I5Z] 157 ^9 19 CORNELL UNIVERSITY LIBRARY •'- n^^ffiTW^Witr^^ABi INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE HEARING BEFORE THE 1 SUBCOMMITTEE OF THE COMMITTEE ON THE JUDICIARY UNITED STATES SENATE SIXTY-FIFTH CONGRESS THIRD SESSION S. 5194 L BILIi TO PROVIDE FOB THE INCORPORATION OF CERTAIN , COMPANIES ENGAGED IN FOREIGN TRADE JANUARY 31, 1919 Printed for the use of the Committee on the Judiciary WASHINGTON GOVERNMENT PRINTING OFFICE 191a "3K A3 T 37 COMMITTEE ON THE JUDICIARY. CHARLES A. CULBEESON, Texas, Chairman. LEE S. OVERMAN, North Carolina. KNUTE NELSON, Mimesota. DUNCAN U. FLETCHER, Florida. "WILLIAM P. DILLINGHAM, Vermont. JAMES A. REED, Missouri. FRANK B. BRANDEGBE, Connecticut. HENRY F. ASHURST, Arizona. WILLIAM E. BORAH, Idaho. JOHN K. SHIELDS, Tennessee. ALBERT B. CUMMINS, Iowa. THOMAS J. WALSH, Montana. MILES POINDEXTER, Washington. HOKE SMITH, Georgia. LeBARON B. COLT, Rhode Island. WILLIAM H. KING, Utah. > THOMAS STEELING, South Dakota. JOSIAH O. WOLCOTT, Delaware. 0. W. JUKNDT, Clerk. F. C. Edwakds, Assistant clerk. Subcommittee on S. 5194. Mr. FLETCHER, Chairman. Mr. REED. Mr. DILLINGHAM. 2 Cornell University Library JK1521.A3 137 1919 Incorporation of companies engagsd in fo olin 3 1924 030 483 766 CONTENTS. Page, Text of bill 7 Statement of — Secretary of Commerce 33, 41 Chqjles Denby 36 Chief of Bureau ot Foreign and Domestic Commerce 40 Solicitor of the Department of Commerce 42 Editorial on Federal incorporation law 42 Letter from Secretary of Commerce 45 Letter from the President 46 Statement on Federal incorporation 46 Draft submitted by American Chamber of Commerce of China 47 3 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/cu31924030483766 INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. FRIDAY, JANTJABY 31, 1919. United States Senate, Subcommittee of the Committee on the Juthciary, Washington, D. C. The subcommittee met in the room of the Committee on the Judiciary, in the Capitol, at 10.30 o'clock a. m., Senator Duncan U. Fletcher presiding. Present: Senator Fletcher. ' The subcommittee had under consideration the following; bill: 65th congress,! o k -» ri /I 3d Session. | ^, O i t? 4t« IN THE SENATE OF THE UNITED STATES. Decembbk 14, 1918. Mr. Fletcher introduced the following bill; which was read twice and referred to the Committee on the Judiciary. A BILL Tojprovide for the incorporation of certain companies engaged in foreign trade. 1 Be it enacted hy the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 That a corporation may be formed, as provided in this Act, 4 solely for the purpose of engaging in and carrying on trade 5 or commerce in goods, wares, or merchandise exported 6 or imported, or to be exported or imported, from or to 7 the United States of America, or any Territory thereof, 8 to or from, any foreign country or noncontiguous territory 9 of the United States of America, including the production 10 or manufacture of such goods, wares, or merchandise, and 1 1 for engaging in any lawful enterprise in foreign countries or (1) 7 8 IWCORPORATIOlSr OF COMPANIES ENGAGED IN FOREIGN TEADB. 1 noncontiguous territories of the United States of America, 2 or in localities in which the United States of America exer- 3 cises extraterritorial jurisdiction. 4 Sec. 2. That any number of persons, not less than 5 three, a majority of whom shall be citizens of the United 6 States of America, desiring to become incorporated wider 7 this Act, shall subscribe and acknowledge articles of' incor- , 8 poration, which must contain: (1) The name of the cor- 9 poration, which shall end with the legend "Inc. U. S. A." 10 (The use of which legend as the part of the name of any 11 firm, corporation, or association engaged in interstate or 12 foreign commerce and not chartered under this Act, is 13 hereby prohibited); (2) the location of its principal office 14 and the place where its principal business is to be transacted; 15 (3) the purpose for which it is formed; (4) the amount of 16 its capital stock and the number of shares into which it is 17 divided. 18 Sec. 3. That articles of incorporation shall bcacknowl- 19 edged before an officer authorized to administer an oath, the 20 form of which acknowledgment shall conform to the require- 21 ments of the place where it is taken. 22 Articles of incorporation shall be filed with the Secre- 23 tary of Commerce, who shall record them and shall also 24 record certificates relating to the corporation thereafter filed 25 with him. In the case of corporations to be formed in non- (2) INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 9 1 contiguous territories of the United' States of America or in 2 localities in which the United States of America exercises 3 extraterritorial jurisdiction, the articles of incorporation shaU 4 be filed in duplicate with the clerk of the highest court of the 5 United States of America in the respective territory or 6 locality who shall record them and shall also record cer- 7 tificates relating to the corporation thereafter filed with him. 8 Sec. 4. That upon filing articles of incorporation the 9 persons who subscribe them, their associates, successors, and 10 assigns, by the name and style provided therein, shall be a 11 body corporate with succession, power to sue and be sued 12 in any court of law or equity of the United States, or of the 13 various States and Territories, including the District of 14 Columbia or of any State or Territory in which the United 15 States of America enjoys sovereignty, or in the courts of 16 any foreign country, or in the courts of the United States 17 of America in any country in which the United States of 18 America has extraterritorial jurisdiction, contract and be 19 contracted with; also, imless specially limited, to acquire and 20 hold aU property, real or personal, necessary to effect the 21 object for which it is created, and at pleasure convey it in 22 conformity with its regulations and the laws of the country 23 in which it is located. Such corporation also may make, 24 use, and at will alter a common seal, and do all other acts 25 needful to accomplish the piu"poses of its organization. (3) 10 INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 1 Sec. 5. That the Secretary of Commerce or other 2 recording officer named in section three shall not file or 3 record any articles of incorporation wherein the corporate 4 name is likely to mislead the public as tci the nature or pur- 5 pose of the business its charter authorizes, nor if such name 6 is that of an existing corporation or so similar thereto as to 7 be likely to mislead the public, unless the written consent 8 of the existing corporation, signed by its president and secre- 9 tary, be filed with such articles. Whenever, after articles of 10 incorporation have been filed or recorded by the Secretary 11 of Commerce, and it shall then appear that the corporate 12 name is that of an earlier-formed corporation, or so similar 13 thereto as to be likely to mislead the public, the Secretary of 14 Commerce is authorized to require a change of name, unless 15 the written consent of the earlier-formed corporation is 16 obtained and filed or recorded. 17 Sec. 6. That a copy of the articles of incorporation so 18 filed and duly certified by the Secretary of Commerce or 19 other recording officer shall be prima facie evidence of the 20 corporation therein named. 21 Sec. 7. That the persons named ia the articles of in- 22 corporation under this Act, or a majority of them, shall 23 order books to be opened for subscriptions to the capital 24 stock of the corporation at such time or times and place or 25 places as they deem expedient. A naajority of the capital (4) INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 11 1 stock shall at all times be owned by citizens of the United 2 States of America. For the purpose of this Act, companies 3 incorporated under the laws of any State or Territory of the 4 United States of America shall not be held to be citizens of 5 the United States of America unless a majority of the capital 6 stock thereof is at all times owned by citizens of the United 7 States of America, and unless a majority, including the presi- 8 dent or chairman of the board of trustees or directors, are 9 citizens of the United States of America. 10 Sec. 8. That such persons shall give at least thirty 11 days' notice of the times and places of opening such books 12 of subscription, by publication in a newspaper published or 13 generally circulated in the place or places where they are 14 to be opened. Such notice, however, may be waived in 15 writing by all the incorporators, but the waiver shall be 16 entered or copied in the corporate records. 17 Sec. 9. That at the time of making a subscription to 18 the capital stock of a corporation, twenty per centum of each 19 share subscribed for shall be payable. The residue shall be 20 paid in such installments at such times and places and to 21 such persons as the directors of the corporation require. 22 Sec. 10. That when twenty per centum of the capital 23 stock is subscribed, the subscribers to the articles of incor- 24 poration or a majority of them at once shall so certify in (5) 12 INCOEPQEA,TION 0^ COMPANIES ENGAGED IN POEEIGN TEADE. 1 writing to the Secretary of Commerce or other recording 2 officer with whoI^ articles have been previously filed. 3 Sec. 11. That the incorporators shall be liable to any 4 person affected thereby in the amount of any deficiency in 5 the actual payment of twenty per centum on the stock 6 subscribed for at the time of so certifying to the Secretary 7 of Commerce or other recording officer. 8 Sec. 12. That as soon as such certificate is made and 9 filed with the Secretary of Commerce or other recording 10 officer, the signers thereto shall give notice to the stock- 11 holders, as provided in section eight hereof, to meet at such 12 time and place as the notice designates for the purpose of 13 choosing not less than five directors, to continue in office 14 until the time fixed for the annual election and until their 15 successors are elected and qualified. But if all the sub- 16 scribers to the capital stock are present in person or by 17 proxy, such notice may be waived by them in writing. 18 Sec. 13. That at the time and place appointed, directors 19 shall be chosen by ballot, by the stockholders who attend, 20 either in person or by lawful proxies. At such and all other 21 elections of directors the election shall be by ballot and each 22 stockholder shall be entitled to as many votes as he owns 23 shares of stock in the company, and the persons receiving 24 the greatest number of votes shall be elected directors. 25 Directors shall not be elected in any other manner. No per- (6) INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 13 1 son shall vote on a share of stock on which an installment is 2 due and unpaid. 3 Sec. 14. That at such first election the subscribers of 4 the articles of incorporation present, or ' any other persons 5 chosen by the stockholders present, shall be inspectors of 6 election, certify what persons are elected directors, and 7 appoint the time and place for holding their first meeting. 