QJnm^U Ham irlinol Hibrary Cornell University Library K 1315.4.K96 1912 A comparative study of the law of corpor 3 1924 021 963 859 Cornell University Library The original of this book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924021963859 2 A COMPAEATIVE STUDY OF THE LAW OF COEPOEATIONS STUDIES IN HISTORY, ECONOMICS AND PUBLIC LAW EDITED BY THE FACULTY OF POLITICAL SCIENCE OF COLUMBIA UNIVERSITY Volume XLIX] [Number 2 Whole Number 123 A COMPARATIVE STUDY LAW OF CORPORATIONS WITH PARTICULAR REFERENCE TO THE PROTECTION OF CREDITORS AND SHAREHOLDERS BY ARTHUR K. KUHN, Ph.D., LL.B. 51'tn) gork COLUMBIA UNIVERSITY LONGMANS, GREEN & CO., AGENTS London : P. S. King & Son 1912 Copyright, 1912 BY ARTHUR K. KUHN PREFACE This book is intended as an humble contribution to the work of legislative research now being conducted at Co- lumbia University under the auspices of the Legislative Drafting Association. I am deeply indebted to Professor Munroe Smith for much valuable assistance and for his stimulating guidance and encouragement. A. K. K. New Yokk, May, 1912. 267] 5 CONTENTS PAGE Preface 5 List of Authorities 9 Introduction 13 CHAPTER I Group Forms and Corporate Types in Ancient Times 17 CHAPTER II Group Forms and Corporate Types in the Middle Ages 30 CHAPTER III The Origin and Development of Corporations in England. ... 43 CHAPTER IV Protection of Creditors and Shareholders in Continental Europe — Organization 56 1. France 56 2. Germany 65 3- Italy 85 4. Spain go 5. Switzerland 93 CHAPTER V Legislation and Reform in England and America — Organization. . 97 CHAPTER VI Protection of Creditors and Shareholders in Continental Europe — Operation 116 1. France 116 2. Germany 122 3- Italy 134 4. Spain 139 5. Switzerland 140 269] 7 8 CONTENTS [270 FAGK CHAPTER VII Legislation and Reform in England and America — Operation . . . 144 CHAPTER VIII Protection of Creditors and Shareholders in Continental Europe — Dissolution 155. 1. France 155 2. Germany , , 157 3. Italy . ^ 160 4. Spain 163 5. Switzerland : 164 CHAPTER IX Legislation and Reform in England and America — Dissolution . . 166- LIST OF AUTHORITIES Baldwin, S. E., "American Business Corporations before 1789." An- nual Report of American Historical Association, 1902. Behrend, J. F., Lehrbuch des Handelrechts. Berlin, 1886-95. 3 vols. Bing, La societe anonyme en droit italien. Paris, 1887. Bockh, A., Die Staatshaushaltung der Athener. 3rd ed., by M. Frankel. Berlin, 1886. 2 vols. Bohm, W., Ueber Aktionarschuis nach deutschem, englischem und franzosischem Recht. Munich and Berlin, 1910. Bruce, J., Annals of the East India Company. London, 1810. 3 vols. Buckland, W. W., The Roman Law of Slavery. Cambridge, 1908. Buckley, Sir H. B., The Law and Practice under the Companies {Consolidation) Act, 1908, and the Limited Partnership Act, 1907. 9th ed. London, 1909. Burgess, J. W., " Private Corporations from the Point of View of Political Science." Political Science Quarterly, igo8. Cawston, G., and A. H. Keane, The Early Chartered Companies. Lon- don, 1896. Cook, W. W., A Treatise on the Law of Corporations having a Capi- tal Stock. 6th ed. Chicago, 1908. 4 vols. Cunningham Wm., The Growth of English Industry and Commerce. Vol. I : Early and Middle Ages. Vols. 2-3 : Modern Times. Cam- bridge, 1907-10. Davis, J. P., Corporations, A Study of the Origin and Development of Great Business Combinations and of their Relation to the Author- ity of the State. New York, 1905. 2 vols. Freund, Ernst, The Legal Nature of Corporations. Chicago, 1896. Frost, T. G., A Treatise on the Incorporation and Organization of Corporations. Boston, 1908. Gareis, C, Das deutsche Handelsrecht. 8th ed. Berlin, 1909. Gierke, Otto, Das deutsche Genossenschaftsrecht. Berlin, 1868. 3 vols. Gierke, Otto, Die Genossenschaftstheorie, und die deutsche Recht- sprechung. Berlin, 1887. Gierke, Otto, " Entwurf des neuen Handelsgesetzbuches." Goldschmidt's Zeitschrift fiir das gesamte Handelsrecht. 1896. Goldschmidt, L., Universalgeschichte des Handelsr'echts. 3rd ed. Stuttgart, i%»i. 271] 9 10 LIST OF AUTHORITIES [272 Goirand, L., A Treatise upon French Commercial Law and the Prac- tice of all the Courts. 2nd ed. London, i8g8. Gray, John Chipman, The Nature and Sources of the Law. New York, 1909. Gross, C, The Gild Merchant; a Contribution to British Municipal History. Oxford, 1890. 2 vols. Holtzendorff, F. von, Encyklopddie der Rechtswissenschaft. Ed. by J. Kohler. Berlin, 1904. 2 vols. Horack, F. E., The Organization and Control of Industrial Corpora- tions. Philadelphia, 1903. Ihering, R. von, Geist des romischen Rechts. Leipsic, 1877-83. Ihering, R. von, Zweck im Recht. Leipsic, 1877-83. 2 vols. Keutgen, F., Die Besiehungen der Hanse su England. Giessen, 1890. KlingmiiUer, F., Die Haftung fiir die Vereinsorgane; being vol. 3 of Studien sur Erlduterung des biirgerlichen Rechts, ed. by R. Leon- hard. Breslau, 1900. Kniep, K. F. F., Societas Publicanorum. Jena, 1886. Lehmann, Karl, Das Recht der Aktiengesellschaft. Berlin, 1904. 