a different conclusion was reached in a similar case. Where an ancillary contract of the vendor of a business not to engage in u, competing business for a specified period is entered into as h. part of a plan for the formation of an unlawful combination it is held that it is itself in conflict with the statute and unen- forceable. McConneU v. Camors-McConnell Co., 152 Fed. 321 (1907). A combination of manufacturers and dealers in wall paper in violation of the federal statute was formed through the agency of a corporation which became the nominal seller of all the products of the combination although they were in fact sold by the different members. Certain dealers having been compelled to enter the combination purchased paper from various members of the combination for which the corporation — the nom- inal seller — brought suit. It was held that as the corporation was obliged to rely upon the agreement CHAP. XL] RIGHTS, REMEDIES AND PROCEDURE 406 § 406. Proceedings in Equity by Government. Injunctive Relief. Parties. — The first three sections of the statute make certain acts and agreements criminal offences against the United States. The fourth section confers jurisdiction upon the circuit courts of the United States to restrain violations of the act, and declares it to be the duty of the several district attorneys " under the direction of the Attorney-General, to institute proceedings in equity to prevent and restrain such violations." The fifth section provides for the citing in of additional parties ; the sixth, for the forfeiture to the United States of certain property in course of transportation, and the eighth states a rule of construc- tion. The only remedy afforded a private person is provided in the seventh section, which gives a party injured the right to recover threefold damages, costs and attorneys' fees.' The of combination to show its right to sue, the invalidity of such agreement was a defence to the suit. Continental Wall Paper Co. o, Voight, 148 Fed. 939 (1906). Where a part of a contract sued upon is not severable from other parts which are in violation of the federal statute no recovery can be had upon it. Getz Bros. & Co. v. Federal Salt Co., 147 Cal. 115 (1905), (81 Pac. Rep. 416, 109 Am. St. Rep. 114). ' Greer v. StoUer, 77 Fed. 2 (1896), (per Phillips, J.): " Can a private citi- zen for a redress of a private grievance, maintain a bill in equity for an injunc- tion under this act? The things for- bidden by the act are declared to be criminal offences against the govern- ment of the United States. By the fourth section, the jurisdiction is con- ferred upon the circuit courts of the United States to prevent and restrain the violations of this act, ' and it shall be the duty of the several district attor- neys of the United States in their re- spective districts, under the direction of the Attorney-General, to institute proceedings in equity to prevent and restrain such violations; ouch pro- ceedings may be by way of petition setting forth the case and praying that such violations shall be enjoined or otherwise prohibited.' Section 7 gives to the private person 'injured in his business or property by any other person or corporation by reason of anything forbidden, or declared to be unlawful by this act, * a right to sue in a circuit court of the United States in the district in which the defendant resides or is found for threefold dam- ages by him sustained. The statute, being highly penal in its character, must be strictly construed ; and, having created a new offence, and im- posed new liabilities, and having pro- vided the modes of redress to the pubUc and the private citizen, by es- tablished rules of construction, these remedies are inclusive of all others. . . . My conclusion is that the right is limited by the fourth section to in- junction at the relation of the district attorney, and that the seventh section gives to the private citizen his only remedy." Southern Indiana Exp. Co. v. United States Exp. Co., 88 Fed. 663 (1898), (affirmed 92 Fed. 1022), (1899) : "The anti-trust law of July 2, 1890, has wrought no such change in the law as will enable the court to 749 406 INTEECOKPORATE RELATIONS [part V statute, being penal in its nature, must be strictly construed. It imposes new liabilities and provides particular modes of redress, both for the pubUc and the individual, and the methods so prescribed are exclusive. The United States, through its dis- trict attorneys, has the sole power to maintain a bill for an in- junction to prevent a violation of the statute, and the only remedy of the individual is that provided by the statute.' In proceedings for injunctive reUef it is provided that a petition shall be filed setting forth the case, and praying that the alleged violation of the law may be enjoined or otherwise prohibited; that, after notice to the parties complained of, the court shall proceed as soon as may be to hear and determine the case, and that, pending petition and before final decree, it may make such temporary restraining order as may be just. In construing these provisions, it has been held that a restraining order may be issued without notice where, on account of the enforce its provisions in favor of a pri- vate party by a bill in equity. Under this act, the only remedy given to any other party than the government of the United States is an action at law for threefold damages, with costs and attorney's fees, and the only party entitled to maintain a bill in equity for injunctive relief for an alleged vio- lation of its provisions is the United States by its district attorney, on the authorization of its attorney-gen- eral." See also Bement v. National Harrow Co., 186 U. S. 87 (1902), (22 Sup. Ct. Rep. 747) ; Post v. Southern R. Co., 103 Tenn. 184 (1899), (52 S. W. Rep. 301) ; Metcalf v. American School-Furniture Co., 108 Fed. 909 (1901) ; Block v. Standard Distilling, etc. Co., 95 Fed. 978 (1899) ; Gulf, etc. R. Co. V. Miami Steamship Co., 86 Fed. 407 (1898); Pidcock v. Harrington, 64 Fed. 821 (1894) ; Hagan v. Blindell, 56 Fed. 696 (1893) ; affirming Blindell V. Hagan, 54 Fed. 40 (1893). Com- pare, however, Bigelow v. Calumet, etc. Mining Co., 155 Fed. 869 (1907). ' United States n. Trans-Missouri 750 Freight Ass'n, 166 U. S. 342 (1897), (17 Sup. Ct. Rep. 540) ; "It is urged that the United States have no stand- ing in court to maintain this bill ; that they have no pecuniary interest in the result of the litigation or in the ques- tion to be decided by the court. We think that the fourth section of the act invests the government with full power and authority to bring such an action as this, and, if the facts are proved, an injunction should issue. Congress, having the control of interstate com- merce, has also the duty of protecting it, and it is entirely competent for that body to give the remedy by injunction as more efficient than any other civil remedy." See also In re Debs, 158 U. S. 564 (1895), (15 Sup. Ct. Rep. 900). It has been held that an injunction order under the statute directed against a combination of railroad em- ployees, is not rendered invalid by providing that it shall operate against persons not named in the bill but within the terms of the order. United States V. Elliott, 64 Fed. 27 (1894), 62 Fed. 801 (1894). CHAP. Xl] rights, remedies AND PROCEDURE § 407 exigencies of the case, notice migiit be dispensed with according to established usages of equity practice.' A proceeding in equity under the statute is a case arising under the Constitution and laws of the United States, and Con- gress may confer jurisdiction upon any federal court to hear it, regardless of the residence of the parties defendant. Conse- quently, the fifth section of the act, providing that when, in any pending proceeding, the interests of justice require it, parties residing outside the district may be brought in, is valid, and such parties may be served with process without the district. The proper practice is to make all parties — resident and non- resident — having an interest in the controversy, parties de- fendant to the bill, and, immediately upon filing it, to apply for an order of service upon the non-resident defendants. This order may be entered either before or after the service of process upon the resident defendants.^ In a proceeding by the government to restrain an alleged violation of the statute by an unincorporated association, it is sufficient that the association, its officers and a num- ber of its members be made parties defendant.' This is in accordance with the rule that where parties are numer- ous, some of them may be cited in as representing the whole number. § 407. Criminal Proceedings. Indictments. Parties. — The first and third sections of the federal anti-trust statute in de- claring contracts in restraint of interstate and interterritorial trade or commerce not only illegal, but criminal offences against the United States punishable by fine and imprisonment, go beyond the common law. Contracts in unreasonable restraint of trade, while invalid at common law as being contrary to pubhc policy, were not criminal.'' The other provisions of these sec- tions, however, directed against conspiracies in restraint of inter- state commerce, and the second section, imposing a penalty upon persons conspiring to monopolize such commerce, relate to a common law offence and extend the application of the law of ' United States v. Coal Dealers' » United States v. Coal Dealers' Ass'n, 86 Fed. 252 (1898). Ass'n, 85 Fed. 260 (1898). * United States v. Standard Oil ■" In re Greene, 52 Fed. 104 Co., 162 Fed. 290 (1907). (1892). 751 § 407 INTERCORPORATE RELATIONS [pART V criminal conspiracies to combinations in restraint of interstate commerce. The statute does not define what constitutes a contract, com- bination or conspiracy in restraint of trade or commerce, or what the term "monopolize" means, and recourse must be had to the common law and outside sources to obtain the proper definitions of those terms. The statute fails, moreover, to set forth all the elements necessary to constitute the several offences, and an indictment simply following the language of the statute, without stating the particular acts of the accused, would be insufficient.^ An indictment must, therefore, be tested by the specific acts alleged to have been done or committed; and it must be distinctly averred that, by means of such acts, the desig- nated offence against the freedom of interstate commerce was committed.^ An indictment for conspiracy should "describe something that amounts to a conspiracy under the act conformably to the rules of pleading at common law, as perhaps modified by general federal statutes."' The gist of the offence — -the combina- tion in restraint of interstate commerce — must be set forth, although the overt act may be omitted.* An indictment sufficiently sets forth the time of the offence, which alleges when the several acts relied upon to show the com- bination were committed, without stating precisely when the unlawful purpose was formed.^ An indictment under the statute containing separate counts, one charging a combination in restraint of interstate commerce and the other, the monopolizing of such commerce, states dis- tinct offences." * In re Greene, 52 Fed. 104 (1892) ; ' United States v. MacAndrews, etc. United States v. Nelson, 52 Fed. 646 Co., 149 Fed. 823 (1906). See also (1892). United States v. Debs, 64 Fed. 747 ' United States v. Greenhut, 50 (1894). Fed. 469 (1892); In re Coming, 51 « See arde, §325: "Criminal and Fed. 205 (1892); United States v. CivU Conspiracies distinguished." Nelson, 52 Fed. 646 (1892) ; In re « United States v. MacAndrews, etc. Greene, 52 Fed. 104 (1892); United Co., 149 Fed. 823 (1906). States!;. Patterson, 55 Fed. 605 (1893). « United States v. MacAndrews, etc. See also In re Terrell, 51 Fed. 213 Co., 149 Fed. 836 (1907). (1892) . Compare United States v. Mac- Andrews, etc. Co., 149 Fed. 823 (1906). 752 CHAP, xl] eights, remedies and procedure § 408 In an indictment all the persons alleged to have violated the statute may be charged as principals. A corporation and its officers may be proceeded against jointly, and the latter, after having made the arrangements by which their corporation was to violate the act, cannot escape upon the claim that they were not personally engaged in interstate commerce.' Corporations are, however, themselves responsible for violations of the statute, and an indictment which charges a mere stockholder with the acts of his corporation is fatally defective.^ § 408. Actions by Government to enforce Forfeiture. — The sixth section of the act provides for the forfeiture to the United States of property owned by an unlawful combination while in course of transportation from one State to another. The method of procedure under this statute follows that provided for the seizure, condemnation and forfeiture, of property un- lawfully imported into the United States, and involves a trial by jury. There can be no seizure in- a suit in equity for an injunc- tion under the fourth section of the act.' The locomotives and cars of a railroad carrier are not subject to forfeiture because it transports property shipped in violation of the statute. Simple transportation is not a contract, com- bination or conspiracy.* 1 United States v. MacAndrews, etc. seizure and condemnation of the loco- Co., 149 Fed. 823 (1906). motives and cars of the carrier en- ' In re Greene, 52 Fed. 104 (1892). gaged in the transportation between ' United States v. Addyston Pipe, the States of those articles of com- etc. Co., 85 Fed. 271 (1898). merce owned as stated in that sixth * United States v. Trans-Missouri section. There is some justice and Freight Ass'n, 166 U. S. 313 (1897), propriety in forfeiting those articles, (17 Sup. Ct. Rep. 540) : " Nor do we but we see none in forfeiting the loco- think that because the sixth section motives or cars of the carrier simply does not forfeit the property of the because such carrier was transporting railroad company when merely engaged articles as described from one State in the transportation of property to another, even though the carrier owned under and which was the sub- knew that they had been manufac- ject of a contract or combination men- tured or sold under a contract or com- tioned in the first section, any ground bination in violation of the act. In is shown for holding the rest of the the case of simple transportation of act inapplicable to carriers by railroad. such articles the carrier would be It is not perceived why, if the rest of guilty of no violation of any of the the act were intended to apply to such provisions of the act. Why, there- a carrier, the sixth section ought fore, would it follow that the sixth necessarily to have provided for the section should provide for the for- 753 409 INTBECORPORATE RELATIONS [part V § 409. Actions for Treble Damages. Pleadings. — At com- mon law contracts and combinations in unreasonable restraint of trade — giving the phrase its modern meaning — were illegal in the sense, but only in the sense, of being unenforceable. Their invalidity prevented any action based upon them, but afforded no affirmative cause of action. The federal statute goes much further than the common law. It not only makes contracts and combinations in violation of its provisions per se unlawful, but gives a person injured thereby a private right of action for punitive damages.^ The seventh section provides that any person injured in his business or property by anything forbidden or declared to be unlawful by the act may recover threefold his damages, costs and attorneys' fees.^ An action upon the statute may be brought in any circuit court of the United States where the defendant resides or is found, without regard to the amount in controversy. As already shown, how- ever, this action at law is the only remedy afforded a private person by the statute. The right to proceed in equity is granted only to the government.' feiture of the property of the carrier if the rest of the act were intended to apply to it? To subject the locomo- tives and cars to forfeitiu*e under such circumstances might also cause great confusion to the general business of the carrier, and, in that way, inflict unmerited punishment upon the inno- cent owners of other property in the course of transportation in the same cars and drawn by the same locomo- tives. If the company itself violates the act, the penalties are sufficient as provided for therein." ^ Wheeler-Stenzel Co. v. National Window Glass Jobbers' Ass'n, 152 Fed. 873 (1907) : "But it does not follow, as is argued by defendant that it does, that, because at conmion law contracts and combinations in re- straint of trade were only illegal in the sense of being unenforceable, as being contrary to public policy, and that private wrongs cannot be predi- cated thereon, proper legislative au- thority has not, by making such con- 754 tracts and combinations absolutely unlawful, created a right of private action in one who has suffered in business or property thereby, even though such damage or loss would not have been actionable at common law." ^ The amount of the attorneys' fees is within the discretion of the trial court, reasonably exercised. Montague v. Lowry, 193 TJ. S. 38 (1904), (24 Sup. Ct. Rep. 307). For consideration of constitution- ality of a provision for the recovery of attorneys' fees, see In re Grice, 79 Fed. 627 (1897). ^ See ante, § 406 : "Proceedings in Equity by Government. Injunctive Relief. Parties." In Leonard v. Abner-Drury Brew- ing Co., 25 App. D. C. 161 (1905), how- ever, it was held that the fact that the statute makes a, conspiracy in re- straint of trade criminal does not pre- vent proceedings in equity where such conspiracy works or threatens CHAP. XL] RIGHTS, REMEDIES AND PROCEDURE § 409 While the statute declares broadly that damages may be re- covered for injuries sustained by reason of any violation of its provisions/ practically speaking a plaintiff, in order to state and establish a cause of action for substantial damages, must aver and show : (1) That the defendants have entered into a combination or conspiracy to restrain or monopolize interstate or foreign commerce.^ (2) That he has been injured in his business or property by reason of specific acts of the defendants in pursuance of such combination or conspiracy.' irreparable injury; that the statute affords new remedies but does not substitute them for those previously existing. And in Bigelow v. Calumet, etc. Mining Co., 155 Fed. 869 (1907), it was held that a person claiming to be injured by a violation of the federal statute could, where the court had jurisdiction by reason of diversity of citizenship, sue for injunctive relief — that while the statute might not afford such relief in an action based strictly upon it, it was not the inten- tion of the statute to take away existing remedies. ' Thus, for example, it is possible that a single corporation, by monopo- lizing interstate trade might inflict injuries for which damages could be recovered under the statute. But all the cases which have yet arisen under the seventh section of the act have been cases of combinations or con- spiracies. ' In an action for damages under the statute a complaint is demurrable which fails to aver that the acts of the defendants complained of have some connection with a contract or com- bination in restraint of interstate commerce. Bishop v. American Pre- servers Co., 51 Fed. 272 (1892), S. C. 105 Fed. 845 (1900). See also Gibbs V. McNeeley, 102 Fed. 599 (1900), S. C. 107 Fed. 210 (1901), 118 Fed. 120 (1902) ; ElUs v. Inman, 131 Fed. 182 (1904). A manufacturer injured by a com- bination of labor organizations in restraint of interstate trade and com- merce may maintain an action for treble damages under the seventh section of the act. Loewe v. Lawlor, 208 U. S. 274 (1908), (28 Sup. Ct. Rep. 301). » Gibbs V. McNeeley, 102 Fed. 599 (1900), S. C. 107 Fed. 210 (1901), 118 Fed. 120 (1902) ; Lowry v. Tile, etc. Ass'n, 106 Fed. 38 (1900), {affirming 98 Fed. 817 (1899)), S. C. sub nom. Montague v. Lowry, 115 Fed. 27 (1902), 193 U. S. 38 (1904), (24 Sup. Ct. Rep. 307). Rice V. Standard Oil Co., 134 Fed. 465 (1905) : "It is apparent that mere proof that the defendant has entered into a contract or engaged in a combination or conspiracy in re- straint of trade or commerce among the several States will not be suffi- cient to support a cause of action under the seventh section, for there must, in addition thereto, be proof that the plaintiff has, by reason thereof, sustained damage. In his declaration, therefore, the plaintiff must aver not only facts shoviing such a contract or combination or con- spiracy as is declared by the act to be unlawful, but facts showing that by reason of such unlawful thing he has 755 § 409 INTERCOHPOBATE RELATIONS [part V (3) That the injury has involved actual, and not merely speculative, damage to his business or property.' been injured in his business or property. " Section seven of the act does not authorize an action against an al- leged trust or combination, by one who was a party to its orgajiization and a, stockholder therein, to recover damages resulting from the enforce- ment by defendant of rights given it by the alleged unlawful agreement. Bishop V. American Preservers Co., 105 Fed. 845 (1900), S. C. 51 Fed. 272 (1892). ' In Lowry v. Tile, etc. Ass'n, 106 Fed. 46 (1900), affirmed sub nom. Montague v. Lowry, 115 Fed. 27 (1902), 193 TJ. S. 38 (1904), (24 Sup. Ct. Rep. 307) — an action for the re- covery of damages under the seventh section — Judge Morrow charged the jury as follows: "Your verdict will be limited to the actual damages which the evidence shows the plain- tiffs have sustained by reason of the acts of the defendants in violation of the act of Congress. The sole ques- tion, then, as to damages, in this case, relates to an injury which the plain- tiffs may have sustained in their busi- ness by reason of the association in question. It is not enough, in an action of this kind, which is one at law, for the plaintiffs to establish the existence of an association which domes within the inhibition of the act of Congress. Plaintiffs must go still further, and the burden of proof is upon them to show some real and actual damage to their business by reason of such an association. . . . Mere speculation as to the possible profits of a mercantile business, in the absence of evidence directed to such conditions, cannot be indulged in by the jury for purposes of finding » verdict in damages. The damages which the law contemplates, and which the act of Congress provides 756 for, niust be reasonable damages as- certainable upon the evidence pre- sented in the case. There must be facts, transactions, actual evidence of some material and pertinent char- acter, relating to a, business from which the jury can ascertain with reasonable certainty that damage has actually been worked to such busi- ness, before any verdict in damages can be returned, other than nominal damages. " In Whitwell v. Continental To- bacco Co., 125 Fed. 454 (1903), where the claim for damages was based upon the defendant's refusal to sell goods to the plaintiff, the Court said : "There is another reason why the complaint in this action fails to state facts suf- ficient to constitute a cause of action. The sole cause of the damages claimed in it is shown to be the refusal of the defendants to sell their goods to the plaintiff at prices which would enable him to resell them with a profit. Now, no act of omission of a party is actionable, no act or omission of a person causes legal injury to another, unless it is either a breach of contract with, or a duty to, him. The dam- ages from other acts or omission form a part of that damnum absque injuria for which no action can be main- tained or recovery had in the courts. The defendants had not agreed to sell their goods to the plaintiff at prices which would make their purchase profitable to him, so that the dam- ages he suffered did not result from any breach of any contract with him. They were not caused by the breach of any legal duty to the plaintiff, for the defendants owed him no duty to sell their products to him at any price — much less, at prices so low that he could reaUze a profit by sell- ing them again to others. The com- plaint, therefore, fails to show that CHAP. Xl] RIGHTS, REMEDIES AND PROCEDURE § 409 The fact that the injuries sustained by a violation of the statute are suffered wholly within a single State in no way prevents the recovery of damages therefor. Damage must nearly always be "in property, that is, in the money of the plaintiff, which is owned within some particular State.'" any legal injury or actionable damages were inflicted upon the plaintiff by the acts of the defendants." Where a city brought suit for the recovery of damages under the seventh section of the act upon the ground that it had been compelled by an unlawful combination to pay more for articles purchased than they were reasonably worth, the Supreme Court of the United States (Chattanooga Foundry, etc. Works v. City of At- lanta, 203 U. S. 390, 396 (27 Sup. Ct. Rep. 65), affirming 127 Fed. 23 (1903), 101 Fed. 900 (1900)), said : "The facts gave rise to a, cause of action under the act of Congress. The city was a per- son within the meaning of section 7, by the express provision of section 8. It was injured in its property, at least, if not in its business of furnishing water, by being led to pay more than the worth of the prpe. A person whose property is diminished by a payment of naoney wrongfully induced is injured in his property. The transac- tion which did the wrong was a trans- action between parties in different States, if that be material. The fact that the defendant and others had combined with the seller led to the excessive charge, which the seller made in the interest of the trust by arrangement with its members, and which the buyer was induced to pay by the semblance of competition, also arranged by the members of the trust. One object of the combination was to prevent other producers than the Anniston Pipe and Foundry Company, the seller, from competing in sales to the plaintiff. There can be no doubt that Congress had power to give an action for damages to an individual who suffers by breach of law." General allegations in a declara- tion based upon the statute showing that as a result of the combination complained of the plaintiff has lost customers and has been prevented from making a profit in its legitimate business, as had been the case before the combination, are sufficient. Wheeler-Stenzel Co. «. National Window Glass Jobbers' Ass'n, 152 Fed. 864 (1907). Where foreign ship-owners formed a combination and granted rebates to parties who used their vessels exclu- sively in shipping from an American port, and the plaintiffs made ship- ments but lost their right to the re- bates under the arrangement by ship- ping by other lines, it was held, in an action against the combination to recover damages under the seventh section, that the plaintiffs' substantial claim grew out of the withholding of the rebates which was not an item of damage growing proximately out of the combination and that they were not entitled to recover. Thomsen v. Union Castle Mail S. S. Co., 149 Fed. 933 (1907). The writ of error in this case to the U. S. Circuit Court of Appeals has not yet been passed upon. For complaint describing an un- lawful combination of lumber dealers and manufacturers and stating a cause of action for the recovery of damages under the seventh section of the act, see ElUs v. Inman, 131 Fed. 182 (1904). ' Chattanooga Foundry, etc. Works V. aty of Atlanta, 203 U. S. 390, 397 (1906), (27 Sup. Ct. Rep. 65), affirnv 757 § 411 INTEHCORPOEATE RELATIONS [PART V The recovery of treble damages under the seventh section must be by direct action and not by way of set-off in an action for the price of goods sold by the alleged unlawful combina- tion.' Upon the trial of an action for the recovery of threefold dam- ages, the jury assess the actual damages sustained, and the court, in entering the judgment upon theverdict, trebles the amount.^ The declaration in an action for the recovery of damages must state the substantial facts relied upon to establish a violation of the act. It is not sufficient to follow the language of the statute.' § 410. Limitations of Actions. — The right of action for the recovery of treble damages under the seventh section of the statute is granted as a remedy for a private wrong and is com- pensatory in its purpose and effect — the damages allowed in excess of those actually sustained being regarded as exemplary. An action based upon the statute, therefore, being remedial rather than penal in its nature, is governed as to limitation by the statutes of the State where it is brought and not by the federal statute^ prescribing a limitation of five years for a "suit or prosecution for any penalty or forfeiture, pecuniary or other- wise, accruing under the laws of the United States." ° § 411. Effect of Voluntary Dissolution of Combination pend- ing Proceedings. — The equitable remedy afforded the govern- ment to restrain combinations in violation of the statute is for the protection of the rights of the public, and the relief granted should be adequate to the occasion. The mere dissolution of the unlawful combination may not be the most important part ing 127 Fed. 23 (1903), 101 Fed. 900 Fed. 23 (1903), 101 Fed. 900 (1900). (1900). ' ConnoUy v. Union Sewer Pipe The fact that no federal statute is Co., 184 TJ. S. 540 (1902), (22 Sup. Ct. appUcable leaves the matter of Umi- Rep. 431). tation to local law (U. S. Rev. Stat., 2 Lowry v. Tile, etc. Ass'n, 106 § 721), and in the above case it was Fed. 46 (1900). held that the ten year limitation of ' alley V. United Shoe Mach. Co., the Tennessee Code for all actions 152 Fed. 726 (1907). not expressly provided for controlled * U. S. Rev. Stat., § 1047. an action under the seventh section » Chattanooga Foundry, etc. ^orks of the statute, rather than the three r. City of Atlanta, 203 U.S. 390(1906), year Umitation for injuries to real or (27 Sup. Ct. Rep. 65), affirming 127 personal property. 758 CHAP. XL] RIGHTS, REMEDIES AND PROCEDURE §412 of the litigation. The essential question is the validity of the agreement, and the injunction prayed for may properly go so far as to enjoin the execution of similar agreements in the future. In such a case, the dissolution of an unlawful association, after judgment and pending appeal, does not deprive the appellate court of jurisdiction.* § 412. Proof of Violation of Statute. Evidence. — In deter- mining whether a particular contract or combination comes within the provisions of the federal statute, illegality is not to be presumed but must be proved.^ It must be shown that the agreement, or the method of doing business thereunder, is in violation of the statute. But where the necessary effect of an agreement, as shown upon its face, is to restrain interstate trade or commerce, the com- bination thereunder is illegal, and the question of the intent of the parties, in entering into it, is immaterial.' But where the ' United States v. Trana-Missouri Freight Ass'n, 166 U. S. 304 (1896), (17 Sup. Ct. Rep. 540): "Although the general rule is that equity does not interfere simply to restrain a pos- sible future violation of law, yet, where parties have entered into an illegal agreement and are acting under it, and there is no adequate remedy at law and the jurisdiction of the court has attached by the filing of a bill to restrain such or any like action under a similar agreement, and a trial has been had, and judgment entered, the appellate jurisdiction of the court is not ousted by a simple dissolution of the association effected subse- quently to the entry of judgment in the suit. Private parties may settle their controversies at any time, and rights which a plaintiff may have had at the time of the commencement of the action may terminate before judgment is obtained or while the case is on appeal, and in any such case, the court, being informed of the facts, •will proceed no further in the action. Here, however, there has been no ex- tinguishment of the rights (whatever they are) of the public, the enforce- ment of which the government has endeavored to procure by a judgment of a court under the provisions of the act of Congress above cited. The defendants cannot foreclose those rights nor prevent the assertion thereof by the government, as a sub- stantial trustee for the public under the acts of Congress, by any such action as has been taken in this case." , See also United States v. Work- ingmen's Amalgamated Council, 54 Fed. 994 (1893). ' United States v. Addyston Pipe, etc. Co., 78 Fed. 723 (1897), (reversed 85 Fed. 271) (1898), 175 U. S. 121 (1899), (20 Sup. Ct. Rep. 96) ; United States V. Trans-Missouri Freight Ass'n, 58 Fed. 58 (1893), (reversed 166 U. S. 341) (1897), (17 Sup. Ct. Rep. 540). The reversals of the judgments of the lower courts in these cases in no way affects the principle stated in the text. ' United States v. Trans-Missouri Freight Ass'n, 166 U. S. 341 (1897), (17 Sup. Ct. Rep. 540) : "Although the case is heard on bill and answer, thus making it necessary to assume the truth of the allegations in the answer which are well pleaded, yet 759 §412 INTERCOHPOBATE RELATIONS [part V agreement, itself, does not establish the illegality of the com- bination, it may be shown by all the facts and circumstances of the case; and the practical working and effect of the defendant's metliods of doing business may properly be considered.^ In such a case, the objects, intent and purposes of the parties to the combination may be very material.^ In Addyston Pipe, etc. Co. v. United States,'' the Supreme Court of the United States said: "It is the effect of the com- bination in limiting and restricting the right of each of the mem- bers to transact business in the ordinary way, as well as its effect upon the volume or extent of the dealing in the com- modity, that is regarded. All the facts and circumstances are, however, to be considered in order to determine the fundamental question — whether the necessary effect of the combination is to restrain interstate commerce." * the legal effect of the agreement itself cannot be altered by the answer, nor can its violation of law be made vaUd by allegations of good intention or of desire to simply maintain reasonable rates; nor can the plaintiffs' allega- tions as to the intent with which the agreement was entered into be re- garded, as such intent is denied on the part of the defendants. And if the intent alleged in the biU were a neces- sary fact to be proved in order to maintain the suit, the bill would have to be dismissed. In the view we have taken of the question, the intent alleged by the government is not necessary to be proved. The ques- tion is one of law in regard to the meaning and effect of the agreement itself; namely, does the agreement restrain trade or conunerce in any way so as to be a violation of the act ? We have no doubt that it does." 1 United States v. Hopkins, 82 Fed. 534 (1897), (reversed on other grounds, 171 U. S. 578 (1898), (19 Sup. Ct. Rep. 40)) : "The first question, whether there is any combination in restraint of trade or commerce, or a combina- tion to monopolize any part of trade or commerce, on the part of the de- 760 fendaat association, is to be deter- mined, not alone from what appears upon the face of its preamble, rules and by-laws, but from the entire sit- uation and the practical working and results of the defendants* methods of doing business, as disclosed by the testimony in the case." In United States v. Workingmen's Amalgamated Council, 54 Fed. 994 (1893), it was held that in order to sustain the allegations of a bill pray- ing for an injunction against a combi- nation in restraint of interstate com- merce, the complainant might offer in evidence the oflEicial proclamation of the various government officers, and also newspaper reports, supported by affidavits, containing manifestos and declarations of the respondents. 2 In United States v. MacAndrews, etc. Co., 149 Fed. 836 (1907), it was held that a, violation of the statute was shown where the evidence estab- lished the existence of a combination with intent to effect the restraint of interstate commerce. ^ Addyston Pipe, etc. Co. v. United States, 175 U. S. 211 (1899), (20 Sup. Ct. Rep. 96). * The facts stated or shown in the CHAP, xl] rights, remedies and procedure § 413 § 413. Interpretation of Immunity Proviso. — The proviso in the general appropriation act of 1903, already referred to,' that no person shall be prosecuted on account of anything which he may testify to in any proceeding under the federal anti-trust statute, is entitled to a sufficiently broad interpretation to pro- tect a witness in disclosures made in pursuance of any judicial inquiry under the act. Accordingly, it is held that the examina- tion of a witness before a grand -jury is a "proceeding" within the meaning of the proviso.^ The practical effect of the proviso is to take a witness testify- ing in any proceeding under the federal statute out of the opera- tion of the Fifth Amendment.^ If he cannot be prosecuted on account of his testimony, he is not incriminated by his testi- mony. And notwithstanding that the immunity may not extend to prosecutions in a State court, he cannot refuse to testify. In granting immunity "the only danger to be considered is one arising within the same jurisdiction and under the same sov- ereignty." * The same principles apply to written as to oral testimony. A witness who cannot set up the Fifth Amendment as to oral testimony on account of the immunity granted by the proviso, cannot avail himself of it to prevent the production of books and papers.' The Fifth Amendment is for the personal protection of the witness, and he cannot set it up in a proceeding under the statute in behalf of a corporation of which he may be the agent or representative. With respect to testimony concern- ing the affairs of his corporation, the immunity proviso is ' inapplicable. If the witness has no constitutional right to de- cline to give such testimony, there is no reason why he should be protected in giving it." recent important cases of United ' Hale v. Henkel, 201 TJ. S. 43 States V. MaoAndrews, etc. Co., 149 (1906), (26 Sup. Ct. Rep. 370). Fed. 823, 836 (1907), and United ' The Fifth Amendment is printed States V. Standard Oil Co., 152 Fed. in note to § 420, post. 292 (1907), should be examined in * Hale v. Henkel, 201 U. S. 43 considering the evidence tending to (1906), (26 Sup. Ct. Rep. 370). estjiblieh combinations and con- ' Hale v. Henkel, 201 U. S. 43 spiracles contrary to the federal (1906), (26 Sup. Ct. Rep. 370). statute. " In Hale v. Henkel, 201 U. S. 43, ' See ante, § 385. 69 (1906), (26 Sup. Ct. Rep. 370), 761 S 414 INTEKCOEPOKATE RELATIONS [PABT V II State Anti-trust Statutes CHAPTER XLI STATE STATUTES AND THEIR CONSTITUTIONALITT § 414. The Statutes. Development of State Legislation. § 415. Sphere of State Legislation. Operation of Commerce Clause of the Constitution. § 416. Controlling Propositions in determining Constitutionality- of State Statutes. § 417. Power of State to prohibit Combinations of Quasi-public Corporations. Power over Property devoted to Public Uses. § 418. Power of State to prohibit Combinations of Corporations in Exercise of Reserved Power. § 419. Validity of State Statutes tested by Fourteenth Amendment — (A) Right to Contract. § 420. Validity of State Statutes tested by Fourteenth Amendment — (B) Police Power of the State. § 421. Validity of State Statutes tested by Fourteenth Amendment — (C) Class Legislation. § 422. VaUdity of State Statutes under State Constitutional Provisions. § 423. State Courts' Interpretation of State Statute followed by Federal Courts in determining its Constitutionality. § 424. Who may question ConstitutionaUty of Statutes. § 414. The Statutes. Development of State Legislation. — A summary of the State laws against combinations — commonly the Supreme Court of the United mony, even though he were the agent States said: "But it is further in- of such person. A privilege so ex- sisted that while the immunity statute tensive might be used to put a stop to may protect incUvidual witnesses, it the examination of every witness would not protect the corporation of who was called upon to testify before which appellant was the agent and the grand jury with regard to the representative. This is true, but the doings or business of his principal, answer is that it was not designed to whether such principal were an indi- do so. The right of a person under vidual or a corporation. The ques- the Fifth Amendment to refuse to in- tion whether a corporation is a criminate himself is piu-ely a personal 'person' within the meaning of this privilege of the witness. It was Amendment really does not arise, never intended to permit him to except, perhaps, where a corporation plead the fact that some third person is called upon to answer a bill of dis- might be incriminated by his testi- covery, since it can only be heard by 762 CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 414 called "anti-trust" acts — is printed in the subjoined note.^ oral evidence, in the person of some one of its agents or employes. The Amendment is limited to a person who shall be compelled in any crimi- nal case to be a witness against him- self, and if he cannot set up the privi- lege of a third person, he certainly cannot set up the privilege of a cor- poration. As the combination or conspiracies provided against by the Sherman Anti-Trust Act can ordi- narily be proved only by the testi- mony of parties thereto, in the person of their agents or employes, the privi- lege claimed would practically nullify the whole act of Congress. Of what use would it be for the legislature to declare these combinations unlawful if the judicial power may close the door of access to every available source of information upon the sub- ject? Indeed, so strict is the rule that the privilege is a personal one that it has been held in some cases that counsel will not be allowed to make the objection." See also McAlister v. Henkel, 201 U. S. 90 (1906), (26 Sup. Ct. Rep. 385). ' Alabama. Crim. Code 1907, ch. 273, § 7579 : "Any person or corpora- tion, who engages or agrees with other persons or corporations, or enters into, directly or indirectly, any combina- tion, pool, trust, or confederation, to regulate or fix the price of any article or commodity to be sold or produced within this State; or any person or corporation who enters into, becomes a member of, or party to, any pool, agreement, combination, or confederal tion to fix or limit the quantity of any article or commodity to be produced, manufactured, mined, or sold in this State, must, on conviction, be fined not less than five hundred nor more than two thousand dollars." lb. §7580: "Any corporation chartered under the laws of this State, or any officer, stockholder, agent, or employee of any such corporation, which enters into any combination with any other corporation or person with the intent to place the manage- ment or control of any such corpora- tion in the hands of another corpora- tion or person, and thereby limit or fix the price, or restrict or diminish the production, manufacture, sale, use, or consumption of any article of com- merce, must, on conviction, be fined not less than five hundred nor more than two thousand dollars." Arkansas. Const. Art. II. § 19 : "Perpetuities and monopolies are con- trary to the genius of a republic, and shall not be allowed. . ." Acts of 1905. Act 1, § 1: "Any corporation organized under the laws of this or any other State, or country, and transacting or conducting any kind of business in this State, or any partnership or individual, or other association or persons whatsoever, who are now, or shall hereafter create, enter into, become a member of, or a party to, any pool, trust, agreement, combination, confederation or under- standing, whether the same is made in this State or elsewhere, with any other corporation, partnership, indi- vidual, or any other person or asso- ciation of persons, to regulate or fix either in this State or elsewhere the price of any article of manufacture, mechanism, merchandise, commodity, convenience, repair, any product of mining, or any article or thing what- soever, or the price or premium to be paid for insuring property against loss or damage by fire, Ughtning or tornado, or to maintain said price when so regulated or fixed, or who are now, or shall hereafter enter into, become a member of, or a party to any pool, agreement, contract, com- 763 §414 INTERCORPOBATE RELATIONS [part V These statutes have followed as the inevitable result of the working of the laws of trade in the face of an adverse public bination, association or confedera- tion, whether made in this State or elsewhere, to fix or limit in this State or elsewhere, the amount or quantity of any article of manufacture, mechan- ism, merchandise, commodity, con- venience, repair, any product of min- ing, or any article or thing whatso- ever, or the price or premium to be paid for insuring property against loss or damage by fire, lightning, storm, cyclone, tornado or any other kind of policy issued by any corpora- tion, partnership, individual or asso- ciation of persons aforesaid, shall be deemed and adjudged guilty of a conspiracy to defraud and be sub- ject to the penalties as provided by this act." § 6 : "A monopoly is any union or combination or consolidation or affilia- tion of capital, credit, property, assets, trade, customs, skill or acts of any other valuable thing or possession, by or between persons, firms or cor- porations, whereby any one of the purposes or objects mentioned in this act is accomplished or sought to be accomplished, or whereby any one or more of said purposes are promoted or attempted to be executed or carried out, or whereby the several results described herein are reasonably cal- culated to be produced; and a mo- nopoly, as thus defined and contem- plated, includes not merely such com- bination by and between two or more persons, firms and corporations, acting for themselves, but is especially defined and intended to include all aggregations, amalgamations affilia- tions, consolidations, or incorpora- tions of capital, skill, credit, assets, property, custom, trade, or other valuable thing or possession whether effected by the ordinary methods of partnership or by actual union under the legal form of a corporation, or 764 any incorporated body resulting from the union of one or more distinct firmis or corporations, or by the pur- chase, acquisition or control of shares or certificates of stocks or bonds, or other corporate property or fran- chises, and all partnerships or cor- porations that have been or may be created by the consolidation or amal- gamation of the separate capital, stocks, bonds, assets, credit, property, customs, trade, corporate or firm belongings of two or more firms or corporations or companies, are es- pecially declared to constitute mo- nopolies within the meaning of this act if so created or entered into for any one or more of the purposes named in this act; and a monopoly, as thus defined in this section, is hereby declared to be unlawful and against public policy, and any and all persons, firms, corporations, or associations of persons engaged therein, shall be deemed and adjudged to be guilty of a conspiracy to de- fraud, and shall be subject to the penalties prescribed in this act. § 6 : "If any person, persons, com- pany, partnership, association, cor- poration or agent engaged in the manufacture or sale of any article of commerce or consumption produced, manufactured or mined in this State, or elsewhere, shall, with the intent and purpose of driving out competition, or for the purpose of financially in- juring competitors, sell within the State at less than cost of manufacture or production, or sell in such a way, or give away in this State, their pro- ductions for the purpose of driving out competition, or financially injuring competitors engaged in similar busi- ness, said person or persons, company, partnership, association, corporation, or agent resorting to this method of securing a monopoly within this CHAP. XLl] STATE STATUTES AND THEIE CONSTITUTIONALITY § 414 policy. As pointed out in the preliminary part of this treatise, the modern tendency of business is toward combination — the State in such business shall be deemed guilty of a conspiracy to form or secure a trust or monopoly in restraint of trade, and on conviction thereof shall be subjected to the penalties of this act." The other sections of the act re- late to penalties, remedies and pro- cedure. For penalties, see post, §§ 447, 448. California. "Cartwright Anti- Trust Bill," approved March 23, 1907 : § 1. "A trust is a combination of capital, skill or acts by two or more persons, firms, partnerships, corpora- tions or associations of persons, or of any two or more of them for either, any or all of the following purposes : 1. To create or carry out restric- tions in trade or commerce. 2. To limit or reduce the produc- tion, or increase or reduce the price of merchandise or of any commodity. 3. To prevent competition in manufacturing, making, transporta- tion, sale or purchase of merchan- dise, produce or any commodity. 4. To fix at any standard or figure, whereby its price to the public or con- sumer shall be in any manner con- trolled or established, any article or commodity of merchandise, produce or commerce intended for sale, barter, use or consumption in this State. 