8 Sec. 15. That before every meeting held for the election 9 of directors, or for the determination of any question, by the 10 stockholders of a corporation, or by the subscribers to its 11 stock, or by its creditors and stockholders for its reorganiza- 12 tion, the ofiicer or agent of the corporation having charge of 13 the transfer of its stock, under oath miist make but a list of 14 its stockholders, showing the number and classes of shares 15 held by each, as shown by its books, oh the date fixed for 16 closing the stock transfers before its meetings; or if no time 17 be fixed therefor, then at the hour of noon on the tenth day 18 prior to the date of such meeting. Such list shall be de- 19 liveried to the inspectors of the meeting and be prima facie 20 .evidence of the ownership of its stock. In case good cause 21 is shown for the absence of such list the inspiectbrs shall 22 ascertain the ownership of stock by ihe corporation books, 23 stock certificates, or other proof. 24 Sec. 16. 'That the inspectors so appointed, or if none 25 be appointed, then thosie selected by the meeting, shall (7) 14 INCORPORATION OP QOMPANIES ENGAGED IN FOREIGN TRADE. 1 receive and count the votes cast at such meeting, or at any 2 adjournment thereof, either upon an election or for the 3 decision of any question to be decided by vote, and determine 4 the result. Their certificate shall be prima facie evidence 5 thereof. 6 Sec. 17. That the corporate powers, business, and 7 property of corporations formed under the provisions of 8 this Act shall be exercised, conducted, and controlled by 9 the board of directors. 10 Sec. 18. That a majority of such directors must be 11 citizens of the United States. All directors and executive 12 officers shall be holders of stock of the company for which 13 they are chosen, in an amount to be fixed by the by-laws. 14 Sec. 19. That when the office of director becomes 15 vacant the board of directors may fill it for the unexpired 16 term as provided for by the by-laws. 17 Sec. 20. That as soon thereafter as is convenient the 18 board of directors chosen at any election shall select one of 19 their number to be chairman thereof, and unless the reo^u- 20 lations of the body otherwise provide for the election of a 21 president and such officers, also appoint a secretary and 22 treasurer of the corporation and such other ofhcers as may 23 be necessary. 24 Sec. 21. That by a vote of a majority of its stock at 25 a regular meeting of a corporation organized under the pro- (8) INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 15 1 visions of this Act, it may increase the number ot its direc- 2 tors to such number as is deemed advisable. In like manner 3 at any time the number of directors can be reduced to not less 4 than five. At a special meeting of stockholders also called 5 and of which notice was given as provided for the election of 6 directors, by vote of a majority of its stock, the increase in 7 the number of directors may be made. Those elected shall 8 hold their ofiices until the next annual election for directors 9 and until their successors are elected and qualified. 10 Sec. 22. That a corporation organized under the pro- 11 visions of -this Act must have a capital stock, which may 12 consist of common and preferred or common only; but at no 13 time shall the amount of preferred stock at par value exceed 14 two-thirds of the actual capital paid in in cash or property. 15 Sec. 23. That when the capital stock is to be both 16 common and preferred, it may be provided in the articles of 17 incorporation that the holders of the preferred stock shall be 18 entitled to yearly dividends of not more than eight per 19 centum, payable quarterly, half-yearly, or yearly, out of 20 the surplus profits of the company each year in preference 21 to all other stockholders. Such dividends also may be made 22 cumulative. 23 Sec. 24. That a corporation issuing both common and 24 preferred stock may create designations, preferences, and (9) 16 INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 1 voting powers, or restrictions or qualifications thereof in the 2 certificate of incorporation, and if desired, preferred stock 3 may be made subject to redemption at not less than par after 4 a fixed time and at a set price, to be expressed in the stock 5 certificates thereof. 6 Sec. 25. That should any corporation organized under 7 the provisions of this Act become insolvent, no holder of 8 preferred stock shall be liable for its debts until after the 9 remedy against the common stockholders upon their liability, 10 as hereinafter provided, has been exhausted, and then only 11 for such amount as remains unpaid. Such liability in no 12 event shall exceed that fixed by this Act for the common 13 stock of such corporation. 14 Sec. 26. That upon the insolvency or dissolution, of any 15- corporation organized under the provisions of this Act the 16 holders of preferred stock shall be entitled to receive from 17 the assets of the corporation remaining after paying its lia- 18 bilities the full payment of its par value before anything is 19 paid to the common stock. 20 Sec. 27. That the directors of such corporation, when 21 organized, shall cause to be kept a record of all stock sub- 22 scribed and transferred, and its secretary or recording ofiioer 23 shall register all subscriptions and transfers of stock. For 24 that purpose a book shall be kept, and when a certificate of 25 stock is assigned and delivered by a stockholder the assignee (10) INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 17 1 thereof on demand may have it duly transferred therein by 2 snch officer, who at the same time shall enroll also the name 3 of the assignee as a stockholder. The books and records of 4 all corporations organized under the provisions of this Act 5 at all reasonable times shall be open to the inspection of every 6 stockholder. 7 Sec. 28. That title to a certificate and to the shares . 8 represented thereby can be transferred only, 9 (1) By delivery of the certificate, indorsed either in 10 blank or to a specified person by the person appearing by 11 the certificate to be the owner of the shares represented 12 thereby, or 13 (2) By delivery of the certificate and a separate docu- 14 ment containing a written assignment of the certificate or a 15 power of attorney to sell, assign, or transfer the same or the 16 shares represented thereby, signed by the person appearing 17 in the certificate to be the owner of shares represented 18 thereby. Such assignment or power of attorney may be 19 either in blank or to a specified person. 20 The provisions of this section shall be applicable 21 although the charter or articles of incorporation or by-laws 22 of the corporation issuing the certificate and the certificate 23 itself provide that the shares represented thereby shall be 24 transferable only on the books of the corporation or shall 25 be registered by a registrar or transferred by a transfer agent. (11) 103537—19 2 18 INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 1 Sec. 29. That nothing in this Act shall be construed 2 as enlarging the powers of an infant or other persons lacking 3 full legal capacity, or of a trustee, executor or administrator, 4 or other fiduciary, to make a valid indorsement, assignment, 5 or power of attorney. 6 Sec. 30. That nothing in this Act shall be construed 7 as forbidding a corporation — 8 (1) To recognize the exclusive right of a person regis- 9 tered on its books as the owner of shares to receive dividends 10 and to vote as such owner; or 11 (2) To hold liable for calls and assessments a person 12 registered on its books as the owner of shares. 13 Sec. 31. That the title of a transferee of a certificate 14 under a power of attorney or assignment not written upon 15 the certificate, and the title of any person claiming under 16 such transferee, shall cease and determine if, at any time 17 prior to the surrender of the certificate to the corporation 18 issuing it, another person for value in good faith, and with- 19 out notice of the prior transfer, shall purchase and obtain 20 delivery of such certificate with the indorsement of the 21 person appearing by the certificate to be the owner thereof, 22 or shall purchase and obtain delivery of such certificate and 23 the written assignment or power of attorney of such person 24 though contained in a separate document. (12) JNCORPOEATION OF COMPANIES ENGAGED IN FOREIGN TKADE. 19 1 Sec. 32. That there shall be no lien in favor of the 2 corporation upon the shares represented by a certificate 3 issued by it, and there shall be no restriction upon the 4 transfer of shares so represented by virtue of any by-laws 5 or otherwise, unless the right of the corporation to such lien 6 or the restriction is stated upon, the certificate. 7 Sec. 33. That if an installment on stock is unpaid for 8 thirty days after the time it was to be paid, whether the 9 stock is held by the subscriber, an assignee, or transferee, it 10 may be collected by suit, or the directors may sell such stock 11 for the installment then due. 12 Sec. 34. That before the directors can sell such stock 13 they shall give thirty days' notice of the time and place of 14 sale, in some newspaper in general circulation of the place 15 or at the place where the delinquent holder resided when he 16 subscribed for it or became such assignee or transferee, or 17 of his. actual residence at the time of sale. 18 Sec. 35i That when a sale of such stock is made, if after 19 paying from its proceeds the amount due on the stock, a 20 balance remains, the same shall, on demand, be paid to thfe 21 owner. But if such proceeds fail fully to pay such install- 22 ment, any balance may be recovered by action against the 23 subscriber, assignee, or transferee. 24 Sec. 36. That a corporation organized under the pro- 25 visions of this Act may purchase, or otherwise acquire, and (13) 20 .INCOKPOBATION OF COMPANIES ENGAGED IN FOKEIGN TRADE. 1 hold shares of stock in other kindred but not competing cor- 2 porations. This shall not authorize the forrnation of a trust 3 or combmation for the pxirpose of restricting trade or compe- 4 tition. 5 Sec. 37. That every corporation organized under the 6 provisions of this Act, annually shall make a statement of 7 its financial conditions, setting forth its assets and liabihties, 8 and file the same with the Secretary of Commerce or other 9 recording officer and furnish to each stockholder a true copy 10 thereof. 11 Sec. 38. That the stockholders of a ' corporation organ- 12 ized under the provisions of this Act shall be severally and 13 individually liable to the creditors of such corporation for the 14 impaid amount due upon the balance of stock held by them, 15 respectively, for all debts and contracts made by such cor- 16 poration, until the whole amount of capital stock fixed and 17 limited by such corporation shall have been paid in. 18 Sec. 39. That an action upon the liability of the stock- 19 holders of such corporation under the next preceding section 20 can only be brought within two years after the debt or obUga- 21 tion shall become enforceable against the stockholders. 