2 vols. Lehmann, Karl, Die geschichtliche Entwickelung des Aktienrechts bis zum Code de Commerce. Berlin, 1895. Liebenam, W., Zur Geschichte und Organisation des romischen Ver- einswesens. Leipsic, 1890. Lindley, W. B., A Treatise on the Law of Companies. 6th ed. Lon- don, 1902. 2 vols. Lingelbach, W. E., The Merchant Adventurers of England, their Laws and Ordinances, with Other Documents. Philadelphia, 1902. Lyon-Caen, C., and L. Renault, Traite de droit commercial. Paris, 1898- 1903. Lyon-Caen, C, and L. Renault, Manuel de droit commercial. 7th ed. Paris, 1904. Lumbroso, Recherches sur I'economie politique de I'Egypte sous les Lagides. Turin, 1870. Maine, Sir Henry, Ancient Law. ist Amer. ed. New York, 1864 Maitland, F. W., Collected Papers, Ed. by H. A. L. Fisher. Cam- bridge, 191 1. 3 vols. Marinesco, C. H., Des conditions exigees pour la constitution des so- cietes anonymes en France, Allemagne, Belgique, Italie, Roumanie et Suisse. Paris, 1889. Mill, James, History of British India. London, 1817. 3 vols. Mitteis, L., Romisches Privatrecht bis auf die Zeit Diokletians. Leip- sic, 1908. . Mommsen, Th., Abriss des romischen Staatsrechts. Leipsic, 1893. 273 J LIST OF AUTHORITIES II Muirhead, J., Historical Introduction to the Private Law of Rome. 2nd ed. London, 1899. Nouel, R., Les Societes par actions. La Reforme. Paris, ipir Prudhomme, H., Code de Commerce espagnol. Paris, 1891. Rehm, H., " Die Uebertreibung des Offenheitsprinzips itn Aktien- rechte." Deutsche Juristen-Zeitung. 1904. Renaud, A., Das Recht der Aktiengesellschaften. Leipsic, 1875. Renault, L., see Lyon-Caen and Renault. Ring, v.. Das Reichsgesetz betr. die Kommanditgesellschafien auf Aktien und die Aktiengesellschaften. Berlin, 1893. Savigny, F. C. von, System des heutigen romischen Rechts. Berlin, 1840-1849. 8 vols. Schneider, A., and Pick, H., Das schweizerische Obligationenrecht. Zurich, 1893. Sojtt, W. R., The Constitution and Finance of English, Scottish and Irish Joint Stock Companies. Cambridge, 1910. 2 vols. Segnitz, H., Prospectus dans les societes anglaises par actions. Paris, 1908. Senftner, R. G., Wie griindet man eine Aktiengesellschaft. Stutt- gart, 1909. Silbemagel, A., Die Griindung der Aktiengesellschaft nach deutschem, schweizerischem, fransosischem und englischem Aktienrecht. Berlin, 1907. Sohm, Rud., The Institutes, a Text-book of the History and System of Roman Private Law. Translated by J. C. Ledlie. 2nd ed. Oxford, 1901. Stammler, Rud., Theorie der Rechtswissenschaft. Halle, 191 1. Staub's Kommentar zum Gesetz betr. die Gesellschaften mit be- schr'dnkter Haftung. Bearbeitet von M. Hachenburg. 3rd ed. Berlin, 1909. Staub, H., Kommentar zum Handelsgesetzbuch. Berlin, 1900. 7th ed. 2 vols. Stubbs, W., The Constitutional History of England. 3rd ed. Ox- ford, 1878-1883. 3 vols. Taylor, H. O., A Treatise on the Law of Private Corporations. Sth ed. New York, 1902. Troplong, R. T., Commentaire du contrat de societe. Paris, 1843. Untermeyer, S., Some Needed Legislative Reforms in Corporate Man- agement. Address delivered before the New York County Bar Association, igii. Vinogradoff, P., Roman Law in Medieval Europe. London and New York, 1909. Vavasseur, A., Traite des societes civiles et commercMes. 5th ed. Paris, 1897-1904. 12 LIST OF AUTHORITIES [274 White, F., On Corporations. 7th ed. New York, 1909. Wilson, Woodrow, The State. Elements of Historical and Practical Politics. Boston, 1897. Windscheid, B., Uhrbuch des Pandektenrechts. Frankfort, lS57. 3 vols. . Zitelmann, E., Begriif und Wesen der sogenannten juristischen Person. Leipsic. INTRODUCTION Corporations as agencies of combination and monopoly have long been the subject of governmental regulation. Indeed, in late years, the so-called " anti-trust " problem has absorbed the attention of statesmen and publicists, somewhat to the neglect of the organic functioning of the corporation itself. Yet this is of equal importance to the welfare of the state. Burgess emphasizes that a just regu- lation of the internal affairs of corporations in order to afford protection to the various parties in interest is es- sential to sound political science. " If government does not exercise such powers and discharge such duties, it is easy to see how, through the device of the corporate or- ganization, the few may despoil the many, and thus weaken the basis of popular government, if not of all forms of gov- ernment." ^ The heterogeneous character of our state laws and the absence of federal legislation on the subject, make a com- parative study of foreign legislation in conjunction with our own, both profitable and enlightening. But as each country has its own type of corporation, often existing nowhere else, it is important to limit the scope of research to a category common to all. We propose to confine our investigations to those groups of individuals, organized for profit, recognized by the state as legal entities and having a capital divided into shares, the 1" Private Corporations from the Point of View of Political Sci- ence," in Political Science Quarterly, 1908, vol. xiii, p. 205. 