5. To make or enter into or exe- cute or carry out any contracts, obli- gations or agreements of any kind or description, by which they shall bind or have bound themselves not to sell, dispose of or transport any article or any commodity or any article of trade, use, merchandise, commerce or consumption below a common stand- ard figure, or fixed value, or by which they shall agree in any manner to keep the price of such article, commodity or transportation at a fixed or gradu- ated figure, or by which they shall in any manner establish or settle the price of any article, commodity or transportation between them or them- selves and others, so as to directly or indirectly preclude a free and uru'e- stricted competition among them- selves, or any purchasers or consumers in the sale or. transportation of any such article or commodity, or by which they shall agree to pool, com- bine or directly or indirectly unite any interests that they may have connected with the sale or trans- portation of any such article or com- modity, that its price might in any manner be affected. Every such trust as is defined herein is declared to be unlawful, against public policy, and void." The remaining sections of the bill relate to remedies, penalties and procedure. For penalties, see post, §447. Florida. Laws 1897, ch. 4534, re- lates only to combinations to ob- struct the sale of meat or edible live stock in the State. For penalties see post, §§ 446, 448. Georgia. Constitutional provision (Art. IV. § 2, par. 4) against agree- ments for prevention of competition appears ante, § 32 n. The Georgia anti-trust act of December 23, 1896 (Supp. to Code 1901, § 6467), was held to be uncon- stitutional by the Supreme Court of that State in Brown v. Jacobs' Phar- macy Co., 115 Ga. 429 (1902), (41 S. E. Rep. 553, 90 Am. St. Rep. 126, 57 L. R. A. 547). For consideration of the constitu- tional question involved, see post, §421. Illinois. Meyer's 111. Stat. 1898, ch. 140 b (Act of June 11, 1891, as amended by Laws 1897, p. 298) : (1) "If any corporation organized under the laws of this or any other 765 §414 INTERCORPORATE RELATIONS [part V unification of interests and concentration of control. During the past twenty years — especially during the past decade — state or country, for transacting or conducting any kind of business in this State, or any partnership or indi- vidual or other association of persons whatsoever, shall create, enter into, become a member of or a party to any pool, trust, agreement, combina- tion, confederation or understanding with any other* corporation, partner- ship, individual or any other person or association of persons, to regulate or fix the price of any article of mer- chandise or commodity, or shall enter into, become a member of or a party to any pool, agreement, contract, combination or confederation to fix or limit the amount or quantity of any article, commodity or merchan- dise to be manufactured, mined, pro- duced or sold in this State, such cor- poration, partnership or individual or other association of persons shall be deemed and adjudged guilty of a conspiracy to defraud, and be subject to indictment and punishment as pro- vided in this act: Provided, however, That in the mining, manufacture or production of articles of merchandise, the cost of which is mainly made up of wages, it shall not be unlawful for persons, firms or corporations doing business in this State to enter into joint arrangements of any sort, the principal object or effect of which is to maintain or increase wages. (2) "It shall not be lawful for any corporation to issue or to own trust certificates, or for any corporation, agent, officer or employees, or the directors or stockholders of any cor- poration, to enter into any combina- tion, contract or agreement with any person or persons, corporation or corporations, or with any stockholder or director thereof, the purpose and effect of which combination, contract or agreement shall be to place the management or control of such com- 766 bination or combinations, or the manu- factured product thereof, in the hands of any trustee or trustees, with the intent to limit or fix the price or lessen the production and sale of any article of commerce, use or consumption, or to prevent, restrict or diminish the manufacture or output of any such article. " (3) All contracts or agreements in violation of any provision of this act are absolutely void. For provision that act may be pleaded as a defence see post, § 445. For penalties against corporations and individuals, see post, §§ 446, 448. The later Illinois anti-trust act of June 20, 1893 (Starr and Curtis Ann. Stat. ch. 38, par. 109), has been de- clared unconstitutional by the Su- preme Court of the United States. See post, § 421. The proviso in the Act of 1891, with respect to com- binations regarding wages has also been declared unconstitutional by the Illinois Supreme Court. See post, § 421. Indiana. Laws 1907, ch. 243, § 1 : "That every scheme, design, under- standing, contract, combination in the form of a trust or otherwise, or conspiracy in restraint of trade, or commerce, or to create or carry out restrictions in trade or commerce, or to deny or refuse to any person or per- sons full participation, on equal terms with others, in any telegraphic service transmitting matter prepared or in- tended for pubhc use, or to limit or reduce the production, or increase or reduce the price of merchandise or any commodity, natural or ar- tificial, or to prevent competition in manufacturing, within or without this State, is hereby declared to be illegal, but none of the provisions of this act shall be construed to apply to [or] repeal, modify or hmit, or make CHAP. XLl] STATE STATUTES AND THEIE CONSTITUTIONALITY § 414 the great producing industries of the country have come under the control of a comparatively few corporations with vast unlawful any of the powers, rights or privileges now existing or conferred by law upon any person, copart- nership, association or corporation. Every person who shall make any such contract or engage in any such com- bination or conspiracy, or enter into any such scheme, design or under- standing, or do within this State any act in furtherance of anysuch contract, combination, conspiracy, scheme, design or understanding, entered into without this State, shall be deemed guilty of a misdemeanor, and on con- viction thereof shall be fined in any sum not exceeding five thousand dol- lars, to which may be added imprison- ment in the county jail or workhouse for a term not exceeding one year in the discretion of the court or jury trying the cause : Provided, however. That it shall be a good defence to any action growing out of any violation of the provisions of this act or any other act or common law relating to the subject-matter of this Act if the defendant shall plead and by a fair preponderance of the evidence prove that such violation is not in restraint of trade or commerce or does not re- strict trade or commerce or limit or reduce the production or increase or reduce the price of merchandise or any conunodity natural or artificial or prevent competition in manufac- tiuing. § 2. " Every person who shall mo- nopolize or attempt to monopolize or combine or conspire with any other person or persons to monopolize any part of the trade or commerce within this State, shall be deemed guilty of a misdemeanor, and on conviction thereof shall be fined in any sum not exceeding five thousand dollars, to which may be added imprisonment in the county jail or workhouse for a term not exceeding one year in the discretion of the court or jury trying the cause." § 12. "The provisions of this act shall be held cumulative of or sup- plemental to each other, and of all other laws in any way affecting them, or any matter which in any manner is the subject of this act in this State, and cumulative of and supplemental to the common law of this State rela- tive thereto, or to any thereof." The other provisions of the act relate to combinations to prevent competition for public contracts, remedies and procedure. For other Indiana anti-trust stat- utes, see Horner's Anno. Stat. 1901, §§ 7554, 7556,' 7557 (Act of March 5, 1897) ; § 7559 a (Act of March 3, 1889), and § 7559/ (Act of March 8, 1901). Iowa. Code 1897, §5060: "Any cor- poration organized under the laws of this or any other State or country for transacting or conducting any kind of business in this State, or any part- nership, association or individual, creating, entering into or becoming a member of or a party to any pool, trust, agreement, contract, combina- tion, confederation or understanding with any other corporation, part- nership, association or individual, to regulate or fix the price of any article of merchandise or commodity, or to fix or limit the amount or quan- tity of any article, commodity or mer- chandise to be manufactured, mined, produced or sold in this State, shall be guilty of a conspiracy. " Kansas. Rev. Stat. 1899, ch. 113 o (Act of 1897): "A trust is a combination of capital, skill or acts, by two or more persons, firms, cor- porations, or associations of persons, or either two or more of them, for either, any or all of the following purposes : 767 §414 INTEECOHPORATE RELATIONS [part V capital and almost unlimited resources. And one of the ob- jects — perhaps the primary object — of these combinations has been the elimination of competition. "First. To create or carry out re- strictions in trade or commerce or aids to commerce, or to carry out re- strictions in the full and free pursuit of any business authorized or per- mitted by the laws of this State. "Second. To increase or reduce the price of merchandise, produce or commodities, or to control the cost of rates of insurance. "Third. To prevent competition in the manufacture, making, trans- portation, sale or purchase of mer- chandise, produce or conmiodities, or to prevent competition in aids to commerce. "Fourth, To fix any standard or figure, whereby its price to the public shall be, in any manner, controlled or established, any article or commodity of merchandise, produce or commerce intended tor sale, use or consiunption in this State. "Fifth. To make or enter into, or to execute or carry out, any contract, obligation or agreement of any kind or description by which they shall bind or have to bind themselves not to sell, manufacture, dispose of or trans- port any article or commodity, or articles of trade, use, merchandise, conamerce or consumption below a common standard figure or by which they shall agree in any manner to keep the price of such article, commodity, or transportation at a fixed or graded figure, or by which they shall in any manner establish or settle the price of any article or commodity or trans- portation between them or them- selves and others, to preclude a free and unrestricted competition among themselves or others in transportation, sale or manufacture of any such arti- cle or commodity, or by which they shall agree to pool, combine or unite any interest they may have in con- 768 nection with the manufacture, sale or transportation of any such article or commodity, that its price may in any manner be affected. And any such combinations are hereby de- clared to be against public policy, un- lawful and void. " For provision that act may be pleaded as defence see post, § 445. For penalties against corpora- tions and individuals see post, §§ 446, 447, 448. For another Kansas anti-trust statute, see Gen. Stat. 1899, § 2377. Kentiicky. Const. § 198: "It shall be the duty of the General Assembly, from time to time, as necessity may require, to enact such laws as may be necessary to prevent all trusts, pools, combinations or other organizations, from combining to depreciate below its real value any article, or to enhance the cost of any article above its real value. " CarroU's Stat. 1903, ch. 101, § 3915 (Act <5f 1890) : "If any corporation under the laws of Kentucky, or under the laws of any other State or country, for transacting or conducting any kind of business in this State, or any partnership, company, firm or indi- vidual, or other association of persons, shall create, establish, organize or enter into, or become a member of, or a party to, or in any way interested in, any pool, trust, combine, agreement, confederation or understanding with any other corporation, partnership, individual or person, or association of persons, for the purpose of regulating or controlling or fixing the price of any merchandise, manufactured articles or property of any kind, or shall enter into, become a member of, or party to, or in any way interested in, a pool, agreement, contract, understanding, combination or confederation, having CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 414 Yet neither the courts, the legislatures nor the people in general have ever relaxed in their belief that " competition is the for its object the fixing, or in any way limiting, the amount or quantity of any article of property, commodity or merchandise to be produced or manufactured, mined, bought or sold, shall be deemed guilty of the crime of conspiracy." The act contains pro- visions similar to those of the Illinois statute, supra, concerning trust cer- tificates and trustees, and the in- validity of contracts. For pro- vision that act may be pleaded as a defence, see post, § 445. For penalties against corporations and individuals see post, §§ 446, 448. Louisiana. Const. Art. CXC : "It shall be unlawful for persons or cor- porations, or their legal representa- tives, to combine or conspire together, or to unite or pool their interests, for the purpose of forcing up or down the price of any agricultural product or article of necessity for speculative purposes; and the legislature shall pass laws to suppress it. " Const, and Rev. Laws (Wolff) 1904, p. 1804: "After the passage of this act, it shall be unlawful for any indi- vidual, firm, company, corporation or association to enter into, continue or maintain any combination, agree- ment or arrangement of any kind, expressed or implied, with any other individual, firm, company, association or corporation for any of the following purposes : First, to create or carry out restrictions in trade. Second, to limit or reduce the production, or in- crease or reduce the price, of mer- chandise, produce or commodities. Third, to prevent competition in manufacture, making, transportation, sale or purchase of merchandise, produce, or commodities. Fourth, to fix at any standard of figure, whereby its price shall be in any manner con- trolled or established, any article of merchandise, produce, commodity or commerce intended for consumption in this State. Fifth, to make or enter into or execute or carry out any con- tract, obligation or agreement of any kind or description by which they shall bind or have bound themselves not to sell, dispose of or transport any article or commodity, or article of trade, use, merchandise, commerce or consumption below a common stand- ard figure, or by which they shall agree in any manner to keep the price of such article at a fixed or graduated figure, or by which they shall, in any manner, establish or settle the price of any article or commodity or trans- portation between them, or themselves and others, to preclude a free and un- restricted competition among them- selves or others in the sale or trans- portation of any such article or com- modity, or by which they shall agree to pool, combine or unite any interest they may have in connection with the sale or transportation of any such article or commodity that its price might in any manner be affected." For penalties against corporations and individuals see post, §§ 446, 448. Louisiana has also another statute directed against combinations in re- straint of domestic trade and commerce which is, apparently, modelled after the federal anti-trust act (Const, and Rev. Laws (Wolff) 1904, p. 1800). Maine. Rev. Stat., ch. 47, § 53 : "It shall be unlawful for any firm or incorporated company, or any num- ber of firms or incorporated com- panies, or any unincorporated com- pany, or association of persons or stockholders, organized for the pur- pose of manufacturing, producing, re- fining or mining any article or prod- uct which enters into general use and consumption by the people, to form or organize any trust, or to enter into 769 §414 INTERCORPORATE RELATIONS [part V life of trade." Combinations for the purpose of stifling compe- tition, as we have seen, have always been declared cotitrary to any combination of firms, incorpo- rated or unincorporated companies, or association of stockholders, or to delegate to any one or more board or boards of trustees or directors the power to conduct and direct the busi- ness of the whole number of firms, corporations, companies or associa^ tions which nmy have, or which may projjose to form, a trust, combination, or association inconsistent with the provisions of this section and contrary to public policy, § 54: "No certificate of stock, or other evidence of interest, in any trust, combination or association, as named in the preceding section, shall have legal recognition in any court in this State, and any deed to real estate given by any person, firm or corpora- tion, for the purpose of becoming in- terested in such trust, combination or association, or any mortgage given by the latter to the seller, as well as all certificates growing out of such trans- action, shall be void. § 5^: "Any firm, incorporated or unincorporated company or associa- tion of persons or stockholders, who shall enter into or become interested in such trust, combination or associa- tion, shall be subject to a fine of not less than five, nor more than ten thou- sand doUars." Maryland. Declaration of Rights, Art. XLI : "Monopolies are odious, contrary to the spirit of free govern- ment and the principles of commerce, and ought not to be suffered." Michigan. Public Act 1899, No. 255 defines a trust in substantially the same language as the Kansas statute, supra. It declares every trust, as so defined, unlawful, against pubUc policy, and void; that any violation of the act is " a conspiracy against trade, " and that any person engaging in such conspiracy shall be punished 770 by a fine or imprisonment, or both. Charters of domestic corjwrations violating the act are subject to for- feiture, and foreign corporations may be excluded from the State. The act also contains provisions similar to those in the Illinois statute {jmpra) concerning tru.st certificates, trustees and the invaUdity of contracts in vio- lation of the act. For further state- ment of penalties see -post, § 446. The Michigan statute of 1905 (No. 329), supplementing the act of 1899, follows: § 1: "All agreements and contracts by which any person, co- partnership or corporation promises or agrees not to engage in any avoca^ tion, employment, pursuit, trade, pro- fession or business, whether reason- able or unreasonable, partial or general, limited or unlimited, are hereby declared to be against public policy and illegal and void. § 2 : " All combinations of persons, copartnerships, or corporations noade and entered into for the purpose and with the intent of establishing and maintaining or of attempting to estab- lish and maintain a monopoly of any trade, pursuit, avocation, profession or business, are hereby declared to be against public policy and illegal and void. § 3 : " Any corporation organized under the laws of this State for the purpose of establishing and main- taining, or attempting to establish or maintain, any combination of per- sons, copartnerships or corporations with intent to establish and maintain or of attempting to e-stablish and main- tain a monopoly of any trade, pursuit, avocation, profession or business, is hereby declared to be against public policy and illegal and void. § 4: " Any foreign corporation or- ganized for the purpose and with the intent of establishing and maintaining CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 414 public policy. But the common law was inefficient in dealing with combinations. It merely let the agreements alone. They or of attempting to establish and maintain a monopoly of any trade, pursuit, avocation, profession or business, is hereby prohibited from doing business in this State, and any permission or authority heretofore obtained by any such corporation to do business in this State is hereby de- clared to be illegal and void. § 5 : " This act shall apply to agree- ments, contracts and combinations in restraint of trade or commerce here- tofore entered into or made, and which are sought to be enforced or main- tained after this act takes effect ; and all contracts and agreements in viola- tion of this act heretofore made, ex- pressly or impliedly, continuing in force after this act takes effect, are hereby declared to be against public policy and illegal and void. § 6 : " This act shall not apply to any contract mentioned in this act nor in restraint of trade, where the only object of the restraint imposed by the contract is to protect the vendee or transferee of a trade, pursuit, avo- cation, profession or business, or the good will thereof, sold and transferred for a valuable consideration in good faith and without any intent to create, build up, establish or maintain a, monopoly," Minnesota. Rev. Laws, § S168 : "No person or association of persons shall enter into any pool, trust, agree- ment, or understanding whatsoever with any other person or association, corporation or otherwise, in restraint of trade, within this State, or between the people of this or any other State or country, or which tends in any way or degree to limit, fix, control, main- tain, or regulate the price of any article of trade, manufacture, or use bought and sold within the State, or which limits or tends to limit the pro- duction of any such article, or which prevents or limits competition in the purchase and sale thereof, or which tends or is designed so to do. Every person violating any provision of this section, or assisting in such violation, shall be guilty of a felony, and upon conviction thereof shall be punished by a fine of not less than five hundred dollars nor more than five thousand dollars, or by imprisonment in the State prison for not less than three nor more than five years." .For provision concerning forfeiture of franchises of corporations violating statute, see post, § 448. Session Laws 1907, ch. 252, pro- hibit combinations with respect to the sale of grain. lb. ch. 269, prohibit unfair discrimination and compe- tition in the sale of petroleum and its products. Mississippi. Const. § 198 : "The legislature shall enact laws to prevent all trusts, combinations, contracts and agreements inimical to the public welfare." Laws 1900, ch. 88, § 11 (see Code 1906, § 5002) : "A trust and combine is a combination, contract, under- standing or agreement, expressed or implied, between two or more persons, corporations, or firms or associations of persons, or between one or more of either with one or more of the others ; (a) in restraint of trade ; (6) to limit, increase or reduce the price of a commodity; (c) to limit, increase or reduce the production or output of a commodity; (d) intended to hinder competition in the production, im- portation, manufacture, transporta- tion, sale or purchase of a commodity ; (e) to engross or forestall a com- modity; (/) to issue, own or hold the certificates of stock of any trust or combine ; (g) to place the control, to any extent, of business or of the products or earnings thereof, in the 771 §414 INTERCORPORATE RELATIONS [part V were unlawful in the sense of being unenforceable, but they were not unlawful in the sense of affording a ground of action power of trustees, by whatever name called; (h) by which any other per- son than themselves, their proper officers, agents and employees shall, or shall have the power to, dictate orcontrol the management of business; or (i) to unite or pool interests in the importation, manufacture, produc- tion, transportation or price of a com- modity ; and is inimical to the public welfare, unlawful, and a criminal con- spiracy. § 2: "Any corporations, domes- tic or foreign, which shall restrain or attempt to restrain the freedom of trade or production; or which shall monopolize or attempt to monopohze the production, control or sale of any commodity, or the prosecution, man- agement or control of any kind, class or description of business; or which shall engross or forestall or attempt to engross or forestall any commodity ; or which shall destroy competition in the manufacture or sale of a com- modity, by offering the same for sale at a price below the normal cost of production, shall be deemed a trust and combine within the meaning and purpose of this Act, shall be hable to all the pains, penalties, fines, for- feitures, judgments and recoveries herein denounced against trusts or combines, and shall be proceeded against in manner and form pro- vided in this Act in case of other trusts and combines." The act further declares all con- tracts in violation of its provisions void and prescribes penalties against corporations and individuals. (See post, § 446.) It also provides that no corporation shall purchase the stock or the franchises, plants, etc., of any competing corporation, and that corporations shall not engage in business not authori zed by their charters. 772 Missouri. Rev. Stat. 1899, as amended in 1907, § 8965 : "Any per- son who shall create, enter into, be- come a member of or participate in any pool, trust, agreement, combina- tion, confederation or understanding with any person or persons in restraint of trade or competition in the impor- tation, transportation, manufacture, purchase or sale of any product or commodity in this State, or any article or thing bought or sold wliatsoever, shall be deemed and adjudged guilty of a conspiracy in restraint of trade, and shall be punished as provided in this act. § 8966 : "Any person who shall cre- ate, enter into, become a member of or participate in any pool, trust, agree- ment, combination, confederation or understanding with any other per- son or persons to regulate, control, or fix the price of any article of man- ufacture, mechanism, merchandise, commodity, convenience or repair, or any product of mining, or any article or thing whatsoever, of any class or kind bought and sold, or the price or pre- mium to be paid for insuring property against loss or damage by fire, light- ning or storm, or to maintain said price when so regulated or fixed, or shall enter into, become a member of or participate in any pool, trust, agree- ment, contract, combination, con- federation or understanding, to fix or hmit the amount [or] quantity of any article of manufacture, mechanism, commodity, convenience, repair, any product of mining, or any article or thing whatsoever of any class or kind bought and sold, or the price or pre- mium to be paid for insuring property against loss or damage by fire, light- ning or storm, shall be deemed and adjudged guilty of a, conspiracy in restraint of trade, and be punished as provided for in this act. CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 414 to a person injured. A fortiori they were not criminal. The federal anti-trust statute went, as has been shown, far beyond § 8967 : "Any two or more persons engaged in buying or selling any article of commerce, manufacture, mechanism, commodity, convenience, repair, any product of mining, or any article or thing of any class or kind whatsoever, who shall create, enter into, become members of or partici- pate in any pool, trust, agreement, combination, confederation, associa- tion or understanding to control or limit the trade in any such article or thing, or to limit competition in such trade by refusing to buy from or sell to any other person any such article or thing aforesaid, for the reason that such other person is not a member of or a party to such pool, trust, com- bination, confederation, association or understanding, or shall boycott or threaten any person from buying or selling to any other person who is not a member of or a party to such pool, trust, agreement, combination, con- federation, association or understand- ing in such article or thing aforesaid, shall be deemed and adjudged guilty of a conspiracy in restraint of trade, and punished as provided for in this act. § 8968: "All arrangements, con- tracts, agreements, combinations or understandings made, or entered into between any two or more persons, designed or made with a view to lessen, or which tend to lessen, lawful trade, or full and free competition in the importation, transportation, manufacture or sale in this State of any product, commodity or article, or thing bought and sold, of any class or kind whatsoever, including the price or premium to be paid for insur- ing property against loss or damage by fire, lightning or storm, and all arrangements, contracts, agreements, combinations or understandings made or entered into between any two or more persons which are designed or made with a view to increase, or which tend to increase the market price of any product, commodity or article or thing, of any class or kind whatsoever bought and sold, includ- ing the price or premium to be paid for insuring property against loss or damage by fire, lightning or storm, are hereby declared to be against public policy, unlawful and void ; and any person or persons creating, enter- ing into, becoming a member of or participating in such arrangements, contracts, agreements, combinations or understandings shall be deemed and adjudged guilty of a conspiracy in restraint of trade, and punished as provided for in this act." The remaining provisions of the statute relate to penalties against corporations and individuals, reme- dies and procedure. See post, § 446. Montana. The anti-trust statute of this State (Penal Code, §§ 321-325) was declared by the Montana Supreme Court in 1905 to be unconstitutional (State V. Cudahy Packing Co., 33 Mont. 179 (82 Pac. Rep. 833)), •and no new statute has been enacted since. For consideration of the ques- tion of constitutionaUty, see post, §421. Nebraska. Cobbey's Comp. Stat. 1907, §12028: " That every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce, within this State, is hereby declared to be illegal. Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be pun- ished by fine not exceeding five thou- sand dollars, or by imprisonment not exceeding one year or by both said punishments in the discretion of the court. 773 §414 INTEHCORPORATE RELATIONS [part V the common law. It made combinations in restraint of inter- state commerce criminal and gave a right of action to persons § 12029: "That every person who shall monopolize, or attempt to mo- nopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce, within this State, shall be guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not ex- ceeding one year, or by both said pun- ishments, in the discretion of the court." The remaining sections of the act relate to penalties against corpora- tions and individuals, remedies and procedure. See post, §§ 446, 448. Nebraska has also a statute (Laws 1907), to prevent unfair commercial discrimination between different localities. The anti-trust act of 1897 was re- pealed by implication by the fore- going statute except as to the first section defining trusts. State v. Omaha Elevator Co. (Neb. 1906), 106 N. W. Rep. 979. ^ew Hampshire. Const. Art. 82: " Free and fair competition in the trades and industries is an inherent and essential right of the people and should be protected against all mo- nopolies and conspiracies which tend to hinder or destroy it. The size and functions of all corporations should be so limited and regulated as to pro- hibit fictitious capitalization, and provision should be made for the supervision and government thereof: — Therefore, all just power possessed by the State is hereby granted to the general court to enact laws to prevent the operations within the State of all persons and associations, and all trusts and corporations, foreign and domestic, and the officers thereof, who endeavor to raise the price of any article of commerce or to destroy free 774 and fair competition in the trades and industries through combination, con- spiracy, monopoly, or any other un- fair means; to control and regulate the acts of all such persons, associa- tions, corporations, trusts, and offi- cials doing business within the State; to prevent fictitious capitalization; and to authorize civil and criminal proceedings in respect to all the wrongs herein declared against." New Mexico. Comp. Laws (1897), I 1292: "Every contract or com- bination between individuals, asso- ciations or corporations, having for its object, or which shall operate, to restrict trade or commerce or control the quantity, price or exchange of any article of manufacture or product of the soil or mine, is hereby declared to be illegal. Every person, whether as individual or agent or officer or stockholder of any corporation or association, who shall make any such contract or engage in any such com- bination, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by a fine not exceeding one thousand dollars nor less than one hundred dollars, and by imprisoimient at hard labor not exceeding one year, or until such fine has been paid. § 1293. "Every person who shall monopolize or attempt to monopo- lize, or combine or conspire with any other person or persons to monopo- lize, any part of the trade or com- merce of this territory, shall be deemed guilty of a misdemeanor and on conviction thereof shall be pun- ished by " fine and imprisonment. The act further provides that all contracts in violation of its provisions shall be void and that purchasers of commodities from persons or corpora- tions violating the act shall not be liable therefor. CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 414 injured thereby. The State anti-trust statutes followed the federal statute, but were even more drastic. The difficulty New York. Birdseye's R. S. 1901, p. 2405 (Lawa 1899, ch. 690), § 1 : " Every contract, agreement, arrange- ment or combination, whereby a mo- nopoly in the manufacture, produc- tion or sale in this State of any article or commodity of common use is or may be created, established or main- tained, or whereby competition in this State in the supply or price of any such article or commodity is or may be restrained or prevented, or whereby, for the purpose of creating, estab- lishing or maintaining a inonopoly within this State of the manufacture, production or sale of any such article or commodity, the free pursuit in this State of any lawful business, trade or occupation, is or may be restricted or prevented, is hereby declared to be against public policy, illegal and void. § 2 : " Every person or corporation, or any oflScer or agent thereof, who shall make or attempt to make or enter into any such contract, agree- ment, arrangement or combinatiob, or who, within this State, shall do any act pursuant thereto, or in, toward or for the consummation thereof, wherever the same may have been made, is guilty of a misdemeanor, and on conviction thereof shall, if a natu- ral person, be punished by a fine not exceeding five thousand dollars, or by imprisonment for not longer than one year, or by both such fine and im- prisonment ; and if a corporation, by a fine of not exceeding five thousand dollars. § 3 : "The attorney-general may bring an action in the name and in behalf of the people of the State against any person, trustee, director, manager, or other officer or agent of a corporation, or against a corporation, foreign or domestic, to restrain and prevent the doing in tliis State of any act herein declared to be illegal, or any act, in, toward or for the making or consummation of any contract, agree- ment, arrangement or combination herein prohibited wherever the same may have been made." The remaining sections of the act relate to procedure in obtaining testi- mony. Another New York statute (Laws 1897, ch. 384; Stock Corp. Law, § 7) is as follows: "No domestic stock corporation and no foreign corpora- tion doing business in this State shall combine with any other corporation or person for the creation of a mo- nopoly or the unlawful restraint of trade or for the prevention of compe- tition in any necessary of life." North Carolina. Const. Art. I. §31: "Perpetuities and monopolies are contrary to the genius of a free State, and ought not to be allowed." Laws 1899, oh. 666: "Any cor- poration organized under the laws of this or any other State or country for transacting or conducting any kind of business in this State, or any partner- ship or individual or other association of persons whatsoever, who shall create, enter into, become a member of, or a party to, any pool, trust, agree- ment, combination, confederation or understanding with any other cor- poration, partnership, individual or any other person or association of per- sons to regulate or fix the price of any article of merchandise or commodity, or shall enter into, become a member of, or a party to, any pool, agreement, contract, combination or confedera- tion to fix the amount or quantity of any article, commodity or merchan- dise to be manufactured, mined, pro- duced or sold in this State, shall be deemed and adjudged guilty of a con- spiracy to defraud and be subject to the penalties provided in this act." 775 §414 INTERCORPORATE RELATIONS [part V with many of them, however, was that they went too far in some directions and not far enough in others. Their exemp- For penalties against corporations and individuals, see post, §§ 446, 448. The Act of March 11, 1907, "pro- hibiting conduct within the State of North Carolina, which interferes with trade and commerce " declares the following acts and things unlawful and imposes penalties : a. Sales on condition that pur- chaser shall not deal in goods of com- petitors or trade rivals or sellers. 6. Destroying, injuring or at- tempting to destroy or injure op- ponent or business rival with intent to fix price where competition is removed. c. Reduction of selUng price or raising of buying price by seller of fifty per cent of any article with in- tent to profit by destroying com- petitors. d. Sales at place where there is competition at less price than at another place, with intent to injure business of another. e. Agreements or understandings not to buy or sell within certain ter- ritory with intent to prevent compe- tition in buying or selling. NoHh Dakota. Const. Art. VII. § 146: "Any combination between individuals, corporations, associations, or either, having for its object or effect the controlling of the price of any product of the soil or any article of manufacture or commerce, or the cost of exchange or transportation, is prohibited and hereby declared un- lawful and against public policy, and any and all franchises heretofore granted or extended, or that may here- after be granted or extended in this State, whenever the owner or owners thereof violate this article shall be deemed armulled and become void." Laws 1907, ch. 259, p. 413: "Any corporation organized under the laws of this State or any other State or 776 country for transacting or conducting any kind of business in this State, or any partnership, association or indi- vidual, creating, entering into or becoming a member of, or a party to, any pool, trust, agreement, contract, combination, confederation or indi- vidual, to regulate or fix the price of any article of merchandise, com- modity or property, or to fix or hmit the amount or quantity of any arti- cle, property, merchandise or com- modity to be manufactured, mined, produced, exchanged or sold in this State, shall be guilty of a misde- meanor. " The act also defines pools and trusts; provides for the punishment of corporations and corporate ofl&cers ; declares contracts in violation of its provisions void, and regulates pro- cedure. Laws 1907, ch. 258, p. 412: "Any person, firm or corporation, foreign or domestic, doing business in the State of North Dakota and engaged in the production, manufacture or distribution of any commodity in general use, that shall intentionally, for the purpose of destroying or pre- venting competition, discriminate between different sections, communi- ties or cities of this State by selling any such conunodity at a lower rate or price in one section, conmauuity or city, or any portion thereof, than is charged for such commodity in any other section, community or city, after equalizing the distance from the point of manufacture, production or distribution and freight rates there- from, or who shall wilfully, for the purpose of such discrimination and unfair competition, refuse to sell any commodity in general use, and in the manufacture, production or distri- bution of which such person, firm or corporation may be engaged, to any CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 414 tions made them class legislation of the most obvious char- acter, and they were declared unconstitutional by the courts other person, firm or corporation which may desire to purchase the same and who shall comply with all reasonable regulations of such person, firm or corporation, and who shall tender payment thereof, shall be deemed guilty of a misdemeanor." Another similar statute against dis- criminations is in Laws 1907, ch. 260, p. 418. Ohio. Act of July 1, 1898, § 1: " A trust is a combination of capital, skill or acts by two or more persons, firms, partnerships, corporations or association of persons, or of any two or more of them for either, any or all of the following purposes : 1. To create or carry put restric- tions in trade or commerce. 2. To limit or reduce the produc- tion, or increase, or reduce the price of merchandise or any commodity. 3. To prevent competition in manufacturing, making, transporta- tion, sale or purchase of merchandise, produce or any commodity. 4. To fix at any standard or figure, whereby its price to the public or consumer shall be in any manner con- trolled or established, any article or commodity of merchandise, produce or commerce intended for sale, barter, use or consumption in this State. 5. To make or enter into or execute or carry out any contracts, obligations or agreements of any kind or descrip- tion, by which they shall bind or have bound themselves not to sell, dispose of or transport any article or any commodity or any article of trade, use, merchandise, commerce or consump- tion below a common standard figure or fixed value, or by which they shall agree in any manner to keep the price of such article, commodity or trans- portation at a fixed or graduated figure, or by which they shall in any manner estabUsh or settle the price of an article, commodity or trans- portation between them or them- selves and others, so as to directly or indirectly preclude a, free and unre- stricted competition among them- selves, or any purchasers or consumers in the sale or transportation of any such article or commodity, or by which they shall agree to pool, com- bine or directly or indirectly unite any interests that they may have con- nected with the sale or transportation of any such article or commodity, that its price might in any manner be affected. Every such trust as is defined herein is declared to be unlaw- ful, against public policy and void." For penalties against corporations and individuals, see post, §§ 446, 448. Oklahoma. Const. 1907, § 45, Art. IX. "Until otherwise provided by law, no person, firm, association or corporation engaged in the pro- duction, manufacture, distribution or sale of any commodity of general use, shall, for the purpose of creating a monopoly or destroying compe- tition in trade, discriminate between different persons, associations or cor- porations, or different sections, com- munities or cities of the State, by selUng such commodity at a lower rate in one section, community or city than in another, after making due allowance for the difference, if any, in the grade, quantity or quality, and in the actual cost of transporta- tion from the point of production or manufacture. " Rev. Stat. ch. 83: (1) "If any in- dividual, firm, partnership, or any association of persons whatsoever, shall create, enter into, become a member of, or a party to, any pool, trust, agreement, combination or understanding with any other indi- vidual, firm, partnership or associa- tion of persons whatsoever, to regulate 777 §414 INTEHCORPOEATB RELATIONS [part V following the lead of the Supreme Court of the United States. The more recent statutes, however, have been passed in view or fix the price of, or prevent or re- strict the competition in the sale of, provisions, feed, fuel, lumber or other building materials, articles of merchandise or other commodity, [they] shall be deemed guilty of [a] misdemeanor, and upon conviction thereof shall be fined not less than fifty nor more than five hundred dol- lars. (2) "It shall not be lawful for any corporation ... to enter into any com- bination, contract, trust, pool or agreement with any other corporation or corporations, or with any indi- vidual, firm, partnership or associa- tion of persons whatsoever, for the purpose of regulating or fixing the price of, or preventing or restricting competition in the sale of provisions, feed, fuel, lumber or other building materials, articles of merchandise or other commodity, including the fixing of the rate of interest. " For provision that act may be pleaded as -cl defence, see jiost, § 445. For penalties against corporations, see •post, §§ 446, 448. Sovih Carolina. Civ. Code 1902, § 2845: "All arrangements, contracts, agreements, trusts or combinations between two or more persons as indi- viduals, firms or corporations, made with a view to lessen, or which tend to lessen, full and free competition in the importation or sale of articles im- ported into this State, or in the manu- facture or sale of articles of domestic growth, or of domestic raw material, and all arrangements, contracts, agreements, trusts or combinations between persons or corporations, de- signed or which tend to advance, re- duce or control the price or the cost to the producer or to the consumer of any such product or article, and all arrangements, contracts, trusts, syn- dicates, associations or combinations 778 between two or more persons as indi- viduals, firms, corporations, syndi- cates or associations, that may lessen or affect in any manner the full and free competition in any tariffs, rates, tolls, premiums or prices, or seeks to control in any way or manner such tariffs, rates, tolls, premiums or prices in any branch of trade, business or commerce, are hereby declared to be against public policy, vmJawful and void." For penalties against corporations and individuals, see post, §§ 446, 448. South Dakota. Const. Art. XVII. par. 20: "MonopoUes and trusts shall never be allowed in this State, and no incorporated company, copartner- ship or association of persons in this State shall, directly or indirectly, combine or make any contract with any incorporated company, foreign or domestic, through their stock- holders or the trustees or assigns of such stockholders, or with any co- partnership or association of persons, or in any manner whatsoever to fix the prices, limit the production or regulate the transportation of any product or. commodity so as to pre- vent competition in such prices, pro- duction or transportation, or to es- tablish excessive prices therefor. The legislature shall pass laws for the en- forcement of this section by adequate penalties, and, in the case of incor- porated companies, if necessary for that purpose, may, as a penalty, de- clare the forfeiture of their franchises. " Penal Code, 1903, § 770: "Within the meaning of this act, « trust or a monopoly is a combination of capital, skill, or acts of two or more persons, firms, corporations or assooiations of persons, first, to create or carry out restrictions in trade ; second, to limit the production or to increase or re- duce the price of commodities ; third. CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 414 of these decisions and avoid the constitutional objections at- taching to the earlier enactments. to prevent competition in the manu- facture, transportation, sale or pur- chase of merchandise, produce or commodities ; fourth, to fix any stand- ard or figure whereby the price to the pubUc shall be in any manner estab- lished or controlled. § 771 : "That it shall be un- lawful for any incorporated company, copartnership or association of per- sons in this State, directly or other- wise, to fix prices, limit the production or regulate the transportation of any product or commodity so as to ob- struct or delay or prevent competition in such production or transportation or limit transportation of commodi- ties or to fix prices therefor. § 772: "That it shall be unlaw- ful for any incorporated company, copartnership or association of per- sons in another State to directly or otherwise combine or make any con- tract with any incorporated company, copartnership, association or person or persons in this State to combine or make any contract to fix prices, hmit the production of conmiodity or regu- late the transportation, directly or otherwise, of any product or com- modity so as to obstruct or prevent competition or limit transportation or to fix prices therefor." For penalties against corporations and individuals, see post, §§ 446, 448. Tennessee. Const. Art. I. § 22 : "That perpetuities and monopolies are contrary to the genius of a free State, and shall not be allowed." Acts 1903, eh. 140, § 1: "From and after the passage of this act all arrangements, contracts, agreements, trusts or combinations between per- sons or corporations made with a view to lessen, or which tend to lessen fiill and free competition in the importa- tion or sale of articles imported into this State, or in the manufacture or sale of articles of donxestic growth or of domestic raw material, and all arrangements, contracts, agreements, trusts or combinations between per- sons or corporations designed, or which tend to advance, reduce or control the price or the cost to the producer or the consumer of any such product or article, are hereby declared to be against public policy, unlawful and void." § 3: "Any violation of the pro- visions of this act shall be deemed, and is hereby declared to be de- structive of full and free competition and a, conspiracy against trade, and any person or persons who may en- gage in any such conspiracy or who shall, as principal, manager, director or agent, or in any other capacity, knowingly carry out any of the stipu- lations, purposes, prices, rates or orders made in furtherance of such conspiracy, shall, upon conviction, be punished by a fine of not less than one hundred dollars nor more than five thousand dollars, " and by im- prisonment in the penitentiary not less than one year nor more than ten years; or in the judgment of the court, by either such fine or imprison- ment. " The remaining sections of the act provide for the forfeiture of the char- ters of domestic corporations and the ouster from the State of foreign corporations, violating its provisions, remedies and procedure. (See post, §448.) Acts 1907, ch. 36, p. 126 : "That it shall be unlawful for any person, firm or corporation engaged in the business of manufacturing in this or any other State to give away, or sell for a less price than the cost of manufacture, any manufactured article in this State, with the intent and purpose of destroying honest competition." 779 §414 INTERCORPORATE RELATIONS [part V These statutes, as a general rule, declare contracts and com- binations in restraint of competition both criminal and unlaw- Texaa. Const. Art. I. § 26: "Per- petuities and monopolies are contrary to the genius of a free government, and shall never be allowed. " Act of March 31, 1903, as amended in 1907, § 1: "That a trust is a combination of capital, skill or acts by two or more persons, firms, corpora- tions or associations of persons, or either two or more of them for either, any or all of the following pur- poses : 1. To create or which may tend to create or carry out restrictions in trade or commerce or aids to com- merce or in the preparation of any product for market or transportation, or to create or carry out restrictions in the free pursuit of any business authorized or permitted by the laws of this State. 2. To fix, maintain, increase or reduce the price of merchandise, prod- uce or commodities, or the cost of insurance, or of the preparation of any product for market or trans- portation. 3. To prevent or lessen competi- tion in the manufacture, making, transportation, sale or purchase of merchandise, produce or commodi- ties, or the business of insurance, or to prevent or lessen competition in aids to commerce, or in the preparation of any product for market or trans- portation. 4. To fix or maintain any standard or figure whereby the price of any article or commodity of merchandise, produce or commerce, or the cost of transportation, or insurance, or the preparation of any product for mar- ket or transportation, shall be in any manner affected, controlled or es- tablished. 5. To make, enter into, maintain, execute or carry out any contract, obligation or agreement, by which 780 the parties thereto bind, or have bound themselves not to sell, dispose of, transport or to prepare for mar- ket or transportation any article or commodity, or to make any contract of insurance at a price below a com- mon standard or figure, or by which they shall agree in any manner to keep the price of such article or com- modity or charge for transportation or insurance, or the cost of the prepa- ration of any product for market or transportation at a fixed or graded figure, or by which they shall in any manner affect or maintain the price of any commodity or article or the cost of transportation or insurance or the cost of the preparation of any product for market or transportation between them or themselves and others, to preclude » free and unre- stricted competition among themselves or others in the sale or transportation of any such article or commodity or business of transportation or insur- ance or the preparation of any product for market or transportation, or by which they shall agree to pool, com- bine or unite any interest they may have in connection with the sale or purchase of any article or "commodity or charge for transportation or insur- ance or charge for the preparation of any product for market or transpor- tation whereby its price or such charge might be in any manner affected. 6. To regulate, fix or limit the output of any article or commodity which may be manufactured, mined, produced or sold, or the amount of insurance which may be undertaken, or the amount of work that may be done in the preparation of any prod- uct for market or transportation. 7. To abstain from engaging in or continuing business or from the pur- chase or sale of merchandise, produce or commodities partially or entirely » CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 414 ful. They impose penalties of fine or imprisonment upon indi- viduals, and provide for the forfeiture of the charters of domestic within the State of Texas, or any por- tion thereof. § 2. That a monopoly is a com- bination or consolidation of two or more corporations when effected in either of the following methods : 1. When the direction of the affairs of two or more corporations is in any manner brought \inder the same management or control for the pur- pose of producing, or where such com- mon management or control tends to create a trust as defined in the first section of this act. 2. Where any corporation acquires the shares or certificates of stock or bonds, franchise or other rights, or the physical properties, or any part thereof, of any other corporation or corporations, for the purpose of pre- venting or lessening, or where the effect of such acquisition tends to affect or lessen competition, whether such acquisition is accomplished directly or through the instrumen- taUty of trustees or otherwise. § 3. That either or any of the fol- lowing acts shall constitute a. con- spiracy in restraint of trade : 1. Where any two or more persons, firms, corporations or associations of persons who are engaged in buying or selling any article of merchandise, produce or any commodity, enter into an agreement or understanding to refuse to buy from or sell to any other persoi^, firm, corporation or associa- tion of persons any article of mer- chandise, produce or commodity. 