22 Sec. 40. That the term "stockholder" as used in the 23 next preceding sections, shall apply not only to persons who 24 appear by the books of the corporation to be such, but also (14) INCOEPOEATIOX OF COMPANIES ENGAGED IN EOKEIGN TRADE. 21 1 to equitable owners of stock, although on the books of the 2 corporation it appears in the name of another person. 3 Sec. 41. That after the original capital stock of a cor- 4 poration organized under the provisions of this Act is fully 5 subscribed' for,, and an installment of twenty per centum on 6 each share of the stock has been paid thereon, such corpora- 7 tion may increase its capital stock or the number of shares 8 into which it is divided prior to organization by the imani- 9 mous written consent of all original subscribers. After 10 organization the increase m,ay be made by a vote of the 11 holders of a majority of its stock, at a meeting called by a 12 majority of its directors, at least thirty days' notice of the 13 time, place, and object of which has been given by public^- 14 tion in some newspaper of general circulation and by letter 15 addressed to each stockholder whose place of residence is 16 known. Or the stock may be increased at a meeting of the 17 stockholders at which all are present in person or by proxy 18 ,and waive in writing such notice by publication or letter, 19 and also agree in writing to such increase, naming thei 20 amount thereof to which they agree. A certificate of such 21 action shall be filed with the Secretary of Commerce or 22 other recording officeir named in section three. 23 Sec. 42. That upon, the assent in writing of the stock- 24 holders of a corporation, organized under the provisions of 25 this Act, representing at least three-fourths of its capital (15) 22 INCOEPOEATION OP COMPANIES ENGAGED IN FOREIGN TRADE. 1 stock, to increase the capital stock it may issue and dispose 2 of preferred stock in the manner provided therefor. Upon 3 the increase of stock, a certificate shall be filed with the 4 Secretary of Commerce or other recording ofhcer. 5 Sec. 43. That upon the assent in writing of the persons 6 in whose names a majority of the shares of the capital stock ^7 of a corporation organized under the provisions of this Act 8 stands on its books, the board of directors of such corpora- 9 tion may reduce the amount of its capital .stock and the 10 nominal valuation of all the shares thereof, and issue cer- 1 1 tificates therefor. The rights of creditors shall not be afEected 12 by such reduction in the amount of such capital stock, and a 13 certificate of such action shall be filed with the Secretary 14 of Commerce or other recording officer. 15 Sec. 44. That the directors of a corporation organized 16 under the provisions of this Act may adopt a code of by-laws 17 for their government, consistent with the regulations of the 18 corporation and the laws of the country in which its principal 19 office is located, and may change such by-laws at pleasure. 20 Sec. 45. That regulations for the government of cor- 21 porations organized under the provisions oi this Act may 22 be adopted or changed by the assent thereto, in writing, of 23 the holders of two-thirds of the stock, or by a majority of 24 the stockholders present at a meeting held for that purpose 25 notice of which has been given personally to each member (16) [NCdRPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 23 1 or stockholder, or by publication in some newspaper of 2 general circulation in the place where the head office of the 3 corporation is located. 4 Sec. 46. That when no other provision is especially 5 made, a corporation organized under the provisions of this 6 Act by its by-laws may provide — 7 (1) The time, place, and manner of calling and con- 8 ducting its meetings. 9 (2) The number of stockholders or members constitut- 10 ing a quorum. 11 (3) The time of the annual election for directors and 12 other officers, and the manner of giving notice thereof. 13 (4) The duties and compensation of directors and 14 other officers. 15 (5) The manner of election, or appointment, and the 16 tenure of office of all officers other than the directors. 17 Sec. 47. That a corporation organized under the pro- 18 visions of this Act may borrow money in any sum not ex- 19 ceeding the amoimt of its capital stock, issue its notes or 20 coupon or registered bonds therefor, bearing any legal rate 21 of interest, and secure their payment by a mortgage of its 22 property, real or personal, or both. 23 Sec. 48. That a mortgage of real and personal property 24 made by a corporation organized under the provisions of (17) 24 INOORPORATIOK OF COMPANIES ENGAGED IN FOREIGN TR'ADE. 1 this Act shall be duly recorded in the office of the recorder of 2 deeds or other proper officer at each place in which the real 3 or personal property mortgaged is situated or employed, and 4 a certified copy of such mortgage shall be filed with the Secre- 5 tary of Commerce or other recording officer. 6 Sec. 49. That a mortgage recorded with the recorder of 7 deeds or other proper officer, as provided for in the precedmg 8 section, shall be a good and sufficient lien from the date of its 9 filing for record where it is recorded upon the personal as 10 well as the real property of such corporation. 11 Sec. 50. That a corporation organized under the pro- 12 visions of this Act which lawfully has issued registered or 13 coupon bonds, upon the request of a holder thereof, may 14 change such registered into coupon bonds, or coupon into 15 registered bonds, either by substitution or by proper indorse- 16 ment thereon. All liens, securities, and rights which existed 17 on or accrued to such original bonds shaU be and continue 18 on and to such substituted or indorsed bonds. 19 Sec. 51. That no corporation organized under the pro- 20 visions of this Act shall sell its entire property and assets to 21 any person, persons, partnerships, associations, or" corpora- 22 tion, whether organized for the same or' similar purposes or 23 otherwise, unless three-fourths of the directors of such cor- 24 poration authorize the execution of an agreement therefor 25 prescribing the terms, considerations, and conditions thereof. (18) INCOEPOEATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 25 1 The considerations may be money, stock, bonds, or other 2 instruments for the payment of money, or any valuable 3 consideration. 4 Sec. 52. That the agreement provided for in the pre- 5 ceding section shall be submitted to the stockholders of the 6 corporation at a meeting called for the purpose, fifteen days' 7 notice of the time and place of holding which, and the object 8 thereof, shall be given by registered letter containing a 9 written or printed notice addressed to each of the persons 10 in whose names the stock of the corporation stands on its 11 books. But when all the stockholders are present at such 12 meeting in person or by proxy notice may be waived in 13 writing. 14 Sec. 53. That at such meeting of the stockholders the 15 agreement of the directors shall be considered and a vote by 16 ballot taken for its adoption or rejection. For each share 17 of stock on which all the installments called for by the board 18 of directors have been paid the holder thereof shall be enti- 19 tied to one vote. The ballots must be cast in person or by 20 proxy, and if three-fourths of all the votes cast at the meet- 21 ing be for the adoption of the agreement it shall be valid and 22 binding on such corporation. Upon its adoption the officers 23 of the corporation shall execute and deliver to the purchaser 24 good and sufficient deeds and transfers of all the property and (19) 26 INCOEPOEATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 1 assets of the corporation upon the terms and conditions m 2 the agreement provided. 3 Sec. 54. That a sale of its entire property by a cor- 4 poration organized under the provisions of this Act, as here- 5 inbefore authorized, shall not be made for the formation of 6 or to a trust or combination for the purpose of restricting 7 trade or preventing competition. 8 Sec. 55. That a corporation organized xmder the pro- 9 visions of this Act may amend its articles of incorporation as 10 follows: 11 First. So as to change its corporate name, but not to 12 one already appropriated, or to one likely to mislead the 13 public. 14 Second. So as to change the place where it is to be 15 , located, or its principal business transacted. 16 Third. So as to modify, enlarge, or diminish the objects 17 or purposes for which it is formed. 18 Fourth. So as to add to them anything omitted from 19 or which lawfully might have been provided for originally 20 in such articles. But the capital stock of such corporation 21 shall not be increased or diminished by such amendment, nor 22 the purpose of its original organization substantially changed. 23 Sec. 56. That amendments to articles of incorporation 24 may be made at any meeting of the stockholders thereof, of 25 which, and of the business to come before it, thirty days' (20) INCOEPORATION OF COMPANIES ENGAGED IN FOREIGN TEADE. 27 1 notice has been given by a majority- .of the directors in a 2 newspaper published and of general cu-culation at the place '3 where the corporation's principal place of business is located, 4 and by a vote of the owners of at least three-fifths of its 5 capital stock then subscribed. 6 Sec. 57. That when thus adopted, a copy of such 7 amendment, with a certificate thereto aflfixed, stating the fact 8 and date of its adoption, that such copy is a true copy 9 thereof, signed by the president and secretary of the cor- 10 poration, sealed with its seal, shallbe filed with the Secretary 11 of Commerce, or other recording officer, who shall cause by 12 note on the margin of the record of the original articles filed 13 by such corporation, and on the margiu of the index thereto, 14 the volume and page where such amendment is recorded. 15 Sec. 58. That amendments to articles of incorporation 16 shall not take effect until filed for record with the Secretary 17 of Commerce or other recording officer, nor unless it be 18 waived, as provided in the next section, until the corporation 19 gives notice of them, in some newspaper of general circula- 20 tion in the place where the principal office or business is 21 located, for three consecutive weeks. 22 ' Sec. 59. That all notices required by the preceding 23 section in auch proceedings to amend the articles of incor- 24 poration, may be waived when the holders of all the capital 25 stock of a corporation consent thereto in writing. (21) 28 INCOEPOEATIOW OF COMPANIES ENGAGED IN FOBEIGN TBADB. 1 Sec. 60. That directors of a corporation organized 2 under the provisions of this Act shall not make dividends 3 except from surplus profits arising from the business of the 4 corporation. 5 Sec. 61. That in order to ascertain the surplus profits 6 from which a dividend may be made, in the account of profit 7 and loss there shall be charged and deducted from the actual 8 profits — 9 First. All ordinary and extraordinary expenses, paid 10 or incurred, in managing the affairs and transacting the 1 1 business of the corporation. 