27s] 13 14 INTRODUCTION [276 holders of which are liable to an amount limited to, or measured by, the capital contributed. A maze of definitions and abstract concepts has grown up about the legal nature of corporations and of group- forms generally. Many of these have been drawn from prepossessions in respect to the nature of sorrte particular group-form, or class of group-forms. Definitions do not necessarily give definite impressions. Frequently they ob- scure those concepts which may be developed more natur- ally from an examination of actual types. Theorists are frequently engaged in determining whether the entity involved in the concept of the corporation has any real existence, or exists only by dogmatic fiction. If it exist by fiction of the law only, the corporation can have no real or "collective" will, to use Gierke's phrase,^ separ- ate from that of the individuals composing the corporate membership. The inquiry has given rise to seemingly endless discussion, to add to which would do as little toward solving the problem of establishing a just relationship be- tween the group and the natural individuals who enter into relations with it, as did the casuistry of the Middle Ages for the establishment of proper standards of righteous action between man and man.^ Professor Gray well points out that there is no differ- ' Gierke, Die Genossenschaftstheorie und die deutsche Rechtsprechung, P- 637. ' Freund, The Legal Nature of Corporations, p. 14: "Amidst an ap- parently irreconcilable conflict of theories, there is yet a substantial consensus of opinion as to the practical requirements in the legal treat- ment of corporations. That is to say, it is generally agreed that the law should regard corporations differently from joint owners; that corporate rights and liabilities should be held apart from individual rights and liabilities of the members. It is also generally agreed that this object is best accomplished by treating the corporation, as far as possible, as a distinct person." 277] INTRODUCTION ig ence in the practical results of the one or the other theory. The actual wills by which in fact the rights of the cor- poration are exercised, or by which duties are enforced upon it, are in each case the wills of persons designated in accordance with the organization of the corporation and the positive law of the state. Both the nature of the duties and the persons on whose actual wills those duties are en- forced are the same under either theory.^ Nor is it of vital importance to insist upon a sharp line of demarkation between what may be designated a corpor- ation according to modern views and what, in legal effect, should be classified under the category of another type of group-form. Classifications depend too largely upon par- ticular legislative systems to be closely adhered to. The true subjects of historic and comparative investigation, in order to attain practical results, must be the capacities of corporate action, the methods through which it operates and the rights and liabilities of individuals resulting from it. " These are the real questions of vital importance, the decision of which will not ordinarily depend on whether or not an institution is to be called a corporation, which, indeed, is little more than a question of how far a medi- eval nomenclature is applicable to modern institutions." ^ Each particular type of group-form which has existed from the earliest commercial periods to the present day was determined by the life of the community in which it was developed and by the particular needs of the time. No type was directly or spontaneously conceived, but each was gradually evolved from some previous form, or was referable to a precedent legal conception. It will therefore be possible to trace the type of the mod- ' Gray, Nature aiid Sources of the Law, p. 53. ' Taylor, Private Corporations, sth ed., sec. 63. 1 6 INTRODUCTION [278 ern business corporation to its earliest beginnings, to note the conceptions to which it owed its origin, to observe the economic environment responsible for its development and thus to obtain a clearer and more unbiased view of its functions and mode of functioning. CHAPTER I Group-forms and Corporate Types in Ancient Times The concept of the corporation may be ascribed to the tendency of ancient peoples to idealize into personality groups of persons, or groups of legal rights and obliga- tions. The association of persons into groups for the achievement- of a common purpose is as old as civilization itself. Modern authorities say that the clan, or family in the larger sense, constituted the earliest form of society and the beginning of the state. Original governments, says Woodrow \A'ilson, " had a corporate existence which they regarded as inhering in their blood and as expressed in all their daily relations with each other." ^ The life of the community thus grew up round the clan or tribe, and, in dealing with other clans or tribes, the conception of a corporate or collective entity became essential." Later, these groups confederated to form the city and clans be- came merged in the larger entity of state.