2. Where any two or more persons, firms, corporations or associations of persons shall agree to boycott or threaten to refuse to buy from or sell to any person, firm, corporation or association of persons for buying from or selling to any other person, firm, corporation or association of per- sons. § 4. Any and all trusts, monopo- lies and conspiracies in restraint of trade as herein defined, are hereby prohibited and declared to be illegal." The remaining sections of the act relate to penalties against corporations and individuals and procedure. (See post, §§ 446, 448.) Utah. Const. Art. XII. § 20 : **Any combinatioi% by individuals, corporations or associations, having for its object or effect the controlling of the price of any products of the soil, or of any article of manufacture or commerce, or the cost of exchange or transportation, is prohibited, and hereby declared unlawful, and against public policy. The legislature shall pass laws for the enforcement of this section by adequate penalties, and in case of incorporated companies, if necessary for that purpose, it may de- clare a forfeiture of their franchises." Rev. Stat. 1898, § 1752, (1): "Any combination by persons having for its object or effect the controlling of the prices of any professional services, any products of the soil, any article of manufacture or commerce, or the cost of exchange or transportation, is pro- hibited and declared unlawful. (2) "Any person or association of persons who shall create, enter into, become a member of, a party to any pool, trust, agreement, combination, confederation or understanding with any other person or persons to regu- late or fix the price of any article of merchandise or commodity; or shall enter into, become a member of, or a party to, any pool, trust, agreement, contract, combination or confederal tion to fix or limit the amount or quantity of any article, commodity or merchandise to be manufactured, mined, produced or sold in this State, shall be deemed and adjudged guilty of a conspiracy to defraud, and be 781 §414 INTERCORPORATE RELATIONS [part V corporations, and the ouster from the State of foreign corpora- tions, violating their provisions. They also usually afford per- sons injured by a combination a right of action for damages. subject to punishment as hereinafter provided. " The statute also contains pro- visions against trust certificates and trusts. For penalties against corporations and individuals, see post, §§ 446, 448. Washington. Const. Art. XII. § 22 : "Monopolies and tfusts shall never be allowed in this State, and no incor- porated company, copartnership or association of persons in this State shall, directly or indirectly, com.bine or m^ke any contract with any other in- corporated company, foreign or domes- tic, through their stockholders or the trustees or assignees of such stockhold- ers, or with any copartnership or asso- ciation of persons, or in any manner whatever, for the purpose of fixing the price or limiting the production or regulating the transportation «f any product or commodity. The legis- lature shall pass laws for the enforce- ment of this section by adequate penalties, and, in case of incorporated companies, if necessary for that pur- pose, may declare a forfeiture of their franchise. '' The Washington statute (Act of March 21, 1895) is confined to com- binations of commission merchants. Wisconsin. Stat. 1898, ch. 86, § 1791 /, as amended by laws 1905, ch. 507, § 7 : ** Any corporation organ- ized under the laws of this State which shall enter into any com.bination, con- spiracy, trust, pool, agreement or contract intended to restrain or pre- vent competition in the supply or price of any articles or commodity in general use in this State, or consti- tuting a subject of trade or commerce therein, or which shall in any manner control the price of any such article or commodity, fix the price thereof, limit or fix the ameunt or quantity 782- thereof to be manufactured, mined, produced or sold in this State, or fix any standard or figure by which its price to the public shall be in any manner controlled or estabUshed, shall upon proof thereof, in any court of competent jurisdiction, have its charter or authority to do business in this State cancelled and annulled. Every such corporation shall upon filing its annual statement with the Secretary of State, make and attach thereto the affidavit of its president, secretary or general managing officer, fully stating the facts in regard to the matters specified in this section. " lb. § 1770 g, as amended by laws 1905, ch. 506, § 2: "Any foreign cor- poration which shall enter into any combination, conspiracy, trust, pool, agreement or contract intended to restrain or prevent competition in the supply or price of any article or com- modity in general use in the State, or constituting a subject of trade or com- merce therein, or which shall in any manner control the price of any such article or commodity, fix the price thereof, Umit or fix the amount or quantity thereof to be manufactured, mined, produced or sold in this State, or fix any standard or figure by which its price to the public shaU be in any manner controlled or established, shall, upon proof thereof, in any court of competent jurisdiction, ha:^ its license or authority to do business in this State cancelled and annulled." Domestic corporations violating these statutes forfeit their charters and foreign corporations may be ousted from the State. (See post, §448.) Wyoming. Const. Art. I. § 30 : "Perpetuities and monopolies are con- trary to the genius of a free State and shall not be allowed. Corporations, CHAP. XLl] STATE STATUTES AND THEIE CONSTITUTIONALITY § 415 In SO far as combinations result from tlie operation of eco- nomic principles, it may well be doubted whether they can be prevented by legislation. As we have noticed, the extreme development of the idea of combination has taken place with stringent statutes against combinations upon the statute books. Still, many of the evils of combinations — especially those pos- sessing the element of oppression — may undoubtedly be reached by the present State enactments if within their sphere. § 415. Sphere of State Legislation. Operation of Commerce Clause of the Constitution. — The commerce clause of the federal Constitution ' confers upon Congress the power to regu- late interstate commerce. This power is broad and compre- hensive. Under it Congress has enacted the federal anti-trust statute which prohibits all combinations in restraint of com- merce among the States. Its purpose is to permit such com- merce to flow in its natural channels unrestrained by any combination whatsoever. The power of Congress and the legislation thereunder are as exclusive as they are comprehen- sive. The States are wholly without power to legislate con- cerning combinations in restraint of interstate commerce. The sphere of State legislation concerning combinations, as compared with that of federal legislation, is limited. The business of the great producing combinations, outside the States in which their plants are located, is carried on by means of inter- state commerce. Shipments beginning and ending within the limits of a single State are inconsiderable when measured against the vast volume of interstate shipments. The effective regula- tion of combinations of railroad companies and of the great industrial corporations cannot result from State legislation. State anti-trust statutes can only reach combinations doing a localized business. Their field of operation, although most important, is not broad.'' being creatures of the State, endowed influence productions or prices thereof, for the public good with a portion of or in any manner to interfere with the its sovereign powers, must be subject public good and general welfare." to its control. " ' The commerce clause is printed lb. Art. X. § 8 : " There shall be no in note to § 379, ante. consolidation or combination of cor- ^ As pointed out in the considera- porations of any kind whatever to tion of the federal statute (see ante, prevent competition, to control or § 393), the later decisions of the 783 §416 INTEKCOEPORATE RELATIONS [part V § 416. Controlling Propositions in determining Constitution- ality of State Statutes. — With the underlying principle estab- Ushed that the sphere of State anti-trust legislation is intrastate Supreme Court of the United States seem to indicate that the application of the Knight decision (United States V. E. C. Knight Co., 156 U. S. 12 (1895), 15 Sup. Ct. Rep. 249), will not be extended. If, however, it should be broadly held that the principles of that decision render the federal statute inapplicable to all producing combinations which merely manu- facture and deliver their products to common carriers, and do not attempt to directly control disposition, then the great industrial corporations of the coimtry have practically no con- cern with anti-trust statutes — State or federal — uiJess perchance they exist in the States where their plants are located or in which they obtain their charters. Under such a con- struction of the federal statute the commerce clause of the Coristitution would not only fail as a source of federal power, but would interfere viith State legislation. This result would follow from the operation of elementary principles. A corporation created by the laws of one State has no absolute right to transact a localized business in an- other. Its privileges in other States are permissive and depend upon comity. A State may exclude foreign corporations entirely. It may admit some and exclude others. It may im- pose such conditions — reasonable or unreasonable — upon those it admits as it may deem expedient. State anti- trust acts apply to foreign as well as to domestic corporations in so far as they have plants or property within the State or are transacting a business not of an interstate character. (See post, § 436.) But foreign corpora- tions engaged in interstate commerce cannot be interfered with by State legislation. Under the commerce 784 clause, the Supreme Court has re- peatedly held that State laws impos- ing conditions upon the sale of goods to be shipped into a State are uncon- stitutional as intrenching upon the powers of Congress. The sale by a foreign corporation, by sample or otherwise, of goods outside the State and their subsequent shipment across State lines is interstate commerce with which alone Congress has power to deal. The consequence is, as pointed out in the text, that State anti-trust statutes apply only to corporate com- binations doing a localized business, e.g. insurance companies and corpora- tions having local distributing cen- tres. And any regulation of the do- mestic corporate combination must prove ineffective if its competitor may locate over the boundary line and freely ship goods into the State and seU them below cost for the purpose of stifling local competition. How far the State anti-discrimination statutes (see ante, § 414, note) will meet the latter practice remains to be seen. Manifestly no remedy for this con- dition, should it arise, can be found in State legislation. State statutes cannot affect interstate commerce, and that which requires regulation is interstate commerce. Moreover, whatever deficiencies may exist in the present federal statute, it cannot be broadened by amendment. It already prohibits all combinations in restraint of interstate commerce. Neither its terms nor its application can be extended. It reaches the con- stitutional limit in the regulation of interstate commerce through the removal of restraint. But the regula- tion of commerce may consist in the imposition as well as in the removal of restraint. If the present statute prove insufficient, it may be necessary CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 417 commerce, the further examination of the subject of the con- stitutionality of such legislation will proceed along the lines of the following broad and controlling propositions: (1) Qwasi-public corporations, in their relations with other corporations, are subject to the control of the State. (2) Property devoted to public use is subject to public regu- lation. (3) Under its reserved power, the State has greater power over a corporation than over an individual. (4) The right to contract is a natural, but not an absolute, right. (5) The police power of the State may be exercised for the pro- motion of the pubhc welfare — not solely for the protection of the public health, morals and safety. (6) The exemption of classes of persons and products from the operation of State anti-trust laws is in violation of the Fourteenth Amendment to the federal Constitution. (7) Statutes which stand the test of the Fourteenth Amend- ment will stand the test of any State constitutional provision protecting property rights, but must conform to other State provisions. § 417. Power of State to prohibit Combinations of Quasi- public Corporations. Power over Property devoted to Public Uses. — QvMsi-p\ib\ic corporations, in consideration of the grant of public franchises, assume the performance of public duties. Contracts with other corporations interfering, in any degree, with the proper discharge of their obligations, are against public policy. The State may make regulations for the control and manage- ment of quasi-pnhlic corporations.' It may, by statute, pro- vide penalties for the execution of agreements inimical to public policy, and may control the relations between such corporations. State laws, designed for the promotion of the public interests, prohibiting combinations of quasi-public corporations, are, unquestionably, constitutional. to place limitations upon interstate operating in States by means of inter- commerce. And the first step in such state commerce. direction might properly be to sup- ' See Georgia, etc. Banking Co. o, plement State legislation with respect Smith, 128 V. S. 174 (1888), (9 Sup. to foreign corporate combinations Ct. Rep. 47), as an illustrative case. 78.5 § 417 INTEECOKPOEATE RELATIONS [PART V But the power of the State is broader than its right to regu- late quasi-public corporations. It is not dependent upon what may be termed the contractual obligations of those cor- porations — assumed in consideration of pubUc grants, — but may grow out of the nature of the business of any corporation — quasi-Tpuhlic or private — or individual. Whenever the nature of a business implies a public duty, the State has power to see that the duty is performed. In the leading case of Munn V. Illinois,'^ the Supreme Court of the United States, in declaring constitutional a law regulating charges at grain elevators, said : "Property does become clothed with a public interest when used in a manner to make it of public consequence and affect the community at large. When, therefore, one devotes his property to a use in which the public have an interest, he, in effect, grants to the public an interest in that use and must sub- mit to be controlled by the public for the common good to the extent of the interest he has thus created. He may withdraw his grant by discontinuing the use, but so long as he maintains the use, he must submit to the control." This power of the State to exercise control over property de- voted to a public use is analogous to its police power, but may be more precisely defined as its power, as trustee for the public, to enforce trusts attaching to property or business for the pubUc benefit. 'Munn V. Illinois, 94 XJ. S. 113 his property to a use in which the pub- (1876). Mr. Chief Justice Waite, in lie has an interest, he, in effect, grants his opinion, said (p. 125) : "This to the public an interest in that use, brings us to inquire as to the principles and must submit to be controlled by upon which this power of regulation the public for the common good, to rests, in order that we may determine the extent of the interest he has thus what is within and what is without created. He may withdraw his grant its operative effect. Looking then to by discontinuing the use ; but so long the common law from whence came as he maintains the use, he must sub- the right which the Constitution pro- mit to the control . . (p. 130). But tects, we find that when private prop- we need not go further. Enough has erty is 'affected with a pubUc interest already been said to show that, when it ceases to be juris 337-ij)aisetts, 167 XJ. S. 43 (1897), (17 Sup. Ct. Rep. 731); Jones V. Brim, 165 U. S. 180 (1897), (17 Sup. Ct. Rep. 282); Covington, etc. Turnpike Co. v. Sandford, 164 U. S. 592 (1896), (17 Sup. Ct. Rep. 198); Giozza v. Tiernan, 148 U. S. 657 (1893), (13 Sup. Ct. Rep. 721); Mugler v. Kansas, 123 U. S. 623 (1887), (8 Sup. Ct. Rep. 273;) Barbier v. Connolly, 113 U. S. 27 (1885), (5 Sup. Ct. Rep. 357). 3 Barbier v. Connolly, 113 U. S. 31 (1885), (5 Sup. Ct. Rep. 357). * "A man has a constitutional right to buy anything, or any quantity, pro- vided he use only fair means, and set his own price on it, or refvise to sell it at all. And what one man may do as an individual, two or more may do when combined as partners. Com- bination for business purposes is legal. Combinations are beneficial as well as injurious, according to the motives or aims with which they are formed. It is therefore impossible to prohibit all combinations. The prohibition must rest upon the objectionable character CHAP. XIJ] STATE STATUTES AND THEIR CONSTITUTIONALITY § 420 contravenes the provisions of the Fourteenth Amendment guaranteeing the right of property, depends upon whether it was enacted in the legitimate exercise of the police power of the State. § 420. Validity of State Statutes tested by Fourteenth Amend- ment — (B) Police Power of the State. — The police power of the State may be broadly defined as that inherent and plenary power which enables it to interdict that which is prejudicial to the welfare of society. It has been aptly termed "the law of overruling necessity." * of the objects of the combination." Tiedeman Lim. Pohce Power, 244. But compare this language with the decision in Bailey v. Master Plumbers' Ass'n, 103 Tenn. 99 (1899), (52 S. W. Rep. 853, 46 L. R. A. 561), where it was held that the legal right of an individual plumber to purchase supplies from any dealer he pleases will not justify a by-law of an associa- tion of plumbers which permits mem- bers to make purchases only from such dealers as will sell to members ex- clusively, the individual right being radically different from the combined action. It is clear that persons cannot always combine to do that which individually they may have the right to do. The act of combining in itself may be against public policy or be prohibited by statute. 1 Town of Lakeview v. Rose Hill Cemetery Co., 70 lU. 191 (1873), (22 Am. Rep. 71). The police power of the State ex- tends not only over matters relating to the health, morals and safety of the public, but over whatever relates to the public comfort and convenience. X.ake Shore, etc. R. Co. v. Ohio, 173 XJ. S. 285 (1899), (19 Sup. Ct. Rep. 465). "The police of a State, in a com- prehensive sense, embraces its whole system of internal regulation by which the State seeks not only to preserve the public order and to prevent of- fences against the State, but also to establish, for the intercourse of citi- zens with citizens, those rules of good manners and good neighborhood which are calculated to prevent a con- flict of rights, and to insure to each the uninterrupted enjoyment of his own so far as reasonably consistent with a like enjoyment of rights by others." Cooley's Const. Lim. (4th ed.) 713. Thorpe v. Rutland, etc. R. Co., 27 Vt. 149 (1855), (62 Am. Dec. 625) (Redfield, C. J.) : "The police power of the State extends to the protection of the lives, limbs, health, .comfort and quiet of all persons, and the pro- tection of all property within the State." Commonwealth v. Alger, 7 Cush. (Mass.) 84 (1851), (Shaw, C. J.) : "The power we allude to is rather the police power; the power vested in the legis- lature by the Constitution to make, ordain and establish aU manner of wholesome and reasonable laws, stat- utes and ordinances, either with penalties or without, not repugnant to the Constitution as they shall judge to be for the good and welfare of the Commonwealth and of the subjects of the same. " New Orleans Gas Light Co. v. Hart, 40 La. Ann. 474 (1888), (4 So. Rep. 215, 8 Am. St. Rep. 544): "Pblice power is the right of the State func- 791 420 INTEKCOEPORATE RELATIONS [part V The State, in the exercise of its police power, may enact " all such laws not- in plain conflict with some provision of the State or federal Constitutions as may rightfully be deemed necessary or expedient for the safety, health, morals, comfort and welfare of the people." ^ Laws against combinations for the purpose of restricting pro- duction, maintaining prices or suppressing competition, have a relation to the end of all police regulations — the comfort, welfare or safety of society.^ The preservation of competition is clearly within the police power of the State. tionaries to prescribe regulations for the good order, peace, protection, comfort and convenience of the com- munity which do not encroach on the hke power vested in Congress by the federal Constitution. " Mayor, etc. of New York v. Miln, 11 Pet. (U. S.) 139 (1837): "Every law comes within this description [a police regulation] which concerns the welfare of the whole people of the State, or any individual within it, whether it relates to their rights or their duties; whether it respects them as men or citizens of the State, whether in their pubhc or private rela- tions ; whether it relates to the rights of persons or of property of the whole people of the State, or of any indi- vidual within it; and whose opera- tion is within the territorial limits of the State, and upon the persons and things within its jurisdiction." * In Knoxville Iron Co. v. Harbison, 183 TJ. S. 20 (1901), the Supreme Court of the United States quotes with approval the extract in the text from the decision of the Supreme Court of Tennessee in the same case, sub nam. Harbison v. Knoxville Iron Co., 103 Tenn. 421 (1900), (53 S. W. Rep. 955). Lochner v. New York, 198 U. S. S3 (1905), (25 Sup. Ct. Rep. 539) : "These powers, broadly stated, and without any attempt at a more spe- cific limitation, relate to the safety, 792 health, morals and general welfare of the public." Commonwealth v. Strauss, 191 Mass. 550 (1906) , (78 N. E. Rep. 136) : "There is no doubt that the statute before us puts a limitation upon the general right to make contracts. The contention of the Commonwealth is- that this limitation is valid as an ex- ercise of the police power. The nature of the police power and its extent, as applied to conceivable cases, cannot easily be stated with exactness. It includes the right to legislate in the interest of the public health, the pub- hc safety and the public morals. If the power is to be held within the limits of the field thus defined, the words should be interpreted broadly and liberally. If we are to include in the definition, as many judges have done, the right to legislate for the pub- lic welfare, this term should be de- fined with some strictness, so as not to include everj^thing that may be enacted on grounds of mere ex- pediency." 2 Ritchie v. People, 155 lU. 98 (1895), (40 N. E. Rep. 454, 46 Am. St. Rep. 315, 29 L. R. A. 79) : "The police power of the State is that power which enables it to promote the health, comfort, safety and welfare of soci- ety. It is very broad and far-reaching, but it is not without its limitations. Legislative acts passed in pursu- ance of it must not be in conflict CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 420 In the absence of statutory provisions, the law leaves com- binations inimical to public policy as it finds them, and contents itself with declining to recognize or enforce their agreements. Statutes reenforcing the common law, defining the rules of public policy and making criminal combinations contrary thereto are, undoubtedly, valid. The power of police, however, is not confined to providing additional penalties for entering into combinations previously unlawful. Statutes having for their object the preservation of competition and prohibiting all agreements or combinations, directly restraining or tending to directly restrain it in any degree, are undoubtedly constitutional, although they go much further than the common law.' The wisdom or poUcy of their with the Constitution, and must have some relation to the ends sought to be accomplished, — that is to say, to the comfort, welfare or safety of society. *' It is within the police power of the legislature to determine what mo- nopolies are contrary to the general welfare. In re Opinion of the Justices, 193 Mass. 605 (1907), (81 N. E. Rep. 142). State V. Missouri, etc. R. Co. (Tex. 1906), 91 S. W. Rep. 214, 219 : " But it is said that this interpre- tation of the statute would render it unconstitutional, as impairing the ob- ligation of a valid contract. . . . The same power which may, upon suffi- cient occasion, destroy other property of the citizen to secure the general welfare, may, to the same end, de- stroy the binding obligation of con- tracts. The constitutional inhibition against the impairment of the obliga- tion of contracts is not a limitation upon the police power when exercised within its legitimate sphere, and there- fore the mere objection that an exer- cise of that power impairs the obliga- tion of a contract does not reach the true question, which is whether or not the attempted exercise is within the scope of the power exercised." ' At the time of the first edition of this treatise the broad question whether the State anti-trust statutes take away the property rights guar- anteed by the Fourteenth Amend- ment had not been passed upon by the Supreme Court of the United States. But since then the Kansas and Texas statutes have been before the Court; their constitutionality has been ques- tioned upon broad grounds, and they have been declared to be con- stitutional. Smiley v. Kansas, 196 TJ. S. 447 (1905), (25 Sup. Ct. Rep. 289); Jack V. Kansas, 199 U. S. 372 (1905), (26 Sup. Ct. Rep. 73) ; National Cotton Oil Co. V. Texas, 197 U. S. 115 (1905), (25 Sup. Ct. Rep. 379). In the Smiley case the Court said (p. 456) : "Undoubtedly there is a certain freedom of contract which cannot be destroyed by legislative enactment. In pursuance of that freedom, parties may seek to further their business interests, and it may not always be easy to draw the line between those contracts which are beyond the reach of the police power and those which are subject to pro- hibition or restraint. But a secret arrangement, by which, under penal- ties, an apparently existing compe- tition among all the dealers in a com- 793 §420 INTBHCORPOBATE RELATIONS [part V munity in one of the necessaries of life is substantially destroyed, with- out any merging of interests through partnership or incorporation, is one to which the police power extends." In the Texas case the Court said (p. 129) : "It is certainly the concep- tion of a large body of pubUc opinion that the control of prices through combinations tends to restraint of trade and to monopoly, and is evil. The foundations of the beUef we are not called upon to discuss, nor does our purpose require us to distinguish between the kinds of combinations or the degrees of monopoly. It is enough to say that the idea of mo- nopoly is not now confined to a grant of privileges. It is understood to include 'conditions produced by the acts of mere individuals.' Its domi- nant thought now is, to quote another, 'the notion of exclusiveness or unity' ; in other words, the suppression of competition by the unification of in- terests or management, or it may be through agreement and concert of action. And the purpose is so defi- nitely the control of prices that mo- nopoly has been defined to be 'unified tactics with regard to prices.' It is the power to control prices which makes the inducement of combina^ tions and their profit. It is such power that makes it the concern of the law to prohibit or limit them. And this concern and the policy based upon it has not only expression in the Texas statutes ; it has expression in the statutes of other States and is a well-known national enactment. Ac- cording to them, competition, not combination, should be the law of trade. If there is evil in this, it is accepted as less than that which may result from the unification of interest, and the power such unification gives. And that legislatures may so ordain, this Court has decided. ... It follows that the statutes of Texas do not deprive the oil company of its property without due process of law." 794 The following decisions of State courts sustain the constitutionality of the anti-trust statutes of their re- spective States : Kansas. The anti-trust statute of this State does not conflict with the guaranty of the right to acquire prop- erty by lawful contract secured by the federal Constitution and is a valid ex- ercise of legislative power. State V. Smiley, 65 Kan. 240 (1902), (69 Pac. Rep. 199), affirmed 196 U. S. 447 (1905), (25 Sup. Ct. Rep. 289). State V. Jack, 69 Kan. 387 (1904), (76 Pac. Rep. 917), affirmed 199 U. S. 372 (1905), (26 Sup. Ct. Rep. 73): "The anti-trust law is a vaUd exercise of legislative power, and is not, as claimed by appellant, violative of the Fourteenth Amendment of the federal constitution. " Michigan. The statute of this State, declaring void all contracts designed in any manner to prevent or restrict free competition with respect to agricultural commodities, is con- stitutional. Bingham v. Brands, 119 Mich. 255 (1899), (77 N. W. Rep. 940). The Michigan anti-trust statute of 1899, providing for the revocation of the certificate of any foreign corpora^ tion violating its provisions, is not in conflict with the clause of the Four- teenth Amendment providing that no State shall enforce any law which shall abridge the privileges or im- munities of citizens of the United States. Attorney-General v. A. Booth & Co., 143 Mich. 89 (1905), (106 N. W. Rep. 868. Missouri. State v. Firemen's Fund Ins. Co., 152 Mo. 46 (1899), (52 S. W. Rep. 595, 45 L. R. A. 363) ; "There is no such thing in civiUzed society as unrestrained power to contract. Every man surrenders some of his individual rights when he associates with or becomes a part of any society or government, and the power of the government to legislate is complete, so that while according to every man CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 420 the fullest possible liberty to do what he pleases with his own, he must not interfere with the similar right of others. This principle underlies and runs through all government and so- cieties, and it is the corner-stone of the police power of the State. " Ohio. State v. Buckeye Pipe Line Co., 61 Ohio State St. 547 (1900), (56 N. E. Rep. 464, 78 Am. St. Rep. 743) : "The definite proposition of counsel upon this point is that although the act is an exercise of legislative power, it transcends the provisions of the State and federal constitutions which render in^■iolable the rights of liberty and property, which include the right to make contracts. It would be difficult to place too high an estimate upon these guaranties, and include the right to make contracts. But it is settled that these guaranties are themselves limited by the public wel- fare or the exercise of the police power. Although that power may not be con- clusively defined, its nature and at- tributes have been the subject of much investigation. In all considerate dis- cussions of the subject it is conceded that, in the exercise of this power, the legislature can prohibit only those uses of property which are hurtful to the public, and the inhibited use must be hurtful in a legal sense. That con- tracts like these are hurtful in that sense has been held in more cases than it would be practicable to cite." South Carolina. . The anti-trust statute of this State (CSvil Code, 1902, § 2845) is a legitimate exercise of the police power of the State and is not in violation of the Fourteenth Amendment to the federal Constitu- tion. State V. Virginia-Carolina Chemical Co., 71 S. C. 544 (1905), (51 S. E. Rep. 455). Tennessee. State v. Schlitz Brew- ing Co., 104 Tenn. 715 (1900), (59 S. W. Rep. 1039, 78 Am. St. Rep. 941) : "The right of contract is confessedly an inherent part of both the right of 'liberty,' and the right of 'property,' and deprivation of it is therefore equally forbidden by that provision, but none of them are unrestricted rights. All are subject to the law's control, and may be abridged or even destroyed within constitutional bounds. " The statute sustained in this case was the Tennessee act of 1897, which was also declared to be constitutional in Bailey v. Master Plumbers' Ass'n, 103 Tenn. 99 (1899), (52 S. W. Rep. 853, 46 L. R. A. 561). This statute, however, contained a provision ex- empting from its provisions agricul- tural products and live stock, and was iindoubtedly unconstitutional for that reason. The Tennessee anti-trust act of 1903 omitted this exemption and was held to be valid and constitu- tional in State v. Witherspoon, 115 Tenn. 138 (1906), (90 S. W. Rep. 852). Texas. Waters-Pierce Co. v. State, 19 Tex. Qv. App. 1 (1898), (44 S. W. Rep. 940) : "By adequate laws, look- ing to the suppression of evil, the State, through the exercise of its po- lice power, must necessarily restrain the unbridled license of the citizen in his conduct and use of property, and restraints in this way have never been held to illegally impair his liberty. . . . The objection to the statutes, that they deprive the owner of his property without due process of law, is equally untenable. It was not the design of the Fourteenth Amendment of the Constitution of the United States to interfere with a just and proper exercise of the police power by the States. ... If legislative au- thority exists to restrain the conduct of owners in a particular way in the use of property, deemed injurious to the public welfare, and the legislature having acted in the manner required, in passing laws, due process of law exists, in so far as it is necessary to find legal authority for prohibiting the act. Legal restraint imposed 795 420 INTERCORPORATE RELATIONS [part V provisions is a matter for legislative determination.' But any statute which, under the guise of preserving competition, takes away the right to contract entirely, or prohibits acts or agreements which can have no direct effect upon competition, is undoubtedly unconstitutional.^ Applying these principles to the existing State legislation against combinations, it may be broadly stated — without analyzing the statutes — that such legislation has been enacted in the legitimate exercise of the police power of the State and does not unduly infringe upon the rights of property, including the right to contract, guaranteed by the Fourteenth Amend- upon the use of property does not deprive the owner of it without due process of law. " In State v. Missouri, etc. R. Co. (Tex. 1906), 91 8. W. Rep. 214, it was held that the Texas act of 1903 making trusts unlawful and ap- plying to combinations formed prior to its enactment but carrying on busi- ness afterwards was Hot unconstitu- tional as impairing the obligation of contracts. See also Houck v, Anheuser-Busch Brewing Ass'n, 88 Tex. 184 (1894), (30 S. W. Rep. 869) ; Texas Brewing Co. V. Anderson (Tex. Civ. App. 1897), 40 S. W. Rep. 737; Texas Brewing Co. V. Durram (Tex. 1898), 46 8. W. Rep. 880. ' Waters-Pierce Co. v. State, 19 Tex. Civ. App. 1 (1898), (44 S. W. Rep. 940) : "When it is once admitted that a matter is a subject of police supervision, the expediency and wis- dom of the means resorted to are sub- jects solely confided to the legislative department of the State, subject, however, to limitations imposed by the organic law of the nation." 2 In In re Grice, 79 Fed. 627 (1897), Judge Swayne held the Texas anti- trust act unconstitutional upon the ground, among others, that it abridged the liberty of contract. The judge said, in his opinion : "The act also pro- hibits combinations which create or 796 carry out restrictions in trade. It has never been held that all restric- tions in trade were illegal or contrary to public policy. Tho rule is well set- tled that when a contract is publicly oppressive, and the restrictions broader than necessary for the legitimate pro- tection of the other party to be bene- fited by the contract, then the con- tract is void; otherwise it is legal. The fault of the act in regard to re- straint of trade is the same in regard to competition. It makes no dis- tinction between legal and illegal com- binations and agreements which pre- vent competition. Those which have always been held legal, and which have always been an essential part of the liberty of the citizen, are made criminal, equally with those which the law has always condemned." But in view of later decisions of the Supreme Court this decision cannot be regarded as of authority. In Niagara Fire Ins. Co. v. Cornell, 110 Fed. 817 (1901), it was held that the Nebraska anti-trust statute was unconstitutional, because it deprived persons of the liberty to make and enforce contracts. The reasoning of the Court is, however, inconclusive. And see Cleland v. Anderson, 66 Neb. 252 (1902), (92 N. W. Rep. 306), where this statute was held to be con- stitutional. CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 421 ment. And the same conclusion may be reached upon authority as well as upon principle, for, as already pointed out, the Su- preme Court of the United States has sustained the constitu- tionality of two of the most sweeping of the State statutes — those of Kansas and Texas.' As a guide for determining the constitutionality of any State anti-trust statute, resort may properly be had to the federal statute and to the decisions of the Supreme Court of the United States construing it. The power of Congress under the Fifth Amendment to regulate the right to contract is the same as that of a State under the Fourteenth Amendment.^ A State statute which goes no further than the federal statute may safely be re- garded as constitutional.' § 421. Validity of State Statutes tested by Fourteenth Amend- ' See a preceding note to this sec- tion. 'Fifth Amendment: "No person shall be compelled in any criminal case to be a witness against himself nor be deprived of life, liberty, or property, without due process of law ; nor shall private property be taken for public use, without just com- pensation." Fourteenth Amenchnent: "Nor shall any State deprive any person of life, liberty, or property without due pro- cess of law." ' In Carrol v. Greenwich Ins. Co., 199 U. S. 401 (1905), (26 Sup. Ct. Rep. 66), the Supreme Court of the United States said: "While we need not aflBrm that in no instance could a distinction be taken, ordinarily, if an act of Congress is valid under the Fifth Amendment, it would be hard to say that a State law in like terms was void under the Fourteenth. It is true that by the provision in the body of the instrument Congress has power to regulate commerce, and that the act of Congress referred to in the cases cited was passed in pursuance of that power. But even if the Fifth Amendment were read as contempo- raneous with the original constitution, the power given in the commerce clause would not be taken to override it so far as the Fifth Amendment pro- tects fundamental personal rights. It is only on the ground that the right to combine at ■ will is a fundamental personal right that it can be held to be protected by the Fourteenth Amend- ment from any abridgment by the State. . . . Many State laws which limit the freedom of contract have been sustained by this Court, and therefore an objection to this law on the general ground that it limits that freedom cannot be upheld. There is no greater sanctity in the right to combine than in the right to make other contracts. Indeed, Mr. Dicey, in his recent work on Law and Public Opinion in England during the Nine- teenth Century, indicated that it is out of the very right to make what contracts one chooses, so strenuously advocated by Bentham, that combi- nations have arisen which restrict the very freedom that Bentham sought to attain, and which even might menace the authority of the State. If, then, the statute before us is to be over- thrown, more special reasons must be assigned." 797 § 421 INTERCORPORATE RELATIONS [PART V ment — (C) Class Legislation. — The Fourteenth Amendment, in its concluding clause, provides that no State shall " deny to any person within its jurisdiction the equal protection of the laws." This provision operates against arbitrary class legislation. State legislatures, in the exercise of the police power, may enact laws applying to particular classes of persons, where the nature of their business or occupation is such that its regulation is necessary for the protection of the public. The nature of the occupation is the controlling factor. Any classification, how- ever, must rest upon a reasonable basis.' A statute which arbi- trarily classifies denies the equal protection of the laws to those against whom it discriminates. In prescribing regulations for the conduct of domestic trade, the legislature cannot exempt from their operation persons en- gaged in a particular branch of industry. A statute distinguish- ing between producers and dealers — declaring that the former may combine and that the latter may not — is unconstitutional. Upon these principles, anti-trust statutes cpntaining a pro- vision that they "shall not apply to agricultural products or live stock while in the hands of the producer or raiser" — or a similar provision — are clearly invalid, and have been declared unconstitutional by the courts.^ As such a provision is, essen- • In People v. Butler St. Foundry, With respect to the constitution- etc. Co., 201 111. 236 (1903), (66 N. E. ality of the Illinois act of 1891 as Rep. 349), it was held that the ex- amended, see People v. Butler St emption of corporations organized un- Foundry, etc. Co., 201 111. 236 (1903), der the building, loan and homestead (66 N. E. Rep. 349). association laws from the operation of Michigan: The constitutionality the Illinois anti-trust statute did not of the anti-trust statute of this State render the act unconstitutional, such was considered but not determined in corporations differing essentially from Merz Capsule Co. v. United States those formed for pecuniary profit. Capsule Co., 67 Fed. 414 (1895). ' Georgia: The act of December 23, Montana: The provision in the anti- 1906, containing the exemption stated trust statute of this State (Penal Code, in the text, was held to be unconsti- §§ 321-325), that it shall not apply tutional by reason thereof in Brown to "persons engaged in horticulture V. Jacobs' Pharmacy, 115 Ga. 429 or agriculture with a view of enhanc- (1902), (41 S. E. Rep. 553). ing the price of their products " renders lUirwis: The act of June 20, 1893, the statute unconstitutional, as deny- containing this exemption, was de- ing the equal protection of the laws. Glared to be unconstitutional as class State v. Cudahy Packing Co., 33 legislation in Connolly v. Union Sewer Mont. 179 (1905), (82 Pac. Rep. 833). Pipe Co., 184 U. S. 540 (1902), (22 Tennessee: The act of April 30, Sup. Ct. Rep. 431). 1897 (Laws, 1897, ch. 94), contain- 798 CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 421 tially, a condition to the operation of the statute as a whole, its presence renders the entire statute unconstitutional. The con- dition could not be stricken out without rendering the statute operative against the very persons the legislature desired to exempt.' ing this exemption, was held by the Supreme Court of Tennessee, in State V. Schlitz Brewing Co., 104 Tenn. 715 (1900), (59 S. W. Rep. 1033), to be constitutional upon the ground that the exemption was natural and rea- sonable. But this decision was ren- dered before that of the Supreme Court of the United States in Connolly V, Union Sewer Pipe Co., aupra, and the unconstitutionality of the act was practically admitted in State v. Witherspoon, 115 Tenn. 138 (1906), (90 S. W. Rep. 852). The Tennessee act of 1903 (see ante, § 414, note) does not contain the exemption. Texas: The act of 1889, as amended in 1895, was held to be con- stitutional in Waters-Pierce Oil Co. v. State, 19 Tex. Qv. App. 1 (1898), (44 S. W. Rep. 943). In State v. Shippers' Compress, etc. Co. (Tex. av. App. 1902), 67 S. W. Rep.- 1049, however, the Texas Court of Civil Appeals, following the decision in Connolly v. Union Sewer Pipe Co., supra, declared the Texas anti-trust statutes of 1895 and 1899 wholly un- constitutional. But when the case came to the Texas Supreme Court (95 Tex. 603 (1902), (69 S. W. Rep. 58)), that Court held that while the statutes were unconstitutional in some respects, so much of them as authorized the forfeiture of the char- ters of domestic corporations and the revocation of the licenses of foreign corporations for violation of their provisions, was valid. See also Na- tional Cotton Oil Co. V. State (Tex. Qv. App. 1903), 72 S. W. Rep. 615. And in State v. Laredo Ice Co., 96 Tex. 461 (1903), (73 S. W. Rep. 951), it was held that the provision of the act of 1899 that its provisions should be cumulative of all the anti- trust statutes of the State, did not incorporate in it the exemption clause of the act of 1895 and, consequently, that it was constitutional. The present Texas anti-trust stat- ute (see ante, § 414, note) contains no such exemption. ' Connolly v. Union Sewer Pipe Co., 184 U. S. 540 (1902), (22 Sup. Ct. Rep. 431), affirming 99 Fed. 354 (1900). In the latter decision Judge Kohlsaat said: "It is urged that, granting the unconstitutionality of said ninth clause, yet it may be declared void without affecting the validity of the remaining clauses of said act. If this were so, then by declaring said clause void, the courts would make the act binding upon those classes of persons within the State which the legislature had especially exempted from its provisions. This would be judicial legislation of the most flagrant character. In my opinion, the said clause nine taints the whole act, and renders it all void. " See also State v. Cudahy Packing Co., 33 Mont. 179 (1905), (82 Pac. Rep. 833), where the same conclusion was reached with respect to the effect of the exemption in the Montana anti- trust statute. In People v. Butler Steel Foundry, etc. Co., 201 111. 236 (1903), (66 N. E. Rep. 349), however, it was held that the amendment of 1897, which ex- empted from the provisions of the Illinois trust act of 1891 combinations of producers, while itself unconstitu- tional, did not render the original act void, being the separate and distinct act of a different legislature. See 799 § 421 INTEHCOEPOBATE RELATIONS [PABT V These principles are very clearly stated by Mr. Justice Harlan in Connolly v. Union Sewer Pipe Company,^ holding an Illinois statute unconstitutional as class legislation: "We have seen that under that statute all except producers of agricultural com- modities and raisers of live stock, who combine their capital, skill or acts for any of the purposes named in the act may be punished as criminals, while agriculturists and live-stock raisers, in respect of their products or Uve stock in hand, are exempted from the operation of the statute, and may combine and do that which, if done by others, would be a crime against the State. The statute so provides, notwithstanding persons engaged in trade or in the sale of merchandise or commodities, within the limits of a State, and agriculturists and raisers of live stock, are all in the same general class, that is, they are all alike engaged in domestic trade, which is, of right, open to all, subject to such regulations applicable alike to all in like conditions, as the State may legally prescribe. ... If combinations of capital, skill or acts, in respect of the sale or purchase of goods, merchandise or commodities, whereby such combinations may, for their bene- fit exclusively, control or establish prices, are hurtful to the public interests and should be suppressed, it is impossible to perceive why like combinations in respect of agricultural prod- ucts and live stock are not also hurtful. ... To declare that some of the class engaged in domestic trade or commerce shall be deemed criminals if they violate the regulations prescribed by the State for the purpose of protecting the public against illegal combinations formed to destroy competition and to con- trol prices, and that others of the same class shall not be bound to regard those regulations, but may combine their capital, skill or acts, to destroy competition, and to control prices for their special benefit, is so manifestly a denial of the equal pro- tection of the laws that further argument . . . [is] unnecessary. . . . Looking at all the sections together, we must hold that the legislature would not have entered upon the policy indicated by the statute unless agriculturists and Uve-stock dealers were also State v. Shippers' Compress, etc. ' Connolly v. Union Sewer Pipe Co., 95 Tex. 603 (1902), (69 S.W. Rep. Co., 184 U. S. 540 (1902), (22 Sup. 58); National Cotton Oil Co. v. State Ct. Rep. 431). (Tex. dv. App. 1903), 72 S. W. Rep. 800 CHAP. XLl] STATE STATUTES AND THEIB CONSTITUTIONALITY § 421 excluded from its operation, and were thereby protected from prosecution. The result is that the statute must be regarded as an entirety, and in that view it must be adjudged to be un- constitutional, as denying the equal protection of the laws to those within its jurisdiction who are not embraced by the ninth section." Nebraska and Illinois anti-trust statutes ' have also been held to be unconstitutional,^ upon the ground that, by excepting labor organizations from their provisions, they denied the equal pro- tection of the laws to persons not members of such organizations. ' Section 9 of the Nebraska act of April 8, 1897, reads as follows : "Noth- ing herein contained shall be con- strued to prevent any assemblies or associations of laboring men from pass- ing and adopting such regulations as they may think proper in reference to wages and the compensation of labor. " The proviso added by the amend- ment of 1897 to the Illinois anti-trust statute of 1891 follows: "Provided, however, that in the mining, manu- facture, or production of articles of merchandise, the cost of which is mainly made up of wages, it shall not be unlawful for persons, firms and cor- porations doing business in this State to enter into joint arrangement of any sort, the principal object or effect of which is to maintain or increase wages. " 2 Niagara Fire Ins. Co. v. Cornell, 110 Fed. 825 (1901) : "The statute expressly excepts from its provisions assemblies or associations of laboring men. By saying that associations of laboring men are exempt from the provisions of the statute, it is thereby stated, in meaning, that unorganized labor must pay the penalties of a crimi- nal statute for an act done by a mem- b)er of an organization, and by him done with impunity. On one side, by this legislation, we have organized labor. Those men are not amenable to the statute. On the other side we have men who do not belong to organ- ized labor, — farmers, merchants, pro- fessional men, laborers, as well as all others. They are amenable, and by this statute that is called 'equal pro- tection.' I do not believe it." This decision, however, was not followed by the Supreme Court of Ne- braska in Cleland v. Anderson, 66 Neb. 252 (1902), (92 N. W. Rep. 306). The Court said : "The section in question [exempting labor organizations for raising wages from operation of act] is inserted rather out of abundance of caution, to prevent judicial exten- sion of the terms of the act beyond its scope and purpose, than to grant a privilege or immunity to persons who would otherwise fall within its terms. The distinction between goods and merchandise produced by skill and labor, and the skill and labor which produce them, is manifest and reason- able. The statute does not say that laborers who have goods, wares or merchandise, the produce of labor, for sale, may combine to advance or con- trol the price, but only that the law designed to prevent combinations in restraint of trade in such articles, when produced, shall not be construed to affect organizations formed to regu- late the wages of compensation of the labor and skill which produce them." The amendment of 1897 to the Illinois act of 1891, exempting from its provisions combinations for rais- ing or maintaining wages, was declared to be unconstitutional in People v. Butler St. Foundry, etc. Co., 201 111. 236 (1903), (66 N. E. Rep. 349). 801 §422 INTERCORPORATE RELATIONS [part V The recent State anti-trust acts omit all these exemptions, and they have been ehminated by amendment from several of the earlier statutes. With few exceptions, the present anti-trust statutes are not open to the objection that they constitute class legislation. § 422. Validity of State Statutes under State Constitutional Provisions. — The section of the Ilhnois anti-trust statute ^ requiring corporations, under penalties, to answer upon oath inquiries from the Secretary of State as to whether they are violating the provisions of such statute, and providing that no one shall be subject to criminal prosecution by reason of any- thing truthfully so declared, is not unconstitutional as involving an assumption of judicial powers by the legislature.^ Nor is it in conflict with the constitutional provision that " no person shall be compelled in any criminal case to give evidence against himself." ^ The immunity afforded by the statute is a full pro- tection against prosecution.^ That the provision of the Michigan anti-trust act of 1889, that it should not apply to "the services of laborers or artisans who are formed into so- cieties or organizations for the benefit and protection of their members," rendered the act unconstitutional, see Davis v. Booth, 131 Fed. 31 (1904). The Michigan act of 1899 omitted this provision. ' Act of 1891 as amended in 1893 (Hurd's Illinois Rev. St. 1899, p. 616;. 2 People V. Butler St. Foundry, etc. Co., 201 111. 236 (1903), (66 N. E. Rep. 349). In this case the Court said (p. 255) : "It is said that the amend- ment of 1893 is unconstitutional in this: that it is an attempt upon the part of the legislature to exercise judicial power. . . These objec- tions, in our opinion, are without force. The statute in apt terms provides that the afiidavit shall be filed in reply to the letter of inquiry. If the legislature may require the affidavit to be filed, as we think it may, we can see no valid reason why it may 802 not provide that a failure in that regard shall subject the offending party to a penalty to be adjudged against it by the courts, without it being said that the legislature has exceeded its jurisdiction by exer- cising judicial power." ' Illinois Const. Art. 2, § 10. * People V. Butler St. Foundry, etc. Co., 201 111. 