12 Second. Interest paid, or then due or accrued, on debts 13 it owes. 14 Third. All losses of the corporation. In computing its 15 Josses, debts owing to it which have been due without prose- 16 cution, or interest paid thereon, for more than one year, or 17 , upon which judgment was recovered, but has been more than 18 two J' ears unsatisfied, and. on which also for that period no 19 interest was paid shall be included. 20 Sec. 62. That when all the capital stock of a corpora- 21 tion has not been actually paid in the corporation shall not 22 advertise the amount of authorized capital stock without 23 also stating the amount actually paid in, nor shall a corpora- 24 tion advertise a greater dividend than has actually been 25 earned and credited or paid to its stockholders. (22) INCOEPOEATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 29 1 Sec. 63. That every director of such a corporation who 2 violates or is concerned in violating any provision of the four 3 preceding sections hereof shall be personally liable to the 4 creditors and stockholders of the said corporation for any loss 5 which thereby they respectively sustain. 6 Sec. 64. That every corporation ol-ganized under the 7 provisions of this Act shall file an annual report with the 8 Secretary of Commerce or other recorchng officer diu-ing the 9 month of January, in such form as the Secretary of Com- 10 merce may prescribe. This report shall be accompanied by 11 an affidavit in such form as the Secretary of Commerce may 12 prescribe, subscribed and sworn to by an officer of the cor- 13 poration having knowledge of the facts therein contained. 14 Sec. 65. That upon the dissolution of a corporation 15 organized under the provisions of this Act, and unless other 16 persons be appointed by the stockholders, the directors of 17 the affairs of such corporation shall be the trustees of the 18 creditors and stockholders thereof, and haA'e full power to 19 settle its affairs, collect, and pay outstanding debts, and 20 divide among the stockholders the money and other property 21 remaining, in proportion to the stock of each stockholder 22 paid up, after the payment of debts and other necessary 23 expenses. 24 Sec. 66. That if aU the stockholders present at such 25 meeting in person or by proxy decide to sm-render' and (23) 30 INCORPOKATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 1 abandon its corporate authority the corporation shall be 2 abandoned and dissolved upon the filing of a certificate of 3 the abandonment or dissolution with the Secretary of Com- 4 merce. 5 Sec. 67. That when a majority of the directors or other 6 officers having the management of a corporation organized 7 under the provisions of this Act which has completely closed 8 its business and paid all the debts and liabilities incurred by 9 it desire to surrender its corporate authority and franchises, 10 they or the president of such board of directors may call a 11 meeting of the stockholders at such time or place as he or 12 they designate, by publication for four weeks in some news- 13 paper published and of general circulation of the country 14 wherein the principal office of the corporation is located and 15 by written Jiotices addressed to each of the stockliolders 16 whose residence is laiown of the object, time, and place 17 of the meeting. 18 Sec. 68. That the persons so constituted trustees may 19 sue for and recover the debts and property of the dissolved " 20 corporation by the name of trustees of the corporation, de- 21 scribing it by its corporate name, and jointly and severally 22 they shall be responsible to the creditors and stockholders of 23 the corporation to the extent of its property and effects com- 24 ing into their hands. Such trustees may be made or become 25 parties to any action by or against the corporation. All (24) INCOEPOEATION OF COMPANIES ENGAGED IN FOKEIGN TRADE. 31 1 liens or judgments existing at the time of the dissolution 2 eith(^r in favor of or against the corporation shall continue 3 in force as if the dissolution had not taken place. 4 Sec. 69. That no corporation created under the pro- 5 visions of this Act shall by any implication or construction 6 be deemed to possess the power of carrying on the business 7 of discounting bills, notes, or other evidences of debt, of 8 i-eceiving deposits of money, or foreign coins, or buying and 9 selling biUs of exchange, or of issuing bills, notes, or other 10 evidences of debt for circulation as money: Provided, how- 11 ever, That corporations created or to be created under the 12 provisions of this Act to buy, sell, and otherwise deal in 13 notes (not including the discounting of notes), open ac- 14 counts, and other similar evidences of debt (not including 15 bills of exchange), or to loan money and to take notes, open 16 accounts, and other similar evidences of debt as- collateral 17 security' therefor, shall not be construed or considered to be 18 within the prohibition of this section; and corporations 19 created or to be created for such purposes may charge such 20 amounts as may be agreed .upon by the respective parties. 21 Sec. 70. That in order that this Act may be as effec- 22 tive, useful, ajid attractive as similar acts enacted by other 23 countries, and in order that corporations created under this 24 Act may be on an equal footing in foreign trade with cor- (25) 32 ISrOOBPORATION OF COMPANIES ENGAGED IN EOEEIGN TRADE. 1 porations created under this Act and doing business ex- 2 clusively in countries foreign to the United States and those 3 countries in which the United States exercises extraterritorial 4 jurisdiction shall be exempt from all Federal tax of any 5 nature whatever, except the fees for filing the articles of 6 incorporation and such other fees as may be prescribed by 7 the Secretary of Commerce under the provisions of this Act. 8 Sec. 71. That in the case of corporations formed imder 9 this Act in localities in which the United States of America 10 exercises extraterritorial jurisdiction, at least fifty-one per 11 centum of the capital stock of the corporation shall at all 12 times be owned by citizens of the United States of America. (26) Senator Fletcher. Mr. Secretary, you want to be heard on this bUl? STATEMENT OF HON. WILLIAM C. REDFIELD, SECRETARY OF COMMERCE. Secretary Redfield. Senator, I am going to say what I have to say very briefly, and then leave Mr. Denby, who has the laboring oar, and Mr. Cutler, Chief of the Bureau of Foreign and Domestic Com- merce, and Mr. Thurman to do the rest. Shall I proceed ? Senator Fletcher. Yes, sir. I could not get a day that would suit the other members of the subcommittee, so they have authorized me to go ahead, and as long as this hearing is to be printed I thint per- haps that course will be satisfactory. Secretary Redfield. I will speak, Mr. Chairman, of the general matters involved, leaving it to Mr. Denby, special assistant to the Department of State, who has had a long residence in China, to speak in detail. At present no company formed by Americans and with American capital, trading exclusively abroad, can be incorporated except under the laws of one of our 48 States. These laws are unlike one another; they are constantly changing; they differ very considerably in powers, in restrictions, m opportunities ; but perhaps one of the chief est diffi- - culties in foreign markets — and it should be borne in mind that I am speaking now exclusively of foreign markets and of companies which trade only in them and which do not do business in the United States — is that the individual States are not kno>vn and understood as distinct from, separate from, the Government of the United States itself. In the Far East, for example, a company organized under the laws of any specific State has always a question concerning its origin. The State is not known or, if it is known, not understood. The foreign merchant may not always know why instead of a charter being given from the National Government it is given from a State which forms but a portion of that Government. He is accustomed in his foreign transactions to dealing with nations and not with subdivisions of nations. He would, in many instances, wonder whether a charter from oiie of our States was not akin in character to a charter from a subdivision of France or from a subdivision of Great Britain or a subdivision of some other country. The independent sovereignty of our' States within their own concerns is something that he often does not comprehend. He realizes very well that the company having this State charter has not the official parentage of the National Gov- ernment. It leads to doubt. , „ .^ . , f ■ , ■ ■• To meet this proposition Great Bntam has, tor instance, m her colonv of Hongkong, which is widely known, granted charters of that colony- and American concerns desn-ing to incorporate have, as a matter of fact because of that fact, because the Hongkong charter was understood and its laws were clear, incorporated their companies iinder the Hongkong laws. In that respect American citizens have 103537—19 3 33 34 INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. thus become, in their corporate relations, subjects of the British Empire, subject certainly to its laws and its regulations, because it was on the whole more advantageous to -them to thus, in a measure, expatriate themselves in their corporate relations than it was to attempt to make plain to people who did not understand the peculiar construction of our Government why one of the separate entities which form our Republic acts in the matter instead of the Republic itself. It is a matter of pirestige very largely. It is a matter of doing away with the necessity of making explanations. It is a matter of establishiiig credit on a broad scale; or perhaps it may be summed up in this respect, that it is a matter of establishing confidence. In the foreign trade nothing is more important than confidence. On it all transactions are based;, and perhaps the greatest single step of the kind that would bepossible for us to take now would be thus to throw the mantle of Federal authority and the prestige of the Federal name over corporate activities who function wholly abroad and who come into conflict in no way with any State laws by any of their operations, and who would thus get the benefit of the national power and the national prestige, for it alone is fully comprehended and understood. I think I ought to say also that this in no way involves the question, to my mind, of the Federal law for domestic corporations. This is a foreign matter and has no relation that I can see to domestic matters. I think that the two should not be now confused, and to bring up this as forming an entering wedge for domestic corporations . is a mistake. It has no relation, as I can see, to that matter of domestic Federal charters. Conditions are different. Here we are functioning in a field where it has been shown by experience that the local or the State charter can not and does not