^ The growth of the Greek city-state effected a unity of 1 The State, sec. i6. ^ Muirhead, Historical Introduction to the Private Law of Rome, p. 6, note : " Recent writers are agreed, in the main, that the gens was originally just the familia in the widest sense of that term, or aggrega- tion of familiae in a narrower sense. The term ' clan ' is the nearest equivalent in English, and suggests a correspondence with the Celtic and other primitive clans, and there are many analogies — for example, as regards the use of a common name and supposed descent from a common ancestor." ' Wilson, of. cit., sec. 64. 279] 17 1 8 THE LAW OF CORPORATIONS [280 public action which had not been realized theretofore. The democratic form of government was conducive to the crea- tion of organs composed of individuals acting in co-opera- tion both in the name of and for the common good of the state. The state thus became idealized and its property dealt with as an aggregate. This idea became more and more widely developed in the Roman state, as the economic transactions undertaken in its name became more complicated. The state, or populus, was deemed capable of entering into transactions with in- dividuals as though it were itself an individual, with this difference, however, that it had certain rights and privi- leges which individuals did not enjoy. The ' sovereignty inherent in the state made it the source of all rights. Hence disputes growing out of transactions between the state and an individual were not cognizable by the ordinary courts, but were submitted to the administrative judgment of the censor.^ So, too, the rule of the inadmissibility of direct representation, characteristic of the Roman system of in- dividual relations, was inapplicable to the state, for the acts of the state were necessarily those of its officials. It could not act except through them. The state was originally the only juristic entity with full power to hold property directly. The old private law of Rome was conceived for the individual citizen alone and individual property was the only property recognized. The property which was designed for the special purposes of certain groups {collegia, sodalitates) had to be formally vested in one or more individual members, and treated as though it were his or their separate property.^ Sohm says that to aiifirm the existence of juristic per- ' Mitteis, Romisches Privatrecht his auf die Zeit Diokletians, i, p. 348.. ' Sohm-Ledlie, The Institutes, s«c. 37. 28lJ CORPORATE TYPES IN ANCIENT TIMES jg sons is to affirm the existence of a particular kind of prop- erty, social property, or property appropriated to the pur- poses of a particular society or community.^ Accordingly, Roman law treated state property as social or public property (res publicae), ancillary to the purposes for which the state itself existed and not subject to the rules of ordi- nary proprietary transactions (extra coviuiercium). The intimate affairs of the town communities, however, were necessarily conducted in a manner more nearly ap- proaching private transactions. The simile so often em- ployed to-day between municipal government and private business held good in early periods as well. The munici- pium thus appeared to be the first to rank in law with the cives, capable of private rights and duties.^ Later, the treasury of the state, or fiscus, also became segreegatd into an aggregate of rights and obligations, separate and apart from its actual property. This also was invested with an ideal or juristic personality, by a system of reasoning which Savigny has designated as a " sort of artificial reflection drawn from within." ^ When we recall that the government of the early Graeco- Roman period was centered in the city, it is clear how easily the idealization of the popular will represented in the state came to be applied, though in modified form, to the mu- nicipalities as well, even after they had lost their com- plete autonomy. The government of Italy, from the be- ginning of Roman supremacy, centered about a large num- ber of provincial towns. These originally constituted in- dependent states and when brought under subjection were still treated, in a measure, as autonomous communities. 1 Sohm-Ledlie, The Institutes, sec. 37. ^Ihid., sec. 57, p. ig9- * System des heutigen romischen Rechts, bk. ii, sec. 87. 