236 (1903), (66 N.E. Rep. 349), where the Court also said (p. 247): "If the statute be confined to its legitimate constitutional scope its proper construction only requires the affidavit to state whether or not the corporation upon whose behalf it is made had violated the statute by performing some one or more of the acts therein prohibited within the State of Illinois, and would not include, but would exclude, all acts which would connect it with any trust, pool, combination, etc., formed outside of the State, and which would violate the anti-trust statute of the United States. . . We conclude, therefore, that the officer making the affidavit, and the corporation in CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 422 On the other hand, it was held that a section of the Missouri statute of 1889 similar to that of the Illinois statute was uncon- stitutional as being in conflict with the provision against self incrimination.' But this statute contained no immunity pro- vision, and the unconstitutionaUty of the particular section was later held not to affect the validity of the statute as a whole.^ whose behalf the same is made, are fully protected by the statutory im- munity from a prosecution by any other State or by the federal authori- ties. ... As a corporation exists or does business in this State only by virtue of a charter granted to it by the State or by the permission of the State, we see no valid reason why it may not require a corporation exist- ing or doing business in this State to file the affidavit provided by the statute, even though it is provided that individuals, when acting alone or in partnership with others, are exempted from so doing. The object of the statute of 1891 as amended, is twofold: to prohibit trusts, pools and combines for the purpose of limiting production and fixing the prices of commodities within the State, and to have supervision and control over corporations created or doing business in this State for the purpose of determining whether they are members of trusts, pools and combines. The placing of corpora- tions in a class by themselves and requiring them to file the anti-trust afiidavit, leaving individuals and partnerships simply liable to the penalties provided for by the act, is not an illegal or arbitrary classifica- tion, any more than is the require- ment that State banking institutions shall file reports with the auditor of State or insurance companies with the insurance department of the State." And in State v. Jack, 69 Kan. 387 (1904), (76 Pao. Rep. 911), affirmed 199 U. S. 372 (1905), (26 Sup. a. Rep. 73), the Supreme Court of Kansas said of a similar provision : "Section 10 of the act contemplates a proceeding or investigation before the district court or district judge to inquire if there has been violation of that law. The record discloses the examination of appellant upon the inquiry to have been confined to its legitimate scope. Within the scope of the inquiry, the immunity afforded appellant by section 10 was coexten- sive with the constitutional privilege invoked for his protection. The possi- bility that his answers to the inquiries might disclose violations of the federal anti-trust law, and the evidence thus given be used against him in a criminal prosecution for a violation of that law, was not a real and prob- able danger of criminal prosecution within the constitutional privilege that no person shall be a witness against himself." In this connection it should be noted that it has been held that a similar provision in an Arkansas statute created no offence and that the mere failure to file the affidavit did not constitute a violation of the statute. State V. International Harvester Co., 79 Ark. 517 (1906), (96 S. W. Rep. 119). See also In re Bell, 69 Kan. 855 (1904), 76 Pac. Rep. 1129. * State V. Simmons Hardware Co., 109 Mo. 118 (1891), (18 S. W. Rep. 1125). ^ Finck V. Schneider Granite Co., 187 Mo. 244 (1905), (86 S. W. Rep. 213, 106 Am. St. Rep. 452). 803 § 422 INTEECORPOEATB EELATIONS [PAET V The Texas anti-trust law ' is not in conflict with the constitu- tional provision of that State that excessive fines shall not be imposed,^ there being a wide range between the maximum and minimum penalties and the latter not being excessive. Tn so holding the Supreme Court of Texas said: "Prescribing fines and other punishments which may be imposed upon violators of the law is a matter peculiarly within the power and discretion of the legislature, and the courts have no right to control or restrain that discretion, except in extraordinary cases, where it becomes so manifestly violative of the constitutional inhibition as to shock the sense of mankind." ^ The Ohio anti-trust statute ^ was held by a lower court of that State to be unconstitutional as interfering with "the inalienable right of enjoying liberty and acquiring property guaranteed by section 1 of the bill of rights of the constitu- tion." ^ Upon appeal to the Supreme Court, however, the act was declared to be constitutional.' The provision of the Kentucky constitution,' requiring the legislature to enact laws to prevent trusts and combinations, is not a grant of power and does not impliedly prohibit the legis- lature from going beyond the duty enjoined. Consequently, a ' Acts 1899, ch. 146, p. 246. tively such contracts and transactions '' Art. 1, § 13. as were previously unlawful, but ' State V. Laredo Ice Co., 96 Tex. which could be so adjudged only 461 (1903), (73 S. W. Rep. 951). when the aid of the courts was in- The Texas anti-trust statute of voked for their enforcement. It 1903 imposing a penalty for each must be obviously unavailing to urge day's offence of carrying on a trust the constitutionally protected right is not unconstitutional as impairing to make contracts with reference to the obligation of contracts although one's property and his faculties as applying to trusts formed before, an objection to a statute which does but carried on after, its enactment. not prohibit or restrain the power State V. Missouri, etc. R. Co., 99 of making such contracts. Exami- Tex. 516 (1906), (91 S. W. Rep. 214). nation of the various cases cited in the *Act of 1898, called the Valen- briefs shows that legislation having tine Anti-trust Act, 93 Ohio Laws, the same object as this and making -^*^- similar, if not identical,, prohibitions « Gage V. State, 24 Ohio C. C. 724 has been quite generally sustained as (1904). a valid exercise of legislative power." •State u. Gage, 72 Ohio St. See also State u. Jacobs, 7 Ohio 210 (1905), (73 N. E. Rep. 1078). N. P. 261 (1899). " Within the limits of the present ' Kentucky, Const. § 198. This case, it is obvious that the effect of provision is printed in the note to the statute is to prohibit affirma- § 414, ante. 804 CHAP. XLl] STATE STATUTES AND THEIR CONSTITUTIONALITY § 423 more rigorous anti-trust statute ' than the constitution requires is valid. ^ The Arkansas constitution forbids unreasonable searches and seizures of persons, papers and effects.' The anti-trust statute of the State authorizes orders requiring, under penalty of a default judgment against the corporation sued for violating the act, non-resident officers of such corporation to appear and testify before a commission and to produce books and papers. It is held that the provisions of the statute are not in conflict with the constitutional provision in so far as they authorize a reasonable order for the production of the papers of a corpora- tion over which the State has control.* It is also held that the provisions of such statute authorizing the recovery of penalties from foreign corporations violating its provisions are not in conflict with the Arkansas constitutional provision' that no person shall be held to answer a criminal charge unless upon the indictment of a grand jury." § 423. State Courts' Interpretation of State Statute followed by Federal Courts in determining its Constitutionality. — The decision of the highest court of a State that a State statute does not contravene a State constitutional provision is, mani- festly, binding upon the federal courts.' But the controlling effect of a local construction of a local law is not confined to cases where the statute is tested by the State constitution. Where the courts of a State have declared what a State statute means their interpretation will be fol- lowed by the federal courts where the claim is made that it is in conflict with the federal constitution.* In Smiley v. Kan- ' Kentucky, Stat. § 3915. « gmiley v. Kansas, 196 U. S. 447 2 Commonwealth W.Bavarian Brew- (1905), (25 Sup. Ct. Rep. 289); Jack ing Co., 112 Ky. 925 (1902), (23 Ky. ■;;. Kansas, 199 V. S. 372 (1905), Law Rep. 2334, 66 S. W. Rep. 1016). (26 Sup. Ct. Rep. 73) ; National ' Arkansas, Const. Art. 2, § 15. Cotton Oil Co. v. Texas, 197 U. S. 115 * Hammond Packing Co. v. State, (1905), (25 Sup. Ct. Rep. 379). 81 Ark. 519 (1907), (100 S. W. Rep. In the last case the Supreme Court 407). said (p. 130) : "There are cases in " Arkansas, Const. Art. 2, § 8. which we determine for ourselves " Hammond Packing Co. v. State, the meaning of a State law, but this 81 Ark. 519 (1907), 100 S. W. Rep. 407. is not one of them. The contention ' Jack V. Kansas, 199 U. S. 372 of the company is that the statutes (1905), (26 Sup. Ct. Rep. 73). of the State discriminate against it; 805 § 424 INTBRCOEPORATE RELATIONS [PART V sas ' Mr. Justice Brewer said : " It may be conceded for the pur- poses of this case that the language of the first section is broad enough to include acts beyond the police power of the State and the punishment of which would unduly infringe upon the freedom of contract. At any rate we shall not attempt to enter into any consideration of that question. The Supreme Court of the State held that the acts charged and proved against the defendant were clearly within the terms of the statute, as well as within the poUce power of the State; and that the statute could be sustained as a prohibition of those acts irrespective of the question whether its language was broad enough to include acts and conduct which the legislature could not rightfully restrain. It is well settled that in cases of this kind the interpretation ^placed by the highest court of the State upon its statutes is conclusive here. We accept the con- struction given to a State statute by that court." § 424. Who may question Constitutionality of Statutes. — It is held that objections to the constitutionality of an anti- trust statute, as infringing the rights guaranteed by the Four- teenth Amendment, can only be made by a person against whom such statute is sought to be enforced. Thus the Supreme Court of the United States has quoted with approval this lan- guage of the Kansas Supreme Court:'' "He [the defendant] cannot be heard to object to the statute merely because it operates oppressively upon others. The hurt must be to him- in other words, deny it the equal " Smiley v. Kansas, 196 TJ. S. 456 protection of the law, by forbidding (1905), (25 Sup. Ct. Rep. 289). The it from doing what they permit quotation is from the decision of the others to do in similar circumstances Kansas Court in the same case ; — punish its acts and exempt from 65 Kan. 240 (1902), (69 Pac. Rep. punishment the same acts when done 199, 67 L. R. A. 903). by others. But the courts of the And in the Winnebago, 205 XT. S. State are the tribunals appointed to 360 (1907), (27 Sup. Ct. Rep. 509), administer the statutes and impose the Supreme Court again said: "In their penalties and to do so they a case from a State court this court must necessarily interpret them. In does not listen to objections of those other words, they are the tribunals to who do not come within the class declare the meaning of the statutes, whose constitutional rights are alleged and if in declaring it they make the to be infringed, or hold a law uncon- statutes discriminatory, then may the stitutional, because, as against a statutes become unconstitutional." class making no complaint, the law ' Smiley v. Kansas, 196 U. S. 447 might be so held." (1905), (25 Sup. Ct. Rep. 289). 806 CHAP. XLl] CONSTRUCTION AND APPLICATION § 425 self. The case, under appellant's contention as to this point, is not a case of favoritism in the law. It is not a case of exclu- sion of classes who ought to have been included, the leaving out of which constitutes a denial of the equal protection of the law, but it is the opposite of that. It is a case of the inclu- sion of those who ought to have been excluded. Hence, unless appellant can show that he himself has been wrongfully included in the terms of the law, he can have no just ground of complaint. This is fundamental and decisively settled." CHAPTER XLII CONSTRUCTION AND APPLICATION OP STATE ANTI-TRUST STATUTES § 425. Definitions. § 426. Statutes not Regulations of Interstate Commerce. § 427. Rule of Construction. § 428. Form of Combination Inmiaterial. Application of Statutes to Holding and Purchasing Corporations. § 429. Objects and Tendencies of Combination as determining Application of Statutes. § 430. Extent of Combination as determining Application of Statutes. § 431. Application of Statutes to Ancillary Contracts in Restraint of Trade. I 432. Application of Statutes to Agency and Other Exclusive and Restrictive Contracts. Sales and Leases. § 433. Application of Statutes to Particular Associations of Manufacturers and Dealers. § 434. Application of Statutes to Combinations under Patents and Copyrights. § 435. Application of Statutes to Insurance Combinations. § 436. Application of Statutes to Foreign Corporations doing Local Business. § 437. Statutes have no Extraterritorial Force. § 438. Application of Statutes to Agreements of Qt«i«i-public Corporations. § 439. Effect of Statutes upon Exercise of Statutory Authority to consolidate or hold Stock. § 440. Statutes Inapplicable to Contracts with State. § 441. Statutes Inapplicable where Other Statutes eliminate Competition. § 442. Statutes do not supersede Conunon Law. § 443. Statutes not Retroactive, but apply to Continuing Combinations. § 444. Construction and Application of Miscellaneous Statutes. § 425. Definitions. — The anti-trust statutes of several States themselves define the words "trust," "monopoly" and "com- 807 § 425 INTERCOEPOHATE RELATIONS [PAHT V bination" used therein.' Definitions of these and similar terms as employed in such statutes also appear in judicial decisions. Thus to constitute a "trust" under the Texas statute^ there must be a "combination of capital, skill and acts." The term "combination" as so employed means "union" or "asso- ciation." And a union or association to come within the stat- ute must be of agencies which might otherwise have been independent and competing.' A "monopoly" within the meaning of the Texas statute not only includes that which is embraced by that term used in its primary sense but any combination the tendency of which is to prevent competition and to control prices to the public injury.* The Mississippi statute ° declares that a "trust "or "combine" is a combination which is in restraint of trade, to increase prices, to limit production, etc., and "is inimical to the public welfare, unlawful and a conspiracy." The last phrase, h'owever, merely states the effect of the " trust " as already defined, and is not an added element of the definition." A " trust" under the Missouri statute "is a contract, combi- nation, confederation or understanding, express or implied, be- tween two or more persons, to control the price of a commodity or service for the benefit of the parties thereto, and to the injury of the public, and which tends to create a monopoly." ^ ' See ante, § 414, note: "The In MacGinnis v. Boston, etc. Min- Statutes. Development of State Legis- ing Co., 29 Mont. 454 (1904), (75 Pac. lotion." Rep. 89), the Supreme Court of Mon- 2 Texas Rev. Stat., 1895, Art. 5313. tana said of the term "trust" as used ' Gates V. Hooper, 90 Tex. 563 in the anti-trust statute of that State : (1897), (39 S. W. Rep. 1079). "The term 'trust,' if assigned the * Jones V. Carter (Tex. Civ. App. meaning given to it by the text- 1907), 101 S. W. Rep. 514. See also writers, includes any form of combina- ante, §§ 332, 389. tion between corporations, or corpora- ' Ante, ^ 414, note; " The Statutes. tions and natural persons, for the Development of State Legislation." purpose of regulating production and • Barataria Canning Co. v. Joulian, repressing competition by means 80 Miss. 555 (1902), (31 So. Rep. of the power thus centralized. . . 961). In this case it was also held The section of the statute quoted that oysters, canned and sold as involves the same idea and demands merchandise, were a "commodity" the same construction, though it is within the meaning of the statute. more specific in its provisions, and ' State V. Firemen's Fund Ins. Co., extends to and includes combina- 152 Mo. 1 (1899), (52 S. W. Rep. 595, tions in restraint of competition in 45 L. R. A. 363). transportation. It denounces any 808 CHAP. XLIl] CONSTRUCTION AND APPLICATION §426 The term " control, " as used in the Mississippi statute, which a corporation is forbidden to grant to others than its officers or agents, means power to dictate corporate action and not merely to manage a department of the corporation's business.' § 426. Statutes not Regulations of Interstate Commerce. — State legislatures have only power to legislate concerning com- binations affecting commerce wholly within the State. ^ Com- merce across State lines is outside their sphere. A State anti- trust statute, therefore, while broad enough in terms to embrace combinations in restraint of interstate commerce will be limited by construction to those to which alone it can lawfully apply — combinations affecting domestic trade and commerce.^ And form of combination or contract which has for its purpose, directly or indirectly, the restraint of produc- tion or trade in any way or manner, or the control of the ' price of any article of consumption by the people. It was not the purpose of the con- vention, or of the legislattu'e, to limit either the terms used in the constitu- tion, or in the statute, by any narrow definition, but to leave it to the courts to look beneath the surface, and, from the methods employed in the conduct of the business, to determine whether the association or combina- tion in question, no matter what its particular form should chance to be, or what might be its constituent ele- ments, is taking advantage of the public in an unlawful way." ' Yazoo, etc. R. Co. v. Searles, 85 Miss. 520 (1905), (37 So. Rep. 939, 68 L. R. A. 715) citing § 294 of this work. A boycott is a combination for the purpose of creating and carrying out a restriction in trade within the meaning of the Ohio statute. State v. Jacobs, 7 Ohio N. P. 261 (1899). In view of the other provisions of the Tennessee statute relating to corporations the words "person or persons" as used in the section pre- scribing penalties of fine or imprison- ment for violating its provisions do not embrace corporations. Standard Oil Co. v. State, 117 Tenn. 618 (1907), (100 S. W. Rep. 705, 10 L. R. A. (N. s.) 1015). 2 That part of the South Carolina statute which prohibits the importa^ tion into, and sale within, the State of articles with a view to lessening free competition is invalid as an attempted regulation of interstate commerce. State V. Virginia^Carolina Chemical Co., 71 S. C. 544 (1904), (51 S. E. Rep. 455). » State V. Smiley, 65 Kan. 240 (1902), (69 Pac. Rep. 199, 67 L. R. A. • 903), affirmed 196 V. S. 447 (1905), (25 Sup. Ct. Rep. 289): "A State legislature is empowered to legislate generally in respect to trusts and conspiracies in restraint of trade, ex- cept as limited by the commerce clause of the federal Constitution; but, on the other hand. Congress is not empowered to legislate generally with respect to trusts and trade conspiracies. It can legislate against them only under the commerce clause of the Constitution. Therefore, a State enactment, though broad enough in terms to apply to trusts engaged in interstate commerce, or conspiracies in restraint of inter- state trade, will be limited by con- 809 §427 INTEKCOKPOHATE RELATIONS [part V the decisions of the State courts so limiting the general language of the State statutes will be accepted as correct interpretations of them by the federal courts.' § 427. Rule of Construction. — State anti-trust statutes, being penal in their nature, must be strictly construed.- Their meaning cannot be extended by implication.^ General language struction to4hat to which it can alone legally apply; but a congressional act, being of necessity limited to the one particular class of trusts or trade conspiracies, viz., those engaged in interstate or international trade, must express that limitation on its face. Nevertheless, we do not doubt that if a congressional enactment, general in terms, could be given specific application to subjects lying within its rightful sphere, without the aid of other and qualifying and explana- tory words, but which general terms were also inclusive of subjects lying without such sphere, it would be restrained by construction to those matters in respect of which Congress is qualified to dispense, and not be nullified as a whole." In People v. Butler St. Foundry, etc. Co., 201 111. 236 (1903), (66 N. E. Rep. 349), it was held that while the terras of the Illinois anti-trust statute were broad enough to include com- binations which might violate the federal anti-trust statute, it should be construed as relating only to transac- tions occurring within the limits of the State. Standard Oil Co. v. State, 117 Tenn. 618 (1907), (100 S. W. Rep. 709, 10 L. R. A. (N. s.) 1015): "The statute, when properly con- strued, does not apply to interstate commerce. The sole object and pur- pose of the enactment of it was to correct and prohibit abuses of trade within the State. This was the legis- lative intent, and will prevail over the literal meaning of words or terms found in the act." See also Hadley Dean Co. v. 810 Highland Co., 143 Fed. 242 (1906); State V. Phipps, 50 Kan. 609 (1893), (31 Pac. Rep. 1097, 34 Am. St. Rep. 152, 18 L. R. A. 657); Fuqua v. Pabst Brewing Co., 90 Tex. 298 (1897), (38 S. W. Rep. 29); Waters-Pierce Oil Co. V. State, 19 Tex. Civ. App. 1 (1898), (44 S. W. Rep. 945) ; Pastern- Vaccine Co. V. Burkey, 22 Tex. Civ. App. 232 (1899), (54 S. W. Rep. 804). In S. S. White Dental Mfg. Co. o. Hertzberg (Tex. Civ. App., 1899), 51 S. W. Rep. 355, it was held that where the invalidity of a contract under the ■ Texas anti-trust statute arose only after the delivery of articles within the State, the operation of the statute would not be defeated by the fact that the delivery within the State had been by means of interstate com- merce. * Waters-Pierce Oil Co. v. State, 177 U. S. 43 (1900), (20 Sup. Ct. Rep. 580); Smiley v. Kansas, 196 U. S. 447 (1905), (25 Sup. Ct. Rep. 289). See also ante, § 423. ^ In State v. Lancashire Fire Ins. Co., 60 Ark. 472 (1899), (51 S. W. Rep. 633, 45 L. R. A. 348), the Su- preme Court of Arkansas, in constru- ing the anti-trust statute of that State, said: *'To determine the mean- ing of a statute, the courts must look mairdy to the language of the act itself; for that is the final expression of the legislative will, and therein must such will and intention be sought. Whatever the legislature may have intended, such intention can have no effect unless expressed in the statute; for this, being a penal statute, can- not be extended by implication. It would be in the highest degree unjust CHAP. XLIl] CONSTRUCTION AND APPLICATION §428 will be limited in its application to such objects and persons as it is reasonable to presume the legislature intended to deal with.' § 428. Form of Combination Immaterial. Application of Statutes to Holding and Purchasing Corporations. — State anti- trust statutes, while broader than the rules of public policy and covering a different field from the federal enactment, have a common purpose — the preservation of competition — and are governed in their application by similar principles. It follows, therefore, from the principles already stated that the test whether a combination is in violation of a State statute lies in its object or tendencies and not in its form.^ The form assumed by a combination is immaterial.' The corporate form of combination in no way prevents the application of the statutes. The corporation as an entity may not be able to create a combination, but its acts, within the purview of the statutes, will be taken as the acts of the persons composing it. Its stockholders may, in controlling it and in conjunction with it create an unlawful combination.* to punish conduct not clearly for- bidden by the law itself . . . and so, to quote the words of a recent opinion of the Supreme Court of the United States, 'we ape left to determine the meaning of this act, as we deter- mine the meaning of other acts, from the language used therein.'" Citing United States v. Trans-Missouri Freight Ass'n, 166 U. S. 318 (1897), (17 Sup. Ct. Rep. 540). See also State v. Associated Press, 159 Mo. 410 (1901), (60 S. W. Rep. 91, 51 L. R. A. 151). ' State V. Smiley, 65 Kan. 240 (1902), (69 Pac. Rep. 199, 67 L. R. A. 903), affirmed 196 U. S. 447 (1905), (25 Sup. Ct. Rep. 289). ' See ante, § 354 : "Analysis of RrUe governing Private Corporations. Form of Combination Immaterial." Ante, § 397: "Form of Combination Im^ material. Illegality of Corporate De- vice." ' Jones V. Carter (Tex. Civ. App. 1907), 101 S. W. Rep. 514; Standard Oil Co. V. State, 117 Tenn. 618 (1907), (100 S. W. Rep. 705). * An association of dealers formed for the purpose of regulating the price of an article in a particular locality which is carried out by the concurrent action of the association and its members is in conflict with the Illi- nois statute. And the fact that the association is incorporated does not affect its illegality, upon the theory that a corporation cannot alone con- stitute a, trust. Its act, within the purview of the statute, is the act of the persons associated together. In so holding the Court, in Ford v. Chicago Milk Shippers Ass'n, 155 111. 179 (1895), (39 N. E. Rep. 651, 27 L. R. A. 298), said: "It is urged that the corporation cannot alone enter into a trust or combination that would be a violation of this statute. Whilst it is true as a general proposition that a cor- poration may be created and consti- 811 428 INTEHCORPORATE RELATIONS [part V And where a corporation is organized for the purpose of effect- ing an unlawful scheme of combination its acts when organized in carrying out the arrangement constitute a violation of an anti-trust statute.* A combination by means of a holding corporation when affecting intrastate commerce is as much in violation of an appropriate State statute against combinations as such a com- bination is in contravention of the federal statute when affecting interstate commerce.^ In such a case, it is not material whether the holding corporation is foreign or domestic and to determine its purposes the court will look through the various steps which led to its organization.^ While the State may have granted power to the holding corporation to hold shares in other cor- porations it acquired no right to exercise such power in violation of the anti-trust statutes of the State.'' Without statutory tuted a legal entity, existing separate and apart from the natural persons composing it, yet it cannot act inde- pendently, or against the will, or abstain from complying with the direction, of the natural persons who constitute the corporate body. A corporation is, in fact, an association of persons united in one body, having perpetual succession, vested with political rights conferred upon it by the authority creating it. Such being the nature of the corporate body, acts done by it are the acts of the asso- ciated persons as corporators or as individuals, and in which capacity the act is done must be determined from the nature and character of the act and the purpose for which the cor- poration was organized. And when the acts of the corporate body are violative of the statutes of the State and would be a misdemeanor that would subject it to punishment in accordance with law, such acts are wholly without the power of the corporation, as the statute will create no body with authority to violate its laws. . . . There can be no immu- nity for evasion of the policy of the State by its own creations. The cor- 812 poration as an entity may not be able to create a trust or combination with itself, but its individual share- holders may, in controlling it, to- gether with it, create such trust or combination that will constitute it, with them, alike guilty." ' Attorney-general, v. A. Booth & Co., 143 Mich. 89 (1906), (106 N. W. Rep. 868). 2 See ante, § 397a: "The Northern Securities Case." ' Southern Electric Securities Co. V. State (Miss. 1907), 44 So. Rep. 785. See also Dunbar v. American Tele- phone, etc. Co., 224 111. 9 (1906), (79 N. E. Rep. 423, 115 Am. St. Rep. 132) ; Bignlow v. Calumet, etc. Min- ing Co., 155 Fed. 874 (1907); Mac- Ginnis v. Boston, etc. Mining Co., 29 Mont. 428 (1904), (75 Pao. Rep. 89). * Bigelow V. Calumet, etc. Mining Co., 1.55 Fed. 874 (1907): "The result of these two statutes is that power was given to the Calumet & Hecla Company to purchase stock in the Osceola Company, but the right to exercise that power in violation of the anti-monopoly statutes of the State was not given." CHAP. XLIl] CONSTRUCTION AND APPLICATION §429 authority it had no power to purchase such shares at all. With such authority it had only the right to purchase for lawful purposes. Upon similar principles, a combination formed by means of a purchasing corporation undoubtedly violates the State anti-trust statutes.^ But an actual purchase and sale, as distinguished from a combination in the form of a sale, does not violate them. Thus it has been held that it is not contrary to such a statute for a manufacturing corporation to purchase the plant and prop- erty of another corporation engaged in the same business, for a cash consideration and in good faith. ^ § 429. Objects and Tendencies of Combination as determining Application of Statutes. — Both the objects and the natural consequences of the operation of a combination must always be considered in determining whether there has been a violation of a State anti-trust statute. The test of the validity of an agree- ment is not alone what ihe parties intend but what its effect will be.' And while, as we have seen,* further testing the agreement by its tendencies is making a standard of that which ' For consideration of this subject, see ante, ^354: ^* Analysis of Rule governing Private Corporations. Form of Combination Immaterial." ^ State V. Continental Tobacco Co., 177 Mo. 1 (1903), (75 S. W. Rep. 737). In this case the Court said (p. 32): "On the other hand, the terms of the statute are not broad enough to prohibit one corporation, in good faith, in the legitimate pur- suit of its business, from purchasing the assets of another corporation in a similar business. Its terms are appli- cable to individuals and partnerships, as well as corporations; its condem- nation is as pronounced against the individual as it is against the corpo- ration; hence it follows, if this statute is to be construed as prohibiting cor- porations from purchasing, in good faith, the assets of another corpora/- tion, it must be applied with equal force to the rights and powers of' individuals." See also Davis v. Booth, 131 Fed. 31 (1904). ' Yazoo, etc. R. Co. v. Searles, 85 Miss. 520 (1905), (37 So. Rep. 939, 68 L. R. A.. 723): "But at last the test, and only test, is, not what the intent of the parties may be, not what form the combination has taken, but what will its probable effect be? If unlawful or oppressive, if obnoxious to public policy, if inimical to public welfare, they will be denounced, and punishment meted out to every par- ticipant; otherwise courts will not limit or restrict the inalienable right of contract, and will not interfere unless the violation of law be apparent, or the apprehended evil effect assume some tangible form." (Citing this treatise.) See also MacGinnis v. Boston, etc. Mining Co., 29 Mont. 428 (1904), (75 Pac. Rep. 89). *See ante, § 355: "Analysis of Ride. Objects and Tendencies of Combination." 813 §429 INTERCORPORATE RELATIONS [part V is necessarily uncertain, still such test is applied by the courts in determining the appUcability of State anti-trust statutes.^ In the very recent case of Standard Oil Co. v. State ^ the Su- preme Court of Tennessee said: "The making of the agreement . . . with a view to lessen competition, and which tended to do so, is thus fully proven. This is all that is necessary to con- stitute a violation of the statute. The statute was not only intended to prohibit contracts and combination between those engaged in the same business, made for the purpose, or which had a tendency, to destroy all competition, and which are in- jurious to the whole public, but those made and formed by any and all persons with a view, or which in their nature tend, to lessen competition to any material extent, to the injury of any part of the people of the State. The number of persons, gener- ally speaking, engaged in the conspiracy, the extent of the ter- ■ standard Oil Co. v. State, 117 Tenn. 618 (1907), (100 S. W. Rep. 705, 10 L. R. A. (n. s.) 1015) ; Chicago, etc. Coal Co. v. People, 214 111. 421 (1905), (73 N. E. Rep. 770), affirming 114 111. App. 75 (1904); Dunbar v. American Telephone, etc. Co., 224 111. 9 (1906), (79 N. E. Rep. 423, 115 Am. St. Rep. 132) ; Jones v. Carter (Tex. Civ. App. 1907), 101 S. W. Rep. 514. Ferd Heim Brewing Co. v. Belinder, 97 Mo. App. 64 (1902), (71 S. W. Rep. 691): "What is the tendency of the agreement? It does not affect the character of the agreement proved, that the brewers only intended a worthy purpose. Intention will not avail when the effect is within the statutes. And it has been held by the highest authority that, though no imposition was consummated by the raising of prices; and even though the agreement was necessary to curb against unjust or ill-advised competition, yet if the effect of the agreement was within the prohibi- tion of the law, it was void." Walter A. Wood Mowing, etc. Mach. Co. V. Greenwood Hardware Co., 75 S. C. 383 (1906), (55 S. E. Rep. 973): "In determining whether 814 a particular contract falls within the inhibition of the statute (against monopolies) the Court must neces- sarily consider the tendency or power of the contract to injure the public, either considered in itself or as a part of a scheme to destroy or impede competition and control supply and prices. A contract niay be lawful in itself as an isolated matter, but yet be unlawful as a part of a scheme to create a virtual monopoly. The immediate effect of a trust or com- bination may be really beneficial to the public, improving the quality of goods or services and reducing the price, yet if it has inherent capability or natural tendency to injure the pub- lic, then competition is stifled and control of supply and prices secured and it is obnoxious to the statute. The main general test should be whether the contract, trust or com- bination is monopolistic in purpose or natural tendency. If so it un- reasonably affects competition and prices to the detriment of the public and is obnoxious to the statute." 2 Standard Oil Co. v. State, 117 Tenn. 618, 659 (1907), (100 S. W. Rep. 705, 10 L. R. A. (n. s.) 1015). CHAP. XLIl] CONSTRUCTION AND APPLICATION § 430 ritory affected, the degree which it was intended or has a tendency to lessen competition, the extent of the injury to the pubUc, or whether it be permanent or temporary in its character, are not material elements of the offence. The form of the com- bination is also a matter of indifference. No forms or prece- dents are followed in the commission of crime. In any form the agreement may be made, or disguise in which it may appear, or whatever scheme may be adopted to accomplish the prohibited acts, it is within the statute. It is enough that the contract was made with a view to lessen competition in the sale of an article of commerce of prime necessity, and that it is injurious to the public, however limited and restricted it may be in its* scope, effect, duration. It is its purpose, tendency, and effect that makes it unlawful." § 430. Extent of Combination as determining Application of Statutes. — To establish a violation of State statutes against monopolies — the term being used in its modern sense — a complete monopoly need not be shown.' Similarly, statutes against combinations affecting competition to the detriment of the pubUc not only embrace those combinations and agree- ments made for the purpose of, or which tend toward, destroy- ing all competition to the injury of the whole public, but those which tend to lessen competition to any material extent to the injury of any part of the public.^ And when the statute is directed against combinations to regulate or fix prices injury to the public need not be shown.' Upon these principles, it was held that a combination of retail dealers to prevent sales by wholesale dealers to retailers not in the combination violated the Nebraska anti-trust statute regardless of the proportion of dealers in the trade outside the combination.* So it has been held that the application of the ' state V. Armour Packing Co., Rep. 770), affirming 114 111. App. 75 173 Mo. 356 (3), 190 (73 S. W. (1904). Rep. 645, 61 L. R. A. 464); Hunt v. "standard Oil Co. v. State, 117 Riverside Cooperative Club, 140 Mich. Tenn. 618 (1907), (100 S. W. Rep. 538 (1905), (104 N. W. Rep. 40, 112 705, 10 L. R. A. (n. 8.) 1015). Am. St. Rep. 420) ; Standard Oil Co. ' State v. Armour Packing Co., V. State, 117 Tenn. 618 (1907), (100 173 Mo. 356 (1903), (73 S. W. Rep. S. W. Rep. 705, 10 L. R. A. (n. s.) 645, 61 L. R. A. 464). 1015) ; Chicago, etc. Coal Co. v. * Cleland v. Anderson, 66 Neb. 252 People, 214 111. 421 (1905),. (73 N. E. (1902), (92 N. W. Rep. 306). 815 §431 INTBRCORPOEATE RELATIONS [part V Illinois statute does not depend upon the number of those im- plicated in its violation nor the extent of the territory covered by the combination.* § 431. Application of Statutes to Ancillary Contracts in Re- straint of Trade. — As already shown, contracts in restraint of trade — using the phrase in its original sense — were agree- ments auxiliary to a principal contract — usually the sale of a business — by a party thereto to refrain from engaging in some trade or occupation for a certain time in a particular territory.^ While the effect of such agreements is in a degree to restrain competition, their primary object is to protect the purchaser of • the good-will of a business and, when reasonable, they have always been sustained at common law. They have also, as we have seen, been held to be outside the application of the federal anti-trust statute.^ One, at least, of the State anti-trust statutes expressly ex- cludes these ancillary contracts from its operation,* and other statutes have been held not to apply to them.^ ' Chicago, etc. Coal Co. v. People, 214 111. 421 (1905), (73 N. E. Rep. 770), affirming 114 111. App. 75 (1904). 2 See ante, ch. XXXIII. : "Applicor- tion of Law of Contracts in Restraint of Trade." = Ante, § 387 : " Vse of Phrase ' Con- tract in Restraint of Trade.' Applicor- tion of Statute to Ancillary Con- tracts." ' See § 6 of Michigan act of 1905, in note to § 414 : "The Statutes. De- velopment of State Legislation." For construction of the Michigan statutes see Davis v. Booth, 131 Fed. 31 (1904). 'An agreement by the vendor of a business not to engage in a similar business in a certain territory is not in violation of the Minnesota anti- trust statute of 1899. Espenson v. Kolpe, 93 Minn. 278 (1904), (101 N. W. Rep. 168). An agreement by one party to employ at certain wages another en- gaged in the same line of business provided he will give up his business 816 and enter the service of the former has been held not to contravene the Ohio anti-trust act of 1898. Kevil V. Standard Oil Co., 8 Ohio N. P. 311, 11 Ohio S. & C. P. Dec. 114 (1900). An agreement by a, merchant in selling out his business that he will not engage in business in the town for a period of twelve months does not create a "trust" under the Texas statute. Gates V. Hooper, 90 Tex. 563 (1897), (39 S. W. Rep. 1079). See also Crump o. Ligon (Tex. 1904), 84 S. W. Rep. 250. But an ancillary contract by the vendor of a business not to reenter such business for a certain period and in a particular place is in violation of the Texas anti-trust statute of 1895, where it also appears that the pur- chasers of the business were the only dealers engaged in that business in such locality and combined and made the purchase for the purpose of elimi- nating conjpetition. CHAP. XLII.] CONSTBUCTION AND APPLICATION §432 § 432. Application of Statutes to Agency and Other Exclusive and Restrictive Contracts. Sales and Leases. — The State anti- trust statutes are directed against contracts and combinations in restraint of competition to the public injury. It is not their purpose to interfere with ordinary transactions of business nor to prevent a person from conducting his affairs according to his own judgment. These are broad and general principles. But the courts have found difficulty in applying them to the sweeping terms of the statutes and the decisions, both on account of the varying views of the courts and the varying phraseology of the statutes, are not uniform. Thus, it is held that an agreement creating an agency for the sale of articles is not a combination in contravention of a State statute, although fixing prices and containing stipulations not to deal with other persons.' But a contract whereby a party obtains the exclusive agency for the sale of the goods manufac- tured by the other party and agrees not to sell any other line of goods has been held to be a contract restricting trade within the meaning of such a statute.^ Comer v. Burton-Lingo Co., 24 Tex. Civ. App. 251 (1900), (58 S. W. Rep. 969). And an agreement between com- peting hotel proprietors wherein ono agreed to close his hotel for hotel pur- poses for a period of three years and the other agreed to pay him a specified sum monthly during such period has been held to violate the Kentucky statute. demons v. Meadows (Ky. 1906), 94 S. W. Rep. 13. ' Welch V. Phelps, etc. Windmill Co., 89 Tex. 656 (1896), (36 S. W. Rep. 71) : "It was not the purpose of the statute, however, to interpose any obstacle to a principal's contract- ing with his agent with reference either to the terms or the subject matter of the agencj*. In the case before us it was entirely within the discretion of the principal, before as well as after the contract was signed, as to how many of its windmills it would send into the named territory. as well as to decline to sell for less than the net price, or permit its agent to sell for others. It controlled them all, and therefore there was no union or association of otherwise indepen- dent, separate and possibly competing 'capital, skill or acts'; and hence no combination." See also Weiboldt v. Standard Fashion Co., 80 111. App. 67 (1899). 2 White Dental Mfg. Co. v. Hertz- berg (Tex. Civ. App. 1899), 51 S. W. Rep. 355. An agreement to assign an out- standing agency contract to a com- petitor operating in the same territory and to refrain from doing business in such territory is in viola- tion of the Mississippi anti-trust statute. Kosciusko Oil Mill, etc. Co. v. Wilson Cotton Oil Co., 90 Miss. 551 (1907), (43 So. Rep. 435, 8 L. R. A. (N. s.) 1053). Where it appeared that a corpora- tion had appointed o, general agent 817 §432 INTBRCOEPOEATE RELATIONS [PAET V Contracts wherein a manufacturer agrees to confine the sale of his products to a particular dealer in a given territory and the dealer agrees to buy of such manufacturer exclusively are generally held not to violate the State statutes.^ But such agreements are held to be within the meaning of statutes and authorized him to establish agen- cies in a particular territory for the sale of machinery made by different manufacturers which had previously been competitors in such territory, and that such general agent had es- tablished the agencies and had bound the local agents under penalties to sell all the machinery at prices fixed by such corporation or general agent, it was held that a trust to fix the price of manufactured articles in vio- lation of the Kentucky statute (see ante, § 414, note) was shown. International Harvester Co. v. Commonwealth (Ky., 1907), 30 Ky. Law Rep. 716, 99 S. W. Rep. 637. ' Houck V. Wright, 77 Miss. 483 (1900), (27 So. Rep. 616) : "The legis- lature, by the chapter on trusts and combines, did not intend to debar a person from conducting his own pri- vate business according to his own judgment. Indeed, there is no law, federal or State, that requires a person to sell his goods, against his will, to any other person, or to send agents abroad to seek business, or even com- pel him to employ agents in the con- duct of his business. These are matters of private judgment and dis- cretion which belong to every citizen by the laws of nature; they are rights inherent in every freeman, which no human law can rightly supersede or impair." A contract by which a manu- facturer agrees to sell exclusively to a dealer certain machinery to be resold in a particular territory and by which the dealer agrees to purchase exclu- sively from the manufacturer is not in violation of the South Carolina statute. 818 Walter A. Wood Mowing, etc. Co. V. Greenwood Hardware Co., 75 S. C. 378 (1906), (55 S. E. Rep. 973). A contract by a brewing company to sell to one dealer only in a desig- nated territory does not violate the Texas statute. Vanderweghe v. American Brewing Co. (Tex. Civ. App. 1901), 61 S. W. Rep. 526. See also Norton v. Thomas, 99 Tex. 578 (1906), (91 S. W. Rep. 780). An agreement by one corporation to purchase all its raw materials from and sell all its finished prod- uct to another corporation is not in conflict with the Illinois statute. Heimbucher v. Goff, Horner & Co., 119 III. App. 373 (1905). A contract between a manufacturer and a dealer wherein the former agrees to sell its product to the latter at a reduced price in consideration of the latter's agreement not to sell at less than a stipulated price is not in con- travention of the New York statute again^ monopolies. Walsh V. Dwight, 40 App. Div. (N. Y.) 513 (1899), (58 N. Y. Supp. 91). See also Commonwealth v. Grin- stead, 111 Ky. 203, 1901 (63 S. W. Rep. 427) ; Over v. Byram Foundry Co., 37 Ind. App. 452 (1906), (77 N. E. Rep. 302). The grant by a railroad company of the exclusive privilege of soliciting transfer business upon its trains has been held not t» contravene the Texas statute. Lewis V. Weatherford, etc. R. Co., 36 Tex. Civ. App. 48 (1904), (81 S. W. Rep. 111). CHAP. XLIl] CONSTRUCTION AND APPLICATION §432 specifically declaring void all agreements to limit trade in any article.' An agreement between manufacturers or wholesale dealers not to sell to any person indebted to any party thereto is in conflict with the Missouri statute. It is said to deprive the debtor of the benefit of free competition and to impose a penalty upon his condition.^ On the other hand, it is broadly held that the right to refuse to maintain trade relations is an inherent right and its exercise not in violation of the New York statute.' An agreement among all the dealers in a certain market limiting their right, under forfeitures and penalties, to buy all the grain on such market they might desire or require is a ' Simmons v. Teny (Tex. Civ. App. 1904), 79 S. W. Rep. 1103. But see Norton v. Thomas, 99 Tex. 578 (1906), (91 S. W. Rep. 780). ^ee also Troy Buggy Works v. Fife (Tex. Civ. App. 1903), 74 S. W. Rep. 956; Texas Brewing Co. v. Templeman, 90 Tex. 277 (1896), (38 S. W. Rep. 27) ; Texas Brewing Co. v, Meyer (Tex. 1896), 38 S. W. Rep. 262. These decisions of course refer to the Texas statutes. Compare these decisions with Lan- yon V. Garden City Sand Co., 223 III. 616 (1906), (79 N. E. Rep. 313, 9 L. R. A. (n. 8.) 446), where it was held that an agreement of a manufac- turer to sell his product exclusively to the other party who agreed to take it was not in violation of the Illinois statute making it an offence to enter into any contract to limit the quality of any article mined, produced or sold. Contracts wherein manufacturers and wholesale dealers have granted to retailers exclusive rights for the sale of goods, containing stipulations that the vendor should not permit other persons to handle their products in the designated territory, have also been held to violate the Texas statutes. Columbia Carriage Co. v. Hatch, 19 Tex. Civ. App. 120 (1898), (47 S. W. Rep. 288). An agreement to purchase salt from a certain corporation for a particular period and not to purchase from other parties or make any importations and "to discourage in every possible manner, any such shipments or importations of salt by other parties" is in violation of the California statute. Getz V. Federal Salt Co., 147 Cal. 115 (1905), (81 Pac. Rep. 416, 109 Am. St. Rep. 114). A contract to purchase lambs wherein the purchaser agrees not to buy any other lambs in a desig- nated territory within a prescribed time, is void under the Michigan statute (3 How. Stat. § 9354j) de- claring void all contracts designed to restrict free competition in the pro- duction or sale of agricultural com- modities. Bingham v. Brands, 119 Mich. 255 (1899), (77 N. W. Rep. 940). ' Ferd Heim Brewing Co. v. Be- linder, 97 Mo. App. 64 (1903), (71 S. W. Rep. 691). ' In the recent case of Locker v. American Tobacco Co., 121 App. Div. (N. Y.) 443 (1907), (106 N. Y. Supp. 115), the Court said: "The complaint evidently proceeds upon the theory that the plaintiffs are vested with the legal right to buy and deal in the 819 § 433 INTERCOEPORATE RELATIONS [pART V contract in restraint of trade in violation of the Kansas statute.' A contract by a producer to sell to a purchaser all his product except a specified amount, and stipulating that this amount shall not be sold to the trade at a lower price than that at which the purchaser offers the product bought by it, is an agreement to fix the price of a commodity within the pro- hibition of the Mississippi statute.^ The leasing of property to an unlawful combination does not contravene the New York statute against monopolies which is "designed to prevent the owners or controllers of property entering into a combination to regulate production and maintain prices for their mutual benefit according to their respective interests.'" § 433. Application of Statutes to Particular Associations of Manufacturers and Dealers. — An association of retail deal- ers, formed to prevent the competition "of wholesale dealers, requiring as a condition of membership that each member con- tinuously carry a fixed amount of stock, and collecting from wholesale dealers a penalty in case they sell directly to con- merchandise manufactured and con- State and federal, guarantee to trolled by the defendants and to be the citizen. It is not within the supplied at all times, as the demands power of the courts to compel an of their customers require, upon com- owner of property to sell or part with plying with the conditions attached his title to it without his consent to the sale of such products, and and against his wishes to any par- paying therefor with such amount ticular person." thereof as their business demands, See also Wills v. Central Ice, etc. and that a refusal to sell to them is a Co. (Tex. Civ. App. 1905), 88 S. W. wrongful and actionable invasion of Rep. 265. such right ; but we are unable to ' State v. Smiley, 65 Kan. 240 discover in this record anything war- (1902), (69 Pac. Rep. 199, 67 L. R. A. ranting or sustaining such theory. 903), affirmed 196 U. S. 447 (1905), It is the well settled law of this State (25 Sup. Ct. Rep. 289). that the refusal to maintain trade " Barataria Canning Co. v. Joulian, relations with any individual is an 80 Miss. 555 (1902), (31 So. Rep. inherent right which every person 961). may exercise lawfully, for reasons he ^ Brooklyn Distilling Co. v. Stand- deems sufficient or for no reasons ard Distilling Co., 120 App. Div. whatever, and it is immaterial whether (N. Y.) 237 (1907), (105 N. Y. Supp. such refusal is based upon reason or 264). See also Export Lumber Co. v. is the result of mere caprice, prejudice South Brooklyn Sawmill Co., 54 App. or malice. It is a part of the liberty Div. (N. Y.) 518 (1900), (67 N. Y. of action which the Constitutions, Supp. 626). 820 CHAP. XLIl] CONSTRUCTION AND APPLICATION §433 sumers or to retail dealers ineligible to membership, is in con- travention of the Nebraska anti-trust statute.' An agreement between an association of plumbers and cer- tain manufacturers and dealers, entered into for the purpose of fixing prices and hmiting production, wherein the latter agree not to sell supplies to others than members of the association and the former agree to boycott any dealer selling to a non-member, is unlawful under the Missouri statute.