meet the situation. Men will go elsewhere, our loyal citizens will incorporate under foreign laws, because, in substance, the situation requires them to do so. And the acts performed under these foreign charters by Americans thus incorporated are acts which have no relation to the territorial jurisdiction or the domestic commerce of the United States, ex- cept so far as every foreign transaction, in its final reaction, comes back through other sources to this country, as they of course all do. But the operations of these companies are carried on wholly abroad, and they can not, as experience shows, be carried oil now successfully under charters which, to the foreign mind, may be under a limitation of that kind and, it is a fact, are local charters. The foreign merchant seeking to invest, as Chinese willingly do, in foreign companies, would look in vain in his country for the repre- sentative of a State from whom he could ascertain facts, from whom he could learn the scope of their laws and their nature ; but he does know the United States of America, and it has representatives there. So, in like manner, he knows the independent, self-governing colony of -Hong Kong, and he can determine what its laws are. I think we might get, perhaps, a view at this situation if we remove it for the moment from our own country and look at it as if we were orientals ourselves, willing to invest in a company operating in our coimtry under a charter which was, say, from some South American republic. I think we should all understand what a charter from Argentina or from Brazil meant. We should be , able to go to the INCOEPOKATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 35 embassies or the legations of those countries and determine what their corporate laws were. We would recognize them as responsible authoritative powers. But I question if we would know the names of the states which compose those federal republics; and I think if "we were offered a charter from one of the states composing the Kepublic of Brazil we would say, " Why not from Brazil itself ? Why should we deal with an individual state ?" The laws of that state are not the same as the laws of Brazil ; they are not the same as the laws of other states that form Brazil. We are ready to put our money into a scheme to operate in our own country if it has an ascertained law behind it, but we can not do so if it has one of what seems a subordinate, even though a self-governing, portion of a republic concerning which we have not readuy available means of information, and concerning which we can not, through authoritative sources, directly inquire. That is, to my mind, a thing which is hampering the development of American commerce, particularly ia the Far East — this necessary uncertainty. It goes without saymg that this does not imply any reflection upon the character or credit of any State. On the contrary, it is because the State is sovereign in its domestic affairs and may and does constantly develop its corporate laws, that the changes occur which make it utterly impossible for you and me, let us say as Chinese merchants having money to invest in a corporation which is to func- tion in our own country, to do so on a basis which is known to be con- stantly evolving; whereas a Federal charter, which would be under- stood to be the net result of the best experience, and concerning which its development would be ascertainable at any time, would be a much more clear matter. I think that is the substance of thie matter. It has been so clear to us as a difficulty, that we are very glad indeed to have had the assist- ance of Mr. Denby in preparing tms measure and submitting it for your approval, and "we are very grateful to him for the part he has taken m the matter. Senator Fletcher. Have you examined this MH as it is now, and have you any suggestions to make as to any amendments ? Secretary Kedfield. I think there are some amendments, which Mr. Denby will explain, arising from the American Chamber of Com- merce of China. Mr. Denbt. Yes. , , . , T,r Secretary Eedfield. The legal questions you have gone over, Mr. Thurman ? Mr. Thurman. Yes. , ^, .,• Senator Fletcher. Has it occurred to you that one of the thmgs desired to be accomphshed by this measure was to put corporations engaged in foreign trade rather in a more favorable attitude in respect to our income-tax laws ? • . 4. .u Secretary Eedfield. No. The purpose is to put them on a com- petitive basis with corporations similarly engaged and incorporated imder foreign laws. . . .... Senator Fletcher. I think perhaps section 61 is the section which does that being somewhat different from the provisions of the law as regards taxes on corporations. 36 INCOEPORATION OF COMPANIES ENGAGED IN TOEEIGN TRADE. STATEMEITT OF MR. CHARLES DENBY, SPECIAL ASSISTANT TO THE DEPARTMENT OF STATE, WAR TRADE BOARD. Senator Fletcher. Will you please give your name, your present occupation, and your experience in China ? Mr. Denby. I have been for many years in the consular service of the United States, including many years as secretary of legation at Peking, consul general at Shanghai, and some years as a merchant engaged in a private capacity there. I returned to this country in 1915 from my position as consul feneral to Austria and was engaged in the motor-car trade, which was interested in before — motor-car manufacturing. I then volunteered for War Trade Board work under Mr. Vance McCormick and was proniptly thereafter sent back to Chma again, on War Trade Board work. I am now in this city, having spent the past year in China, acting in an advisory capacity on Chinese commercial questions. Senator Fletcher. Now, will you answer the question submitted" to Secretary Eedfield ? Mr. Denby. In answer to the question submitted to Secretary Eedfield by Senator Fletcher, I wish to state that it was largely a practical matter. A large part of the purpose of a Federal charter would be to secure the incorporation not of Ajnerican capital under American charters, because we find in China a great abundance of money. We find a willingness for this money under proper guidance to associate itself with foreigners as share owners in public companies. Great Britain has realized this very keenly and has incorporated a great number of companies. I hesitate to say how much it is, but it is a great many million dollars of capital, largely in some cases Chinese and foreign, under the British flag. In my own experience out there I have helped to incorporate a number of companies. In approaching capitalists of various nation- alities, Chinese, Japanese, Americans, and others, I have been con- fronted with this question: "What is your charter going to be?" On my replying that I would incorporate under the law of some State of the United States, under a State charter, they would say, "We do not know anything about that. It does not mean anything to us. We are not prepared to risk our money there." Great Britain has met this difficulty by the company ordinance of Hongkong, which permits the incorporation of the capital of all nationalities under the British flag, the incorporations thus acquir- ing British citizenship. I have found it better in my various ventures, electric-light and water-works companies, to avail of this British charter. There is the peculiarity of all charters in this respect, that there never was a perfect charter written on the statute books. All charters are subject to modifications and interpretation and adjustment, leading to a number of applications to the courts of the company's nationality. Theoretically it is thus possible to eliminate from any cha-rter all its inequalities, and it is thus theoretically possible to arrive at a perfect charter. Time is a necessary element in this. Under the American system it would evidently require just 48 times as long to develop a perfect charter as it does to develop the English uniform charter. If we are going to do business in China under INCORPOEATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 37 satisfactory terms, it will need a corporate capacity, which we must have. We must have a charter to which every Judicial decision applies and not have the present utterly incongruous system of a dispute under a New Jersey charter being settled by a court and the terms of the decision not applying to a West Virginia charter, and so on. Another point: It is entirely probable that the State charters never contemplated foreign business. A proper business charter should be so drawn up as to suit the conditions of the market in which it is going to be used. It should, in the course of judicial proceedings, be so adjusted to that market as to be adapted to its use there. We have not got the proper limitations on American activities in China under our present charters. We have not got the charters drawn up with an intelligent regard to the demands of local condi- tions there. We have such things as this: Under a State charter of one of the States, a company incorporated for $100,000 doing business in China with $1,500 paid up, an idea which is utterly at variance with common business sense anywhere. A bank does not give a letter of credit to a man for $100,000 and say that it is only good for $500; nor should a State give a charter for a man to go abroad and call him one thing whereas he is in reality another. It is such inequalities as that we have got to get around before we can get a perfect charter for business abroad. The answer might be, let us revise State charters, let us revise the charters of the States ; but it would require the revision of 48 different State charters. Much the simpler way is for the United States Government to enact a charter for United States foreign business alone. Under this bill we have this point covered. Senator Fletcher. Let me ask you with reference to that Hong- kong ordinance, is that some special law that applies only to British charters or does it give the same rights to Americans to organize ? Mr. Denbt. Anybody can organize. I have incorporated com- panies in China, doing a large business there today, in which there IS 80 per cent Chinese capital, a very considerable amount of American capital, some Danish capital, and a minimum of British capital. That is not at all unusual. It is an ordinary practice in China today. Senator Fletcher. Does that charter have to be called a British charter? .,,.,.,. , , . , Mr. Denbt. Oh, yes; limited liabihty and everythmg else. Senator Fletcher. And to be recognized as a British company ? Mr. Denbt. It is a British company, absolutely subject to British law and subject to the British consular authorities in China. Senator Fletcher. Can you not organize an American company under the same ordinance ? .. . t^ ... ■, , Mr Denbt. It is not American any more; it is British then. Senator Fletcher. It is? t u j Mr Denbt. That is what i have done m my cases, i nave done that in four cases. Here is the Hongkong ordinance. Mr. Thurman has that. For us to avail of a proper charter we are driven into the arms of Great Britain and we lose, in the corporate capacity, our citizenship. Senator Fletcher. What do you mean by the Hongkong ordi- nance ? What legislative authority enacted that ? 