20 THE LAW OF CORPORATIONS [282 They thus retained their character of juristic entities, with this modification, however, that, being dependent upon Rome, they were subjected to the law and under the juris- diction of the civil courts. It is not surprising to find a well developed corporate theory of the town in the Republican period, for the aggre- gate group-form was typical even of the primitive com- munity. There is much to be said in favor of the belief that at one period all property rights were traceable to the community, or at least " to larger societies composed on the patriarchal model." ^ The internal arrangement of the group was a matter of prime importance; the relation of the individual to the group became a fixed status, which (in certain communities at least) might be sold like a share of stock, the purchaser succeeding to the liabilities which the vendor had incurred toward the aggregate group.- In this manner, the community departed from its original character as a union of kinsmen and became a group of individuals, only nominally united by blood, but in fact united by their common interest in an undivided state of property.* Later, the legal separation of persons constituting mem- bers of the community from the concept of the community ' Maine, Ancient Lazv. chap. 8, p. 260. There seems to be a differ- ence of opinion as to tlie precise period wherein the concept of juristic personality arose. Maine seems to think tliat it existed in some form in very early commmiities, whereas Sohm is of the opinion that it was "the product of a very advanced age of legal development." Sohm- Ledlie, The Institutes, sec. 27- * Maine, op. cit., p. 257. " Ibid., p. 256. " No institution of the primitive world is likely to have been preserved to our day, unless it has acquired an elasticity foreign to its original nature through some vivifying legal fiction. The village community then is not necessarily an assemblage of blood rela- tions, but it is either such an assemblage or a body of co-proprietors formed on the model of an association of kinsmen." 283] CORPORATE TYPES IN ANCIENT TIMES 2 1 as a whole approached completeness. Even the sum of its members could not, by their joint acts, bind the whole, unless the act could be said to have been that of its official organs.^ The logical reasoning of the Roman jurists carried the idea of separate entity to conclusions from which modern law has gradually drawn away. The community was strictly an impersonal subject of rights and an impersonal object of duties. It could not be held to liabilities result- ing from guilty intent, because an artificially created entity could not, under Roman principles, be capable of guilt, much less of evil intent. A municipal community could therefore not be held liable in tort by the actio doli, though the individual officials {e. g. decurions) might be per- sonally liable even though they had acted in the name of the community." In the very book in which Ulpian expounds the entity idea in respect of public corporations, excluding them from a possible liability for fraud, he asserts a right of action directly against the official, irrespective of the fact that the nominal defendant might be a populus, curia, collegium, or corpus.^ If the community had been enriched, it was compelled, of course to restore that which it had un- lawfully received.* We have observed that the organized bodies of society, the state and the municipality, were conceived in the light of separate economic establishments for convenience in a larger sense; in other words, that they might more com- 1 Mitteis, Romisches Privatrecht, sec. 18, p. 341. 2 Savigny, System, bk. ii, chap, ii, sec. 95, citing Dig., iv, 3, 15, sec. i. » Dig., iv, 2, 9, § I. A law of Majorian forbids judgment to be taken against a curia as an entity; it may only be taken against its guilty individual members. Nov. Maj. Tit., 7, cited in Savingy, op. cit., sec. 95- * Savigny, op. cit., bk. ii, ch. ii, sec. 95, citing Dig., iv, 3, 15, sec. I. 22 THE LAW OF CORPORATIONS [284 pletely fulfill their functions. " It was to enable the com- munity as a whole to take part in the economic life of the nation on the same terms as the individual." ^ With this development, other forms of social property made their appearance, to which the peculiar nature of the pagan re- ligion was conducive. In a system requiring numerous temples, each under the temporal control of different bodies or colleges of priests, the segregation of proprietary rights was inevitable.^ A further consolidation of property rights resulted from the peculiar method which the Roman state had adopted, similar to Greek and probably also Egyptian practise, in the collection of its ordinary revenues.