^ A combination of corporations, effected by means of a series of contracts between each corporation and an intermediary association composed of a member from each of the combining corporations, wherein the several corporations agree to sell all their respective products to such association for a stated period ' Cleland v. Anderson, 66 Neb. 252 (1902), (92 N. W. Rep. 306): "The provisions of § 1, ch. 91a, Comp. St. 1901, are very broad, and expressly cover any combination of dealers intended 'to prevent others from conducting or carrying on the same business,' or which tend 'to prevent or preclude a free and unrestricted competition among themselves or others or the public generally.' The express object of the association in question is to prevent competition of wholesale dealers in selling directly to contractors and other consumers, an(#it endeavors not only to prevent this, but to prevent its members from selling in localities where other members are in business, and to pre- vent wholesalers from selling to deal- ers who do not carry a stock of 75,000 feet and maintain a per- manent yard. These purposes are clearly in contravention of the statute, and, however lawful its other objects, render its acts and the acts of its members, and those who unite with them therein, so far as they are in furtherance of such purposes, unlawful and actionable. A point is made that a large number of dealers in the State are not members, and that the number of wholesalers who cooperate is relatively small. But the statute meets such a case expressly. It pro- vides that combinations of this nature on the part of 'two or more persons' shall be unlawful, and acts of even a single person, intended to prevent others from engaging in the same business, are prohibited. Hence the number of persons who engage in such combinations, and the propor- tion they bear to the whole number of dealers in the same trade, are not material." The early Nebraska statute di- rected against combinations of grain dealers does not relieve such dealers from the operation of the later statutes declaring illegal all combinations in restraint of competition. State V. Omaha Elevator Co., 75 Neb. 637 (1906), (106 N. W. Rep. 979). ' Walsh V. Association of Plumbers, 97 Mo. App. 280 (1902), (71 S. W. Rep. 455). A somewhat similar plumbers' association was held to conflict with the Michigan statute of 1899 in Hunt V. Riverside Club, 140 Mich. 538 (1905), (104 N. W. Rep. 40, 112 Am. St. Rep. 420). 821 § 433 INTBHCORPORATE EELATIONS [PART V and at a stipulated price, is also contrary to the Missouri statute.' On the other hand, a live stock exchange formed to promote the interests of its members was held not to be an illegal com- bination under the Missouri statute although its by-laws pro- vided that no member should do business with a member who had been suspended or expelled.^ The by-laws of an association of local dealers which permit its members to purchase only from such wholesale dealers as will sell to members exclusively contravene the Tennessee statute. Such by-laws are "contracts, arrangements and com- binations" calculated to prevent free competition, influence prices and injuriously affect trade and commerce.' An association of commission merchants by means of a corporation the constitution and by-laws of which provide for discriminations in favor of members in the prices to be paid for produce, regulate deliveries, and prescribe penalties against offending members, is a combination interfering with the free purchase and sale of commodities in contravention of the Minnesota statute.^ An association of dealers in live stock, a by-law of which forbids members buying or selling for others without charging a minimum commission, has been held to violate the Kansas statute.* An agreement among brewers to raise the price of beer to the extent of a tax imposed thereon is in violation of the Kentucky statute against combinations to fix the price of merchandise or ' Finck V. Schneider Granite Co., 8978) was that prohibiting persons 187 Mo. 244 (190.5), (86 S. W. Rep. engaged in selling ariy article of 213, 106 Am. St. Rep. 452). commerce from entering into any For consideration of the applica- agreement to limit competition by tion of the Missouri statute of 1899 refusing to buy from, or sell to, prohibiting combinations to fix prices another person. in the case of a "corner " of the market, ' Bailey v. Master Plumbers' Ass'n, see C. H. Albers Commission Co. v. 103 Tenn. 99 (1899), (52 S. W. Rep. Spencer, 205 Mo. 105 (1907), (103 853, 46 L. R. A. 561). S. W. Rep. 523). 4 E^tz v. Produce Exchange Co., ^Gladish v. Bridgeford (Kansas 82 Minn. 173 (1901), (84 N. W. Rep. City a. of App. 1905), 89 S. W. Rep. 743, 51 L. R. A. 825). ^''- 'State V. Wilson, 73 Kan. 334 The statutory provision in que,s- (1906), (84 Pac. Rep. 737). tion (Missouri Rev. Stat. 1899, § 822 CHAP. XLIl] CONSTRUCTION AND APPLICATION §435 manufactured articles, notwithstanding it relates to an article the increased use of which is not favored by law.' § 434. Application of Statutes to Combinations under Patents and Copyrights. — The principles which control the applica- tion of the federal anti-trust statute to combinations under patents and copyrights govern the application of the State statutes to such combinations and do not require separate examination.^ § 435. Application of Statutes to Insurance Combinations. — The anti-trust statutes of several States include, in express terms, combinations of insurance companies designed to pre- vent competition and maintain rates.' In other States, the question has been judicially considered whether such a combi- nation comes within the general provisions of the State statute. An Iowa statute^ prohibited the formation of combinations to regulate and fix the price of "oil, lumber, coal ... or any other commodity." The Supreme Court of Iowa held that 1 Commonwealth v. Bavarian Brew- ing Co., 112 Ky. 925 (1902), (66 S. W. Rep. 1016). ' See ante, § 399 : "Application of Statute to Combinations under Pat- ents" ; § 400: "Application of Statute to CoTribinations under Copyrights." A corporation organized for the purpose of acquiring patents and granting licenses thereunder, and which has acquired nearly all the patents covering a particular article but which does not bind its licensees as to prices or output, is not in con- travention of the Illinois anti-trust statute. Columbia Wire Cloth Co. v. Free- man Wire Co., 71 Fed. 302 (1895). See also Clark v. Cyclone Woven Wire Fence Co., 22 Tex. Civ. App. 41 <1899), (54 S. W. Rep. 392). An agreement between publishers representing over ninety per cent of the book trade and controlling over ninety-five per cent of the books published in this country that all future copyrighted books should be sold at retail at certain net prices and that all other books, whether copyrighted or not, should be sold only to retailers agreeing to maintain prices or to jobbers agreeing not to sell to any blacklisted retailers, while purporting to secure to the pubUshers the monopoly granted by the copy- right law, in effect interferes with the sale of uncopyrighted books and is in violation of the New York anti- monopoly act. Strauss v. American Publishers Ass'n, 177 N. Y. 473 (1904), (69 N. E. Rep. 1107, 101 Am. St. Rep. 819, 64 L. R. A. 701), affirming 85 App. Div. (N. Y.) 446 (1903), (83 N. Y. Supp. 271). 'The Arkansas statute printed in note to § 414, ante, "The Statutes. Development of State Legislation," is illustrative. For construction of the provisions of the Missouri statute relating to insurance companies, see State v. Firemen's Fund Ins. Co., 152 Mo. 1 (1899), (52 S. W. Rep. 595, 45 L. R. A. 363). *McClain's Iowa Code, § 5454. 823 §435 INTEBCOEPOBATE BELATIONS [PAET V insurance was a "commodity" within the meaning of this statute, and that a combination of insurance companies was prohibited by its provisions.^ On the other hand, the Supreme Court of Texas held that the term " commodity," in the Texas statute of 1889, did not include insurance, and that a combination of fire insurance companies to establish uniform rates did not contravene the act.^ The decision in the Iowa case cannot be regarded as sound. It ignores the ejusdem generis rule of construction. The term "commodity," in its broadest sense, may include insurance, but it is not a commodity of the same general class or nature as those commodities pre- viously mentioned in the Iowa statute. The word "property," as used in the Kentucky anti-trust statute, "does not include the right to enter into a contract of insurance nor to fix the terms upon which such a contract will be made." ^ Insurance is a "business," the control of which cannot be placed in the hands of trustees, within the meaning of the Mississippi statute.' ' Beechley v. Mulville, 102 Iowa, 602 (1897), (70 N. W. Rep. 107, 63 Am. St. Rep. 479). The word "trade'' in the title of an act fairly includes the provisions of the act concerning insurance, and such an act is valid in a State where the subject of. an act must be clearly expressed by its title. In re Pinkney, 47 Kan. 89 (1891), (27 Pac. Rep. 179). See also State v. Phipps, 50 Kan. 609 (1893), 31 Pae. Rep. 1097, 34 Am. St. Rep. 152, 18 L. R. A. 657). "Queen Ins. Co. v. State, 86 Tex. 250 (1893), (24 S. W. Rep. 397, 22 L. R. A. 483). To meet this decision the word "business" was inserted in the Texas act of 1895. ' .^tna Ins. Co. v. Commonwealth, 106 Ky. 864 (1899), (21 Ky. Law Rep. 503, 51 S. W. Rep. 624): "While it may be admitted that a contract, either for labor or for indemnity against contingent loss, like an insur- ance contract, when executed, becomes 824 property, because it is then a chose in action, the right to enter into such contracts, which belongs to all per- sons capable of contracting — as well natural persons as artificial ones authorized by their organic law to make such contracts — would hardly be considered to be included in the word 'property,' unless that word were used in a much broader sense than it is customarily used by lawyers or in statutes." 'American Fire Ins. Co. v. State, 75 Miss. 24 (1897), (22 So. Rep. 99) : "It [the statute] prohibits any trust the object of which is to place the control of business (any business) to any extent in the power of trustees. The law-makers wisely refrained from any specification of, or attempt to emmierate, the kinds of business whose control should thus be placed in the power of trustees, for the ob- vious reason that such kinds of busi- ness in modem life are multiform. It, therefore, prohibited any trust CUAP. XLIl] CONSTRtrCTION AND APPLICATION §436 Contracts of insurance issued by a foreign insurance com- pany upon property within a State do not constitute interstate commerce, and State statutes against combinations may apply to foreign insurance companies combining to increase local rates, and when so applying are, as shown in the next section, within the appropriate scope of State legislation.' § 436. Application of Statutes to Foreign Corporations doing Local Business. — A corporation created by the laws of one State has no absolute right to transact business beyond its borders. Its privileges in other States are permissive and depend upon the comity between States. A State, in admitting foreign corporations, may impose any conditions, reasonable or un- reasonable, which it deems expedient.^ A foreign corporation doing business in a State is subject to its general laws and regulations. It cannot exercise, within the State, powers prohibited in the case of corporations gener- ally. Statutes against combinations of corporations apply to whose object was to place the control of any business in the power of trus- tees, when the effect of such trust should be to injure the public or any particular person or corporation in this State. Such legislation has be- come very general in the United States owing to the pernicious results of such trusts." ' State V. Phipps, 50 Kan. 615 (1893), (31 Pac. Rep. 1097, 34 Am. St. Rep. 152, 18 L. R. A. 657): "It is a. conclusive presumption of the law that this court knew that the legislature of this State had no power to regulate interstate commerce, and the presumption is equally strong and conclusive, that by the use of the word 'trade' the intercourse between citizens of different - States, that constitutes interstate commerce, was not in contemplation. It has been judicially determined, time and time again, by the highest judicial author- ity in the land, that issuing a policy of insurance is not a transaction of commerce." In holding the Iowa statute (Code 1897, § 1754) prohibiting particularly combinations of insurance companies constitutional, the Supreme Court of the United States in Carrol v. Greenwich Ins. Co., 199 U. S. 401, 411 (1905), (26 Sup. Ct. Rep. 66) said: "If the legislature of the State of Iowa deems it desirable artificially to prevent, so far as it can, the sub- stitution of combination for compe- tition, this court cannot say that fire insurance may not present so con- spicuous an example of what that legislature thinks an evil as to justify special treatment." " Hartford Fire Ins. Co. v. Ray- mond, 70 Mich. 501 (1888), (38 N. W. Rep. 474): "It has been repeatedly held, . . that corporations of one State have no right to exercise their franchises in another State except upon the assent of such other State, and upon such terms as may be im- posed by the State where their busi- ness is to be done. The conditions imposed may be reasonable or un- reasonable ; they are absolutely within the discretion of the legislature." 825 436 INTERCORPORATE RELATIONS [PABT V foreign as well as domestic corporations. Foreign corporations violating their provisions may be ousted from the State.' ' United States: Waters-Pierce Oil Ck). V. Texas, 177 U. S. 28 (1900), (20 Sup. Ct. Rep. 518). Illinois: Harding v. ■ American Glucose Ck>., 182 111. 551 (1899), (55 N. E. Rep. 577, 74 Am. St. Rep. 189, 64 L. R. A. 738). See also Bishop V. American Preservers Co., 157 111. 284 (1895), (41 N. E. Rep. 765, 48 Am. St. Rep. 317) ; Chicago, etc. Coal Co. v. People, 214 111. 421 (1905), (73 N. E. Rep. 770). Kansas: State v. Phipps, 50 Kan. 619 (1893), (31 Pac. Rep. 1097, 34 Am. St. Rep. 152, 18 L. R. A. 657): "The State has power to regulate and control, and to provide penalties for the transgression of its regulating and controlling statutes, the business of a foreign insurance company within its borders." Michigan: The anti-trust statute of this State in providing in case of the violation of its provisions by a foreign corporation for the revoca- tion of the certificate of such corpora- tion, upon which its right to do busi- ness in the State depends, is not in contravention of the Fourteenth Amendment as abridging the privi- leges or immvmities of citizens of the United States. Attorney-General v. A. Booth & Co., 143 Mich. 89 (1905), (106 N. W. Rep. 868). See also ante, § 421. Missouri: National Lead Co. v. Grote Paint Store Co., 80 Mo. App. 247 (1899) : "Neither can the plaintiff shut off an investigation of its cor- porate organization and purpose upon the plea of comity due it as a foreign corporation. The doctrine on this subject is simple and clear. It concedes no rights to a corporation of a sister State which are denied by law to a domestic corporation, or which are contrary to the laws or public policy of the State into which 826 the foreign corporation enters for business." See also State v. Fire- men's Fund Ins. Co., 152 Mo. 1 (1899), (52 S. W. Rep. 595, 45 L. R, A. 363). A State may impose such condi- tions as it may deem expedient upon the pri^-ilege of foreign corporations to do business therein ^o long as it does not interfere with interstate commerce or invade some other federal right. State V. Standard Oil Co., 194 Mo. 124 (1906), (91 S. W. Rep. 1062). Nebraska: State v. Standard Oil Co., 61 Neb. 28 (1901), (84 N. W. Rep. 413). South Carolina: A foreign corpora- tion accepting the privilege to do business within a State upon the same conditions as domestic corporations is not deprived of any constitutional rights by a statute which deprives it of such privilege in case it violates an anti-trust statute. State V. Virginia^Carolina Chemical Co., 71 S. C. 544 (1904), (51 S. E. Rep. 455). Tennessee: State v. Schlitz Brew- ing Co., 104 Tenn. 715 (1900), (59 S. W. Rep. 1039, 78 Am. St. Rep. 941). See also Standard Oil Co. v. State, 117 Tenn. 618 (1907), (100 S. W. Rep. 705, 10 L. R. A. (n. s.) 1015). Texas: Waters-Pierce Oil Co. v. State, 19 Tex. Civ. App. 1 (1898), (44 S. W. Rep. 936). See also Waters-Pierce Oil Co. o. State (Tex. Civ. App. 1908), 106 S. W. Rep. 918; National Cotton Oil Co. v. State (Tex. Civ. App. 1903), 72 S. W. Rep. 615. That foreign corporations may attack constitutionality of State anti-trust statute, see Niagara Fire Ins. Co. V. Cornell, 110 Fed. 816 (1901). See also Carrol v. Greenwich Ins. Co., 199 TJ. S. 401 (1905), (26 Sup. Ct. Rep. 66). CHAP. XLIl] CONSTRUCTION AND APPLICATION § 437 In Waters-Pierce Oil Co. v. Texas,^ the Supreme Court of the United States, in holding that a Texas anti-trust statute appUed to foreign corporations, and that their privilege of transacting business within the State might be forfeited for disobeying it, said: "The plaintiff in error is a foreign corpora- tion, and what right of contracting has it in the State of Texas ? This is the only inquiry, and it can only find an answer in the rights of corporations and the power of the State over them. What those rights are and what that power is has often been declared by this court. A corporation is the creature of the law, and none of its powers are original. They are precisely what the incorporating act has made them, and can only be exerted in the manner which that act authorizes. In other words, the State prescribes the purposes of a corporation and the means of executing those purposes. Purposes and means are within the State's control. This is true as to domestic corporations. It has even a broader application to foreign corporations. ... A contract of the corporation is the con- tract of the legal entity, and not of its individual members. Its rights are those given to it in that character, and not the rights which belong to its constituent citizens. Its charter confers its powers and the means of executing them, and such powers and means can only be exercised in other States by the permission of the latter." The greater power of wholly excluding from a State for- eign corporations contravening its laws or policy includes the power, when such a corporation is formed for the purpose of controlling a domestic corporation in violation of an anti-trust statute, to enjoin it from doing any act in furtherance of such purpose.^ § 437. Statutes have no Extraterritorial Force. — The penal statutes of a State have no binding effect outside its borders. A law attempting to make criminal, acts done without the State is void.' The State may, however, make criminal and unlawful ' Waters-Pierce Oil Co. v. Texas, "The fifth paragraph of the said act, 177 U. S. 43 (1900), (20 Sup. Ct. in which it is attempted to claim Rep. 518). jurisdiction for offences committed ^Southern Electric Sec. Co. v. outside of the State of Texas, is so State (Miss. 1907), 44 So. Rep. 785. absurd that a denial thereof is scarcely ' In re Grioe, 79 Fed. 638 (1897) : necessary. ... It has been properly 827 §437 INTEECORPORATE RELATIONS [part V the carrying into effect within its limits of a combination entered into without. In the construction of an anti-trust statute, it will be pre- sumed that the legislature recognized these elementaiy prin- ciples, and intended "that its statutes should not apply to acts or contracts done or effected beyond the limits of the State, and having no reference to or effect upon persons or property in this State." ^ Upon these principles it follows that while a State has no extraterritorial jurisdiction and cannot reach offences com- mitted outside its borders, it has power to deal with offences put in motion in a foreign State but carried into execution within its hmits. Thus a foreign corporation doing business in a State which becomes a member of a combination outside the State to fix the prices of property therein violates a State statute prohibiting combinations to fix prices.^ suggested that, should this feature of this act be carried out and adminis- tered, it would be unnecessary for any other State or the nation at large to have any other laws upon the sub- ject, as all persons within the limits of the United States could be regu- lated in their dealings and in the conduct of their business according to the wishes of the legislature of Texas. The State, in its criminal jurisdiction as to acts committed within its own boundaries, and within the limits prescribed by the federal Constitution, is sovereign, and its process should not be interfered with where it does not contravene the said Constitution ; but, beyond the bound- aries of the State, it has no more authority in New York, Missouri, or Ohio than it has in Great Britain or Austria, and that part of the act which proposes this extraterritorial jurisdiction is absolutely null and void." See also State v. Associated Press, 159 Mo. 410 (1901), (60 S. W. Rep. 91, 81 Am. St. Rep. 368, 51 L. R. A. 151). ^ State V. Lancashire Fire Ins. Co., 828 66 Ark. 472 (1899), (51 S. W. Rep. 633, 45 L. R. A. 348), (per Riddick, J.). See also State v. ^tna Fire Ins. Co., 66 Ark. 480 (1899), (51 S. W. Rep. 638). 2 International Harvester Co. v. Commonwealth (Ky. 1907), 30 Ky. Law Rep. 716, 99 S. W. Rep. 637. In this case the Court said: "The legislature has no extraterritorial power to punish crime. The crime specified in the statute is the enter- ing into, becoming a member of, or a party to, any pool, trust, etc., to fix the prices at which property may be sold in this State. If a foreign corporation doing business in this State enters into or becomes a member of a pool or trust beyond the limits of this State, then the crime is clearly committed beyond the limits of this State, unless the pool or trust is to fix the prices of property in this State, in which event the crime put in motion in the foreign State took effect and became complete in Ken- tucky." See also Waters-Pierce Oil Co. v. State (Tex. Civ. App. 1908), 106 S. W. Rep. 918. CHAP. XLIl] CONSTRUCTION AND APPLICATION § 438 § 438. Application of Statutes to Agreements of Quasi-public Corporations. — An agreement between the gas and electric lighting corporations of a city, the effect of which is to practically place them under one management, divide public contracts, and eliminate competition, is in violation of the Texas statute.' A practical consolidation of electric companies for the pur- pose of eUminating competition, effected by means of a foreign holding corporation, is in conflict with the Mississippi statute.^ An agreement between a gas company and a coal company wherein the former agrees to sell to the latter exclusively all its coke — a by-product — is not in conflict with the Minnesota statute. By-products stand in a different position from the gas or electricity which a public service corporation is bound to furnish to all alike.^ A contract between a railroad company and a sleeping car company giving the latter the exclusive right to run its cars upon the railroad for a stated period is not in conflict with the Texas statute. Sleeping car companies have no right to run their cars upon railroads except under arrangements with the railroad companies. "Since no such business right existed it could not be restricted." * An agreement by railroad companies to make specially low ' San Antonio Gas Co. v. State, corporation; the rule remains the 22 Tex. Civ. App. 118 (1899), (54 same." S. W. Rep. 289). * Fort Worth, etc. R. Co. v. State ' Southern Electric Sec. Co. v. (Tex. 1905), 87 S. W. Rep. 336, 70 State (Miss. 1907), 44 So. Rep. 786. L. R. A. 950. See also ante, § 428. An agreement between a railroad . St. Paul Gaslight Co., company and an express company 92 Minn. 470 (1904), (100 N. W. Rep. whereby the latter is granted exclu- 216): "A distinction must be made sive privileges upon the railroad of between a, corporation engaged in a the former, and is protected in the particular line of business, which contingency that the railroad corn- enters into a combination to dispose pany should be required by law to of all of its products to a competitor accord similar privileges to other for the purpose of enabling the com- express companies, is in violation of petitor to fix prices and control the the Texas anti-trust statute, which markets, and one situated as defend- is not rendered inapplicable by the ant, which, in the course of its prin- fact that the railroad commission of cipal business, accumulates incident- that State has power to regulate the ally thereto a by-product or com- rates of both railroad and express modity in which it does not deal. companies. It is unimportant that the gas- State v. Missouri, etc. R. Co., 99 light company is a public service Tex. 516 (1906), (91 S. W. Rep. 214). 829 § 439 INTEECOBPOEATB RELATIONS [PAET V rates for non-transferable excursion tickets from a certain city is not in violation of the Texas statutes, there being no agree- ment to restrain competition in the sale of such tickets.^ A car-service association organized by railroad companies for the purpose of securing the prompt and just assessment of demurrage for the detention of cars is not unlawful under the provisions of the Mississippi statute forbidding the placing of the control of the business of corporations in the hands of trustees or persons other than their officers and agents.^ § 439. Effect of Statutes upon Exercise of Statutory Authority to consolidate or hold Stock. — Statutes authorizing corpora- tions to consolidate or to hold shares in other corporations in themselves define the policy of the State upon such subjects. The exercise of the power conferred could not be held invalid upon any principle of the common law. But it does not neces- sarily follow that it could be exercised in contravention of a State statute forbidding combinations. Under such conditions, in the case of private corporations, the statute which applied the more specifically would control. Thus, for example, if a particular combination were expressly authorized it would undoubtedly be held valid notwithstanding it might conflict with an anti-trust statute. And, on the other hand, a consolidation under a general statute would probably not be upheld if clearly contrary to the specific provisions of a statute against combinations. The latter statute would be treated as limiting the powers conferred by the former. These principles also apply to qvasi-puhlic corporations subject to the additional principle that the State has, in the case of such corporations, full power to protect itself against increases in charges. A union of public utiUty corporations, either by strict consolidation or through corporate stockhold- ing, when authorized by law, could hardly be said to constitute a combination to increase charges in violation of an anti-trust statute although embracing all the corporations in a particular territory and although designed to prevent competition.^ The "Lytle V. Galveston, etc. R. Co. 'In /rare Consolidated Gas Co., 124 (Tex. 1907), 99 S. W. Rep. 396. App. Div. (N. Y.) 401 (1908), (108 2 Yazoo, etc. R. Co. v. Searles, 85 N. Y. Supp. 823), affirming 56 Misc. Miss. 520 (1905), (37 So. Rep. 939, 49 (1907), (106 N. Y. Supp. 407), it 68 L. R. A. 715). was held that the consolidation, under 830 CHAP. XLIl] CONSTRUCTION AND APPLICATION §439 legislature would have full power over the situation for the protection of the public. Probably only a statute applying statutory authority, of six gas com- panies and the subsequent purchase by the consolidated company, under like authority, of all, or controlling in- terests in, the shares of other similar corporations in order to prevent com- petition did not create a monopoly in violation of the New York statute. The Court said : " What is prohibited is the creation of a monopoly, and estab- lishing such a competition as will result in limiting the supply and enhancing the cost of the commodity dealt in. In no sense can the consoli- dation of the lighting companies in the City of New York into :<. single corporation be said to create such a monopoly, for it gains thereby no exclusive right, the field is still open to any other company that can obtain the necessary consents from the con- stituted authorities, and neither the production nor the price can be arbi- trarily fixed by the Consolidated Company. In this respect there is a, very clear distinction between a company supplying gas or electricity and a corporation or combination of producers who deal in ice, envelopes, bluestone, milk, sheep and lambs, coal and lard, as to all of which our courts have condemned combinations organized for the purpose of control- ling output and fixing prices. ... In the case of the Consolidated Gas Company it cannot, as a result of its control of the business of furnishing light, either limit production or in- crease prices and maintain them, be- cause both of those matters are within the control of the Legislature. It is within the power of that body, and it has frequently used the power, to fix the maximum rate which may be charged to consumers, and it is well settled that any person within the territory served by a gas or electric light company is entitled to be fur- nished with such gas or electricity as he require upon payment of the statutory price therefor, and can compel the company so to furnish it. That a single company, thus regulated by law as to price and production, does not offend against the anti- monopoly laws, even although its field of operation extends over a whole city, seems to be quite clear. We are, therefore, of the opinion that the organization of the Consolidated Gas Company of New York, under the provision of ch. 367 of the Laws of 1884 was lawful and valid, and its subsequent purchase of the stock of the companies named in the petition was authorized by § 40 of the Stock Corporation Law, and that neither by the organization of the company nor by its purchase of the stock of other companies was an unlawful monopoly created within the meaning of § 7 of the Stock Cor- poration Law or of the Anti-Monopoly Act of 1899." Com/pare, however. Burrows u. Interborough-Metropolitan Co., 156 Fed. 389 (1907), where it was held that the acquisition by a holding corpora^ tion of controlling stock interests in all the street railway lines in the boroughs of Manhattan and the Bronx in New York City, although in the exercise of statutory authority to purchase shares, was invalid as creat- ing a monopoly in violation of the New York statutes. Judge Holt said : "There may be many cases in which it is desirable and in all respects unobjectionable for a corporation to purchase and hold some of the stock of another corporation; and it would have been perfectly consistent for the Legislature to have tacked § 7 on to § 40 as a proviso. I think that is the true construction of the legisla^ tive meaning as shown by the statute. 831 § 442 INTERCORPORATE RELATIONS [PART V specifically to quasi-public corporations would curtail the power to consolidate or purchase shares conferred upon them by other statutes. § 440. Statutes Inapplicable to Contracts with State. — Con- tracts in which a contractor agrees to furnish for the use of the State articles below the normal cost of production do not con- travene the Mississippi statute. A public contract for an article below cost cannot be said to be " inimical to the public welfare." * § 441. Statutes Inapplicable where Other Statutes eliminate Competition. — State statutes for the preservation of competi- tion are inapplicable where other statutes eliminate the possi- biUty of there being competition. Thus the purchase by a cor- poration engaged in the business of compressing cotton of other compress plants is not in contravention of an anti-trust statute where the price for compressing is the same throughout the State — being regulated by a commission — and where the laws require cotton to be compressed at the nearest press. ^ § 442. Statutes do not supersede Common Law. — The inade- quacy of the common law remedy of merely refusing to enforce contracts contrary to public policy lead to the present anti-trust legislation.^ But while the statutes generally embrace all Corporations were authorized by it ' Johnson Pub. Co. v. Mills, 79 to purchase, acquire, and hold the Miss. 543 (1902), (31 So. Rep. 101). stocks of other corporations, provided For consideration of the question they did not thereby combine for whether statutes authorizing boards the creation of a monopoly or the of education to enter into contracts unlawful restraint of trade, or for for the exclusive use of school books the prevention of competition in contravene constitutional provisions any necessary of life. So long as against monopolies, see Rand, Mc- such acquisition did not create a Nally & Co. v. Hartranft, 29 Wash, monopoly, or restrain trade, or pre- 591 (1902), (70 Pac. Rep. 77) ; Leeper vent competition in any necessary of v. State, 103 Tenn. 500 (1899), (53 life, such a purchase was lawful; as S. W. Rep. 962, 48 L. R. A. 167). soon as it did, it became unlawful." See also Dickinson v. Cunningham, In In re Interborough-Metropoli- 140 Ala. 527 (1903), (37 So. Rep. 345). tan Co., 56 Misc. Rep. (N. Y.) 128 ^ gj^te v. Shippers Compress, etc. (1907), (106 N.Y.Supp. 416), the New Co., 95 Tex. 603 (1902), (69 S. W. York Supreme Court followed In re Rep. 58, 93 Am. St. Rep. 870, 58 ConsolidatedGasCo.,sMpra, and, upon L. R. A. 714). the same facts, declined to follow the ' State v. Firemen's Fund Ins. Co., decision of Judge Holt. 152 Mo. 42 (1899), (52 S. W. Rep. 595, See also Rafferty v. Buffalo City 45 L. R. A. 363): "But the common Gas Co., 37 App. Div. (N. Y.) 622 law remedy of refusing to enforce (1899), (56 N. Y. Supp. 288). such contracts proved insufficient to 832 CHAP. XLIl] CONSTRUCTION AND APPLICATION § 443 contracts and combinations contrary to the rules of public policy — and go much farther — they do not, unless expressly so providing, supersede the common law. They supplement and add to, but do not abrogate, it.' Conversely, no right to recover a penalty prescribed in an anti-trust statute can be based upon the ground that the con- tract, in addition to violating the statute, creates a monopoly at common law.^ § 443. Statutes not Retroactive, but apply to Continuing Combinations. — An act making it unlawful for a corporation to enter into a combination for certain purposes, and imposing penalties for its violation, is not retroactive and does not deprive a corporation, infringing its provisions, of the right to enforce its antecedent contracts.' And, in general, an anti- trust statute cannot affect contracts entered into and executed before its enactment. Otherivise it would be unconstitutional as impairing the obligation of contracts.* The object of anti-trust statutes, however, is to eliminate combinations of the character prohibited, and, while not retro- active, the effect of their enactment, as a general rule, is to prevent the continuance of combinations of that nature which may be in existence, as well as the formation of new ones.^ prevent the blighting injuries to the * Crump v. Ligon (Tex. Civ. App. public interests which modern trusts 1904), 84 S. W. Rep. 250. produced, and hence it has been found ' Matter of Davies, 168 N. Y. 89 necessary by the national and State (1901), (61 N. E. Rep. 118, 56 L. R. A. legislatures to enact stringent laws 855). against trusts, pools, unlawful com- State v. Missouri, etc. R. Co. binations and conspiracies which will (Tex. 1906), 91 S. W. Rep. 219: "The prevent them, and not leave them to State may, in the exercise of its police exist and enforce their contracts power, prohibit the continuance in among themselves, den3ang them only the future of those things already in the aid of the courts, as at common existence which are so injurious to the law." rights and interests of its citizens ' People V. Aachen, etc. Fire Ins. generally as to justify such an exer- Co., 126111. App. 636 (1906). See also cise of the power whether the con- Chicago, etc. Coal Co. v. People, 214 tinuance of the things is provided 111. 421 (1905), (73 N. E. Rep. 770). for by contract or not." ' Missouri, etc. R. Co. v. Sisson A State anti-trust statute is not (Tex. Civ. App. 1905), 88 S. W. Rep. retroactive, but it prohibits both the 371. continuance in business and the en- ' Sterling Remedy Co. v. Wyckoff, gaging in business in violation of its 154 Ind. 437 (1900), (56 N. E. Rep. provisions. State v. Jack, 69 Kan. All). 387 (1904), (76 Pac. Rep. 911), 833 § 444 INTERCORPORATE RELATIONS [PART V The offence is rather in persisting in the combination than in entering into it. Moreover, where a contract is a continuing one a statute which declares it unlawful has no retroactive effect. If it results in an unlawful combination or monopoly after the adoption of the statute, it may be reached by the statute acting prospectively although it was entered into before its enactment.^ § 444. Construction and Application of Miscellaneous Statutes. — The New York statute^ against combinations is disjunctive, and prohibits corporations from combining to accomplish three things: (1) the "creation of a monopoly"; (2) " the unlawful restraint of trade"; or (3) "the prevention of competition in any necessary of life." ' In making such prohibitions the statute "is little more than a codification of the common law upon the subject." * The Minnesota statute ^ follows substantially the language of the federal anti-trust statute and should receive a similar con- struction." A broad provision in the Texas statute of 1899 that it should be held to be cumulative of all the laws upon the subject did affirmed 199 U. S. 372 (1905), (26 » Finck v. Schneider Granite Co., Sup. Ct. Rep. 73). 187 Mo. 244 (1905), (86 S. W. Rep. Ford V. Chicago Milk Shippers' 213, 106 Am. St. Rep. 452). Ass'n, 155 in. 166 (1895), (39 » iVcw yori Laws of 1897, ch. 384, N. E. Rep. 651, 27 L. R. A. § 7. 298) : "The corporation is sub- » National Harrow Co. v. Bement, ject to the statute and although 21 App. Div. (N. Y.) 290 (1897), (47 the contract of guaranty was entered N. Y. Supp. 462). into before the passage of the act, yet « Matter of Davies, 168 N. Y. 89 by its terms the furnishing of the (1901), (61 N. E. Rep. 118, 56 L. R. A. commodity named, from month to 855). The statute, however, in im- month, was contemplated, and by the posing penalties goes farther than the facts as found by the appellate common law. court that for which the price ^Minnesota Laws 1899, p. 487 is sought to be recovered in this ch. 359. case was furnished after the passage • Minnesota v. Northern Securities of the act. The acts of the corpora- Co., 123 Fed. 692 (1903). The deci- tion and its stockholders with refer- sion in this case was, however, re- ence to this sale were within the versed by the Supreme Court ipon meaning of the act." the ground that the case had been im- See also arOe, § 404 : "Statute {Fed- properly removed from the State eral) not Retroactive but applies to court. 194 U. S. 48 (1903), (24 Sup. Continuing Combinations." Ct. Rep. 589). 834 CHAP. XLIl] CONSTRUCTION AND APPLICATION § 444 not incorporate in it the unconstitutional class exemption of an earlier law and thus render it itself unconstitutional.' Where an oil company in order to procure the countermand of an order given by a merchant to a competitor presented a quantity of oil to the merchant, it was held that both the oil company and the merchant were engaged in a conspiracy to lessen competition within the meaning of the Tennessee statute.^ A Nebraska statute ' forbidding combinations entered into by persons "engaged in manufacturing, selling or dealing in the same or any like manufactured or natural products," does not apply to persons engaged in the laundry business.* The Indiana statute ^ declares that contracts designed or tending to affect prices entered into by persons or corporations who "control the output" of merchandise shall be void. The phrase "control the output" in the act is given a broad inter- pretation. It is said that a limited number of firms cannot control the output of an article which can be made in any foun- dry, and that the statute does not apply to those who merely control the output of a single town or factory.' The Illinois anti-trust statute did not repeal a previously existing general conspiracy statute — there being no repug- nancy between the acts — and both enactments are in force. ' The Kansas statute of 1891 prohibiting combinations among dealers in live stock was, however, superseded by the later gen- eral anti-trust act.* The contracts and combinations declared unlawful and ' state V. Laredo Ice Co., 96 Tex. ' Sanford v. People, 121 111. App. 461 (1903), (73 S. W. Rep. 951). 619 (1905). ^Standard Oil Co. v. State, 117 A combination between several Tenn. 618 (1907), (100 S. W. Hep. independent newspaper concerns to 706, 10 L. R. A. (n. s.) 1015). The compel another concern to reduce statute in question was Tennessee rates for advertising or lose customers Acts 1903, p. 268, ch. 140. See is indicative of a malicious purpose ante, § 414. and is in contravention of a Wiscon- ' Nebraska Sess. Laws 1889, ch. 69. sin statute against combinations to ' Downing v, Lewis, 56 Neb. 386 maliciously injure the business of (1898), (74 N. W. Rep. 900). another. ^Indiana Anno. Stat. 1901, § State v. Huegin, 110 Wis. 189 3312g. (1901), (85 N. W. Rep. 1046). « Over V. Byram Foundry Co., 37 » State v. Wilson, 73 Kan. 334 Ind. App. 452 (1906), (77 N E. Rep. (1906), (84 Pac. Rep. 737). 302). 835 § 445 INTERCORPORATE RELATIONS [pART V void by the South Carolina statute ' are only those made with a view to lessen, or which tend to lessen, competition to an unreasonable degree.^ The provision in the Arkansas statute " requiring the Secretary of State to send yearly to each corporation in the State a letter of inquiry as to whether it has any interest in any unlawful trust or combination, to be answered under oath by an officer of the corporation, but not expressly requiring the corporation to answer or making the failure of the officers to answer an offence, does not create an offence and the mere failure to answer does not constitute a violation of the act.^ CHAPTER XLIII EIGHTS, REMEDIES, AND PROCEDURE UNDER STATE ANTI- TRUST STATUTES I 445. Contracts in Violation of Statutes Unenforceable. Independent Con- tracts. Invalidity under Statutes as Ground of Collateral Attack. § 446. Criminal Proceedings. Indictments. § 447. Proceedings to enforce Forfeitures. § 448. Proceedings against Corporations. § 449. Actions for Damages. § 450. Evidence. Production of Books. § 451. Statutes of Limitation. § 445. Contracts in Violation of Statutes Unenforceable. In- dependent Contracts. Invalidity under Statutes as Ground of Collateral Attack. — The State anti-trust statutes, as a general rule, contain a provision that any contract in violation thereof shall be void and shall not be enforced in law or equity.' And • South Carolina Code 1902, § 2845. free competition in the manufacture " State V. Virginia-Carolina Chemi- or sale of any article, an agreement cal Co., 71 S. C. 544 (1904), (51 S. E. with subscribers to stock in » cor- Rep. 455). poration which was designed to mo- = Acts 1905, p. 6, § 7. nopolize the dairy business of a cer- ' State V. International Harvester tain territory was held to be invalid Co., 79 Ark. 517 (1906), (96 S. W. and unenforceable. The Court said: ■^^P- ^^^)- "If the plaintiff entered into a com- Under a statute declaring void all bination with subscribers to the stock contracts designed or tending to lessen in the contemplated association with 836 CHAP. XLIIl] BIGHTS UNDER STATE ANTI-TRUST STATUTES § 445 without such express provision any such contract would be unenforceable. An agreement in violation of a statute has no validity. A provision in a contract in violation of a State anti-trust act is not only void itself but, when not severable, taints the con- tract as a whole, and all the other provisions of it, and renders them unenforceable.' But upon the principles considered with respect to illegal combinations in general,^ and combinations in violation of the federal statute in particular,' the fact that one of the parties to an independent contract is a member of, or is, itself, a combination in violation of a State anti-trust statute, cannot be set up as a defence to an action brought upon the contract. In the absence of express statutory provision, the validity of a combination must be tested in direct proceedings. - Buyers from a combination cannot avoid paying their debts by showing its illegaUty unless a statute authorize such pro- cedure.* the purpose and intent to lessen full and free competition in the produc- tion and sale of articles, products and commodities to be bought, handled and manufactured by such contemplated association, the con- tract was void." Hastings Industrial Co. v. Baxter, 125 Mo. App. 494 (1907), (102 S. W. Rep. 1075). ■ Getz Bros. & Co. v. Federal Salt Co., 147 Cal. 115 (1905), (81 Pao. Rep. 416, 109 Am. St. Rep. 11.4). Where two notes and a mortgage securing them were given for a con- sideration, a part of which, and less than either of the notes, was based upon a. transaction contrary to an anti-trust statute, it was held that both of the notes and the mortgage were void. State v. Wilson, 73 Kan. 334 (1906), (84 Pac. Rep. 737). In this case the Court 'said: "A part of the consideration of the mort- gage was, therefore, illegal, if the facts were as the defendant attempted to show. Would this render the mortgage itself void? The generally accepted rule is that if any part of a single consideration or cither of two separate considerations of a contract is illegal the entire contract is void, although where two promises, one of which is illegal, are made upon a lawful consideration, the promise which is unobjectionable is ordinarily held to be enforceable. . . . Where one of two considerations or a distinct part of one consideration is unlawful as being forbidden either by the statute or by the common law the prevailing view is that the partial illegality taints the entire transac- tion and the contract itself is void." 2 See ante, § 369:- "Collateral Attack upon Combination. Remedies upon Independent Coniracts." ^ See ante, § 405: *' Invalidity under Federal Statute as u. Ground of Col- lateral Attack." *A lease of a distillery to a cor- poration organized to create a monop- oly in violation of a State anti-trust statute is not invalid even if the lessor know the purposes of the corpo- ration. In so holding the Court, in Brooklyn Distilling Co. v. Standard Distilling Co., 120 App. Div. (N. Y.) 837 §445 INTERCORPORATE RELATIONS [part V In several States, however, the anti-trust statutes provide that purchasers of goods from a combination, formed in viola- tion of their provisions, shall not be liable for the purchase price, and may plead the statute as a defence to any action therefor.' The difficulties attending the application of such statutes and the possibility of conflicting adjudications are obvious; but it is not perceived upon what ground they can be declared uncon- stitutional.^ Certainly, the obstacles in the way of the prac- 237 (1907), (105 N. Y. Supp. 264), said : "It must be borne in mind that the plaintiff in making the lease did not in any way become a party to the illegal combination or partici- pate to any extent in any scheme to avoid the statute by controlling the manufacture or sale of th^ commodity referred to. The lease was the only contract which it made with the de- fendant. It could just as well be contended that a contractor who had built the distillery for the defendant with knowledge of its purpose was not entitled to recover the contract price, or that a farmer who had sold his corn to the defendant knowing its purpose in buying it, could not re- cover the price agreed to be paid, as it can that the plaintiff is not entitled to recover in this action. The plaintiff, as we have already seen, took no part in the illegal com- bination; could derive no benefit from it or from the incorporation of the defendant or the carrying out of its purpose-; had nothing to do with regulating the quantity of alcohol and spirituous liquors to be produced, or the price to be charged, and, there- fore, the contract is clearly distin- guishable from those where premises are leased to be used for inunoral purposes. '^ See also Harrison v. Glucose Sugar Ref'g Co., 116 Fed. 304 (1902), (58 L. R. A. 915); National Salt Co. v. Ingraham, 143 Fed. 805 (1906); Chicago Wall Paper Mills v. General Paper Co., 147 Fed. 491 (1906). 838 ' The Illinois statute is illustrative (Act of June 11, 1891): "Any pur- chaser of any article or commodity from any individual, company or corporation transacting business con- trary to any pi-ovision of the preceding sections of this act shall not be liable for the price or payment of such article or commodity and may plead this act as a defence to any suit for such price or payment." See also anti-trust statutes of Iowa, Kansas, Kentucky, Missouri, Ne- braska, North Dakota and Texas, re- ferred to in note to § 414, ante: "The Statutes. DevelopmeTit of State Legis- lation.*' ' The statutes have been pleaded and the defences sustained as valid in National Lead. Co. v. Grote Paint Store Co., 80 Mo. App. 247 (1899); Ford V. Chicago Milk Shippers' Ass'n, 155 111. 166 (1895), (39 N. E. Rep. 651, 27 L. R. A. 298). See also American Strawboard Co. v. Peoria Strawboard Co., 65 111. App. 502 (1895). An agreement between brewers in a certain city not to sell beer to any dealer indebted to any party thereto until such debt should be paid is in violation of the Missouri anti-trust statute and is, consequently, by the provision ' of that statute — which is the same as the Illinois provision pointed out in a preceding note — a complete defence to an action by a party to such agreement to recover the price of beer sold. Ferd Heim Brewing Co. v. Belinder, 97 Mo. CHAP. XLIIl] BIGHTS UNDER STATE ANTI-TRUST STATUTES § 445 tical working of such a statute can hardly furnish ground for a conclusion which has been reached, that the illegality of a plaintiff organization can only be pleaded, under such a statute, when it has been previously established in direct proceedings.' App. 64 (1902), (71 8. W. Rep. 691). In Chicago Wall Paper Mills v. General Paper Co., 147 Fed. 491 (1906), it was held in an action to recover the price of merchandise that the fact that the plaintiff was a corporation formed for purposes con- trary to the Illinois anti-trust statute was no defence under the aforesaid provision of the statute, unless such corporation were organized in Illinois. In Peoria Gas, etc. Co. v. Peoria, 200 U. S. 48 (1906), (26 Sup. Ct. Rep. 214), where a gas company had been denied relief by the lower court, in an action to restrain the enforcement of an ordinance fixing rates, upon the ground that it had violated the Illinois anti-trust statute, the Supreme Court of the United States said : "We shall assume that there was testimony from which the court justly found that the rates announced on August 1 were fixed by an agreement between the two companies. We shall also assume, though without deciding, that while that agreement was in force and the parties were acting under it, neither could recover for the gas that it furnished, nor could this plaintiff question the validity of the ordinance of September 4. But although the stringent provisions of the Illinois anti-trust law may apply to the case of an agreement between two gas companies fixing the price of gas, and even if while the parties are proceeding under it any party receiving gas may avoid pay- ment therefor on that ground, and the city likewise be upheld in an ordinance establishing maximum rates which are not remunerative, yet the making of such an agreement does not subject the companies to a per- petual penalty. Parties making an agreement, unlawful by the anti- trust act, may while the agreement is in force be subject to its penalties, but whenever they cease to act under it the penalties also cease. The punishment adheres to the offence and stops when the offence itself stops." See also with respect to defences under such statutes, American Handle Co. V. Standard Handle Co. (Tenn. Ch. 1900), 59 S. W. Rep. 709; Wylie v. National Wall Paper Co., 70 111. App. 543 (1896); Barton v. Mulvane, 59 Kan. 313 (1898), (52 Pac. Rep. 883). ' Lafayette Bridge Co. ■». City of Streator, 105 Fed. 731 (1900): "The defendant is, in this suit, attempting to avail itself in a collateral proceeding of a defence based on a fact which should be determined in a direct proceeding. In other words, before a defendant can evade the payment of the purchase price of commodities, actually re- ceived, on the ground that the seller is a trust or combination, in restraint of trade, in contravention of the statute, there should be an adjudica- tion of a competent tribunal, in a direct proceeding instituted for that purpose, determining that such seller is a trust or combination in the sense contemplated by the statute. This is in accord with the ordinary rules of statutory construction. The prac- tical working of any other rule could not fail to emphasize the justice and necessity of so holding in cases similar to the one at bar. It cannot be insisted that the decision in one case would be binding or even persuasive in any other case. Each suit to recover purchase money, in which the statute is pleaded by way of defence, would call for a separate and distinct de- termination of the legal status of the 839 §446 INTERCORPOBATE RELATIONS [PART V In National Lead Co. v. Grate Paint Store Co.,' the Court, in holding that the Missouri anti-trust statute might be pleaded, and the illegality of the plaintiff organization — a corporate combination — established, as a defence to an action of debt, said: "It is quite true, as a general rule, that questions affect- ing the right of a corporation to enjoy its franchise to be a corporation, or its legal entity as such, can only be raised in a direct proceeding to annul or forfeit the grant, to which the State granting the charter is a party, for the reason that, as to third parties, the legaUty of the corporation is avouched by its charter from the State, which reserves to itself the power to withdraw the franchises bestowed, upon evidence of fraudulent obtensions or subsequent abuse. But the existence of this rule of procedure cannot deprive the legislature of the power of enacting that inquiries affecting the vahdity of the charter of a corporation may be made in other proceedings than by an action in the name of the State, and this is just what was done when the anti-trust act pleaded in defendant's answer became the law of this State. ... As it thus appears that the Act, in express terms, permits a violation of any of its provisions to be pleaded by a private person in a suit against him for the price of goods purchased of a corporation transacting business con- trary to the statute, it must follow that the right to plead such a defence entitles the party so authorized by the legislature to prove what he has pleaded." § 446. Criminal Proceedings. Indictments. — State anti- trust statutes create statutory offences and prescribe penalties to be imposed upon those who commit them.