38 INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. Mr. Denby. Hongkong is a British colony, and they have author- ized Hongkong under their colonial power to organize and issue charters for foreign corporations. Great Britain attaches so niucn importance to this that they have not only organized corporations in Hongkong but they constituted a separate registrar, where you can go and organize British charters, in Shanghai. They realize the importance of that. They reahze that every time they take a Chinese dollar under their flag they have gained something from China and from ourselves. My companies appear in the list as British subjects, and every dollar we have in them is a British doUar for their purposes. They appear in the statistics as British investments, and it gives them an opportunity to enlist capital which we Americans have not got at all. The only way we will ever get it is by a charter adapted to our conditions there. Senator Fletcher. Do they have to pay income and other taxes ? Mr. Denby. No; they are exempt from taxes, because they reahze perfectly well that if you are. going to invite capital which is not subject to taxes to come under your flag, you are never going to get it if you tax it. If the excess-profits tax and the income tax of the United States are to apply, you will get no capital at all. If you are going to be liberal about it, if you reahze that thousands and thou- sands of people are doing business .abroad and their capital is not American, you will get millions of dollars under the American flag. Senator Fletcher. That is the purpose of this bill ? Mr. Denby. There is no selfish purpose in this bUl, I believe, from the first word to the last. It is absolutely a business man's idea of getting the Government to give him the proper facility to do his business out there, and the percentage of American capital they have in these countries is very small. But you will have it; it wiU all be American, and it wUl be a benefit to the United States and in China. It win enable us to tap the great sources of Chinese wealth there that we can not now tap at all, and it will relieve our business men from the discrimination they are under in Certain countries, and it will prevent operations of the disreputable character I have spoken of. There is no power to create an artificial citizen of the United States, and all the activities of these people abroad are without safeguards and restrictions; and yet we have in China to-day a number of Amer- ican companies in which the nominal capital bears no ratio to the actual capital invested. I submit that that is a commercial fraud, pretty nearly. Do you not think so ? It is manifestly improper to launch on the sea of Shanghai an American company of $100,000 nominal capital with $2,000 only paid up. That is utterly improper. We provide against that, in concrete terms, in this biU. Senator Fletcher. It is that sort of thing which shakes confidence in American corporations. Mr. Denby. It is that sort of thing which shakes confidence in American corporations, and it has hurt every bona fide American corporation there. If you can provide any other means of correcting that than a Federal charter, I am willing to accept it. I do not think there is any other means, at all. Senator Fletcher. In what particular lines do you think our opportunities over there are? Mr. Denby. A very great variety of local manufacturing lines ; a great variety of land-developing lines — subdivisions ; a great number IjrCOBPOEATION OF COMPANIES ENGAGED IN EOEEIGN TRADE. 39 of waterworks and electric plants ; all kinds of manufacturing indus- tries. The Chinese capital is abundant; it is sensitive; it does not like to come out; but give them the right opportunity and it comes out readily if it is under foreign protection; and the whole purpose of this is not to avoid income tax and excess-profits tax at all but to enable our American citizens out there to induce foreign capital to come in. Senator Fletcher. Would such a corporation doing business in foreign countries be permitted to reside in this country? Mr. Denby. I should think that would be a matter of the by-laws of the particular corporation. This bill provides that a majority of the directors shall be Americans. I do not know of any one act that could be done by the Department of Commerce as to which we would have to ask the consent or permission of any other power, China or Japan or anybody else, in the enactment of this law. It would be an indication of good faith. Senator Fletcher. Is there any provision for having the charter granted under this legislation recorded in foreign countries where the corporations do business ? Mr. Denby. It is recorded in the office of the Secretary of Com- merce of the United States, and it is to be recorded in such places in foreign countries as may be designated. You know we have a United States court for China now which, has been in operation there for some years, and that United States court for China says that it has the right to grant charters. Mr. Thueman. Section 3 provides as follows: Articles of incorporation shall be filed with, the Secretary of Commerce, who shall record them and shall also record certificates relating to the corporation thereafter filed with him. In the case of corporations to be formed in noncontiguous territories of the United States of America or m localities in which the United States of America exercises extraterritorial jurisdiction, the articles of incorporation shall be filed in duplicate with the clerk of the highest court of the United States of America in the respective territory or locality who shall record them and shall also record certificates relating to the corporation thereafter filed with him. .Senator Fletcher. Where is our court located there? Mr. Denby. It is located in Shanghai. It sits once or twice every year in the cities of Shanghai, Hankow on the west, and Tientsin in the north. Senator Fletcher. That was established by treaty with China? Mr. Denby., It is under the treaties we have, because we have an absolute treaty with China that Americans in China are exclusively under American law. We do not have to go to China and consult her in regard to the court act or in regard to this act. Senator Fletcher. Does that provide sufficient power to give that court authority to issue charters of this kind ? Mr. Denby. The court derives its power under some provision of the organization which makes the United States law applicable to it. Now the United States has granted certain powers to the judicial authorities in Alaska, and that court interpreted that to confer these powers on the United States Court at Shanghai. The United States Congress has never definitely done it, nor do I think it ever intended to enre this power, but the power of the Shanghai court is derived from certain powers given to the court in Alaska, which, by the organizing act of the court itself, are held to be applicable to the court at Shang- hai- and the court itself does hold that it has the right to grant char- 40 INCOBPOEATION OF COMPANIES ENGAGED IN FOEEIGN TEADE. ters. If you want to introduce another element into the matter that will certainly create a lot of confusion, that nobody knows anything about, just let this go for a little while longer. Mr. Thurman has pointed out here one thmg that is very important. You can not incorporate under this act for banking business there. That is a self-denymg provision that we in China are willing to agree to because we realize that you can not grant power to banks to do btisiness as Americans in China until the banking laws apply to China and you can control the banks. We have no ri^t to create banks to go out there and wander about without supervision or control. Do you think we have ? That is the way I feel about it. Senator Fletcher. We have a provision in the law now with re- spect to establishing banks in foreign countries. Mr. Denby. Yes; I know that is one of the commerce laws. Mr. Thubman. Yes. Senator Fletcher. Under that a bank here can do business in foreign countries. Mr. Denby. Yes; as individuals can go anywhere else. Senator Fletcher. But I think that Americans out there should be very cautious about establishing banks, anyhow, because I imder- stand they hang the bankers when they go broke ! Mr. Denby. What we are afraid of is that a lot of rascals will get hold of American charters and go about the country doing things that we do not tolerate, and we have not got the machinery at the present time to stop them. Mr. Cutler. Mr. Chairman, I am anxious to go away. I have just a word to say. Senator Fletcher. Very well; we will hear you now. STATEMENT OF MR. BTJEWELI S. CUTLER, CHIEF OF THE BTJREATJ OF FOREIGN AND DOMESTIC COMMERCE, DE- PARTMENT OF COMMERCE. Mr. Cutler. The industrial ambition of almost every country to-day is to be independent, with a very decided home-trade tendency. This will make it necessary, for the next two years at least, 'to form companies with American and foreign capital in order for our mer- chants to get their goods abroad. Home-trade preference is evident all over Europe, and it is beginning to evidence itself in South America; and some form of incorporation should be devised tlaat will allow native capital to come in on safe and sure ground, so that they can understand their liabilities. That is the merchandising purpose of this bill. Great Britain has adopted several laws which exclude out- side capital from control of her companies, which is another phase of the home- trade preference. Not only in China, but in South America, and even in South Africa, it has become advisable for a number of American coinpanies to in- corporate in those countries_ under the native law. They are not amenable in any degree to the American corporation laws ; they have adopted another commercial flag. As Mr. Denby said a few minutes ago, we would like to put that kmd of enterprise under the American flag, allowing us to merchandise American goods in American fashion. Senator Fletcher. Then you think this sort of a law ought to be enacted for promoting our trade not only in China but in other countries ? INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 41 Mr. CuTLEB. Exactly; I am afraid, otherwise, that their indirect legislation will block us out in many cases. Senator Fletcher. Yes. Mr. Cutler. A very large automobile concern of Detroit, of which we know a great deal, recently went to the United Kingdom just on that account and established their own factories there, and they have been forced to take on a certain amount of native capital. As they told me, if there had been in our laws an incorporation law covering them without their being subject to all the State laws they would have remained a purely American enterprise. Senator Fletcher. If they had a charter under this sort of legis- lation, woi4d they still, if they wanted to do business in foreign countries, have to conform to the requirements of the laws in those countries ? Mr. Cutler. They would, of course, in a way; but we