^ The state did not act directly in the collection of its taxes; until com- paratively late in the Imperial period, it farmed them out, by various franchises, according to locality and the nature of the tax." This franchise continued only for a fixed period, usually for a yekr. Although the historical data are incomplete, it seems that the importance of the undertak- ing and the degree of responsibility demanded from those who applied for the franchise made some form of combi- nation essential. But as the state always insisted upon dealing with a single individual, probably for the sake of 1 Sohm-Ledlie, op. cit., sec. 37, p. 205 note. ' As an illustration of the extent to which this segregation proceeded, it is interesting to recall that as late as the early Roman Empire, a legacy to the temple of Diana was a legacy to Diana; and to escape the incapacity of celibacy introduced by the Lex Papia et Poppaea, Diana had to receive formally the jus liberorum. Ihering, Scherz t(nd Ernst in der lurisprudens (4th ed.), p. 113. ' For the origin and early development of this institution among the Greeks and Egyptians, see Bockh-Fraenkel, Die Staatshaushaltung der Athener; Lumbroso, Recherches sur I'economie politique de I'Egypte sous les Lagides, cited Lehmann, op. cit., p. 6 note. * Kniep, Societas publicanorum, p. 90. 28s] CORPORATE TYPES IN ANCIENT TIMES 23 simplicity and a greater concentration of responsibility, the group formation was employed only in the execution of the enterprise and the division of the profit (or loss). It did not function in transactions with the state itself. The chief publican, or ynanceps (sometimes called auctor emptionis) thus organized his enterprise into a joint asso- ciation (societas publicanoriiin) for the purpose of raising capital in sufficiently large amount to guarantee his success in bidding for the franchise. For the capital advanced, his associate capitalists became partners (socii, fierixovTeg) according to agreement.^ The Roman state recognized the manceps alone, not the partners who had furnished the whole or a part of the capital, though it doubtless had notice of their existence by a system of registration. If one of the partners was guilty of a wrong in the exercise of the delegated function of gathering the taxes, all of the partners were equally liable and there was no restriction of liability to the amount of the capital contributed.^ The relations inter se differed from that of the usual partner- ship in certain elements tending to weaken the importance of personality, though by no means entirely eliminating it. The liability of the partners was not limited except inter se, pursuant to their agreement with the manceps, but the capital, even though a fixed sum, probably did not consist of assignable shares. The death of one of the partners did not effect a termination of the relation, provided it were origi- nally agreed that the heir might be substituted in place of the deceased. Even if there were no precedent agree- ment, the substitution might be made if the heir was not personally unacceptable to the survivors.' Differing from ' Kniep, Societas publicanorum, p. 240; Lehmann, Das Recht der Akti- engesellschaften, i, p. 6. ' Dig., xxxix, 4, 6. ' Lehmann, op. cit., p. 15. 24 THE LAW OF CORPORATIONS [286 the customary partnership-,- the fund was deemed a perma- nent one, without right of division until the completion of the enterprise/ Thus if the heir was not admitted, he had no right to an immediate accounting but was compelled to take his chances with the enterprise until the termination of the franchise period.^ We see a tendency then, even in this primitive form of association, to provide a method of succeeding to the rela- tions of the member to the group, without disturbing the continuity of function of the group itself. The develop- ment of the Roman law of private property was essen- tially utilitarian and variations from its established rules were usually made only after long periods of contrary practise. " Originally, it was neither capable nor desirous of supplying the law for any other proprietary relations but those of private persons in the strictest sense of the term, i. e. individual persons." "' The demands of these huge aggregations of private capital for the purpose of farming the revenues, however, gradually introduced var- iations from the partnership form of association ; but these did not go beyond the necessity of each case. There was no need for a corporate name, because the manceps was the responsible head of the organization and the contractual relations of the state existed only with him. The law of Rome, both in the late Republican period and in the Empire, recognized no freedom of association and was opposed to all societies on principle.* Authorized pri- ' Kniep, op. cit., p. 254; Lehraann, op. cit., p. 14. Like municipal com- munities, the societas publicanorum enjoyed the right of direct repre- sentation through a syndicus, or actor, denied, in the Roman system generally, to private individuals. Kniep, p. 250. ' Lehmann, i, p. 14, citing Dig., xvii, 2, 59, and Dig., xvii, 2, 63, § 8. ' Sohm-Ledlie, The In.stitutes, p. 201. * Mommsen, Staatsrechi, vol. ii, pp. 886 et seq. 287] CORPORATE TYPES IN ANCIENT TIMES 25 vate societies were compared to the corporations of public law — ad exemplum reipuhlicae '- — and permitted to hold property like municipal communities. This applied to the benefit and burial clubs as well as to the numerous asso- ciations {collegia) of tradesmen and artisans, member- ship in which, though originally voluntary, had become compulsory in the fourth century. They had their own regulations and officers; also a capital fund from which the income was distributed (eiiwlumentum) but from the body of which (area) nothing could be taken.