^ Combinations in violation of their provisions are made criminal conspiracies. They are generally declared to be "conspiracies to defraud," plainti£f, thereby making the claim confusion as would force federal for purchase money merely an inci- courts to so construe the statutes as dental issue. This would be true to protect the due and regular ad- even if the amount involved were but ministration of justice from uncon- five dollars, and the case were before scionable prolixity and irreconcilable a justice of the peace. The result adjudications." would depend upon the varying condi- ' National Lead Co. v. Grote Paint tions of each case as affected by the Store Co., 80 Mo. App. 264 (1899). skill of lawyers, the bias of jurors, ^ State «. 'Buckeye Pipe Line Co., and other attendant circumstances. 61 Ohio St. 545 (1900), (56 N. E. Rep. This would inevitably lead to such 464). 840 CHAP. XLIIl] EIGHTS UNDER STATE ANTI-TRUST STATUTES § 446 or conspiracies against trade." While, in exceptional in- stances, a penalty in the form of a forfeiture is prescribed, gen- erally the penalty is a fine for offending corporations, and a fine or imprisonment for individuals, including officers and agents of corporations.^ ' The following penalties are pre- scribed in the anti-trust statutes of the several States for violating their provisions. (For references to stat- utes, see note to § 414, ante.) Alabama. Fine of not less than $500 nor more than $2000 to be imposed upon any "person or corpora^ tion." Florida. Fine of not more than $5000, or imprisonment for not more than one year, or both. Applies to any person as principal, manager, director or agent. lUinois. "Corporations, compa/- nies, firms and associations" punish- able by fine of not less than $500 nor more than $2000 for first offence. Additional penalties for subsequent offences. Officers, agents and indi- viduals may be fined not less than S200 nor more than $1000, or impris- oned for not more than one year, or both. Indiana. Fine not exceeding $5000 and imprisonment not exceeding one year. Iowa. "Corporation, company, firm or association" may be fined not less than one nor more than twenty per cent of capital stock or money in- vested. Officers, agents or indivi- duals are punishable by fine of not less than $500 nor more than $5000, or by imprisonment for not more than one year, or both. Kansas. Fine not less than $100 nor more than $1000 and imprison- ment for not less than thirty days nor more than six months. Applies to "all persons, companies and corpo- rations, their officers, agents, repre- sentatives or consignees." Kentucky. "Corporation, company. firm, partnership or person or asso- ciation of persons" may be fined not less than $500 nor more than $5000. Any officer or agent or any indi- vidual may be fined not less than $500 nor more than $5000, or imprisoned for not less than six nor more than twelve months, or both. Louisiana. Fine of not less than $100 nor more than $1000, or impris- onment for not less than six months nor more than one year, or both. Ap- plies to any person who, as "principal, manager, director or agent," engages in, or knowingly carries out purposes of, conspiracy. Maine. "Any person, incorporated or unincorporated company, or associa^ tion of persons or stockholders" enter- ing into an unlawful* combination, may be fined not less than five nor more than $10,000. Michigan. Fine of not less than $50 nor more than $5000, or impris- onment for not less than six months, nor more than one year, or both. Applies to any person engaging in or carrying out conspiracy as "principal, manager, director, agent, servant or employer, or in any other capacity." Minnesota. Fine of not less than $500 nor more than $5000, or im- prisonment for not less than three nor more than five years. Mississippi. Fine of not less than $100 nor more than $5000, or impris- onment for not less than three nor more than twelve months, or both. Applies to any person as "principal, director, manager, agent, or in any other capacity," engaging in or know- ingly carrying out purposes of con- spiracy. The minimum fine under 841 §446 INTEECORPOBATE RELATIONS [part V Of the purpose of these statutes in prescribing penalties to be imposed, not only upon corporations but upon their officers another statute is larger. See Ameri- can Fire Ins. Co. j). State, 75 Miss. 24 (1897), (22 So. Rep. 99). Missouri. ''Any person violating any of the provisions of this act, or who shall do any act prohibited or declared unlawful by the provisions of this act, shall be adjudged guilty of a felony and upon conviction thereof shall be punished by imprisonment in the penitentiary not exceeding five years, or by imprisonment in the county jail not exceeding one year, or by a fine of not less than $500 nor more than $5000, or by both such fine and imprisonment." Nebraska. Any person, corpora^ tion, joint stock company or other association entering into contract, combination or conspiracy in viola- tion of act is guilty of a misdemeanor punishable by fine not exceeding $5000, or by imprisonment not ex- ceeding one year, or both. Statute also provides for forfeiture of prop- erty owned under combination and prescribes penalties against officers of corporations. New Mexico. Fine not exceeding $1000 nor less than $100, and impris- onment not exceeding one year, or until fine is paid. Applies to every person, whether individual, agent, officer or stockholder, violating act. New York. Fine not exceeding $5000, or imprisonment for not longer than one year, or both. Applies to •every person or corporation making contract or engaging in combination in violation of act. North Dakota. Any person, firm, company, association or corporation violating act and any officer, agent or receiver of any firm, company, asso- ciation or corporation, or any member of the same or any individual, found guilty of a violation of act, is subject to fine of not less than $500 nor more 842 than $5000, or to imprisonment not exceeding one year, or both. Ohio. Fine of not less than $50 nor more than $5000, or imprisonment for not less than six months nor more than one year, or both. Applies to any person engaging in, or "as princi- pal, manager, director, agent, ser- vant or employer, or in any other capacity," carrying out purposes of conspiracy. Each violation consti- tutes a separate offence. Oklahoma. Fine of not Jess than $50 nor more than $500. Applies to "any individual, firm, partnership or any association of persons." South Carolina. Fine of not less than $100 nor more than $5000, or imprisonment for not less than six months nor more than ten years, or both. Applies to any person engag- ing in, or as "principal, manager, director or agent, or in any other ca- pacity," knowingly carrying out pur- poses of conspiracy. South Dakota. Fine of not less than $1000 nor more than $5000. Additional penalties for second of- fence. Applies to "any person or persons, officers or servants of any company, copartnership or associa- tion of persons" violating provisions of act. Tennessee. Fine of not less than $100 nor more than $5000, or impris- onment for not leas than one year nor more than ten years, or both. Applies to any person engaging in, or "as principal, manager, director or agent, or in any other capacity," knowingly carrj'ing out purposes of conspiracy. Texas. " If any person shall enter into an agreement or understanding of any character to form a trust, or to form a monopoly, or to form a conspiracy in restraint of trade . . . or shall form a trust, monopoly or conspiracy in restraint of trade, or CHAP. XLIIl] EIGHTS UNDER STATE ANTI-TRUST STATUTES § 446 and agents, the Supreme Court of Kentucky in Commonwealth v. Grinstead ' said : " It seems manifest that the object of the statute was, in the first part, to impose punishment upon the corporate entities which might violate the statute, and this could be done only by a fine; and that the intention in the second part was to impose punishment upon the officers of such corporate entities or associations, and punish individuals who might be guilty of the same offence; and that in the case of natural persons, as it was possible to impose an additional penalty of imprisonment, it was imposed, in order the more effectively to deter them from committing, or permitting the corporations which they represent to commit, the offences denounced by the statute." It is not necessary to constitute a conspiracy within the provisions of an anti-trust statute, in a common form, that the combination should actually have an effect upon competi- tion or prices. Entering into a combination designed to affect competition or prices constitutes a complete offence.^ And persons forming such a combination cannot escape crim- inal responsibility therefor upon the ground that there were no written articles of association and that the organization was entirely voluntary.^ Where, under the provisions of an anti-trust statute, a cor- poration is not indictable for entering into a conspiracy in restraint of competition, it may still be counted as a party to shall be a party to the formation of and individuals may be fined not less a trust or monopoly or conspiracy than $100 nor more than $1000, or in restraint of trade, or shall become imprisonment for not more than one a party to a trust or monopoly or year, or both. conspiracy in restraint of trade, or ' Commonwealth u. Grinstead, 111 shall do any act in furtherance of Ky. 203 (1900), (21 Ky. Law. Rep. or aid to such trust or monopoly or 1444, 55 S. W. Rep. 720). conspiracy in restraint of trade, he ' American Handle Co. v. Standard shall be punished by imprisonment Handle Co. (Tenn. 1900), 59 S. W. in the penitentiary for a period of not Rep. 709 ; Commonwealth v. Grin- less than two years nor more than stead, 111 Ky. 203 (1900), (21 Ky. ten years." Law Rep. 1444, 55 S. W. Rep. Utah. Corporations, firms and as- 720). sociations may be fined not less than " Chicago, etc. Coal Co. v. People, $100 nor more than $2000 for first 214 111. 421 (1905), (73 N. E. Rep. offence. Additional penalties for sub- 770), affirming 114 111. App. 75 .sequent offences. Officers, agents (1904). 843 §447 INTEBCOHPORATE RELATIONS [part V the conspiracy as distinct from its officers or agents, and with an officer or agent may make up the two or more parties neces- sary to constitute the conspiracy.* In an indictment or information for conspiracy under an anti-trust statute all known parties to the conspiracy must be named, but it is not necessary to charge them all jointly with the commission of the offence.^ Where the words of an anti-trust statute are descriptive of the offence an indictment thereunder which follows the lan- guage of the statute is sufficient.' The means by which the alleged unlawful combination was intended to be effected need not be stated in an indictment nor is it necessary to set forth the evidence tending to establish its existence.^ § 447. Proceedings to enforce Forfeitures. — The statutes of several States instead of prescribing penalties in the form of fine or imprisonment for the violation of their provisions prescribe them in the form of forfeitures.' Sometimes, also, the statutes 1 standard Oil Co. v. State, 117 Tenn. 618 (1907), (100 S. W. Rep. 705, 10 L. R. A. (n. s.) 1015). 2 State V. Dreany, 65 Kan. 292 (1902), (69 Pac. Rep. 182). ' International Harvester Co. v. Kentucky, (Ky. 1907), 30 Ky. Law Rep. 716, 99 S. W. Rep. 637; Com- monwealth V. Grinstead, 111 Ky. 203 (1900) (21 Ky. Law Rep. 1444, 55 S. W. Rep. 720). * State V. Witherspoon, 115 Tenn. 138 (1906), (90 S. W. Rep. 852). In this case, however, it was held that an indictment charging the de- fendant, as agent of a corporation, with unlawfully carrying oi^t an agreement entered into by the cor- poration with others for the purpose of restricting competition and con- trolling prices, but which failed to state the terms of the agreement or the articles affected, was fatally defective. An indictment charging a con- spiracy to destroy competition in the sale of oil "imported into this State" refers to oil which has been imported and not oil to be imported. 844 Standard Oil Co. v. State, 117 Tenn. 618 (1907), (100 S. W. Rep. 705, 10 L. R. A. (N. s.) 1015). As to procedure under New York statute of 1899 for the purpose of obtaining testimony before institut- ing proceedings, see Matter of Davies, 168 N. Y. 89 (1901), (61 N. E. Rep. 118, 56 L. R. A. 855). ' The provisions of the California act of 1907 (§ 7) are illustrative: "Each and every firm, person, part- nership, corporation, or association of persons, who shall in any manner vio- late any of the provisions of this act, shall for each and every day that such violations shall be committed or continued, after due notice given by the attorney-general or any district attorney, forfeit and pay the sum of fifty dollars, which may be recovered in the name of the people of the State of California, in any county where the offence is committed, or where either of the offenders resides; and it shall be the duty of the attorney-general, or the district attorney of any county on the order of the attorney-general. CHAP. XLIIl] EIGHTS UNDEB STATE ANTI-TRUST STATUTES § 447 provide both for fines and forfeitures.' And, without special provision, it is held that for violations of the Illinois statute the State may prosecute criminally or may maintain actions of debt to recover the penalties imposed.^ A suit by the State for the recovery of penalties prescribed in a Texas statute is a civil action.' And in such a suit no right in the State to recover such penalties can be predicated upon the ground that the combination was unlawful at common law or contravened the federal anti-trust act. The penalties can be recovered only for violations of the statute upon which the action is based.* A violation of the Arkansas statute ' which subjects an offender to the forfeiture of a money penalty does not constitute a criminal offence requiring the action of the grand jury. Con- sequently, a constitutional provision that no person shall be held to answer a criminal charge except upon the indictment of a grand jury is inapplicable to an action by the State for the recovery of the statutory penalties." to prosecute for the recovery of the same. When the action is prosecuted by the attorney-general against » corporation or association of persons, he may begin the action in the supreme court of the county in which defendant resides or does business." See also statutes of Kansas, Michi- gan (Act of 1899), Ohio, and Texas, referred to in note to § 414, ante; "The Statutes. Development of State Legislation." See Arkansas statute in another note to this section. ' The Nebraska statute provides for the forfeiture to the State of property owned under or pursuant to any combination or conspiracy. ' Chicago, etc. Coal Co. v. People, 214 111. 421 (1905), (73 N. E. Rep. 770), -affirming 114 111. App. 75 (1904). ' State V. Waters-Pierce Oil Co. (Tex. 1902), 67 S. W. Rep. 1057. See also Waters-Pierce Oil Co. v. State (Tex. Civ. App. 1908), 106 S. W. Rep. 918. * Fort Worth, etc. R. Co. ». State (Tex. 1905), 88 S. W. Rep. 370. An action by the attorney-general to recover from a railroad company the penalties prescribed in the Texas statute of 1903 can be maintained without the consent of the State Rail- road Commission. State V. Missouri, etc. R. Co., 99 Tex. 516 (1906), (91 S. W. Rep. 214). ' The Arkansas statute is as follows: "Any person, partnership, firm or association, or any representative or agent thereof, or any corporation or company, or any officer, repre- sentative or agent thereof, violating any of the provisions of this act, shall forfeit not less than $200 nor more than $5000 for every such offence, and each day such person, corporation, partnership or assi^ciation shall con- tinue to do so shall be a separate offence." ' Hammond Packing Co. v. State, 81 Ark. 519 (1907), (100 S. W. Rep. 407). For consideration of pleadings in actions by the State for the recovery 845 §448 INTERCORPORATE RELATIONS [part V § 448. Proceedings against Corporations. — In addition to prosecutions for violations of State anti-trust statutes, viewed as criminal offences, civil remedies are generally provided against offending corporations, which take substantially the following forms : (1) Any domestic corporation violating any of the provisions of the statute shall forfeit its charter and franchises and its corporate existence shall thereupon terminate. (2) Any foreign corporation violating any of such provisions shall forfeit the right and privilege of doing business in the State.' Proceedings against domestic corporations to enforce the forfeiture of their charters must, in the absence of other statu- tory provision, foe by quo warranto. Quo warranto proceedings may also be instituted against foreign corporations to oust them from the State for violating these statutes; ^ or, it is held, the attorney-general may maintain a suit for an injunction to restrain them from further doing business,^ or from further violating the statutes.^ of penalties, see State v. Missouri, etc. R. Co., 99 Tex. 516 (1906), (91 S. W. Rep. 214) ; State v. ^tna Fire Ins. Co., 66 Ark. 480 (1899), (51 S. W. Rep. 638). ' See statutes of Arkansas, Cali- fornia, Indiana, Iowa, Kansas, 'Ken^ tucky, Louisiana, Michigan, Minne- sota, Mississippi, Missouri, Nebraska, North Carolina, North Dakota, Ten- nessee, Texas, Utah and Wisconsin referred to in note to § 414, ante: "The Statutes. Development of State Legislation.'' For provisions found in several anti-trust statutes prohibiting the issue of trust certificates or the plac- ing of the management or control of corporations in tjie hands of trustees, see Illinois statute printed in note to said § 414, ante. ^ See cases collected in note to § 436, ante: " Application of Statutes to Foreign Corporations doing Local Business." When the unlawful combination has been abandoned punishment may be by a fine instead of a general judgment of ouster. State V. Armour Packing Co., 173 Mo. 536 (1903), (73 S. W. Rep. 645, 61 L. R. A. 464). ' State V. Schlitz Brewing Co., 104 Tenn. 715 (1900), (59 S. W. Rep. 1041, 78 Am. St. Rep. 941). See also Hartford Ins. Co. v. Raymond, 70 Mich. 485 (1888), (38 N. -W. Rep. 474). * Attorney-General v. A. Booth & Co., 143 Mich. 89 (1906), (106 N. W. Rep. 868). See also People v. Aachen, etc. Fire Ins. Co., 126 III. App. 636 (1906). Compare, however, Minnesota v. Northern Securities Co., 123 Fed. 692 (1903), {reversed on other groimds, 194 U. S. 48 (1903), (24 Sup. Ct. Rep. 598)), where it was held that a court of equity, in the absence of statutory authorization, has no power to enjoin the violation of anti-trust statute. The anti-trust statutes of several CHAP. XLIIl] EIGHTS UNDBE STATE ANTI-TEUST STATUTES § 449 These remedies against offending corporations are inde- pendent of the other remedies prescribed in the statutes, and an antecedent criminal conviction of a violation of such a statute is not a condition precedent to the institution of quo warranto, or other, proceedings.' In quo warranto proceedings against a corporation upon the ground that it is a member of a combination in violation of an anti-trust statute it cannot object that the other members of the combination are not joined with it as parties defendant. It may be proceeded against whether the others can be reached or not.^ § 449. Actions for Damages. — Combination agreements con- trary to public policy while invalid and unenforceable at com- mon law were not unlawful in the sense of affording a right of action to persons injured thereby. State statutes against com- States expressly authorize the at- torneys-general to institute proceed- ings in equity to prevent and restrain violations of their provisions. See Missouri Rev. Stat. (1907), § 8979. ' State V. Schlitz Brewing Co., 104 Tenn. 715 (1900), (59 S. W. Rep. 1041, 78 Am. St. Rep. 941); Attorney- General V. A. Booth & Co., 143 Mich. 89 (1906), (106 N. W. Rep. 868). The Nebraska statute of 1905 pro- vides that any corporation twice ad- judged to have violated its provisions which shall thereafter violate them shall, on the suit of the attorney-gen- eral, be prohibited from further doing business in the State. It is held that, in an action to obtain an injunction under the act, the court cannot for- feit the charter of the corporation. State V. Omaha Elevator Co., 75 Neb. 654 (1906), (110 N. W. Rep. 874). ' Attorney-General v. A. Booth & Co., 143 Mich. 89 (1906), (106 N. W. Rep. 868). That foreign corporations may be ousted from the State for acts of their agents within the State, see Waters- Pierce Oil Co. V. State, 19 Tex. Civ. App. 1 (1898), (44 S. W. Rep. 936), 8. c. 177 U. S. 43 (1900), (20 Sup. Ct. Rep. 518) ; State v. Schlitz Brewing Co., 104 Tenn. 715 (1900), (59 S. W. Rep. 1041, 78 Am. St. Rep. 941). As to liability, under anti-trust statutes, of agents of foreign corpora- tions, see State v. Phipps, 50 Kan. 609 (1893), (31 Pao. Rep. 1097, 34 Am. St. Rep. 152, 18 L. R. A. 657). See also State V. Schlitz Brewing Co., supra. Under the Missouri statutes a for- eign corporation, in accepting a license to do business in the State, agrees that notice in any matter affecting such licen.se to its attorney of record shall be notice to it. State V. Standard Oil Co., 194 Mo. 124 (1906), (91 S. W. Rep. 1062). For extended consideration of the appointment of receivers in proceed- ings by the State against corporations for violating the Texas anti-trust statutes; the rights and powers of such receivers, and the possible con- flict of authority with federal re- ceivers, see Waters-Pierce Oil Co. v. State (Tex. Civ. App. 1907), 103 S. W. Rep. 836; (Tex. Sup. Ct. 1907), 106 S. W. Rep. 326; (Tex. Civ. App. 1907), 105 S. W. Rep. 851 ; (Tex. Civ. App. 1908), 106 S. W. Rep. 918. 847 §449 INTEECOEPOKATE RELATIONS [PAET V binations, however, go beyond the common law; make that positively unlawful which was only negatively invalid before, and thus — it is held — give rights of action to injured per- sons. Thus, where a statute declares a combination in restraint of competition criminal and unlawful and prescribes a penalty, it is said that any person suffering special damage by reason of the combination has a right of action therefor.' Moreover, the State anti-trust statutes not only declare com- binations previously only invalid criminal and unlawful, but, as a general rule, specifically grant to persons injured by unlawful combinations rights of action for damages or penalties. Some- times these statutes give a purchaser of articles, the sale of which is controlled by a combination, the right to recover back the full consideration paid.^ Other and more drastic provisions are along the Unes of the seventh section of the federal anti-trust statute ' and provide that persons injured by reason of anything declared unlawful by the act may recover the damages — and sometimes double or treble the damages — sustained.' ' Rourke v. Elk Drug Co., 75 App. Div. (N. Y.) 145 (1902), (77 N. Y. Sup. 373) : "The combination charged being prohibited and made criminal, every act of the defendants in further- ance of the object of the combination was unlawful, and any person suffering special injury on account of any of such acts has a right of action. It makes no difference whether such acts if done by an individual not in the combination might have been lawful, and a person suffering therefrom would be without remedy. The same acts done by agreement or combina^ tion of several are made unlawful, and for that reason a right of action fol- lows." Compare Brewster v. C. Miller's Sons Co., 101 Ky. 368 (1897), (41 S. W. Rep. 301). ^Thus for example the Tennessee statute provides: "Any person or persons or corporation that may be injured or damaged by any such arrangement, contract, agreement, trust, or combination, described in 848 § 1 of this act, may sue for and re- cover in any court of competent jurisdiction in this State of any person or persons or corporation operating such trust or combination, the full consideration or sum paid by him or them for any goods, wares, merchan- dise, or articles, the sale of which is controlled by such combination or trust." ' For construction of the seventh section of the federal statute, see ante, § 409: ^' Actions for Treble Damages. Pleadings." * The Missouri statute as amended in 1907 provides as follows: "Any person injured in his business or property by any other person or persons by reason of anything for- bidden or declared to be unlawful by this act may sue therefor in any circuit court of this State in which the defendant or defendants, or any of them, reside, or have any officer, agent or representative, or in which any such defendant or any agent, officer or representative may be found. CHAP. XLIIl] RIGHTS UNDER STATE ANTI-TRUST STATUTES § 449 While the statutory provision that persons injured by a com- bination may recover the "full consideration or sum paid" ap- parently prescribes a penalty, it has been held by the Supreme Court of Tennessee that the amount recoverable may also be designated as "damages."' The Court said: "It cannot be affirmed with any degree of certainty that the measure of re- covery prescribed in the act is not in fact within the bounds of actual damages, for it is a matter of common knowledge that men who, in their business, become the injured victims of trusts or combinations often suffer not only a depreciation in the salable value of their commodities then on hand, but also a complete destruction of their business for the future; the aggre- gate losses so sustained in many instances greatly exceed the prices they originally paid for the commodities in question." Where retail lumber dealers formed an association to prevent the sale of lumber by wholesalers to dealers not members of the association it was held, under the provisions of the Nebraska statute, that a dealer injured by such unlawful combination might maintain an action against any or all the members thereof for the recovery of the damages sustained.^ without regard to the amount in provision authorizing the recovery controversy and shall recover three- back of money paid to an unlawful fold the damages by him sustained, combination was a penalty, and not and the costs of suit, including a, liquidated damages, reasonable attorney's fee." As to recovery of double damages See also statutes of California, under Tennessee statute of 1891, see Indiana, Kansas, Michigan, Nebraska, American Handle Co. v. Standard Oklahoma, Ohio and Utah, referred to Handle Co. (Tenn. Ch. 1900), 59 S. W. in note to § 414, ante: "The Statutes. Rep. 709. Development of State Legislation." ' Oleland v. Anderson, 66 Neb. 252 Most of the late comprehensive (1902), (92 N. W. Rep. 306). anti-trust statutes have a similar In an action against an ice corn- provision to that of the Missouri pany for breach of contract to deliver statute, excepting that they may pro- ice the damages cannot be enhanced vide for the recovery of actual or by showing that the reason why the double, instead of treble, damages. contract was broken was that the A few follow the Tennessee form defendant had entered into an unlaw- shown in a preceding note. ful combination in violation of the ' State V. Schlitz Brewing Co., 104 Kansas anti-trust statute. "The Tenn. 715 (1900), (59 S. W. Rep. 104, reason for the breach furnished no 78 Am. St. Rep. 941). cause of action." Compare, however, Mason jj. Adoue, Crystal Ice Co. v. Wylie, 65 Kan. 30 Tex. Civ. App. 276 (1902), (70 S. W. 104 (1902), (68 Pac. Rep. 1086). Rep. 347), where it was held that the 849 § 450 INTEHCOBPORATE RELATIONS [PART V The Missouri statute gives a person injured by a combina- tion in violation of its provisions a right of action at law to recover treble damages, but affords no direct remedy in equity.' § 450. Evidence. Production of Books. — For reasons al- ready considered in reference to illegal combinations generally, it is not necessary, in order to establish a violation of an anti- trust statute, to show, by direct evidence, that a combination with an unlawful object has been formed.^ The facts and cir- cumstances attending the acts of the parties may clearly show their purpose and may constitute the best evidence. Illegal combinations are seldom evidenced by written agreements stating a purpose forbidden by law. In State v. Firemen's Fund Ins. Co} the Supreme Court of Missouri said: "Of course there was no written agreement forming the trust, for that was 'inexpedient, and might make the members liable to prosecution under the trust laws,' as the president of the club well and wisely remarked when the club was formed. When people set out to do acts that are either mala in se or mxila prohibita, they do not put up a sign over the door or a stamp on the act declaring their purposes and intent. Concealment is generally their prime object. But as such mat- ters exist without agreements and rest upon common under- standing and practice, so the proof of their existence may be of the same character; and while such laws are penal in their na- ture and should be strictly construed, . . . nevertheless a pool or trust may be as conclusively proved by facts and circum- ' C. H. Albers Commission Co. v. Rep. 770), affirming 114 111. App. 75 Spencer, 205 Mo. 105 (1907), (103 (1904) ; Detroit Salt Co. v. National S. W. Rep. 523). Salt Co., 134 Mich. 1113 (1903), (96 Compare Walsh v. Association of N. W. Rep. 1); Waters-Pierce Oil Master Plumbers, 97 Mo. App. 280 Co. v. State, 19 Tex. Civ. App. 1 (1902), (71 S. W. Rep. 455). See also (1898), (44 S. W. Rep. 936). See also Union Pressed Brick Co. v. Chicago, American Handle Co. v. Standard etc. Brick Co., 31 Chic. Leg. News 428, Handle Co. (Tenn. Ch. 1900), 59 S. W. 4 Chic. L. J. Wkly. 346. Rep. 709. And see arUe, § 375 : 'Stater. Firemen's Fund Ins. Co., "Evidence"; ante, § 405: " Proof of 152 Mo. 1 (1899), (52 S. W. Rep. 59.5, Violation of Statute. Evidence." 45 L. R. A. 363) ; Southern Electric ' State v. Firemen's Fund Ins. Co., Sec. Co. V. State (Miss. 1907), 44 So. 152 Mo. 40 (1899), (52 S. W. Rep. Rep. 785; Chicago, etc. Coal Co. v. 595, 45 L. R. A. 363), (per Marshall, People, 214 111. 421 (1905), (73 N. E. J.). 850 CHAP. XLlIl] EIGHTS UNDER STATE ANTI-TRUST STATUTES §451 stances as by direct written evidence, for in this regard they are like all other frauds." ' A court having power to require any party to a suit to produce any books in its possession relating to the merits of the case may compel a corporation, charged with violating an anti-trust statute, to produce its stock book when it is material to the issues. And the stock book is material when it is claimed that a defendant corporation, while ostensibly independent, is actu- ally controlled by another corporation through stock ownership which likewise controls its competitors.^ § 451. Statutes of Limitation. — Upon the principle that every overt act is a renewal of the original conspiracy, a prosecution for a violation of a State anti-trust statute making combinations criminal conspiracies may be maintained against a continuing combination, although the statutory period has elapsed between ' It is not necessary in order to establish an unlawful combination to show that an agreement has been actually entered into. Proof of an understanding to work a common purpose is sufficient. Chicago, etc. Coal Co. V. People, 214 III. 421 (1905), (73 N. E. Rep. 770), affirming 114 111. App. 75 (1904). For statements of evidence held sufficient to establish combinations in violation of State anti-trust stat- utes, see State v. Armour Packing Co., 173 Mo. 356 (1903), (73 S. W. Rep. 645, 61 L. R. A. 464); Detroit Salt Co. V. National Salt Co., 134 Mich. 103 (1903), (96 N. W. Rep. 1); State v. Omaha Elevator Co., 75 Neb. 654 (1906), (110 N. W. Rep. 874). Cowr- pare State v. Continental Tobacco, 177 Mo. 1 (1903), (75 S. W. Rep. 737); State V. Shippers Compress, etc. Co., 95 Tex. 603 (1902), (69 S. W. Rep. 58, 93 Am. St. Rep. 870, 58 L. R. A. 714); Wilson i;. Morse, 117 Iowa, 581 (1902), (91 N. W. Rep. 823). Where in an action upon a lease it was set up in the answer that it was taken as part of a scheme to create an unlawful monopoly and was, consequently, invalid, it waa held that the question whether the lease was made to control prices or restrict production was for the jury. Hartz V. Eddy, 140 Mich. 479 (1905), (103 N. W. Rep. 852). But where all the evidence is con- sistent only with an unlawful purpose the question of illegality should not be submitted to the jury. Detroit Salt Co. v. National Salt Co., 134 Mich. 103 (1903), (96 N. W. Rep. 1). Mandamus will not lie to compel the attorney-general to institute proceedings to forfeit the charters of corporations alleged to be violat- ing an anti-trust statute. Before he acts he must look into the facts and determine whether the evidence neces- sary to a successful prosecution can be obtained. Lewright v. Bell, 94 Tex. 556 (1901), (63 S. W. Rep. 623). 2 State V. Standard Oil Co., 194 Mo. 124 (1906), (91 S. W. Rep. 1062). For construction of Arkansas statute relating to the production of books and papers in prosecutions under the anti-trust act, see Hammond Packing Co. v. State, 81 Ark. 519 (1907), (100 S. W. Rep. 407). 851 § 451 INTERCORPORATE RELATIONS [PART V the formation of the combination and the finding of the indict- ment.' An action by the State for the recovery of penalties under the Texas statutes is a civil suit and is not barred by the statutes of limitation which prevent prosecutions for the criminal offences created by such statutes. And as such a suit is for the protec- tion of the public rights, it is not barred by statutes of limitation applicable to civil actions upon the theory that it is an action of debt only.^ ' American Fire Ins. Co. v. State, ^ Waters-Pierce Oil Co. v. State 75 Miss. 24 (1897), (22 So. Rep. (Tex. Civ. App. 1908), (106 S. W. 99). Rep. 918). 852 INDEX (References are to sections. Letter " n " refers to note.) ABSORPTION. (See Merger.) ACCOUNTING, after attempted consolidation, 97. ACQUIESCENCE, of stockholders in consolidation, 45. implied sanction of sale, 116. implied sanction of sale of railroad, 150. of stockholders in lease of railroad, 192. of stockholders in ultra vires stockholding, 293. (See also Estoppel.) ACTIONS. (See Pending Suits; Remedies.) ADMISSIONS, consolidated corporation bound by, of constituents regarding obli- gations, 86. (See also Evidence; Procedure.) ADOPTION OF RAILROAD LEASES, acknowledgment, witnesses, etc., 195. allegation and proof of proper, 195 n. authority of officers or agents, 195. construction of statutes prescribing method of, 194. estoppel to allege irregular, 196. formalities attending, 195. place of execution, 195. seals, 195. statutes prescribing method of, 193. AGREEMENT FOR LEASE, power to make, 184. ALABAMA, (a) Consolidation. statute authorizing consolidation of business corporations, 23 n. statute authorizing consolidation of railroads, 22 n. ' statutes prescribing method of consolidating, 52 n. (6) Sales. statutes authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. 853 INDEX ALABAMA — continued, (c) Leases. statute authorizing railroad leases, 145 n, 180 n. statute prescribing method of adopting railroad lease, 193 n. (d) Stockholding. statute authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statutes, 414 n. ALLEGATION OF CONSOLIDATION, how made, 91. (See also Pleadings.) ALLIANCE. (See Confederation.) AMALGAMATION, compared with consolidation, 12. English statute authorizing, 12 n. remarks of English judges concerning, 12. uncertain meaning of term, 12. AMERICAN BISCUIT COMBINATION, formation and purposes of, 349. ANCILLARY CONTRACTS IN RESTRAINT OF TRADE. (See Contracts in Restraint op Trade; Federal Anti-trust Statute.) ANTI-TRUST LEGISLATION. (See Federal Anti-trust Statute; State Anti-trust Statutes.) APPRAISAL, of stock of dissenting stockholders in case of exchange, 121. of stock of dissenting stockholders upon consolidation, 57. statutory provisions for, of stock, 57. whether court of equity can make, without statute, 121. whether stock can be appraised in aid of lease, 167. ARIZONA, (a) Consolidation. statute authorizing consolidation of railroads, 22 n. statute prescribing method of consolidating, 52 n. (6) Sales. statutes authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. (c) Leases. statutes authorizing railroad leases, 145 n, 180 n. statute prescribing method of adopting railroad lease, 193 n. {d) Stockholding. statutes authorizing corporate stockholding, 271 n. ARKANSAS, (a) Consolidation. constitutional provision against consolidation of competing corporations, 32 n. statutes authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. 854 INDEX ARKANSAS — continued, (6) Sales. statutes authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. (c) Leases. statute authorizing lessee to exercise right of eminent domain, 210 n. statute authorizing railroad leases, 145 n, 180 n. statute concerning taxation of leased railroad, 224 n. statute prescribing method of adopting railroad lease, 193 n. statute providing that lessor corporation shall be liable for dam- ages, 216 n. statute relating to foreign lessee corporations, 254 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statute, 414 n. constitutional provision against monopolies, 414 n. ARTICLES OF ASSOCIATION, effect of assumption of power to hold stock in, 270. ASSENT OF STOCKHOLDERS. (See Stockholders.) ASSESSMENTS, corporation liable for, upon intra vires holdings, 287. covenant to pay, in railroad leases, 205. liability for, upon ultra vires holdings, 289. (See also Taxes.) ASSIGNEES, of illegal combination, rights and remedies of, 368. ASSIGNMENT, covenant not to make, of leases, 206. of trackage contracts, 258. what constitutes, of lease, 206. ASSOCIATIONS, application of rule of public policy to, of carrier corporations, 365. application of rule of public policy to, of dealers, 362. application of rule of public policy to, of gas companies, 365. application of rule of public policy to, of manufacturers, 360. application of rule of public policy to, of manufacturers owning patents, 361. application of rule of public policy to, of producers, 360. definition, 303. formation of, 308. forms of industrial, 308. legality of, not generally a question of corporation law, 312. nature of pools, 308, 364. ASSOCIATIONS OF RAILROAD COMPANIES, pools, 308, 364 a. 855 INDEX ASSOCIATIONS OF RAILROAD COUTA^IES — continued, traffic contracts of competing lines, 364. trafl&c contracts of connecting lines, 363. ASSUMPTION, of power to hold stock in articles of association, 270. by vendee corporation of debts of vendor, 123. B BONDS, collateral trust, 287 a. power of consolidated corporation to issue mortgage, 75. when guarantee of, by competing corporation amounts to consolida- tion, 35. (See also Bondholders.) BONDHOLDERS, election of, in case of convertible bonds, 81. obligations of consolidated corporation to, of constituents, 81. of de facto consolidated corporation estopped to deny regularity of consolidation, 96. when, cannot be deprived of right to convert bonds into stock of consolidated corporation, 81. BOOKS, production of, under federal anti-trust statute, 413. production of, under State anti-tnist statutes, 450. BRIDGE COMPANIES, constitutional prohibitions against consolidation of competing, 39. BUSINESS CORPORATIONS, consolidation of, statutory provisions, 23. construction of statutes authorizing consolidation of, 30. CALIFORNIA, ^ (a) Consolidation. statute authorizing consolidation of mining companies, 23 n. statute authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (6) Sales. statute authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. (c) Leases. statute authorizing railroad leases, 180 n. (d) Combinations. anti-trust statutes, 414 n. CALLS, apply to all subscriptions, 69. how consolidated corporation may apply amount received on, 77. on subscriptions made pending consolidation, continue in force 69 856 INDEX CANAL COMPANIES, constitutional prohibitions against consolidation of competing, 39. CARRIERS, combination of, violates federal anti-trust statute, 398. constitutional provisions against consolidation of competing, 39. CHARTER. (See Corporation.) CHICAGO GAS TRUST, nature and formation of, 346. CHOSES IN ACTION, of constituents pass, upon consolidation, to consolidated company, 67. CITIZENSHIP, of corporation, 101 n. of interstate consolidated corporation, 106. CIVIL REMEDIES. (See Remedies.) CLAIMS. (See Obligations.) CLASSIFICATION, of intercorporate relations, 1. CLASS LEGISLATION, State anti-trust statutes as constituting, 421. (See also Fourteenth Amendment.) COLLATERAL, incidental power to take stock as, 278. COLLATERAL ATTACK, invalidity under federal anti-trust statutes as a ground of, 405. invalidity under Statue anti-trust statutes as a ground of, 445. upon combination, 369. upon de facto consolidated corporation, 93, 94, 95. upon unlawful consolidated corporation, 93. COLLATERAL CONTRACTS, to ultra vires stockholding invalid, 290. COLLATERAL TRUST BONDS, duties of trustee under, 287 a. nature of, 287 a. rights and remedies of holders of, 287 a. COLORADO, (o) Consolidation. constitutional provision against consolidation of competing cor- porations, 32 n. statute authorizing consolidation of business corporations, 23 n. statute authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (6) Sales. statutes authorizing sales of railroads, 145 n. (c) Leases. .statute authorizing railroad leases, 145 n, 180 n. statute prescribing method of adopting railroad lease, 193 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. COMBINATIONS, analysis of principles determining legality of, 311. analysis of rules of public policy governing, 354-359. 857 COMBINATIONS — continued, application of rules of public policy to particular classes of, 360-365. basis of rules of public policy concerning, in judicial decisions, 341. by means of holding stock, 292. collateral attack upon, 369. connection between contracts in restraint of trade and, 335. control of the market, 356. corporate, by means of holding corporation, 323. corporate, by means of purchasing corporation, in general, 318. definition of phrase "corporate combination," 306. definition of term "association," 303. definition of term " combination," 302. definition of term "trust," 304. difficulty of formulating rules of public policy concerning, 340. distinction between, and consolidation, 16. evidence, 375. evolution of, 6, 307. formation of associations, 308. formation of corporate, 310. formation of trusts, 309. form of, immaterial, 354. forms of industrial associations, 308. forms of pools, 308. illegality of, no defence to creditors' actions, 370. in formation of trust. State regards acts of stockholders as acts of corporation, 313. issue of stock for good-will in formation of corporate, 320. issue of stock for property in formation of corporate, 319. legality of association not generally a question of corporation law, 312. members of illegal, cannot recover agreement upon, 366. modern, of capital seldom conspiracies, 328. modern use of term "monopoly," 332. nature of pools, 308. objects and tendencies of, 355. of carriers violate federal anti-trust statute, 398. of railroads violate federal anti-trust statute, 398. over- valuation of property acquired by issue of stock, 321. popular use of word " trust," 305. power of Congress to prohibit, of competing railroads, 381. power of Congress under commerce clause to legislate concerning, under State laws, 380. power of vendor corporations to sell property for stock, 322. power of State to prohibit, in exercise of police power, 420. power of State to prohibit, in exercise of reserved power, 418. primary meaning of term "monopoly," 329. quo warranto against combining corporations, 373. 858 INDEX COMBINATIONS — continued, quo warranto against corporate, 372. remedies of members of illegal, 366. rights and liabilities growing out of trusts, 317. rights and remedies between illegal, and members, 367. rights and remedies of stockholders of combining corporations, 371. rights of debtors to attack legality of, 369. rights of members of illegal, 366. rights of receivers and assignees of illegal, 368. rights of, to allege its own illegality, 370. rules of public policy regarding, 352. sketch of growth of, 6. test of right of member to recover, 366. test of validity of, not whether in restraint of trade, 337. test of validity of, not whether monopolies, 333. trust invalid as delegating powers, 315. trust invalid as involving partnership of corporations, 314. trust invalid as involving practical consolidation, 316. what, are conspiracies, 327. , COMMERCE, distinction between, and manufacture, 393. interstate, a matter of federal regulation, 393. State, a matter of State control, 393. (See also Interstate Commerce.) COMMERCE CLAUSE, construction of, 38 n. development of, 38 n, 379 n. operation of, upon State anti-trust legislation, 415. provisions of, 379 n. COMMUNITY OF INTEREST, meaning of phrase, 5, 296. COMPETING OR PARALLEL RAILROADS, (a) Consolidation. constitutional and statutory provisions against consolidation of, 32. construction of provisions against consolidation of, 33-37. popular view regarding consolidation of, 31. public policy concerning consolidation of, 31. stockholder may restrain consolidation of, 40. State may prevent consolidation of, 40. what are, 37. (6) Sales. constitutional and statutory provisions against purchase of, 147. (c) Leases. constitutional and statutory provisions against leases of, 186. COMPETITION, distinction between restriction of, and control of the market, 356. lease of railroad for purpose of suppressing, against public policy, 249. 859 INDEX COMPETITION — continued, holding stock to prevent, 292. public policy regarding, 356. CONDEMNATION OF STOCK, for purposes of consolidation, 51. (See also Appbaisal.) CONDITIONAL SUBSCRIPTIONS. (See Subscriptions.) CONFEDERATION, consolidation in form of, 8. exemplified in interstate consolidations, 8. CONGRESS, cannot regulate combinations of manufacturers, 6, 393. can only regulate or prohibit combinations affecting interstate commerce, 391. limitations upon powers of, 6. power of, to prohibit combinations of competing railroads, 381. power of, to legislate concerning private contracts affecting inter- state commerce, 379. power of, to legislate concerning contracts and combinations under State laws, 380. (See also Commerce Clause.) CONNECTICUT, (o) Consolidation. statute authorizing consolidation of business corporations, 23 n. statute authorizing consolidation of railroads, 22 n. statute concerning evidence of consolidation, 91 n. statutes prescribing method of consolidating, 52 n. (6) Leases. statute authorizing railroad leases, 180 n. statute prescribing method of adopting railroad lease, 193 n. (c) Stockholding. statute authorizing corporate stockholding, 271 n. CONNECTING OR CONTINUOUS RAILROADS, construction of statutes authorizing consolidation of, 29. construction of statutes authorizing leases of, 185. what are, 29. whether connection may be by leased road, 29. CONSIDERATION, for fraudulent sale, may be reached by creditors, 125. for lease of railroad, 198. CONSOLIDATED CORPORATION, acquires real estate and rights in streets of constituents, 66. act creating, contravenes constitutional provision against creating corporations by special act, 19. choses in action of constituent corporations pass to, 67. constitutional limitations affecting obligations of, 78. entitled to municipal aid voted to constituents, 70. legislative recognition of, validates organization, 20. 860 INDEX CONSOLIDATED CORPORATION — conHnwed, liability of, for debts upon consolidation after foreclosure sale, 83. liability of, for torts of constituents, 82. liability of, general rule of, 79. liable upon its own obligations, 78 a. liens, takes property of constituents subject to, 84. may be organized for full statutory period, 19. miscellaneous powers of, 77. not purchaser for value without notice, 87. obligation of, to perform public duties of constituents, 80. obligations of, determined by constitutional limitations, 78. obligations of, to bondholders and preferred stockholders of con- stituents, 81. powers of, in general, 74. power of, to issue mortgage bonds, 75. remedies upon subscription contracts, 69. right of eminent domain, 76. rule as to transmission of property and franchises to, 65. special privileges and immunities passing to, 73. takes property subject to equitable liens, 85. terms of existence of constituent corporations do not affect, 19. when, takes subject to constitutional limitations, 71. whether entitled to exemptions from taxation of constituents, 72. CONSOLIDATING CORPORATIONS. (See Constituent Corporations.) CONSOLIDATION, absorption, process of, in, 8. accounting after attempted, 97. after foreclosure, consolidated corporation not liable for debts, 83. allegation and proof of, 91. analogy in civil law, 10. appraisal of stock in, statutory provisions for, 57. arrangements amounting to, within constitutional prohibitions, 35. as a result and process, 9. assent of stockholders to, how manifested, 45. attempted, 92. authorization of, of interstate railroads not regulation of interstate commerce, 19 a. chases in action of constituents pass upon, to consolidated corpora^ tion, 67. citizenship of interstate consolidated corporation, 106. condemnation of stock for purposes of, 51. consolidated corporation takes per universitatem, 10. constitutional limitations affecting result of, 71. constitutional prohibitions of, not regulations of interstate com- merce, 38. 861 INDEX CONSOLIDATION — continued, constitutional provisions against, of carrier corporations other than railroads, 39. constitutional provisions against, of competing railroads, 32. construction of constitutional prohibitions against, 33, 34. construction of particular statutes authorizing, 28. construction of statutes authorizing, of business corporations, 30. construction of statutes authorizing, of corporations of different States, 100. construction of statutes authorizing, of railroads, 29. construction of statutes creating distinct corporation, 62. construction of statutes showing merger as result of, 63. construction of statutes prescribing method of, 54. conventional and statutory liens, effect of, upon, 84. court will not take judicial notice of, 91. . definitions of, 7 n. description of, 9. distinction between, and combination, 16. distinction between, and control, 15. distinction between, and lease, 14. distinction between, and reorganization, 16 n. distinction between, and sale, 13. distinction between irregular and invalid, 92. . distinction between use of term in authorizations and prohibitions, 7. duties of interstate consolidated corporation, 105. effect of, as a general rule, is creation of distinct corporation, 60. effect of, depends upon terms of consolidation act, 7, 59. effect of, in general, 58. effect of interstate, upon status of constituent corporations, 102. effect of irregular, 94. effect of unlawful, 93. effect of, upon stockholders of constituent corporations, 64. enforcement of conditional subscriptions, 69. enforcement of provisions against, 40. enforcement of subscriptions by consolidated corporation, 69. equitable liens, effect of, upon, 85. estoppel to deny regularity of, 96. exemptions from taxation, whether pass to consolidated corporation, 72. extreme development of idea of combination, 16. foreclosure of mortgage of interstate consolidated corporation, 107. formal statutory requisites for, 52. fraud in consolidation agreements, 98. fusion, process of, 8. incidental power to acquire stock in connection with, 279. includes merger, 11. 862 CONSOLIDATION —coniinMed, in form of confederation, 8. interstate, how authorized, 99. invalid, a nuUity, 93. laches of stockholders in restraining invalid, 49. lease is not, 34. legislative sanction of, how expressed, 20. legislative ratification of, equivalent to authorization, 20. liability of consolidated corporation, general rule of, 79. management of interstate consolidated corporation, 103. meaning of term "in constitutional prohibitions," 33. merger and continued existence as result of, 61. miscellaneous powers of consolidated corporation, 77. municipal aid voted to constituent passes to consolidated corpora- tion upon, 70. not dependent upon considerations of public policy, 16. obligations of consolidated corporation determined by constitu- tional limitations, 78. obligations of consolidated corporation, in general, 79. obligations of consolidated corporation to perform public duties of constituents, 80. obligations of consolidated corporation upon special contracts of constituents, 81. of business corporations, statutory provisions, 23. of railroads, sketch of, 2. outstanding contract does not prevent legislature from authorizing, 19. pending suits, effect of, upon, 89. powers of consolidated corporation, in general, 74. power of consolidated corporation to issue mortgage bonds, 75. power of legislature, in absence of reserved power, to withdraw right to consolidate, 24. power of legislature to authorize, 19. power of legislature to compel, 44. power of legislature to withdraw right to consolidate in exercise of police power, 26. power of legislature to withdraw right to consolidate in exercise of reserved power, 25. power to consolidate a license, 24. power to consolidate not a vested right, 24. procedure in stockholders' actions to restrain, 48. procedure regarding pending suits, 90. public policy regarding, of competing railroads, 31. public policy regarding, of non-competing railroads, 21. remedies at law of creditors of constituent corporations, 86. remedies in equity of creditors of constituent corporations, 87. remedies of dissenting subscriber in case of invalid, 47. 