think they would be accepted more readily, would find investors more readily, under a United States Federal law. Mr. Thurman. They would, of course, be subject to local laws. But the purpose of this is to induce capital to invest ; and, having a distinct Federal law, any foreign investor knows right away the limit of his liabihties and what his rights and liabilities are growing out of his connection with this particular corporation. He has it right at hand, in other words. Mr. Denby. And everybody would be more willing to invest. Mr. Thurman. Yes. Mr. Cutler. That is all, Mr. Chairman. Thank you. Senator Fletcher. I am certainly much obliged to you. Now, will you finish, Mr. Denby ? STATEMENT OF ME. CHARLES DENBY— Resumed. Mr. Denby. If some such law as this is not passed, all American capital engaged exclusively abroad, as well as all foreign capital engaged in our American enterprises, would inevitably pass under a foreign flag. Senator Fletcher. You mean that with reference particularly to China? at /-i Ui Mr. Denby. I mean it with reference to China, and, as Mr. Outler pointed out, in South America they are incorporating under local laws. We are big enough abroad to give our people the facilities that they want. Senator Fletcher. You do not speak from experience as to any countries other than China ? . ■ . Mr Denby. No. What I have done there is to incorporate a company there myself with a very small part of my capital from Americans; and I have had several companies incorporated there. I have one miUion taels— that is, $1,3C0,000— in the Tientsin Water- works Co., and it is British, under British law absolutely, and we have been necessarily compelled to depart entirely from American jurisdiction and control. I have done that m four-fifths of the cases; and I am merely in the same boat with others over there. Ihey are all going to get Hongkong charters. The British merchants are inviting foreign merchants to join with them under the Hongkong charter; and it is practicaUy inevitable that if you want to do busi- 42 INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. ness in China, you must get a Hongkong cha;rter, under this British law, in all cases, and it is not at all unusual for Chinese merchants to go to Hongkong and get a British charter and do business in China. They have the advantage that the Hongkong charter is very well known, nearly all the questions that would arise under the charter having been raised now, and there has been a stream of decisions that rectified the original document. STATEMENT OF MR. ALBERT LEE THURMAN, SOIICITOR OF THE DEPARTMENT OF COMMERCE. Mr. Thurman. I really do not think that I hare anyiting to say in addition to what has been said, Senator. Mr. Denby, as I under- stand it, tells me that he took this proposed act, which was drawn about a year ago, to some commercial organization in Shanghai Mr. Denby. The American Chamber of Commerce of China. Mr. Thurman. The American Chamber of Commerce of China, at Shanghai, Suggested a few changes in it, in the verbiage, of which he has notes and which he might put in the record, so that when finally considered, if favorably reported, the law will have those changes ' in it. There is only one other thing. There is an editorial appearing in the Journal of Commerce and Commercial Bulletin of January 21 , 1919, in favor of this proposed act, which I would like to have, if I can, inserted in the record as part of this hearing. Senator Fletcher. Very weU. (The editorial referred to is here printed in the record in full as follows:) THE FEDERAL INCOHPOEATION LAW. The American Chamber of Commerce of China has sent out a draft of a law to pro- vide for the incorporation of American companies engaged in foreign trade. The draft follows the lines of a bill (S. 5194) introduced in the United Sates Senate by Mr. Fletcher at the instance of the Secretary of Commerce. The. original draft was taken by Mr. Charles Denby, late consul general at Shanghai and now special assistant of the Department of State, to Shanghai, where it was submitted to the American Chamber of Commerce, and in its present form it is the result of the labors of a com- mittee that amended it so as to conform to the requirements of American business in China. The necessity for such legislation arises from the fact that under existing American laws there is no machinery for the incorporation of companies for the special purpose of foreign trade . and companies organized in overseas commerce are compelled to incorporate under the laws of the various States with their frequently conflicting regulations. It is part of the argument of the chamber that in the period of recon- struction and competition for foreign trade following the war America must be ready to hold and develop its share in the foreign commerce of the world if its citizens are to minimize the financial burden they are called upon to bear and are to have a field for the increased manufacturing activity they have developed and the shipping they have built. Broadly spea'dng, there is no reason why citizenship as applied to public com- panies should differ from the citizenship of individuals as to their status abroad. Thus it would seem to be much better for a company which is now the artificial creature of a legislature to be a citizen of the United States abroad rather than the citizen of New Jersey, Connecticut, or whatever State may have. granted its charter. The public companies of the United States incorporated under charters of any of the 48 States of this Union are handicapped not only by a lack of uniformity in the acts under which they do business but by the fact that the legal decisions which rectify the inaccuracies of one do not necessarily apply to a charter granted by a neighboring State. This is doubly unfortunate because no act for the incorporation of public companies is ever perfect as it is placed on the statute books. It is in all cases subject to modidcation and interfiretation by judicial decision for a period of years after it INCOEPOEATION OF COMPANIES ENGAGED IN FOEBlGN TRADE. 43 IS enacted. Since every such decision tends to perfect the act as originally passed, It would seem to be theoretically possible to arrive at a perfect corporation act, but It would also theoretically require 48 times as long to perfect American corporation law 3,3 to perfect an act uniform for the whole country ' It IS essential for the proper conduct of business abroad, particularly in China, that corporate powers granted to a company should be granted with a view to the conditions under which the business must be transacted. The present American system of creating American companies which go abroad to do business, without a charter especially devised for thfe relations to the community amid which they are to settle, and without proper provision for trustworthy audit and proper control, is manifestly improper It is, for example, highly undesirable in the present status of the American banking laws to endow an American corporation with banking powers in China under a btate charter. It is argued with some force that the status of American banks abroad would be much higher if derived from the National Government rather than from the government of a State. It is confidently claimed that we would find a readier acces- sion of foreign capi.tal in the form of subscription to the stock of American companies if these companies were endowed with national rather than with State citizenship. As commercial conditions exist in China, the Chinese are much inclined to invest their money in companies under foreign charters, but it has been found that a country which can bring under its charters the investment of large sums of Chinese money gains a status in the Chinese community not held by countries whose charters are less acceptable to the Chinese community. Hence a great field of commercial develop- ment would unquestionably be open to the United States if we could offer such a charter to the American merchant in China as would appeal to the Chinese investor. Great Britain has perceived the importance of this and has in her Hongkong com- pany's ordinanceprovided a very suitable charter for business in China. It happens that this charter is almost universally used, and it is not uncommon to find incorpo- rated under the Hongkong ordinance a variety of companies for an equal variety of purposes, in which the capital is mainly Chinese and that of other nations, even of British subjects themselves, is proportionately small. As a matter of fact, Americans who wish to invite the capital of Chinese and other nationalities are compelled to resort to the laws of England to do their business in a corporate capacity in China. They thus submit themselves to English jurisdiction and become, in their corporate capacity British subjects, under the control of British courts and consular authorities. Their business, moreover, figures as an asset of Great Britain in the communities in which they may be established. In section 7 of the Fletcher bill it is provided that a majority of shares shall be held by American citizens in any company incorporated under the proposed act. In view of the fact that it would be impossible to incorporate any considerable number of American companies in China in which the majority of the stock would be held by Americans, and as it is extremely desirable to open these companies to investment by the Chinese, the Shanghai Chamber considered it necessary^ to change this provi- sion. They accordingly proposed that the majority of the voting stock merely shall in all cases be held by Americans. This secures the object which the l?ill has in view, while enabling Chinese freely to invest in the companies organized under it. It is provided in both drafts that the majority of the directors shall be American citizens, and to this there seems to be no objection. Section 70 of the bill contains the following provision: " In order that corporations created under this act may be on an equal footing in foreign trade as corporations created under similar acts of other countries, the cc rpo- rati'jns created under the provisions of this act * * * shall be exempted fro'm Federal tax of whatever nature, except the fees for filing the articles of incorporati. n and such other fees as may be provided by the Secretary of Commerce under the provisi-^'us of this act." This is an essential feature of any act for the incorporation of comjjanies under an American Federal charter abroad, since it is manifest that if the United States pro- posed to exact surplus-profits tax and other war taxes from companies created under an American charter, no international companies would apply for one of the Ameri- can Federal type. Not only would no new companies be incorporated under Ameri- can law, but none' of the existing companies in which American interests now pre- dominate would change their charters from Hongkong_ to the United States. The British Government recognizes this fa,ct, and companies created under .the Hong- kong ordinances are exempt from taxation. Mr. Thurman. I may say that this act was largely taken from