^ All public corporations were ipso facto recognized in law under the Empire and their legal personality followed as an incident.^ The idea of the separate entity of the group was essen- tially a development for the convenience of social order within a community. The requirements of the municipium and of the peculiar form of local government which was prevalent toward the end of the Republic, demanded a segregation of the property of the community from that greater aggregate of public property which belonged to the dominant Roman state as a whole. The gradual identifi- cation of certain public property with the community to the use of which the particular property was subservient, created a set of rights and duties of the local government with relation to that property. The entity idea was thus developed as one of the instrumentalities of government 1 Sohm-Ledlie, pp. 202-4, 209, citing Dig., iii, 4, i, sec. i. Thus a societas publicanorum [vectigalium publicanorum socii] might be con- firmed in its corporate existence by senatorial decree. Kniep, op. cit., p. 241. 2 Brown, " State Control of Industry in the Fourth Century,'' in Pol. Sci. Quar., ii, p. 494; Liebenam, Zur Geschichte und Organisation des romischen Vereinswesen (i8go), passim. " Sohm-Ledlie, op. cit., p. 209. 26 THE LAW OF CORPORATIONS [288 and as a more convenient juristic method for rendering precise the respective rights and duties existing betv^^een the community and the individual. The Empire saw its adoption into settled lavvr. It was not consciously evolved in order to create new subjects capable of private owner- ship. Writers often fail to emphasize this distinguishing feature of the Roman concept of the corporation. Some have even ventured the assertion that " the Roman cor- poration was much the same as the corporation of modern times." ^ If the statement had been restricted to municipal and quasi-public corporations, it would have been more easily defensible. In regard to these, it may be said that the emphasis which the Roman law placed upon individual rights as opposed to the communism of the Teuton tribes, was the very force which so completely developed the entity idea. The property of the corporation became col- lective property, not only distinct from that of its mem- bers, but property in which the members had no direct ownership, divided or undivided. Their interests were in personam the corporation itself. Under the Roman devel- opment of group-forms, " the rights and liabilities of a corporation were not the rights and liabilities of the sum total of its individual members, but exclusively the rights and liabilities of the collective whole of its members, that is, of the corporation as such." " The entity idea has too often been held responsible for the origin and growth of incidents of the group-form of private enterprise which really are not at all necessary, nor historically referable thereto. Chief among these incidents of the modern group-form is the exemption or limitation 1 Cook, On Corporations (6th ed.), p. 4, sec. i. '^ Sohrn-Ledlie, op. cit., p. 200. 289] CORPORATE TYPES IN ANCIENT TIMES 27 of the liability of the members for acts of the group. The separation of personality results in a capacity to have separ- ate rights and to protect them by legal action {ester en justice) ; to have separate duties and to be subjected sep- arately to the remedial procedure of the law. It does not necessarily or logically follow that the members should be absolved from responsibility for the acts of the group-per- sonality. The will of the group-personality represents the collective will of the members composing the group. It makes no difference whether we accept one or the other theory of the group-personality under the dispute already alluded to. It is immaterial whether we follow the opin- ion of civilians, such as Ihering ^ and Windscheid,^ who contend that the sole subjects of group rights are the mem- bers and that the personality is fictitious, or the view of the Germanists, as represented in the writings of Gierke ^ and Zitelmann,* that the personality is real. In either event, the members have chosen to merge their wills into the col- lective will of the group. Collectively they have consti- tuted the constitutional organ of the group as a mandatary implied in law to act in their behalf.^ It is often urged that even in the Roman law this ex- ^Geist des romischen Rechts, vol. 3, p. 343. 