863 CONSOLIDATION — continued, remedy of creditors against constituent corporation, if not dissolved, 88. requisite number of stockholders whose assent is necessary, 41, 42, 43. rights and powers of interstate consolidated corporation, 104. rights and remedies of dissenting stockholders, 46. rule as to transfer of property and franchises by, 65. V rules of construction of statutes authorizing, 27. special privileges and immunities pass to consolidated corporation, 73. status of interstate consolidated corporation, 101. statutes authorizing, not regulations of interstate commerce, 19. statutes showing merger as result of, 62. subscriptions pass upon, to consolidated corporation, 68. taxation of interstate consolidated corporation, 105. torts of constituents, liability of consolidated corporation for, 82. transmission of real estate and rights in streets upon, 66. trust invalid as involving practical, 316. uncertain meaning of term, 7. uses of term distinguished, 8. what are competing or parallel lines, 37. what railroads may consolidate, statutory provisions, 22. what statutory provisions conditions precedent to, 55. what statutory provisions not conditions precedent to, 56. when consolidation is effected, 53. when guarantee of bonds of competing corporation amounts to, 35. whether control through holding corporation amounts to, 36. whether lease amounts to, 34. whether majority can effect, upon giving security, 50. whether right of eminent domain passes upon, 76. who may attack irregular, 95. without legislative authority, against public policy, 18. without legislative authority, ultra vires, 17. CONSPIRACIES, applicability of law of, to corporations, 326. classification of, 324. criminal and civil, distinguished, 325. damage essential to civil, 325. definitions of, 324. definition of civil, 324. definition of criminal, 324. gist of criminal, is the combination, 325. modern combinations of capital seldom, 328. remedies and procedure in case of, 327 a. what combinations are, 327. CONSTITUENT CORPORATIONS, choses in action of, pass, upon consolidation, to consolidated com- pany, 67. 864 INDEX CONSTITUENT CORPORATIONS — continued, effect of consolidation upon, 58-63. effect of consolidation upon suits pending by or against, 89. effect of interstate consolidation upon status of, 102. estoppel of, of de facto consolidated corporation, to deny regularity of organization, 96. liability of consolidated corporation for torts of, 82. liens upon property of, not affected by consolidation, 84, 85. municipal aid voted to, passes to consolidated corporation, 70. obligations of, assumed by consolidated corporation, 79. obligation of consolidated corporation to perform public duties of, 80. obligations of consolidated corporation to preferred stockholders and bondholders of, 81. real estate and rights in streets of, pass to consolidated corporation, 66. remedies at law of creditors of, 86. remedies in equity of creditors of, 87. remedies of consolidated corporation to enforce subscriptions to, 69. remedies of creditors against, if not dissolved, 88. rule as to transmission of property of, upon consolidation, 65. stockholders of, effect of consolidation upon, 64. special contracts of, assumed by consolidated corporation, 81. subscriptions to, pass to consolidated corporation, 68. terms of existence of, do not affect consolidated corporation, 19. whether exemptions from taxation of, pass to consolidated com- pany, 72. whether special privileges and immunities of, pass to consolidated corporation, 73. CONSTITUTIONAL PROVISIONS, against consolidation, not regulations of interstate commerce, 38. against consolidation of carrier corporations other than railroads, 39. against consolidation of competing railroads, 32. against leases of competing or parallel railroads, 186. against purchase of competing or parallel railroads, 147. against trusts and monopolies, 414 n. arrangements amounting to consolidation within, 35. commerce clause of federal constitution, 379 n. construction of, against consolidation, 33-37. construction of, against corporate stockholding, 274. construction of commerce clause, 38 n. defining status of interstate consolidated corporations, 101 n. development of commerce clause, 38 n. enforcement of, against consolidation, 40. Fifth Amendment, 419 n. Fourteenth Amendment, 419 n. imposing limitations upon grants of privileges and immunities, 71. imposing limitations upon grants of special privileges, 78. 865 CONSTITUTIONAL PROVISIONS — continued, meaning of term "consolidation" in, 33. validity of State anti-trust statutes tested by Fourteenth Amend- ment, 419-421. validity of State anti-trust statutes under State constitutional pro- visions, 422. what are competing or parallel lines within meaning of, 37. whether control through holding corporation amounts to consolida- tion, 36. whether lease amounts to consolidation, 34. who may question constitutionality of State anti-trust statutes, 424. (See also Commerce Clause; Fourteenth Amendment; Fifth Amend- ment.) CONSTRUCTION OF STATUTES, (a) Consolidation. authorizing consolidation of railroads, 29. authorizing consolidation of business corporations, 30. authorizing consolidation, when enabling act, 42. authorizing consolidation, when an impairment of contract, 42. consolidation statutes receive strict but not unreasonable con- struction, 27. general statutes authorizing consolidation not retroactive, 20. of interstate consolidation statutes, 100. of Minnesota, concerning consolidation, 64. particular consolidation statutes, 28. power to connect does not authorize consolidation, 28. prescribing method of consolidation, 54. rules of construction of consolidation statutes, 27. showing distinct corporation as a result of consolidation, 62. showing merger as result of consolidation, 63. what is a connecting or continuous line, 29. what statutory provisions conditions precedent to consolida- tion, 55. what statutory provisions not conditions precedent to consolida- tion, 56. whether authority to consolidate must be expressly conferred upon all consolidating corporations, 27. whether continuous line may be formed by leased road, 29. whether power to consolidate gives power to sell and mce versa, 28. (6) Sales. relating to sales of railroads, 146. (c) Leases. authorizing lease to foreign corporation, 253. authorizing railroad leases, 181. concerning leases of connecting lines, 185. not authorizing railroad leases, 183. 866 INDEX CONSTRUCTION ON STATUTES — continued, power to lease unfinished road, 184. power to make agreement for lease, 184. prescribing method of adopting railroad leases, 194. rule of, authorizing railroad leases, 181. (d) Stockholding. authorizing corporate stockholding, 273. (e) Combinations. federal anti-trust statute, 386-404. State anti-trust statutes, 425-444. CONTRACT, charter, between State and corporators, 17. grant of power to consolidate is not, 24. liability of lessor upon, of lessee, 222. outstanding, does not prevent legislature from authorizing consoli- dation, 19. power of Congress under commerce clause to legislate concerning^ affecting interstate commerce, 379. power of Congress under commerce clause to legislate concerning, under State laws, 379. special, of constituent corporation assumed by consolidated corpo- ration, 81. CONTRACTS IN RESTRAINT OF TRADE, connection between, and combinations, 335. conventional, are ancillary agreements, 334. definition of, 334. development of law of, 335. do not furnish direct test of validity of combination, 337. modern use of phrase, 336. nature of, 334. test of reasonableness of, 335. use of phrase, in federal anti-trust statute, 387. CONTROL, definition of, 294. distinction between, and community of interest, 296. distinction between, and consolidation, 15, 297. distinction between, of corporation and, of property, 295. nature of, 5. no implied power to purchase stock for, 298. phases of, 294. power to purchase stock to obtain, 298. remedies of minority stockholders of controlled corporation, 301. status of corporation as controlling stockholder, 299. trust relation of controlling corporation to minority stockholders, 300. CONTROLLING CORPORATION. "(See Control.) 867 CONTROL OF. THE MARKET, distinction between, and restriction of competition, 356. meaning of phrase, 356. no limit of territory prescribed, 357. rule of public policy concerning, 352. use of phrase, 350. what are "useful commodities," 358. CONVERTIBLE BONDS, rights of holder of, upon consolidation, 81. COPYRIGHTS, application of federal anti-trust statute to combinations under, 400. are gMOsi-monopolies, 331. CORPORATE COMBINATIONS, by means of holding corporations, 310, 323. by means of purchasing corporation, 310, 318. definition of phrase, 306. formation of, 310. injunction not substitute for quo warranto against, 374. issue of stock for good-will in formation of, 320. Lssue of stock for property in formation of, 319. over- valuation of property acquired by issue of stock, 321. power of vendor corporations to sell property for stock, 322. quo warranto against, 372. CORPORATE PROPERTY, effect of sale of entire, 117. exchange of, for stock in another corporation, 118-122, 281. lease of entire, of losing corporation, 167. lease of entire, of prosperous corporation, 166. sale of entire, by directors, 112. sale of entire, by unanimous consent, 109. sale of entire, of losing corporation by majority vote. 111. sale of entire, of prosperous corporation, by majority vote, 110. (See also Corporation.) CORPORATE STOCKHOLDING, collateral trust bonds, 287 a. construction of constitutional prohibitions against, 274. construction of statutes authorizing, 273. corporation has right to vote stock, 287. corporation liable for assessments upon intra vires holdings, 287. distinction between control and community of interest, 296. distinction between control of corporation and control of property, 295. English rule as to necessity for statutory authority, 265. expediency of purchase immaterial, 269. incidental power to acquire stocks, in general, 275. incidental power to invest in stocks, 276. incidental power to take stock as collateral, 278. 868 INDEX CORPORATE STOCKHOLDING — continued, incidental power to take stock for debt, 277. incidental power to take stock in connection with consolidation or purchase, 279. incidental power to take stock in exchange for corporate assets, 281. incidental power to take stock upon reorganization, 280. incidents of ownership attach to intra vires holdings, 287. liability for assessments upon ultra vires holdings, 289. meaning of term "control," 294. mere assumption of power to hold stocks of no effect, 270. miscellaneous instances of incidental power, 282. nature of holding corporations, 285. necessity for statutory authority to purchase stock, 264, 265. necessity for statutory authority to subscribe for stock, 266. outline of, 5. phases of control, 294. power of corporation to acquire and hold its own stock, 283 a. power to purchase stock to obtain control, 298. power to subscribe for stock in foreign corporation, 272. presumption of power to hold stock, 283. purchases through trustees or agents, 267. remedies in case of ultra vires, 293. remedies of minority stockholders of controlled corporation, 301. rights of foreign corporation as stockholder, 286. rule requiring statutory authority cannot be evaded by indirection, 267. similar nature of corporations immaterial, 268. . status of corporation as controlling stockholder, 299. status of corporation holding stock, 284. statutes authorizing, 271. statutory authority necessary to purchase stock, 264, 265. subscriptions through trustees or agents, 267. to prevent competition, 292. trust relation of controlling corporation to minority, 300. ultra vires contracts for purchase of stock, 290. validity of collateral contracts, 290. validity of independent contracts, 291. what incidents of ownership attach to ultra vires holdings, 288. CORPORATION, applicability of law of conspiracies to, 326. charter of, measure of powers, 17. citizenship of, 101 n. definition, 1. distinction between acts ultra vires the, and acts ultra vires the ma- jority, 151. distinction between control of, and control of property, 295. 869 INDEX CORPORATION — continued, distinction between rules of public policy applicable to private and quasi-public, 351. in formation of trust, State regards acts of stockholders as acts of, 313. lease for longer term than existence of, may be valid, 201. may exist without property, 117. nature of relations of, 1-6. power of, to acquire and hold its own stock, 283 a. powers and privileges of, in foreign State, 101 n. proceedings against, under State an ti- trust statutes, 448. similar nature of, does not aflfect power to hold stock, 268. status of, as controlling stockholder, 299. status of, as stockholder, 284. status of, created by action of different States, 101 n. status of foreign, 101. trust invalid as involving partnership of, 314. trust relation of, as controlling stockholder, 300. trustee of property for creditors, 87. violating State anti-trust statutes forfeits charter, 448. when receiver may be appointed to follow assets of, 125. (See also Consolidation; Foreign Corporation; Interstate Con- solidation; Sales of Railroads; Leases of Railroads; Cor- porate Stockholding; Combinations.) COVENANTS IN RAILROAD LEASES, assumption of interest payments, 204. dependent and independent contracts, 203 miscellaneous, 209. not to assign, 206. to keep property insured, 209. to maintain and increase business, 209. to make repairs, 207. to pay assessments, 205. to pay damages and defend suits, 208. to pay rent, 204. to pay taxes, 205. to pay taxes, for sole benefit of lessor, 205. what constitutes breach of covenant not to assign, 206. what constitutes necessary repairs within covenant, 207. (See also Leases op Railroads.) CREDITORS, (a) Consolidation. consolidated corporation directly liable to, of constituents, 79- 82. corporation trustee of property for benefit of, 87. estoppel of, to deny regularity of consolidation, 96. remedies at law of, of constituent corporations, 86. 870 INDEX CREDITORS — continued, remedies in equity of, of constituent corporations, 87. remedy of, against constituent corporation, if not dissolved, 88. rights of, not impaired by consolidation, 19. rights of, of constituent corporations not impaired by stipula- tions in consolidation agreement, 79. (6) Sales. actions at law of, in case of fraudulent sale, 125. equitable remedies of, in case of fraudulent sale, 125. may sue directly vendee upon assumption clause, 123. mortgage by vendee takes priority over claims of, 'of vendor, 126. of vendor, cannot look to vendee unless debts are assumed or imposed by statute, 163. remedies of, against consideration for fraudulent sale, 125. remedies of, in case of fraudulent conveyances, 125. remedies of, upon assumption clause, in contract of sale, 125. vendee generally not liable for debts of vendor, 123. when, entitled to appointment of receiver to follow corporate assets, 125. when, may charge stockholders of vendor corporation, 125. (e) Corporate Stockholding. remedies of, when corporation acquires its own stock, 283 a. (d) Combinations. illegality of combination no defence to actions by, 370. (See also Federal Anti-trust Statute; Obligations; Pending Suits; Remedies; State Anti-trust Statutes.) CRIMINAL PROCEEDINGS, under federal anti-trust statute, 407. under State anti-trust statutes, 446. D DAMAGES, covenant to pay, in railroad leases, 208. recoverable under federal anti-trust statute, 409. recoverable under State anti-trust statutes, 449. DEALERS, application of rule of public policy to associations of, 362. DEBT, incidental power to take stock as security for, 278. incidental power to take stock in satisfaction of, 277. DEBTS. (See Obligations.) DE FACTO CORPORATION, can only exist where de jure corporation might be created, 17, 92. elements necessary to form, 92. DE FACTO CONSOLIDATED CORPORATION, as a result of an irregular consolidation, 94. creditors of, estopped from attacking regularity of organization, 96. 871 DE FACTO CONSOLIDATED CORPORATION — continued, estoppel to deny regularity of organization, 96. existence generally cannot be collaterally attacked, 94. under Ohio statute, 29. who may attack existence of, 95. DEFENCES. (See Acquiescence; Estoppel; Pkoceduhe; Remedies; Stock- holders.) DEFINITIONS, (a) Consolidation. " consolidation," 7 n. "corporation," 1. "merger," 11. "univeraitatis juris,'' 10. (6) Sales. " corporate franchises," 133. "franchise," 130. "franchise of corporate existence," 131. "franchises of railroad company," 133. (c) Leases. "perpetuity," 187. "railroad lease," 175. "trackage contract," 255. (d) Corporate Stockholding. "community of interest," 296. " control," 294. "holding corporation," 285. (e) Combinations. "association," 303. "civil conspiracy," 324. " combination," 302. "commerce," 393. "conspiracy," 324. " contract in restraint of trade," 334. "contract in restraint of trade" (in modern use), 336. " control of the market," 356. "corporate combination," 306. "criminal conspiracy," 324. " engrossing," 358 n. "forestalling," 358 n. "good-will," 320. "manufacture," 393. "monopolize," 389. "monopoly," 329. "monopoly" (in modern use), 332, 389. " police power," 420. "pools," 308. 872 INDEX DEFINITIONS — continued, " public policy," 338. "regrating," 358 n. " right to contract," 419. " trade or commerce among the several States," 390. " trust," 304. DELAWARE, (a) Consolidation. consolidation appraisal statute, 57. statute authorizing consolidation of business corporations, 23 n. statute authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (6) Corporate Stockholding. statutes authorizing corporate stockholding, 271 n. DELEGATION OF POWERS, consolidation without legislative authority, involves unlawful, 18. trust invalid, as involving, 315. unauthorized sale of franchise involves unlawful, 138. DEPENDENT AND INDEPENDENT CONTRACTS, in connection with railroad leases, 203. DIAMOND MATCH COMPANY, formation and purposes of, 347. DIRECTORS, (a) Consolidation. not liable to dissenting stockholder in case of illegal consolida- tion, 46. (5) Sales. have no power to authorize sale of railroad, 149. have no power to sell entire property of corporation not insolvent, 112. have power to assign property of insolvent corporation, 112. ratification by stockholders of sale by, 113. when same, in vendor and vendee companies, sale prima facie fraudulent, 124. (c) Leases. cannot lease railroad unless expressly authorized, 188. lease by directors may be voidable, 168. lease by, to corporation in which, are interested voidable, 248. DISSENTING STOCKHOLDERS. (See Stockholders.) DISSOLUTION, efiFect of voluntary, of combination pending proceedings under federal anti-trust statute, 411. sale of entire property does not effect, of corporation, 117. sale of railroad and franchises does not effect, of railroad company, 152. sale of railroad and franchises, including franchise of corporate existence, may effect, 152. 873 INDEX DIVIDENDS, liability of consolidated corporation for, upon preferred stock of constituents, 81. whether consolidated corporation can declare, out of earnings of constituent before consolidation, 77. E EFFECT OF CONSOLIDATION, as general rule, creation of distinct corporation, 60. cases of absorption or merger, 63. cases showing creation of distinct corporation, 62. depends upon consolidation act, 59. fusion, merger or continued existence, 58. interstate upon status of constituent corporations, 102. merger and continuance of corporations, 61. of unlawful, 93. upon pending suits, 89. upon stockholders of constituent companies, 64. (See also Consolidation; CoNsoiiiDATED Cobpobation; Pending Suits.) EMINENT DOMAIN, lessor corporation retains right of, 210. power of consolidated corporation to exercise right of, 76. whether right of, passes to vendee corporation upon sale of railroad, 159. when may be exercised by lessee, 210. EMPLOYEES, application of federal anti-trust statute to combinations of railroad, 398. lessor liable to, of lessee for breach of statutory or primary obliga- tions, 220. of lessee corporation generally cannot look to lessor, 220. of lessee corporation, must look to it for damages, 220. remedies of, against licensee company under trackage contract, 263. remedies of, against proprietary company under trackage contract, 263. (See also Leases op Railboads; Lessee Cobpobation; Lessob Cobpobation.) ENGLAND, amalgamation statute, 12. appraisal statute applicable in case of transfer for stock, 121 n. statute concerning issue of stock for property, 319 n. statute concerning railroad leases, 180 n. ENGROSSING, definition of, 308 n. EQUITABLE LIENS. (See Liens.) EQUITABLE REMEDIES. (See Remedies.) 874 INDEX EQUITY RULE, of federal courts imposing conditions upon plaintiff stockholder, 115. ESTOPPEL, against de facto consolidated corporation, 96. defence of, involves both knowledge and delay, 116. when a defence to stockholder's action to prevent consolidation, 45. when a defence to stockholder's action to prevent sale of corporate property, 116. when a defence to stockholder's action to prevent sale of railroad, 150. when, operates against subscriber of constituent corporation, 96. when, operates against constituent corporations, 96. (See also Acquiescence; Remedies; Stockholdebs.) EVIDENCE, (a) Consolidation. consolidated corporation, bound by admissions of constituents regarding obligations, 86. consolidation, how proved, 91. existence of competition, must be established by, 37. necessary to dissolve injunction granted dissenting stockholder, 48. of consolidation, statutory provision, 91 n. (6) Combinations. in proceedings under federal anti-trust statute, 412. in proceedings under State anti-trust statutes, 450. of unlawful combination, 375. EXCHANGE OF CORPORATE PROPERTY FOR STOCK, appraisal of stock of dissenting stockholders, 121. distinction between, and sale, 118. effect of execution of ultra vires contract for, 122 a. incidental power to take stock upon, 281. infringement of rights of dissenting stockholders, 120. objection of ultra vires obviated Iby distribution of stock to stock- holders, 119. payment for shares of dissenting stockholders, 121. remedies of dissenting stockholders in case of, 122 6. stock received belongs primarily to corporation, 122. transfer of entire corporate property without unanimous consent requires monetary consideration, 118. whether stock having established market value can be taken, 120. without legislative authority ultra vires, 119. EXCHANGES, not in violation of federal anti-trust statute, 395. EXCLUSIVE PRIVILEGES, charters do not confer, unless clearly expressed 133. for selling gas, passes to consolidated corporation, 73. grants of, as constituting monopolies, 331 n. (See also Franchises.) 875 INDEX EXECUTION, indispensable property of quasi-puhlic corporation cannot be taken on, 127. of trackage contracts, 257. EXECUTION OF RAILROAD LEASES. (See Adoption op Railroad Leases.) EXEMPTION, from jury, road and military duty passes to consolidated corporar- tion, 73. invalidity of, in State anti-trust statutes, 421. necessary to relieve lessor from primary obligations, 217. necessary to relieve lessor from statutory obligations, 216. whether necessary to relieve lessor under authorized lease, 219. EXEMPTIONS FROM TAXATION, improvements and betterments follow property, 72. term "immunities" generally includes, 160. what language carries, upon sale of railroad, 160. whether, pass to consolidated corporation, 72. whether,'pass to vendee corporation upon purchase of railroad, 160. EXPEDITION ACT, as supplementing federal anti-trust statute, 384. provisions of, 384. EXPRESS COMPANIES, constitutional prohibitions against consolidation of competing, 39. FACILITIES FOR COMMERCE, combination imposing restraints upon, not in violation of federal an ti- trust statute, 394. FEDERAL ANTI-TRUST STATUTE, actions for treble damages under, 409. analysis of, 377. application of, to combinations under copyrights, 400. application of, to combinations under patents, 399. application of, to combinations under secret processes, 401. application of, to contracts concerning market quotations, 402. applies only to restraints upon interstate commerce, 391. applies to combinations of carriers, 398. applies to combinations of railroad employees, 398. applies to continuing combinations, 404. applies to railroad combinations, 398. combination controlling disposition and distribution violates, 393. combination must have direct effect upon interstate commerce, 392. combination of distributors violates, 393. combination of manufacturers not in violation of, 393. 876 INDEX FEDERAL ANTI-TRUST ST ATVTE — continued, constitutionality of, 379-382. construction of, 386-404. criminal proceedings under, 407. damages recoverable under, 409. device of holding corporation may be illegal under, 397. distinction between manufacture and commerce, 393. effect of voluntary dissolution pending proceedings, 411. enforcfement of forfeitures by government, 408. evidence in proceedings under, 412. exchanges not in violation of, 395. form of combination immaterial, 397. illegality of combination must be shown, 412. immunity proviso, 385, 413. inapplicable to State's monopoly, 403. inapplicable to State regulations, 403. indictments under, 407. injunctive relief under, remedy of government only, 406. invalidity under, as a ground of collateral attack, 405. is constitutional, 382. limitations of actions under, 410. meaning of phrase " trade or commerce among the several States," 390. meaning of term " monopolize," 389. not in conflict with interstate commerce act, 398 n. not retroactive, 404. object of, 378. parties to proceedings under, 406, 407, 409. pleadings in actions to recover treble damages under, 409. previous legality of combination immaterial, 388. reasonableness of restraint imposed by combination immaterial, 388. remedies under, 406—409. restraint upon commerce must be direct, 392-395. restraint may be imposed upon those engaged in interstate com- merce by those not engaged therein, 396. restraints upon facilities for commerce not in violation of, 394. statute, 376. title of, 386. use of phrase, contract in restraint of trade, 387. voluntary associations for mutual benefit not in violation of, 395. FEDERAL COURTS, equity rule of, applicable in stockholders' actions, 115. (See also Citizenship.) FIFTH AMENDMENT, provisions of, 420 n. FLORIDA, (o) Consolidation. statute authorizing consolidation of competing lines, 32 n. statute authorizing consolidation of railroads, 22 n. 877 FLORIDA — continued, (b) Sales. statute authorizing sales of railroads, 145 n. (c) Leases. statute authorizing railroad leases, 145 n, 180 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statute, 414 n. FORECLOSURE, extinguishes claims of general creditors, 83. of mortgage executed by interstate consolidated corporation, 107. FOREIGN CORPORATION, (o) Consolidation. consolidation with, when authorized, 99. construction of statutes authorizing consolidation with, 100. status of, 101 n. (b) Sales. purchasing railroad, status of, 164. remedies of State against, in case of unauthorized purchase of railroad, 156. (c) Leases. authority to lease to, 252. railroad lease to, must be authorized by State where road is located, 252. status of, leasing railroad, 254. (d) Stockholding. power to subscribe for stock In, 272. rights of, as stockholder in domestic corporation, 286. right of, to acquire stock in domestic corporation, 286. (e) Combinations. applicability of State anti-trust statutes to, 436. violating State anti-trust statutes ousted from State, 448. FORESTALLING, definition of, 358 n. FORFEITURES, enforcement of, under federal anti-trust statute, 408. under State anti-trust statutes, 447. FORM OF LEASE, habendum, 197. premises, 197. reddendum, 197. term, 197. (See also Leases op Railroads.) FOURTEENTH AMENDMENT, does not conflict with police power, 420. guarantees right to contract, 419. provisions of, 420 n. 878 FOURTEENTH AMENDMENT — conHnwed, State anti-trust statutes as class legislation, 421. validity of State anti-trust statutes tested by, 419-421. FRANCHISE OF CORPORATE EXISTENCE, belongs to stockholders, 131. nature of, 131. transferability of, 132. FRANCHISES, definition of, 130. distinction between sale of, and sale of railroad, 142. essential, pass to lessee corporation, 225. essential, pass upon sale of railroad, 157. essential elements of, 130. exclusive, are gwasi-monopolies, 331. franchise of corporate existence, 131. kinds of, 130. leases of, 173. legislative authority essential to purchase of, 139. legislative authority essential to sale of, 135. municipality cannot grant, 133. of 5MOsi-public corporations, 133. of railroad companies, 133. to construct and operate street railway, 133. transferability of corporate, 134. transferability of franchise of corporate existence, 132. ultra vires sales of, 139 a. unauthorized sale of, against public policy, 137. unauthorized sale of, ultra vires, 136. unauthorized sale of, unlawful delegation of powers, 138. FRANCHISES OF CORPORATIONS, distinction between, and powers, 133. distinction between, and privileges, 133. fundamental nature of transfer of, 134. nature of, 133. transferability of, 134. (See also Franchises.) FRAUD, exchange of property for stock, constructively fraudulent, 124. in consolidation agreements, 98. in sales of property of private corporation, 124. remedies of creditors in case of, 125. sale in which directors are personally interested prima facie fraudu- lent, 124. what transfers of corporate property are fraudulent, 124. FUSION, of corporations, as a result of consolidation, 8, 58. (See also Consolidation.) 879 INDEX G GAS COMPANIES, associations of, 365. GEORGIA, (o) Consolidation. constitutional provision against consolidation construed, 35. constitutional provision against consolidation of competing cor- porations, 32 n. statutes authorizing consolidation of railroads, 22 n. (6) Sales. statutes authorizing sales of railroads, 145 n. (c) Leases. statute authorizing railroad leases, 145 n, 180 n. statute concerning terms of railroad leases, 193 n. statute imposing liability upon lessee corporation, 230 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statute, 414 n. GLUCOSE COMBINATION, nature and formation of, 348. GOOD-WILL, definition of, 320. issue of stock for, in formation of corporate combination, 320. GUARANTEE, of ultra vires lease void, 247. (See also Leases op Railroads.) H HOLDING CORPORATION, as a device to form combination may contravene federal anti-trust statute, 397. corporate combination by means of, 310, 323. nature of, 5, 285. peculiar value of, 5, 285. rights of foreign, 286. whether control through, amounts to consolidation, 36. I IDAHO, (a) Consolidation. constitutional provision defining status of interstate consolidated corporation, 101 n. statute authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. 880 INDEX IDAHO — continued, (5) Sales. statutes authorizing sales of railroads, 145 n. (c) Leases. statutes authorizing leases of railroads, 145 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. ILLINOIS, (a) Consolidation. constitutional provision against consolidation of competing corporations, 32 n. public policy of, regarding consolidation of domestic and foreign railroads, 21. public policy regarding consolidation of non-competing rail- road, 21. statute authorizing consolidation of business corporations, 23 n. statute authorizing consolidation of railroads, 22 n. statute providing that consolidated corporation cannot change location of railroad, 77 n. statute prescribing method of consolidating, 52 n. (6) Sales. statutes authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroads, 148 n. (c) Leases. construction of statute of, authorizing railroad leases, 182. (d) Stockholding. statute authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statutes, 414 n. certain an ti- trust statutes unconstitutional, 421. IMMUNITY PROVISO, as supplementing federal anti-trust statute, 385. interpretation of, 413. provisions of, 385. IMPROVEMENTS, whether exempt from taxation, 72. whether lessee can recover for, made under ultra vires lease, 245. INCIDENTAL POWER TO ACQUIRE STOCK, as collateral, 278. for investment, 276. in connection with consolidation or purchase, 279. in exchange for corporate assets, 281. in general, 275. in satisfaction of debt, 277. miscellaneous instances, 282. upon reorganization, 280. (See also Corporate Stockholding.) 881 INDEX INDEPENDENT CONTRACTS, remedies upon, of illegal combination, 369. validity of, connected with ultra vires stockholding, 291. (See also Collateral Attack.) INDIANA, (a) Consolidation. statutes authorizing consolidation of railroads. 22 n. statute prescribing method of consolidating, 52 n. (b) Sales. statutes authorizing sales of railroads, 145 n. statute conferring powers on corporation purchasing railroad, 158 n. (c) Leases. construction of, statute authorizing connecting railroads to make contracts, 183. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statutes, 414 n. INDICTMENTS, under federal an ti- trust statute, 407. under State anti-trust statutes, 446. INDISPENSABLE PROPERTY, leases of, 171. of quasi-puhlic corporation cannot be alienated without statutory authority, 127. of guosi-public corporation cannot be taken on execution without statutory authority, 127. of railroad cannot be sold without statutory authority, 143. test of indispensability, 128. INJUNCTION, remedy of dissenting stockholders by, in case of invalid consolida- tion, 40, 46, 48. remedy of State by, in case of ultra vires consolidation, 40. remedy of State by, in case of ultra vires lease, 251. remedy of State by, in case of unlawful combinations, 374. under federal anti-trust statute, granted at instance of government only, 406. (See also Remedies.) INSURANCE COMBINATIONS, application -of State anti-trust statutes to, 435. INTERCORPORATE RELATIONS, distinction between relation of lessor and lessee and other, 176. distinction between relation of vendor and vendee and other, 141. nature of, 1. outline of consolidation, 2. 882 INDEX INTERCORPORATE RELATIONS — continued, outline of corporate stockholding, 5. outline of evolution of combination, 6. outline of relations of lessor and lessee, 4. outline of relations of vendor and vendee, 3. INTERSTATE COMMERCE, federal anti-trust statute applies only to restraints upon, 391. prohibitions of consolidation not regulations of, 38. restraint upon, must be direct to violate federal anti-trust statute, 392-395. restraint may be imposed upon those engaged in, by those not engaged therein, 396. State anti- trust statutes not regulations of, 426. statutes authorizing consolidation not regulations of, 19 a. when article becomes subject of, 393. when, begins, 393. INTERSTATE COMMERCE ACT, not in conflict with federal anti-trust statute, 398 n. provision concerning connecting lines, 363 n. provision concerning pools, 364 n. INTERSTATE CONSOLIDATED CORPORATION, a domestic corporation in each State, 101. citizenship of, 106. duties of, 105. foreclosure of mortgage of, 107. jurisdiction in case of mortgage foreclosure, 107. management of, 103. rights and powers of, 104. status of, 101. taxation of, 105. (See also Consolidated Corporation; Consolidation; Interstate Consolidation.) INTERSTATE CONSOLIDATION, authorization of, not regulation of interstate commerce, 19 a. effect of, upon status of constituent corporations, 102. how authorized, 99. (See also Consolidation; Foreign Corporation; Interstate Con- solidated Corporation.) INTRA VIRES, holdings of stock, incidents of ownership attach to, 287. (See also Cobporate Stockholding; Ultra Vires.) INVALID CONSOLIDATION. (See Consolidation.) INVALID LEASES. (See Leases op Railroads.) INVALID SALES. (See Sales op Property op Private Corporaxion.) INVESTMENTS, incidental power to make corporate, in stocks, 276. 883 INDEX IOWA, (o) Consolidation. statute authorizing consolidation of railroads, 22 n, statute prescribing method of consolidating, 52 n. (b) Sales. statute authorizing sales of railroads, 145 n. (c) Leases. statute authorizing mortgage of leases, 227 n. statute imposing liability upon lessee corporation,' 230 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statute, 414 n. IRREGULAR CONSOLIDATION. (See also Collateral Attack; Consolidation.) IRREGULAR LEASES. (See Leases op Railroads.) JUDICIAL NOTICE, court may take, of geography of State and general direction of railroads, 37. court will not take, of consolidation, 91. JURISDICTION, of foreclosure of mortgage of interstate consolidated corporation, 107. E KANSAS, (o) Consolidation. statute authorizing consolidation of railroads, 22 n. statute prescribing method of consolidating, 52 n. (6) Sales. statute authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. (c) Leases. statutes authorizing railroad leases, 145 n, 180 n. statute concerning taxation of leased railroad, 224 n. statute prescribing method of adopting railroad lease, 193 n. statute relating to foreign lessee corporations, 254 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statutes, 414 n. constitutionality of anti-trust statute, 420. INDEX KENTUCKY, (o) Consolidation. constitutional provision against consolidation of competing cor- porations, 32 n. constitutional provision defining status of interstate consolidated corporation, 101 n. statute authorizing consolidation of railroads, 22 n. statute authorizing consolidation of business corporations, 23 n. statute prescribing method of consolidating, 52 n. (6) Stockholding. statutes authorizing corporate stockholding, 271 n. (c) Combinations. anti-trust statute, 414 n. constitutional provision against trusts and combinations, 414 n. LABOR ORGANIZATIONS, invalidity of exemptions of, from State an ti- trust statutes, 421. (See also Class Legislation; Fourteenth Amendment.) LACHES, as a defence to stockholder's action to prevent sale of corporate property, 116. of stockholders in restraining consolidation, 49. of stockholders may prevent attacking invalid railroad lease, 192. (See als(f Acquiescence ; Estoppel.) LEASE, distinction between, and consolidation, 14. nature of, 14. outline of relations of lessor and lessee, 4. statute authorizing condemnation of stock for consolidation not applicable to, 51. whether, amounts to consolidation, 34. (See also Leases op Property op Private Corporations; Leases OP Property op Quasi-public Corporations; Leases op Rail- roads.) LEASES OF PROPERTY OF PRIVATE CORPORATIONS, distinction between, and leases of quasi-puhho corporations, 170. of entire property of prosperous corporation, 166. of entire property of losing corporation, 167. of entire property of losing corporation may be made for purposes of liquidation, 167. power to lease generally, 165. power to take a lease, 165. remedies of objecting stockholders, 169. voidable leases, 168. 885 LEASES OP PROPERTY OF QUASI-PUBLIC CORPORATIONS, distinction between, and leases of private corporations, 170. of indispensable property, 171. of surplus property, 172. LEASES OF RAILROADS, acknowledgment, witnesses, etc., 175. acquiescence and laches may prevent stockholder attacking, 192. allegation and proof of execution of, 195 n. assent of stockholders necessary, 188. authority of officers or agents to execute, 195. authority to execute, must be derived from State where railroad is located, 252. by receiver, 238. consideration, 198. constitutional provisions against, when competing or parallel, 186. construction of particular, 200. construction of statutes authorizing leases of connecting lines, 185. construction of statutes prescribing method of adopting, 194. construction of statutory provisions authorizing, 182. corporation may be estopped to allege irregular execution, 196. * covenant not to assign, 206. covenant to defend suits, 208. covenant to make repairs, 207. covenant to pay assessments, 205. covenant to pay damages, 208. covenant to pay rent, 204. covenant to pay taxes, 205. » delivery of possession under vUra vires, 241. dependent and independent contracts, 203. distinction between, and trackage contracts, 176, 255. distinction between relations under, and other intercorporate rela- tions, 176. distinction between ultra irires and irregular, 239. effect of ultra vires, upon stock subscriptions, 246. enforcement of executory ultra vires, 240. essential elements of, 175. for longer term than existence of corporations may be valid, 201. formalities attending execution of, 195. formal parts of, 197. form of, 197. for purpose of suppressing competition against public policy, 249. guarantee of ultra vires, void, 247. improvements made by lessee under ultra vires, 245. incidental franchises pass to lessee, 225. injunction by State, in case of ultra vires, 251. joint liability of lessor and lessee, 232. legislative authority necessary to make, 177. 886 « INDEX LEASES OF RAILROADS — continued, legislative authority necessary to take, 178. lessor cannot avoid primary obligations unless exempted, 217. lessor cannot avoid statutory obligations unless exempted, 216. lessor retains prerogative powers, 210. liability of lessee for debts of lessor, 233. liability of lessee for nuisance, 217, 231. liability of lessee for torts, 231. liability of lessor for negligent operation under authorized, 219. liability of lessor for negligent operation under unauthorized, 218. liability of lessor for nuisance, 217. liability of lessor for reconstruction and repairs, 223. liability of lessor to employees of lessee, 220. liability of lessor upon contracts of lessee, 222. liability of lessor when it shares in control, 221. long term, not perpetuities, 187. majority may authorize, in absence of controlling statute, 189. meaning of phrase " terminal facilities " in, 200. miscellaneous covenants in, 209. mortgages of, 227. mortgage of rent charge, 213. obligation of lessee to perform lessor's public duties, 229. obligation of lessor to State, 215. obligations of receiver after election to assume, 237. obligations of receiver after renunciation of, 237. partial invalidity of, 202. place of execution of, 195. power to lease unfinished road, 184. quo warranto in case of ultra vires, 250. receiver may elect to assume or renounce, 235. receiver may not abrogate, as between parties, 234. receiver not assignee of term, 234. receiver's obligations pending election to assume or renounce, 236. record of, 195. recovery of property after disaffirmance of ultra vires, 243. recovery on quantum meruit after disaffirmance of uUra vires, 244. remedies of dissenting stockholders, 191. remedies of lessee, 228. remedies of lessor, 214. requisite majority prescribe terms of, 190. right and duty of disaffirmance of ultra vires, 242. rights of lessee, in general, 225. rights of lessee in matter of tolls, 226. rights of lessor when entitled to share of earnings, 211. rights of stockholders when rent is payable in form of dividends, 212. rules of construction of, 199. rule of construction of statutes, 181. 887 INDEX ■ LEASES OF RAILROADS — continued, seals upon, 195. status of foreign lessee corporation, 254. statutory liability of lessee, 230. statutory provisions authorizing, 180. statutory provisions concerning approval and execution of, 193. statutory provisions not authorizing, 183. taxation of leased railroads, 224. to foreign corporations, 252, 253, 254. typical of leases of guasi-public corporations, 174. unauthorized, validated by legislative ratification, 179. voidable, 248. void restrictions, 202. what constitutes, 175. what constitutes breach of covenant not to assign, 206. what statutory provisions authorize, to foreign corporations, 253. when lessee liable for nuisance, 217, 231. when lessor liable for nuisance, 217. whether lessor liable for negligent operation under authorized lease, 219. whether lessor may have equitable lien upon earnings, 211. whether right of eminent domain passes by, 210. whether unanimous consent of stockholders is necessary, 189. without legislative authority, against public policy, 177. without legislative a,uthority, ultra vires, 177. LEGAL REMEDIES. (See Remedies.) LEGISLATION SUPPLEMENTING FEDERAL ANTI-TRUST STATUTE, anti-trust provisions of Wilson Tariff Act, 383. expedition act, 384. immunity proviso, 385. LEGISLATIVE AUTHORITY, (o) Consolidation. consolidation without, against public policy, 18. consolidation without, unlawful delegation of powers, 18. consolidation without, ultra vires, 17. for consolidation, how expressed, 20. (b) Sales. essential to purchase of franchises, 139. essential to purchase of railroad, 144. essential to sale of franchises, 135. essential to sale of railroad, 143. necessary for sale of indispensable property of gwasi-public cor- poration, 127. sale of franchises without, against public policy, 137. sale of franchises without, ultra vires, 136. sale of franchises without, unlawful delegation of powers, 138. 888 INDEX LEGISLATIVE AUTHORITY — continued, (c) Leases. lease of railroad invalid without, 177. necessary to take a lease, 178. not necessary for execution of trackage contract, 256. ratification of unauthorized lease validates it, 179. to lease railroad, must be granted by State where located, 252. (d) Stockholding. necessary for corporation to purchase stock, 264. necessary for corporation to subscribe for stock, 266. rule in England as to necessity for, to purchase stock, 265. (See also Legislature.) LEGISLATURE, outstanding contract does not prevent, from authorizing consolida- tion, 19. power of, to authorize consolidation, 19. power of, to compel consolidation, 44. power of, over property devoted to public uses, 417. power of, to prohibit combinations of gwasi-public corporations, 417. power of, under reserved power, to change rights of shareholders among themselves, 43. power of, to withdraw right to consolidate, in absence of reserva- tion, 24. power of, to withdraw right to consolidate in exercise of police power, 26. power of, to withdraw right to consolidate in exercise of reserved power, 25. presumption of intention of, as to succession by consolidated corpo- ration to property of constituents, 65. (See also Legislative Authority.) LESSEE CORPORATION, acquires incidental franchises, 225. estopped to allege irregular execution of lease, 196. joint liability of, and lessor, 232. liability of, as a common carrier, 231. liability of, for debts of lessor, 233. liability of, for failure to maintain cattle guards, 230. liability of, for failure to maintain fences, 230. liability of, for fires, 230. liability of, for negligence, 231. liability of, for nuisance, 217, 231. liability of, for performance of lessor's public duties, 229. liability of, for torts, 231. liabilty of lessor for negligence of, under authorized lease, 219. liability of lessor for negligence of, under unauthorized lea.se, 2l8. liability of lessor upon contracts of, 222. may surrender ultra vires lease without liability, 241. 889 LESSEE CORPORATION — continued, must be expressly authorized to take lease of railroad, 178. obligation of, to perform lessor's public duties, 229. power to mortgage lease, 227. remedies of, 228. rights of, in general, 225. rights of, in matter of tolls, 226. statutory liability of, 230. when, agent of lessor, 222. when, liable for debts of lessor, 233. when, liable for nuisance, 217, 231. when, liable for taxes, 224. when, may exercise power of eminent domain in its own name, 210. when, may exercise power of eminent domain in name of lessor, 210. whether, may recover for improvements made under idtra vires lease, 45. LESSOR CORPORATION, cannot avoid primary obligations unless exempted, 217. cannot avoid statutory obligations unless exempted, 216. equitable lien upon earnings, 211. estopped to allege irregular execution of lease, 196. generally liable for taxes upon leased roads, 224. joint liability of, and lessee, 232. liable for negligent operation under unauthorized lease, 218. liability of, for negligent operation of railroad under authorized lease, 219. liability of, for reconstruction and repairs, 223. liability of lessee for debts of, 233. liability of, not affected by fact that lessee is also liable, 216. liability of, upon contracts of lessee, 222. liability of, when it shares in control, 221. liability of, for failure to fence tracks, 216. liability of, for failure to maintain cattle guards, 216. liability of, for nuisance, 217. liability of, to employees of lessee for failure to perform statutory or primary duties, 220. may recover on qiiantum meruit after disaffirmance of ultra vires lease, 244. may recover property after disaffirmance of lease by lessee, 243. must be expressly authorized to lease railroad, 177. not liable to emploj'ees of lessee for its negligence, 220. obligation of lessee to perform public duties of, 229. obligations of, to State, 215. power to mortgage rent charge, 213. primary duties of, 217. public duties of, 215. remedies at law of, 214. 890 LESSOR CORPORATION — continued, remedies in equity of, 214. retains prerogative powers, 210. retains right of eminent domain, 210. rights of, when entitled to share of earnings, 211. statutes providing that, shall be liable for damages, 216 n. statutory liability of, 216. when liable for injuries from fires, 216. when liable for nuisance, 217. when power of eminent domain may be exercised in name of, 210. whether, can recover property after disaflBrmance of ultra vires lease, 242. LESSOR AND LESSEE, joint liability of, 232. outline of relations of, 4. LICENSE, grant of power to consolidate is, 24. trackage contract, in nature of, 255. (See also Tbackage Contbacts.) LICENSEE COMPANY, liability of, under trackage contract, to employees, 263. liability of, under trackage contract, to third persons, 262. (See also Trackage Contracts.) LICENSOR COMPANY. (See Proprietary Company.) LIEN, equitable, of lessor when entitled to share of earnings, 211. effect of consolidation upon conventional and statutory, 84. effect of consolidation upon equitable, 85. LIMITATIONS, of actions under federal anti-trust statute, 410. of actions under State anti-trust statutes, 451. LOSING CORPORATION, lease of entire property of, 167. sale of entire property of, 111. (See also Leases op Property of Private Corporations; Sales op Property op Private Corporations.) LOUISIANA, (o) Consolidation. constitutional provision defining status of interstate consolidated corporation, 101 n. corporate existence of consolidated corporation limited to ninety- nine years, 77 n. statute authorizing consolidation of business corporations, 23 n. statutes authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. 891 INDEX LOUISIANA — continued, (jb) Combinations. anti- trust statute, 414 n. constitutional provision against combinations, 414 n. M MAINE, (o) Sales. statute concerning sales of railroads, 145 n. (6) Leases. statute concerning railroad leases, 145 n. (c) Stockholding. statutes authorizing corporate stockholding, 271 n. id) Combinations. anti-trust statute, 414 n. MAJORITY, (a) Sales. Cannot sell entire property of prosperous corporation for pur- poses of speculation, 110. distinction between acts ultra vires the, and acts ultra vires the corporation, 151. may sell entire property of prosperous corporation for purposes of liquidation, 110. obligation of, to minority in case of sale of corporate property, 114. power of, to sell entire property of losing corporation, 111. power of, to sell not limited to failing concerns, 110. whether, can authorize sale of railroad, 149. (6) Leases. cannot lease entire property of prosperous corporation, 166. fiduciary relation of, towards minority, 168. lease by, may be voidable, 168. lease by, to corporation in which, are interested may be voidable, 248. may authorize lease of entire property of losing corporation, 167. may authorize lease of railroad in absence of controlling statute, 189. prescribed, fix terms of railroad lease, 190. (See also Consolidation.) MANDAMUS, when, may be granted to compel recording of consolidation agree- ment, 55. MANUFACTURE, combinations relating solely to, not in violation of federal anti-trust statute, 393. distinction between, and commerce, 393. 892 INDKX MANUFACTURERS, associations of, 360. combination of, when in violation of federal anti-trust statute, 393. owning patents, associations of, 361. MARKET QUOTATIONS, application of federal anti-trust statute to contracts concerning, 402. MARYLAND, (a) Consolidation. statute authorizing consolidation of business corporations, 23 n. statute authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (b) Sales. statute authorizing sales of railroads, 145 n. (c) Leases. statute authorizing railroad leases, 145 n, 180 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. constitutional provision against monopolies, 414 n. MASSACHUSETTS, (o) Leases. statute authorizing railroad leases, 180 n. statutes prescribing method of adopting railroad lease, 193 n. (6) Stockholding. statutes authorizing corporate stockholding, 271 n. MERGER, as a result of consolidation proceedings, 8, 61. definition of, 11. included in term "consolidation," 11. outline of process of, 8. statutes showing, as a result of consolidation, 63. when, may be effect of consolidation, 58. (See also Consolidation.) MICHIGAN, (o) Consolidation. constitutional provision against consolidation of competing cor- porations, 32 n. statute authorizing consolidation of railroads, 22 n. statute authorizing consolidation of street railway, electric, and gas companies, 23 n. statute prescribing method of consolidating, 52 n. statutory provision as to powers of consolidated corporation, 77 n. (6) Sales. statutes authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. 