various sections of State laws. I examined very thoroughly the corporation codes of a number of the States and selected from them 44 INCORPORATION OF COMPANIES ENGAGED IN FOREIGN TRADE. those provisions that I thought were applicable to this proposed foreign-incorporation law. Senator Fletcher. I can see how a corporation organized under the laws of any of our States going out to China or any other country to do business might be at a very great disadvantage in competing with the other corporations, particularly where they were tax exempt by the laws under which they were organized, whUe our corporations are compelled to pay income taxes and excess-profits taxes, and that sort of thing, under the present law. Mr. Thurman. Yes. Senator Fletcher. And I take it that this provision in section 61 is intended to take care practically of that, so that our people ma,y have in prospect fairly reasonable profits and very good dividends without having them taken away by taxation. Mr. Denby. That would not apply to the American citizens in the company. They would still be liable to pay all American taxes. Senator Fletcher. Yes; but the corporations themselves would not have to pay those taxes that are now provided by law for cor- porations in this country. Mr. Thurman. Yes; it is intended to exclude them from that, in reaching the surplus from which the dividends may be paid. Senator Fletcher. Yes. Now, Mr. Denby, what sections do you want to amend? Mr. Denby. First, amend section 7 of the bill. Mr. Thurman. Section 7 is changed so as to read as section 7 in the draft of a Federal incorporation law suggested by the American Chamber of Commerce in China. Senator Fletcher. You propose to change section 7 by striking out the whole of the present provisions and inserting in lieu thereof section 7 of the draft by the American Chamber of Commerce of China, which, reads as follows: Sec. 7. The persons named in the articles of incorporation under this Act, or a majority of them, shall order books to be opened for subscriptions to the capital stock of the corporation at such time or times and place or places as they deem expedient, and all persons subscribing to the stock of the corporation shall furnish proof of their nationality and at no time shall more than forty-nine per cent of the stock issued carrying voting power be owned, held or registered by persons other than citizens of the United States either in their own right or in trust for any other person or persons. The next suggestion is to insert, in section 22, page 9, line 12, after the word "only" and before the semicolon, a comma and the words "voting or nonvoting". Then you want us to strike out in section 28 all after line 19, page 11; that is, strike out lines 20 to 25, inclusive, 6n page 11 ? Mr. Denby. Yes, sir. Senator Fletcher. Then you want to add something to section 32, on page 13 ? Mr. Denby. Yes; we add that to bring section 7 into effect. Senator Fletcher. That is, you want to add at the end of section 32, on page 13, the following: Except that it is provided by section 7 of this Act that at no time shall more than forty-mne per cent of the voting stock issued be owned, held or registered by persons other than citizens of the United States of America either in their own right or in trust for any other person or persons. INCORPOKATION OF COMPANIES ENGAGED IN FOREIGN TRADE. 45 Your next suggestion is in section 61. The first part of that reads as follows: ^i^'^-^^li-'^^^* ^^ °^^^^ ^ ascertain the surplus profits from wHch a dividend may be made, in the account of profit and loss there shall be charged and deducted from the actual profits — First. All ordinary and extraordinary expenses, paid or incurred, in managing the attairs and transacting the business of the corporation. Mr. Denby. There we have added the words "and a reasonable depreciation upon its plant and property". Senator Fletcher. That is, in section 61, on page 22, line 11, you propose to add, after the word "corporation", a comma and the words "and a reasonable depreciation upon its plant and property". Mr. Denbt. In section 67, on page 24, line 10, there is a verbal change. In the bill you use the words "president of such board of directors:" In previous parts of the bUl the word "chairman" is also used. Senator Fletcher. You want to insert in line 10, page 24, after the word "president", the words "or chairman". Mr. Denby. That is all, sir. Those are all the changes that Shangha,i asks, after very mature consideration. They follow your prohibition against banking and think it is a very useful thing. (The following correspondence and statement were ordered printed in full in the record:) Department of Commerce. Office op the Secretary. Washington-, December 10, 1918. My Dear Senator Fletcher: In almost every important country except the United States of America, corporations are formed under National or Federal laws such as the "British Companies Acts". In the United States of America, this is not the case, as you know, and practically all except banking corporations are formed under the various State enactments. For purposes of domestic trading this situation presents no great difficulties since the main points and the distinctive features of each of the more important State enactments are fairly well known to most attorneys specializing in corporation law. In foreign trade, however, it is the opinion of well-informed officials and business men that our corporations are at a disadvantage as compared with -British registered companies, for instance, mainly because the terms of the British Companies Acts as well as legal interpretations of the meaning of these terms are fairly well known in all countries, while outside of the United States of America the terms of oiu: many State enactments are known to but few. This acts as a great deterrent to the investment of foreign capital in our industrial undertakings as wellms a handicap in doing business particularly where contractual obligations are involved which may eventually have to be settled acpording to the terms of some unknown State law. Moreover, in certain countries, particularly China, the United States of America and other countries exercise extraterritorial jurisdiction and citizens of the United States of America are at a great disadvantage in such countries, because there is no Federal law under which they can organize a corporation. In China our citizens have been compelled to organize under British and British colonial laws, with a resulting tribute in the way of taxes, etc., to British sovereignty. For diplomatic support they are then compelled to look to the .British Government which naturally will not get behind them as if they were British subjects. The recently enacted legislation which permits manufacturers to combine for export business would be of much, more assistance to our manufactiKers if facilities for organizing these associations under Federal instead of State auspices were provided. For these reasons. I beg to ask your kind assistance in introducing a bill in Congress to provide for the incorporation of companies engaged solely in foreign trade, and I submit, herewith a draft of such a bill for your consideration. Very truly yours, ^ _^ William C. Redfield, Secretary. Hon. Duncan U. Fletcher, United States Senate, Washington, D.. C. 46 INCOBPOEATION OF COMPANIES ENGAGED IN POBEIGN TRADE. International High Commission, United States Section, Washington, D. C, January 11, 1919. My Dear Senator Fletcher: I take pleasiire in sending; you a copy of a letter I have received from Ool. Wigpore with reference to the bill introduced by you to permit the Federal incorporation of companies to be engaged in foreign trade. Sincerely yours, 0. E. MoGuiRB, Assistant Secretary-General. Hon. Duncan U. Fletcher, United States Senate, Washington. Washington, D. C, January 9, 1919. Dr. C. E: MgG'tjike, International High Commission, Treasury Department, Washington, D. C. Dear Dk. McGuirb: I have received and studied the copy of the bill. It seems to me that article 69 covers the purpose described by Mr. Warburg, in that it author- izes the eatabliehment of a corporation whose business should be to loanmon«yby way of investment, taking bonds as securities, the borrower being in a foreign country; hy another article the corporation is authorized to issue its own notes and bonds. This would seem to me to meet all requirements — unless there be anything too narrow in section 47, which authorizes the borrowing of money and the issuance of bonds in a sum not exceeding its capital stock. The act does not provide for any Government guaranty attached to the debentiu-es of the corporation, but I did not understand that Mr. Warburg's proposed measure regarded that as essential. In other words, if the debentures to be marketed bore the guaranty of an American corporation, this would overcome the ordinary distrust of the American investor. However, if by his plan some guaranty of the American Gov- ernment should be regarded as a necessary help, it could probably be obtained by some alteration of the national banking law giviifg such debentures a preferred status in respect to assets available in the Federal reserve banks, providing Congress was willing to go that far. In any event, it seems to me that the promise of this for Mr. Warburg's proposal is so adequate that it would be appropriate for the United States Section of the com- mission, if it introduces Mr. Warburg's proposal, to treat this bill as representative and to urge upon Congress the enactment oi the new bill. I presume that you will soon hear from Mr. Warburg on this subject. Sincerely yours, John H. Wigmore. The White House, Washington, December SI , 1917. My Dear Mr. Secretary: Mr. Charles Denby's suggestion strikes me very favor- ably indeed and I am going to take the liberty of calling it to the attention of Mr. Sims, the new chairman of the Committee on Interstate and Foreign Commerce. Cordially and sincerely yours, WooDROw Wilson. Hon. William C. Redpield, Secretary of Commerce. INCORPORATION OP AMERICAN COMPANIES IN CHINA. There are two general methods of incorporation available to private companies in China. Either as incorporations under Chinese law and jurisdiction which, in the case of foreign corporations, under extraterritorial treaty rights, would probably not be held as permissible by the governments of the foreign nationals concerned, or as incorporations under the law of a treaty power whose laws governing incorporation extend from their own territorial jurisdiction to "extraterritorial" jurisdiction over those concessions and areas reserved for foreign occupation in China. Chinese law in its operation respecting foreigners being established on treaty, the question, for example, of securing an interest m a Chinese public utility franchise INCOEPOEATION OF COMPANniS ENGAGED IN FOEEIGN TEADE. 47 is one whidi would have to be settled by negotiation. Each case would form a sepa- rate subject for negotiation and the result of such negotiation would take on the form of an established legal right, provided the sanction were obtained from the properly