893 INDEX MICHIGAN — continued, (c) Leases. ■ statute authorizing lessee to condemn in name of lessor, 210 n. statutes authorizing railroad leases, 145 n, 180 n. statute prescribing method of adopting railroad lease, 193 n. statute relating to foreign lessee corporations, 254 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Comhinaiions. anti-trust statutes, 414 n. MINNESOTA, (o) Consolidation. statutes against consolidation of competing railroads, 35 n. statutes authorizing consolidation of railroads, 22 n. statutes prescribing method of consoUdating, 52 n. (6) Sales. statutes authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. (c) Leases. statute authorizing railroad leases, 145 n, 180 n. statute prescribing method of adopting railroad lease, 193 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statutes, 414 n. MINORITY, obligation of majority to, in case of sale of corporate property, 114. remedies of, in case of voidable leases, 248. right of, to avoid leases authorized by majority, 168. trust relation of controlling corporation to, 300. (See also Majority.) MISSISSIPPI, (a) Consolidation. statute authorizing consolidation of railroads, 22 n. statute prescribing method of consolidating, 52 n. (6) Leases. statute authorizing railroad leases, 180 n. (c) Stockholding. statutes authorizing corporate stockholding, 271 n. {d) Combinations. anti-trust statutes, 414 n. constitutional provision against trusts and combinations, 414 n. MISSOURI, (a) Consolidation. constitutional provision against consolidation of competing cor- porations, 32 n. 894 INDEX MISSOURI — continued, constitutional provision defining status of interstate consoli- dated corporation, 101 n. statute authorizing consolidation of manufacturing companies, 23 n. statutes authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. statute providing that consolidated corporation may hold neces- sary real estate, 77 n. (6) Saks. statutes authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. (c) Leases. statute authorizing railroad leases, 145 n, 180 n. statute concerning taxation of leased railroad, 224 n. statute prescribing method of adopting railroad lease, 193 n. statute relating to foreign lessee corporations, 254 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statutes, 414 n. MONOPOLIES, grants of exclusive privileges as constituting, 331 n. growth of, 330. history of, 330. illegality of, 330. modern use of term, 332. no true, in United States, 331. patents and other quasi, 831. primary meaning of term, 329. , test of validity of combinations, not whether constitute, 333. use of term, in federal anti-trust statute, 389. MONOPOLIZE, use of term, in federal anti-trust statute, 389. MONTANA, (o) Consolidation. constitutional provision against consolidation of competing cor- porations, 32 n. constitutional provision defining status of interstate consolidated corporation, 101 n. statute authorizing consolidation of mining companies, 23 n. statutes authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (b) Sales. statutes authorizing sales of railroads, 145 n. statutes prescribing method of authorizing sale of railroad, 148 n. 895 MONTANA — continued, (c) Leases. statute authorizing railroad leases, 145 n, 180 n. statute concerning taxation of leased railroad, 224 n. statute prescribing method of adopting railroad lease, 193 n. (i) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statute unconstitutional, 414 n. MORTGAGES, efiFect of consolidation upon, 84. foreclosure of, executed by interstate consolidated corporation, 107. of leases, 227. of vendee corporation, take priority over claims of vendor's creditors, 126. power of consolidated corporation to issue bonds secured by, 75. whether lease comes within "after acquired property" clause, 227. (See also Bonds; Bondholdeks.) MUNICIPAL AID, consolidated corporation entitled to, voted to constituents, 70. to railroads against present public policy, 70. N NEBRASKA, (a) Consolidation. constitutional provision against consolidation of competing cor- porations, 32 n. statute authorizing consoUdation of railroads, 22 n. statute prescribing method of consolidating, 52 n. (6) Sales. , statutes authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. (c) Leases. statute authorizing railroad leases, 145 n, 180 n. statute concerning taxation of leased railroad, 224 n. statute prescribing method of adopting railroad lease, 193 n. statute relating to foreign lessee corporations, 254 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statute, 414 n. constitutionality of anti-tnist statute, 421. NECESSARIES OF LIFE, what articles constitute, 358. NEGLIGENCE, liability of lessee for, 231. liability of lessor for, of lessee under authorized lease, 219. 896 INDEX NEGLIGENCE — continued, liability of lessor for, of lessee under unauthorized lease, 218. liability of lessor for, when it shares in control, 221. liability of parties to trackage contracts for, 261-263. liability of vendor for, 154, 155. NEVADA, (a) Consolidation. statute authorizing consolidation of corporations generally, 23 n. statute authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (b) Sales. statute authorizing sales of railroads, 145 n. statute conferring powers on corporation purchasing railroad, 158 u. (c) Stockholding. statutes authorizing corporate stockholding, 271 n. NEW HAMPSHIRE, (a) Consolidation. statute authorizing consolidation of railroads, 22 n. (6) Leases. statutes authorizing railroad leases, 180 n. statute prescribing method of adopting railroad lease, 180 n. statute providing that lease shall not affect lessor's public obliga- tion, 215 n. NEW JERSEY, (a) Consolidation. statute authorizing consolidation of business corporations, 23 n. statutes authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (6) Sales. statute authorizing purchase of railroad, 145 n. statute prescribing method of authorizing sale of railroad, 148 n, (c) Leases. statutes authorizing railroad leases, 180 n. statute prescribing method of adopting railroad lease, 180 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. statute authorizing issue of stock for property, 319 n. NEW MEXICO, (o) Consolidation. statute authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (6) Sales. statute authorizing purchase of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. 897 NEW MEXICO — continued, (c) Leases. statutes authorizing railroad leases, 145 n, 180 n. statute prescribing method of adopting railroad lease, 193 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. NEW YORK, (a) Consolidation. public policy of, regarding consolidation of non-competing rail- roads, 21. statute authorizing consolidation of business corporations, 23 n. statute authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. statute prescribing obligations of consolidated corporation, 79 n. statute relating to transmission of property and franchises upon consolidation, 65. statute regarding effect of consolidation upon pending suits, 89 n. statutory provision as to powers of consolidated business cor- poration, 77 n. (6) Sales. statute authorizing acquisition of railroad, 145 n. (c) Leases. construction of statute of, authorizing railroad leases, 182. statute authorizing railroad leases, 180 n. statutes imposing liabilities upon lessee corporation, 230 n. statute prescribing method of adopting railroad lease, 180 n. (d) Stockholding. statutes authorizing corporate stockholding, 201 n. (e) Combinations. anti-trust statutes, 414 n. NON-COMPETING RAILROADS, public policy regarding consolidation of, 21. NORTH CAROLINA, (a) Leases. statute authorizing railroad leases, 180 n. statute concerning taxation of leased railroad, 224 n. (6) Stockholding. statutes authorizing corporate stockholding, 271 n. (c) Combinations. an ti- trust statute, 414 n. constitutional provision against monopolies, 414 n. NORTH DAKOTA, (a) Consolidation. constitutional provision against consolidation of competing cor- porations, 32 n. statute authorizing consolidation of railroads, 22 n. statute prescribing method of consolidating, 52 n. 898 INDEX NORTH DAKOTA — continued, (6) Sales. statute authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 a. (c) Leases. statute authorizing railroad leases, 145 n, 180 n. statute prescribing method of adopting railroad lease, 193 n. (d) Combinations. anti-trust statute, 414 n. ■ constitutional provision against combinations, 414 n. NORTHERN SECURITIES CASE, review of, 397 a. NUISANCE, joint liability of lessor and lessee for, 232. lessee liable for maintaining, 217. lessor liable for creating, 217. liability of lessee for creating or maintaining, 231. O OBLIGATIONS, (a) Consolidation. liability of consolidated corporation after foreclosure for, of con- stituents, 83. of constituents, assumed by consolidated corporations, 79. of interstate consolidated corporation, 105. of subscribers of constituents enforced by consolidated corpora- tion, 69. public, of constituents assumed by consolidated corporation, 80. settlement of, of constituents by consolidated corporation, 77. (6) Sales. of vendor not assumed by vendee upon purchase of railroad, 163. vendee not generally liable upon, of vendor, 123. (c) Leases. when lessee liable for, of lessor, 233. (See also Creditoes.) OHIO, (a) Consolidation. statute authorizing consolidated corporation to take and dispose of stocks and bonds, 77 n. statute authorizing consolidation of railroads, 22 n. statute prescribing method of consolidating, 52 n. (5) Sales. statute authorizing sales of railroads, 145 n. statute conferring powers on corporation purchasing railroad, 158 n. statute prescribing method of authorizing sale of railroad, 148 n. 899 INDEX OHIO — continued, (c) Leases. statute authorizing lessee to exercise right of eminent domain, 210 n. statutes authorizing railroad leases, 145 n, 180 n. statute prescribing method of adopting railroad lease, 193 n. statute providing that lessor shall be liable as if operating rail- road, 216 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statutes, 414 n. OKLAHOMA, (a) Consolidation. statute authorizing consolidation of railroads, 22 n. statute prescribing method of consolidating, 52 n. (6) Sales. statutes authorizing sales of railroads, 145 n. statute conferring powers on corporation purchasing railroad, 158 n. (c) Leases. statute authorizing railroad leases, 145 n, 180 n. (d) Combinations. anti-trust statutes, 414 n. constitutional provision against monopolies, 414 n. . OREGON, statute authorizing sales of railroads, 145 n. statute authorizing railroad leases, 145 n, 180 n. PARALLEL LINES. (See Competing oe Parallel Railroads.) PARTIES, in stockholders' actions to enjoin sales, 115. necessary, in proceedings under federal anti-trust statute, 406, 407, 409. (See also Procedure; Remedies.) PATENTS, application of federal anti-trust statute to combinations under, 399. are gMasi-monopolies, 331. associations of manufacturers owning, 361. PENALTIES, under federal anti-trust statute, 407, 409. under State anti-tnist statutes, 446, 449. (See also Foepeituhes.) 900 INDEX PENDING SUITS, effect of consolidation upon, 89. procedure regarding, 90. PENNSYLVANIA, (a) Consolidation, constitutional provision against consolidation of competing cor- porations, 32 n. statutes authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (b) Sales. statute authorizing acquisition of railroad franchises and prop- erty, 145 n. statute conferring powers on corporation purchasing railroad, 158 n. statute prescribing method of authorizing sale of railroad, 148 n. (c) Leases. statute authorizing lessee to assume obligations of lessor, 225 n. statute authorizing railroad leases, 180 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. PERPETUITIES, definition of, 187. long-term leases not prohibited by statutes against, 187. PLEADINGS, allegation of execution of lease, 195 n. allegation of consolidation, 91. in actions to recover treble damages under federal anti-trust statute, 409. what allegations necessary to dissolve injunction restraining at- tempted consolidation, 48. (See also Procbduke.) POCAHONTAS COKE COMPANY, nature and formation of, 348 a. POLICE POWER, definition of, 420. fourteenth amendment does not conflict with, 419. power of State under, to withdraw right to consolidate, 26. power of State under, to enact anti-trust statutes, 420. POOLS, money, 308. nature of, 308. New Hampshire statute against, 35 n. provisions of interstate commerce act concerning, 364. traffic, 308. validity of railroad, 364 a. 901 INDEX POWER OF CORPORATION TO ACQUIRE AND HOLD ITS OWN STOCK, American doctrine, 283 a. English doctrine, 283 a. rights and remedies of creditors, 283 o. statutes granting, 283 a. statutes prohibiting, 283 a. status of corporation as holder of its own stock, 283 a. POWERS, (a) Consolidation. charter of corporation measure of, 17. miscellaneous, of consolidated corporation, 77. of consolidated corporation, eminent domain, 76. of consolidated corporation, in general, 74. of consolidated corporation to issue of mortgage bonds, 75. of corporation, how conferred, 17. of interstate consolidated corporation, 104. (6) Sales. distinction between franchises of corporation and, 133. of private corporation, to purchase and sell, 108. of vendor corporation after sale of railroad, 153. (c) Leases. lessor corporation retains its prerogative, 210. (See also Consolidated Corporation; Consolidation; Corpora- tion; Lessor Corporation; Lessee Corporation; Vendor Corporation; Vendee Corporation.) PRESERVERS TRUST, nature and formation of, 345. PRESUMPTION, of citizenship, for jurisdictional purposes, 101 n. of power to hold stock, 283. that certificate of consolidation has been recorded, 55. PRIORITY, of purchaser's mortgage over claims of vendor's creditors, 126. PRIVATE CORPORATIONS. (See Corporations.) PRIVILEGES AND IMMUNITIES, constitutional limitations upon transmission of, upon consolidation, 71. whether special, pass upon consolidation, 73. (See also Exemptions FROM Taxation; Franchises; Rates of Fare.) PROCEDURE, defences in stockholders' action to enjoin sale of corporate property, 116. in stockholders' action to enjoin sale of corporate property, 115. in stockholders' actions to restrain consolidation, 48. in suits pending at time of consolidation, 90. (See also Evidence; Parties; Pleadings; Remedies.) 902 INDEX PRODUCERS, associations of, 360. associations of, when in violation of federal anti-trust statute, 393. PROPERTY, devoted to public uses, power of State over, 406. issue of stock for, in formation of corporate combination, 319. (See also Coeporate Combination; Corporate Property.) PROPRIETARY COMPANY, liability of, under trackage contract, to employees, 263. liability of, under trackage contract, to third persons, 261. (See also Trackage Contracts.) PROSPEROUS CORPORATION, lease of entire property of, requires unanimous consent, 166. sale of entire property of, requires unanimous consent, 110. PUBLIC DUTIES, corporation purchasing railroad assumes accompanying, 162. lessor corporation must discharge, 215. obligation of lessee to perform lessor's, 229. obligation of consolidated corporation to perform, of constituents, 80. PUBLIC POLICY, (o) Consolidation. consolidation not dependent upon considerations of, 16. consolidation, without legislative authority, against, 18. regarding consolidation of competing railroads, 31. regarding consolidation of non-competing railroads, 21. (&) Sales. unauthorized sale of franchises, against, 137. (c) Leases. lease of railroad for purpose of suppressing competition against, 249. unauthorized lease of railroad against, 177. unauthorized taking of lease against, 178. (d) Combinations. basis of, 338. basis of rules of, in judicial decisions, 341. definition of, 338. difHculty of formulating rules of, concerning combinations, 340. nature of, 338. necessity for rules of, 339. regarding competition, 356. regarding combinations generally, 6. rules of, 352. (See also Rules of Public Policy.) PURCHASE OF FRANCHISES. (See Franchises; Sales op Franchises.) 903 INDEX PURCHASE OF RAILROADS. (See Sales op Railroads.) PURCHASING CORPORATION. (See Vendee Corporation.) Q QUANTUM MERUIT, recovery on, by lessor corporation after disaffirmance of ultra vires lease, 244. (See also Leases of Railroads.) QUASI-PUBLIC CORPORATIONS, (a) Consolidation. consolidation of, without legislative authority, against public policy, 18. railroad companies are, 18 n. (&) Sales. indispensable property of, cannot be sold without statutory authority, 127. indispensable property of, cannot be taken on execution without statutory authority, 127. legislative authority essential to purchase of franchises of, 139. legislative authority essential to sale of franchises of, 135. nature of franchises of, 133. sales of surplus property of, 129. test of indispensability of property of, 128. transferability of franchises of, 134. unauthorized sales of franchises of, against public policy, 137. unauthorized sale of franchises of, ultra vires, 136. unauthorized sale of franchises of, unlawful delegation of powers, 138. (c) Leases. leases of franchises of, 173. leases of indispensable property of, 171. leases of surplus property of, 172. railroad leases typical of leases of, 174. (d) Combinations. analysis of rule of public policy applicable to, 359. associations of, 365. distinction between rules of public policy applicable to private and, 351. power of State to prohibit combinations of, 417. rule of public pohcy applicable to, 362. QUO WARRANTO, against combining corporations, 373. against corporate combination, 372. in case of ultra vires consolidation, 40. in case of uUra vires leases, 250. 904 QUO WARRANTO — continued, in case of unauthorized sale, 156. judgment in, 373. (See also Remedies; State.) R RAILROAD COMPANIES, are gi«isi-public corporations, 18 n. combinations of, violate federal anti-trust statute, 398. franchises of, 133. power of Congress to prohibit combinations of competing, 381. sketch of consolidation of, 2. (See also Associations op Railroad Companies; Consolidation; Sales of Railroads; Leases of Railroad^; Pools; Track- age ContrXcts.) RAILROADS, highways, early theory, 2 n. sketch of leases of, 4. sketch of sales of, 3. unconstructed, when within provisions of consolidation act, 29. unfinished, when may be leased, 184. (See also titles containing words "Railroads" or "Railroad Companies.") RAILROAD EMPLOYEES, application of federal anti-trust statute to combinations of, 398. RAILROAD LEASES UNDER RECEIVERSHIP. (See Leases of Railroads; Receivers.) RAILROAD POOLS. (See Pools.) RATES OF FARE, consolidated corporation may exercise power of constituent regard- ing, 77. right of lessee to fix, 226. whether chartered rates follow railroad when sold, 161. whether right to fix, passes to vendee corporation, 161. RATIFICATION, (a) Consolidation. •legislative recognition of consolidation equivalent to, 20. (5) Sales. by stockholders of sale by directors, 113. governed by same principles as authorization, 113. (c) Leases. distinction between, by legislature and stockholders, 179. legislative, validates unauthorized railroad lease, 179. legislative, what constitutes, 179. (See also Legislative Authority.) REAL ESTATE, transmission of, upon consolidation, 66. 905 INDEX RECEIVER, (o) Sales. when may be appointed to follow corporate assets, 125. (6) Leases. may elect within reasonable time to assume or renounce lease, 235. may not abrogate lease as between parties, 234. not assignee of term of railroad lease, 234. obligations of, after election to assume lease, 237. obligations of, after election to renounce lease, 237. obligations of, pending election to assume or renounce lease, 236. power to lease railroad, 238. power to take lease of railroad, 238. what constitutes election to assume or renounce lease, 235. what constitutes reasonable time within which to elect to assume or renounce lease, 235. (c) Combinations. of illegal combination, rights and remedies of, 368. RECOGNITION, legislative, of consoUdated corporation validates organization, 20. (See also Ratification.) RECONSTRUCTION AND REPAIRS, liability of lessor corporation for, 223. REGRATING, definition of, 358 n. REMEDIES, (o) Consolidation. against consoUdating corporations if not dissolved, 88. enforcement of constitutional provisions against consohdation, 40. equitable, of creditors of consoUdating corporations, 87. legal, of creditors of consolidating corporations, 86. of consolidated corporation to enforce subscriptions, 69. of dissenting stockholder in case of invalid consolidation, 46. of dissenting subscribers in case of invalid consolidation, 47. procedure in stockholders' actions to restrain consolidation, 48. (6) Sales. of creditors against consideration for fraudulent sale, 125. of creditors against stockholders of vendor corporation, 125. of creditors, at law, in case of fraudulent sale, 125. of creditors, in equity, in case of fraudulent sale, 125. of creditors upon assumption clause in contract of sale, 125. of dissenting stockholders in case of invalid sale, 114. of dissenting stockholders in case of invalid sale of railroad, 151. (c) Leases. against licensee company under trackage contract, 262, 263. against proprietary company under trackage contract, 261, 263. 906 INDEX REMEDIES — continued, of lessee corporation, 228. of lessor corporation, in equity, 214. of lessor corporation after disaffirmance of ultra vires lease, 242, 243, 244. of State in case of ultra vires leases, 250, 251. of stockholders in case of unauthorized railroad lease, 191. of stockholders to restrain lease, 169. (d) Stockholding. of minority stockholders of controlled corporation, 301. of State in case of ultra vires stockholding, 293. of stockholders in case of ultra vires stockholding, 293. stockholder may enjoin voting ultra vires holdings of stock, 288. (e) Combinations. between combination and its members, 367. collateral attack upon combination, 369. injunction by State against illegal combination, 374. injunction not a substitute for quo warranto, 374. member of illegal combination cannot recover upon, 366. of members of illegal combination, 366. of receivers and assignees of illegal combinations, 368. of stockholders of combining corporations, 371. quo warranto against corporate combination, 372. test of right of member of illegal combination to recover, 366. under federal anti-trust statute, 406-409. under State anti-trust statutes, 446-449. upon independent contracts of illegal combination, 369. RENT, by stipulation may be paid to third person, 198. consideration of lease is, 198. covenant to pay, 204. due primarily to lessor, 198. equitable lien upon share of earnings, 211. rights of stockholders when, payable in form of dividends, 212. share of earnings as, 211. (See also Leases of Railroads.) REORGANIZATION, corporation takes property under, as successor, 141. distinction between, and consolidation, 16 n. distinction between, and sale of railroad, 141. incidental power to take stock upon, 280. (See also Exchange op Corporate Property for Stock; Sales OP Property op Private Corporations.) REPAIRS, covenant to make, in railroad leases, 207. what constitutes necessary, 207. 907 RESERVED POWER, power of legislature to withdraw or Umit right to consolidate in absence of, 24. power of legislature to withdraw or limit right to consolidate in exercise of, 25. power of state to prohibit combinations of corporations in exercise of, 418. RIGHT OF EMINENT DOMAIN. (See Eminent Domain.) RIGHT TO CONTRACT, . as affected by State anti-trust statutes, 419. not absolute, 419. under Fifth Amendment, 420. under Fourteenth Amendment, 419. RIGHT TO VOTE, corporation has, intra vires holdings, 287. corporation has no, ultra vires holdings, 288. RIGHTS IN STREETS, transmission of, upon consolidation, 66. RULES OF PUBLIC POLICY, analysis of rule applicable to gwasi-public corporations, 359. analysis of rule governing private corporations, 354. application of, to associations of quasi-puhlic corporations, 365. application of, to associations of dealers, 362. application of, to associations of manufacturers, 360. application of, to associations of manufacturers owning patents, 361. application of, to associations of railroad companies, 363, 364. application of, to associations of producers, 360. basis of, in judicial decisions, 341. basis of, case of Biscuit Combination, 349. basis of, case of the Chicago Gas Trust, 346. basis of, case of the Diamond Match Company, 347. basis of, case of the Glucose Combination, 348. basis of, case of the National Lead Trust, 349. basis of, case of the Pocahontas Coke Company, 348 a. basis of, case of the Preservers Trust, 345. basis of, case of the Standard Oil Trust, 343. basis of, case of the Sugar Trust, 342. basis of. Whiskey Trust cases, 344. basis of, cases of associations, 349. conservative standards, 353. control of the market, 356. difficulty of formulating, concerning combinations, 340. distinction between, applicable to private and quasi-pnhlic corpora^ tions, 351. distinction between useful commodities and necessaries of life, 358. extent of territory, 357. form of combination immaterial, 354. 908 RULES OF PUBLIC POLICY — continued, in general, 350. necessity for, 339. objects and tendencies of combinations, 355. stated, 352. what are necessaries of life, 358. what are useful commodities, 358. (See also Combinations; Public Policy.) RUNNING POWERS. (See Trackage Contracts.) , S SALE, distinction between, and consolidation, 13. outline of relations of vendor and vendee, 3. (See also Sales of Franchises; Sales of Property of Private Corporations; Sales of Property of Quasi-public Cor- porations; Sales of Railroads.) SALES OF FRANCHISES, distinction between, and sale of railroad, 142. legislative authority essential to, 135. legislative authority essential to purchase, 139. of corporations, 133, 134. of, corporation, does not carry property, 142. of corporations, nature of, 134. transferability of franchise of corporate existence, 132. ultra vires, 139 a. unauthorized, against public policy, 137. unauthorized, ultra virjes, 136. unauthorized, unlawful delegation of powers, 138. SALES OF PROPERTY OF PRIVATE CORPORATION, defences to stockholders' actions to set aside, 116. effect of sale of entire corporate property, 117. for stock, constructively fraudulent, 124. liability of purchasing corporation for debts of vendor, 123. obligation of majority stockholders to minority, 114. of entire property by directors, 112. of entire property by unanimous consent, 109. of entire property of losing corporation by majority vote, 111. of entire property of prosperous corporation by majority vote, 110. power to purchase and sell generally, 108. priority of purchaser's mortgage over claims of vendor's creditors, 126. procedure in stockholders' actions, 115. ratification by stockholders of sale by directors, 113. remedies of creditors in case of fraudulent, 125. remedies of dissenting stockholders in case of invalid, 114. 909 SALES OF PROPERTY OF PRIVATE CORPORATION — continued, ultra vires, 129 a. voidable, 114. what action necessary to authorize, 108. when directors are interested in vendee company, prima facie fraudu- lent, 124. whether stock of dissenting stockholders can be appraised, 121. (See also Exchange op Corporate Phopbbty fob Stock.) SALES OF PROPERTY OF QUASI-PUBLIC CORPORATIONS, indispensabte property cannot be alienated without legislative authority, 127. surplus property, 129. test of indispensability, 128. ultra vires, 129 a. SALES OF RAILROADS, acquiescence of stockholders in, 150. construction of statutes, 146. conventional and judicial, distinguished, 140. directors have no power to authorize, 149. distinction between, and reorganization, 141. distinction between, and sales of franchises, 142. do not terminate corporate existence, 152. essential franchises pass upon sale of road, 157. liabilities of vendor corporation after authorized sale, 154. liabilities of vendor corporation after unauthorized sale, 155. method of authorizing and executing, 148. obligations of vendee in respect of vendor's public duties, 162. of road alone carries necessary franchises, 142. remedies of dissenting stockholders in case of invalid, 151. remedies of State in case of unauthorized, 156. rights of vendee corporation in general, 158. rights of vendor corporation after sale, 153. seller must have authority to sell and buyer to buy, 144. status of foreign purchasing corporation, 164. statutes authorizing, 145. statutes authorizing, strictly construed, 146. statutory authority necessary to, 143. statutory requisites for authorization and execution, 148. stockholders may be estopped from questioning validity of, 150. to competing or parallel line prohibited, 147. vendee not liable for debts of vendor, 163. whether approval of majority is suflBcient in absence of statute, 149. whether chartered rates of fare follow the property, 161. whether exemptions from taxation pass to vendee corporation, 160. whether right of eminent domain passes to vendee, 159. whether sale of railroad carries franchises, 142. 910 INDEX SECRET PROCESSES, • application of federal anti-trust statute to combinations under, 401. SECURITY, whether majority can effect consolidation upon giving, 50. (See Appraisal.) SHERMAN LAW. (See Federal Anti-trust Statute.) SPECIFIC PERFORMANCE, of trackage contracts, 260. SOUTH CAROLINA, (a) Consolidation. constitutional provision against consolidation of competing cor- porations, 32 n. statutes authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. statute providing that consolidated corporation shall acquire no extraordinary powers, 77 n. (6) Sales. statutes authorizing purchase of railroads, 145 n. (c) Leases. statute authorizing railroad leases, 145 n, 180 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statute, 414 n. SOUTH DAKOTA, (o) Consolidation, statute authorizing consolidation of railroads, 22 n. statute prescribing method of consolidating, 52 n. (6) Sales. statute authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. (c) Leases. statute authorizing railroad leases, 145 n, 180 n. statute concerning taxation of leased railroad, 224 n. statute prescribing method of adopting railroad lease, 193 n. statute relating to foreign lessee corporations, 254 n. (d) Stockholding. statute authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statutes, 414 n. constitutional provision against monopolies and trusts, 414 n. STANDARD OIL TRUST, nature and formation of, 343. STATE, (a) Consolidation. may attack irregular consolidation, 95. status of corporation created by joint legislative action, 101 n. (6) Leases. remedies of, in eases of ultra vires leases, 250. 911 INDEX STATE — continued, (c) Sales. remedies of, in case of unauthorized sale of railroad, 156. (d) Stockholding. remedies of, in case of ultra vires stockholding, 293. (e) Combinations. federal anti-trust statute inapplicable to regulations of, 403. outline of power of, over combinations, 414. power of, over property devoted to public uses, 417. power of, to prohibit combinations of corporations in exercise of reserved power, 418. power of, to prohibit combinations of gMosi-public corporations, 417. remedies of, in case of unlawful combinations, 372, 373, 374. (See also Quo Warranto.) STATE ANTI-TRUST STATUTES, applicability of, to foreign corporations, 436. application of miscellaneous, 444. application of, to insurance combinations, 435. apply to continuing combinations, 443. as defence to actions for recovery of debt, 445. civil remedies under, 449. constitutionality of, 415-424. construction of miscellaneous, 444. controlling propositions in determining constitutionality of, 416. criminal proceedings under, 446. damages recovered under, 449. development of, 414. enacted in exercise of police power, 420. evidence in proceedings under, 450. forfeitures under, 447. have no extraterritorial effect, 437. indictments under, 446. invalidity of class legislation, 421. invalidity of exemptions of anti-trust statutes, 421. invalidity of exemptions of agricultural products, 421. invalidity under, as a ground for collateral attack, 445. limitations of actions, 451. not regulations of interstate commerce, 426. not retroactive, 443. penalties, 446 n. power of State over property devoted to public uses, 417. power of State to prohibit combinations of corporations, in exercise of reserved power, 418. power of State to prohibit combinations of quasi-pnhlic corporations, 417. proceedings against corporations under, 448. 912 INDEX STATE ANTI-TRUST STATUTES — continued, production of books under, 450. provisions that, may be pleaded as defence, 445. rule of construction of, 427. sphere of State legislation, 415. State courts' interpretation of, followed by federal courts, 423. summary of, 414 n. validity of provisions that, may be pleaded as defence, 445. validity of, tested by Fourteenth Amendment, 419-421. validity of, under state constitutional provisions, 422. when, may be pleaded as defence, 445. who may question constitutionality of, 424. STATUS, effect of interstate consolidation upon, of constituent corporations, 102. of corporation as controlling stockholder, 299. of foreign corporations, 101 n. of foreign vendee corporation, 164. of interstate consolidated corporation, 101. (See also Cobpobation.) STATUTES, (a) Consolidation. against consolidation of competing or parallel railroads, 32 n. as to transmission of property and franchises upon consolidation, 65. authorizing consolidated corporations to issue mortgage bonds, 75 n. authorizing consolidation not regulations of interstate commerce, 19. authorizing consolidation, not retroactive, 20. authorising consolidation of business corporations, 23 n. authorizing consolidation of railroads, 22 n. authorizing consolidated corporation to exercise right of eminent domain, 76. Connecticut, concerning evidence of consolidation, 91 n. construction of particular, authorizing consolidation, 28, 62, 63. construction of, prescribing method of consolidation, 54. effect of consolidation depends upon terms of, 59. enforcement of, against consolidation, 40. English, authorizing amalgamation, 12. for appraisal of stock in consolidation proceedings, 57. formal requirements of, for consolidation, 52. Minnesota, against consolidation of competing lines, 35 n. miscellaneous, conferring powers on consolidated corporation, 77 n. New York, concerning effect of consolidation upon pending suits, 89 n. 913 STATUTES — continued, prescribing obligations of consolidated corporation, 79 n. prohibiting consolidation of competing railroads have no ex post facto application, 32. relating to transmission of property and franchises, 65. rule of construction of, authorizing consolidation, 27. showing creation of distinct corporation as result of consolida- tion, 62. showing merger as result of consolidation, 63. (6) Sales. against purchase of competing or parallel railroads, 147. authorizing purchases of railroads, 145. authorizing sales of railroads, 145. construction of, relating to sales of railroads, 146. defining status of corporation purchasing railroad, 158. for appraisal of stock in case of exchange, 121. Pennsylvania, concerning dissolution of vendor corporation, 152 n. prescribing method of authorizing and executing sales of rail- roads, 148. providing that corporation purchasing railroad may exercise right of eminent domain, 159 n. providing that sale of railroad shall not affect creditors, 163 n. (c) Leases. authorizing leases of railroads, 180. authorizing lessee to exercise power of eminent domain in name of lessor, 210 n. authorizing lessee to exercise right of eminent domain, 210 n. authorizing railroad leases, rule of construction of, 181. compelling railroads to make track connections,, 255. concerning taxation of leased railroads, 224 n. construction of, authorizing railroad leases, 182. construction of, not authorizing railroad leases, 183. imposing liability upon lessee, 230 n. prescribing method of adopting lease of railroads, 193. prohibiting leases of competing or parallel railroads, 186. providing that railroad lease shall not affect public obligations of lessor, 215. relating to foreign lessee corporations, 254. (d) Stockholding. authorizing corporate stockholding, 271. (e) Combinations. authorizing issue of stock of property, 319 n. concerning pools, 364 n. federal anti-trust statute, 376 n. interstate commerce act concerning connecting lines, 363 n. invalid exemptions in State anti-trust, 421. 914 INDEX STATUTES — continued, providing that anti-trust, may be pleaded in defence, 445. State anti-trust, 414 n. STATUTES OF LIMITATION. (See Limitations.) STATUTORY AUTHORITY. (See Legislative Authority.) STOCK, (a) Consolidation. appraisal of, 57. condemnation of, for purposes of consolidation, 51. (6) Sales. appraisal of, of dissenting stockholder in case of exchange, 121. English statute for appraisal of, 121 n. exchange of corporate property for, ultra vires, 119. exchange of property for, infringement of rights of dissenting stockholders, 120. ^ received upon exchange belongs primarily to corporation, 122. reorganization plan involving payment of money in lieu of, 120. transfer of entire corporate property for, requires unanimous consent, 118. l,c) Stockholding. assumption of power to hold, in articles of association, 270. English rule as to necessity for statutory authority to purchase, 265. expediency of purchase of, immaterial, 269. power of corporation to acquire and hold its own, 283 a. rule requiring statutory authority for corporate subscriptions or purchases not evaded by indirection, 267. similar nature of corporations does not affect power to hold, 268. statutory authority necessary for corporation to purchase, 264. statutory authority necessary to subscribe for, 266. (d) Combinations. issue of, for good-will in formation of corporate combination, 320. issue of, for property in formation of corporate combination, 319. (See also Corpoeatb Stockholding; Stockholdees.) STOCKHOLDERS, (a) Consolidation. assent of, to consolidation, how manifested, 45. condemnation of stock of, in aid of consolidation, 51. estoppel of, of constituent corporations to deny regularity of organization of de facto consolidated corporation, 96. estoppel of, of de facto consolidated corporation to deny regular- ity of organization, 96. laches of, in restraining consolidation, 49. of constituent corporations, effect of consolidation upon, 64. of constituent corporations may restrain consolidation of com- peting railroads, 40. 915 INDEX STOCKHOLDERS — continued, preferred, of constituents, obligations of consolidated corpora- tion to, 81. procedure in actions of, to restrain consolidation, 48. requisite number of, whose consent is necessary to consolida- tion, 41, 42, 43. rights and remedies of dissenting, to enjoin consolidation, 46. statutes authorizing condemnation of stock of dissenting, in con- solidation proceedings not applicable to lease, 51. when unanimous consent is necessary to consolidation, 42. whether majority can effect consolidation upon giving security, 50. (6) Sales. appraisal of stock of dissenting, in case of exchange, 121. defences to actions by, to set aside sales of property, 116. entitled to stock received upon exchange only upon distribution, 122. estoppel of, to maintain suit to set aside sales of property, 116. exchange of entire corporate property for stock requires unani- mous consent of, 118. exchange of property for stock infringement of rights of, 120. franchise of corporate existence belongs to, 131. hold consideration for fraudulent sale as trustees for creditors, 125. laches of, as affecting right to complain of sales of property, 116. may be estopped by participation or acquiescence from ques- tioning validity of sale of railroad, 150. objections to plan of paying dissenting, money in lieu of shares, 120. procedure in actions of, to enjoin sale of corporate property, 115. ratification by, of sale by directors, 113. remedies of dissenting, in case of invalid sales, 114. remedies of, in case of exchange of property for stock, 122 6. remedies of, in case of invalid sale of railroad, 151. sale of property of private corporation, defences to actions of, to prevent, 116. when, may directly receive stock in exchange for corporate property, 122. whether approval of majority of, sufficient in absence of statute, 149. (c) Leases. assent of, necessary to railroad lease, 188. distinction between ratification by, and by legislature, 179. laches of, may prevent attacking. railroad lease, 192. lease of entire property of prosperous corporation requires unani- mous consent of, 166. 916 INDEX STOCKHOLDERS — continued, may be estopped by acquiescence from attacking invalid railroad lease, 192. remedies of, in case of unauthorized railroad lease, 191. remedies of, to restrain lease of corporate property, 169. rights of, when rent is payable in form of dividends, 212. when leases by directors or majority of, can be set aside, 168. whether approval of lease by majority of, sufficient in absence of statute, 189. (d) Stockholding. may enjoin voting of ultra vires holdings of stock, 288. remedies of, in case of ultra vires stockholding, 293. remedies of minority, of controlled corporation, 301. status of corporations, as controlling, 299. status of corporations as, 284. (e) Combinations. in formation of trust State regards acts of, as acts of corporation, 313. remedies of, of combining corporations, 371. (See also Subscribers.) SUBSCRIBERS, action upon subscription by constituent corporation against, 69. enforcement by consolidated corporation of obligations of, to con- stituent corporation, 69. remedies of dissenting, in case of invalid consolidation, 47. to stock of constituent corporation may attack irregular consolida- tion, 95. when, bound by consolidation proceedings, 68. when, estopped to question regularity of consolidation, 96. (See also Consolidation; Stockholders.) SUBSCRIPTIONS, conditional, enforcement of, by consolidated corporation, 69. corporate, for stock in foreign corporations, 272. corporate, through agents invalid, 267. effect of ultra vires lease upon, 246. necessity for tatutory authority for corporate, 266. remedies of consolidated corporations to enforce, 69. to stock of constituent corporations pass to consolidated corpora^ tion, 68. SUGAR TRUST, nature and formation of, 342. SUITS. (See Remedies.) SURPLUS PROPERTY, leases of, 172. sales of, 129. surplus use of tracks, 172. 917 TAXATION, exemptions from. (See Exemptions from Taxation.) of interstate consolidated corporation, 105. of leased railroads, 224. TAXES, distinction between, and assessments, 205. covenant to pay, for sole benefit of lessor, 205. covenant to pay in railroad leases, 205. TELEGRAPH COMPANIES, constitutional prohibitions against consolidation of competing, 39. TELEPHONE COMPANIES, constitutional prohibitions against consolidation of competing, 39. TENNESSEE, (o) Consolidation. statutes authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (6) Sales. statutes authorizing purchase of railroads, 145 n. statute prescribing method of authorizing sale of railroadi 148 n. (c) Leases. statutes authorizing railroad leases, 145 n, 180 n. statute prescribing method of adopting railroad lease, 193 n. (d) Combinations. anti-trust statutes, 414 n. constitutional provision against monopolies, 414 n. TERMINAL FACILITIES, meaning of phrase, 200. TEXAS, (o) Consolidation. statute authorizing consolidation of benevolent, etc., corpora- tions, 23 n. statute concerning consolidation of railroads, 22 n. constitutional provision against consolidation of competing corporations, 32 n. (6) Leases. constitutional provision against consolidation not construed to authorize lease, 183. statute authorizing railroad leases, 180 n. statute providing that lease shall not affect lessor's public obli- gation, 215. statute providing that lessor shall be liable as if operating rail- road, 216 n. (c) Stockholding. statutes authorizing corporate stockholding, 271 n. 918 INDEX TEXAS — continued, (d) Combinations. anti-trust statutes, 414 n. constitutional provision against -monopolies, 414 n. constitutionality of anti-trust statutes, 420. TORTS, liability of consolidated corporation for, of constituents, 82. liability of lessor for, of lessee, 218-221. (See also Consolidation; Lessee Corporation; Lessor Corpora- tion; Negligence.) TRACKAGE CONTRACTS, assignability of, 258. construction of, 259. distinction between, and leases, 176, 255. English statutes granting running powers, 255. execution of, 256, 257. limitations upon power to execute, 256. liability of licensee company to employees, 263. liability of licensee company to third persons, 262. liability of proprietaiy company to employees, 263. liability of proprietary company to third persons, 261. nature of, 255. nature of running powers, 255. specific performance of, 260. statutory authority not necessary for execution of, 256. whether written contract is necessary, 257. TRAFFIC CONTRACTS. (See Associations op Railroad Companies.) TRANSMITTING COMPANIES, constitutional prohibitions against consolidation of competing, 39. TRANSPORTATION COMPANIES, constitutional prohibitions against consolidation of competing, 39. TRUST, definition of, 304. formation of, 309. in formation of. State regards acts of stockholders as acts of corpo- ration, 313. invalid as delegating corporate powers, 315. invalid as involving partnership of corporations, 314. invalid as involving practical consolidation, 316 nature of trust certificates, 317. popular use of word, 305. rights and liabilities of trustees, 317. right of trustee, 317. transferability of certificates, 317. (See also Combinations.) 919 INDEX TRUST CERTIFICATES, nature of, 317. State anti-trust statutes concerning, 414 n. transferability of, 317. TRUST FUND DOCTRINE, development of, 123 n. limitations upon, 123 n. objections to, 123 n. stated, 123 n. TRUSTEES, rights and liabilities of, under industrial trusts, 317. U ULTRA VIRES, consolidation without legislative authority is, 17. contracts for purchase of stock, 290. defence of, after delivery of possession under lease, 241. defence of, to enforcement of leases, 240. distinction between acts, the majority and, the corporation, 151. effect of execution of, contract for exchange of property for stock, 122 a. exchange of property for stock is, 119. holdings of stock, independent contracts, 291. holdings of stock, liability for assessments upon, 289. holdings of stock, what incidents of ownership attach to, 288. purchase for control without express authority is, 298. sale of railroad, remedies of dissenting stockholders in case of, 151. sales of franchises, 139 u. unauthorized lease of railroad is, 177. unauthorized sale of franchises is, 136. unauthorized taking of lease is, 178. ULTRA VIRES LEASES, distinction between, and irregular, 239. effect of delivery of possession under, 241. effect of, upon stock subscriptions, 246. enforcement of executory, 240. guarantee of, void, 247. lessee may surrender, without liability, 241. obligations of parties after disaffirmance, 242. quo warranto in case of, 250. recovery of property after disaffirmance by lessee, 243. recovery on quantum, meruit after disaflBrmance, 244. remedy of State by injunction in case of, 251. right and duty of disaffirmance, 242. right of lessee to disaffirm, 242. right of lessor to disaffirm, 242. 920 INDEX ULTR VIRES L'EASES — continued, whether lessee can recover for improvements made under, 245. whether lessor can recover property when it disaffirms, 242. (See also Leases op Railroads.) UNANIMOUS CONSENT, exchange of entire corporate property for stock requires, 118. lease of entire property of prosperous corporation requires, 166. sale of entire corporate property by, 109. when necessary to consolidation, 42. whether, necessary for lease of railroad, in absence of statute, 189. whether, necessary for sale of railroad, in absence of statute, 149. (See also Majority; Minority.) UNAUTHORIZED LEASE. (See Leases op Railroads; Lessee Corporation; Lessor Cor- poration.) UNIVERSITATIS JURIS, meaning of phrase, 10. UNREASONABLE RESTRAINT OF TRADE, federal anti-trust statute not limited to contracts in, 388. USEFUL COMMODITIES, use of phrase, 350, 351, 358. what are, 358. UTAH, (o) Consolidation. constitutional provision against consolidation of competing corporations, 32 n. statute authorizing consolidation of business corporations, 23 n. statute authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (6) Sales. statutes authorizing sales of railroads, 145 n. statute conferring powers on corporation purchasing railroads, 158 n. (c) Leases. statutes authorizing railroad leases, 145 n, 180 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statutes, 414 n. constitutional provision against combinations, 414 n. V VENDEE CORPORATION, acquires essential franchises upon purchase of railroad, 157. generally not liable for debts of vendor, 123. may assume debts of vendor, 123. may assume obligations of vendor, 163. may be made liable by statute for debts of vendor, 163. 921 VENDEE CORPORATION — coreimwerf, mortgage of, takes priority over claims of vendor's creditors, 126. not liable for debts of vendor unless assumed or imposed by law, 163. obligations of, in respect of vendor's public duties, 162. rights of, in general, 158. statutes defining status of, 158. status of foreign, 164. whether, acquires exemptions from taxation upon purchase of rail- road, 160. whether, acquires right of eminent domain upon purchase of rail- road, 159. whether, acquires vendor's right to fix rates of fares, 161. VENDOR CORPORATION, liabilities of, after authorized sale of railroad, 154. liabilities of, after unauthorized sale of railroad, 155. liability of vendee for debts of, 123. mortgage of vendee takes priority over claims of creditors of, 126. obligations of, not assumed by vendee upon sale of railroad, 163. obligations of vendee in respect of public duties of, 162. power of, to sell property for stock, 322. powers of, after sale of railroad, 153. quo warranto against, in case of unauthorized sale of railroad, 156. sale of railroad does not terminate corporate existence of, 152. vendee may assume debts of, 123. vendee may be liable by statute for debts of, 163. vendee may expressly assume obligations of, 163. VENDOR AND VENDEE, outline of relations of, 3. distinction between relation of, and other intercorporate relations, 141. VERMONT, (a) Consolidation. statute authorizing consolidation of railroads, 22 n. (6) Leases. statute authorizing railroad leases, 180 n. (c) Stockholding. statutes authorizing corporate stockholding, 271 n. VESTED RIGHTS, legislation cannot affect, 26, 266. power to consolidate not a, 24. VIRGINIA, statutes authorizing corporate stockholding, 271 n. VOIDABLE LEASES, may become valid by acquiescence, 248. of private corporation, 168. of railroads, 248. (See also Leases of Railroads.) VOID RESTRICTIONS, in railroad leases, 220. 922 INDEX w WASHINGTON,' (a) Consolidation. constitutional provision against consolidation of competing cor- porations, 32 n. statute authorizing consolidation of railroads, 22 n. statute prescribing method of consolidating, 52 n. (&) Sales. statute authorizing purchase of railroads, 145 n. (c) Leases. statute authorizing railroad leases, 145 n, 180 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. constitutional provision against monopolies and trusts, 414 n. WEST VIRGINIA, (a) Consolidation. constitutional provision against consolidation of competing cor- porations, 32 n. statutes authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (6) Sales. statutes authorizing purchase of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. (c) Leases. statutes authorizing railroad leases, 180 n. statute prescribing method of adopting railroad lease, 193 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. WHISKEY TRUST, nature and formation of, 344. WISCONSIN, (o) Consolidation. statute authorizing consolidation of railroads, 22 n. statute providing that land grants pass to consolidated corpora- tion, 77 n. statute prescribing method of consolidating, 52 n. (6) Sales. statute authorizing sales of railroads, 145 n. statute conferring powers on corporation purchasing railroad, 158 n. (c) Leases. statute authorizing railroad leases, 145 n, 180 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. anti-trust statute, 414 n. 923 ^ INDEX WILSON TARIFF ACT, provisions of, supplementing federal anti-trust statute, 383. WORDS AND PHRASES. (See Definitions.) WYOMING, (a) Consolidation. constitutional provision against consolidation of competing cor- porations, 32 n. statutes authorizing consolidation of railroads, 22 n. statutes prescribing method of consolidating, 52 n. (b) Sales. statute authorizing sales of railroads, 145 n. statute prescribing method of authorizing sale of railroad, 148 n. (c) Leases. statute authorizing lessee to exercise right of eminent domain, 210 n. statute authorizing railroad leases, 145 n, 180 n. statute concerning taxation of leased railroad, 224 n. statute prescribing method of adopting railroad lease, 193 n. statute relating to foreign lessee corporations, 254 n. (d) Stockholding. statutes authorizing corporate stockholding, 271 n. (e) Combinations. constitutional provision against consolidations or combinations, 414 n. constitutional provision against monopolies, 414 n, '>4 KF l6k9 N95 1909 Author Noyes, Walter Chadwlck Copy A treatise on tb GorDorate relatu .„e law of inter- .lonsj