2 Pandekten, vol. i, sec. 49, p. 122 ; sec. 57, p. 139. ^ Die Genossenschaftstheorie, p. s et seq. See also Stammler, Theorie der Rechtswnssenschaft (1911), p. 356. * Begriff und Wesen der sog. juristichen Person, sec. 13, p. 53. ^ Davis, Corporations, their Origin and Development, p. 25, says : " The fact that the common group-will may not coincide completely with the -will of any one member ought not to exempt the members from responsibility for the effects of its execution.'' Klingmiiller, Die Haftung filr die Vereinsorgane, in Leonhard's Studien sur Erl'duterung des biirgerlichen Rechts, 1900, pp. 22-23, inclines to the Romanistic view. He refers the capacity of the corporation to act and to be made responsible for its acts to the will of the legislator. 28 THE LAW OF CORPORATIONS [290 emption was recognized. If anything is owed to the group, it is not owed to the members individually; nor do they owe what it owes. Si quid universitati debetur, singulis 11 on debetur, nee quod debet universitas singuli debent} This passage is often relied upon to prove that the Romans had already recognized a limited liability as incidental to the group-form.^ We have observed that this was applicable only to public corporations and to those beneficial groups, usually of pious or eleemosynary character, assimilated to that class by a lex specialist Even in this class, the relation of the group to its members empowered it to compel them to contribute sufficient funds to enable it to meet its obligations.* A number of writers have pointed out that there was no need for a commercial device with limited liability because trade was conducted by the slaves and the Roman law of peculinm permitted the master to participate in profits without risk- ing more than the capital embarked in the enterprise.^ We have seen then that group-forms, as the subjects of legal rights and the objects of legal obligations, had their origin in the functioning of governmental authority in early communities. The economic needs of the clan or tribe, ^Dig., iii, 4, 7, § i. ' See for example Taylor, op. cit., p. 2; Davis, op. cit., i, p. 26; ii, p. 221. ' See Sohni-Ledlie, pp. 209-210, citing Dig., iii, 4, i, and Dig., xxxiv, S, 20. * Savigny, System des heutigen romischen Rechts, bk. ii, chap, ii, sec. 92. ^ Renaud, Das Recht der Aktiengesellschaft, p. 8 ; Fick, " Ueber Be- griiif und Geschichte der Aktiengesellschaften," in Zeitschrift fUr das gesamte Handelsrecht, v, pp. i, 31 ; Deitzel, ihid., ii, pp. i, 10. See also Buckland, The Roman Law of Slavery, p. 233. It must be re- membered, however, that the liability of the master was much ex- tended by the praetorian actiones exercitoria, institutoria, and quasi institutoria. Ibid., pp. 169, 174. 291] CORPORATE TYPES IN ANCIENT TIMES 29 and later, of the city-state, demanded a segregation of prop- erty which gradually led to a segregation of the rights and obligations with reference to that property. In no sense did the group-form originate in the necessities of private commercial initiative: it was developed from the agencies called into existence for the more convenient exercise of the political and religious functions of the state. The con- solidation of municipal and sacral property and rights was followed by consolidations of property and rights of the state as a whole, in the exercise of specific functions. The consolidation of the rights and obligations of groups of private individuals with a separate legal en- tity was recognized only in conjunction with the ex- ercise of public functions, though these, it is true, be- came interpreted in a somewhat extended sense. But the entity was co-extensive only with the public pur- pose which it subserved. Even the group form most nearly approaching the modern corporation, though a re- sult of private enterprise and subservient to private inter- ests, was permitted because it was, at the time, the most convenient method of collecting state revenues. It bore the character of an economic, rather than a legal entity. Persons alone were the subjects of rights under Roman law. The right of association was denied for reasons of public policy. Even Gains does not mention legal or juris- tic persons in his classification.^ He recognizes their ex- istence for specific purposes merely. The great significance of the Roman period lies in the fact that the forms which had developed in satisfying the economic needs of state action and which were tolerated, though not recognized in law, were found readily adaptable to the operations of private initiative in later periods when, under greatly varied forms, they became crystallized into complete legal entities. 1 Dig., xlvi, l 22 ; " personae vice fiingitiir." CHAPTER 11 Group-forms and Corporate Types in the AIiddle Ages The growth of association types was stimulated by the encouragement given to corporate organizations by the church. The independence of the Roman temples, supply- ing the motive for separate entity during the pagan period, was now supplanted by the independence of monastic es- tablishments, each leading a life complete in itself within the walls of the cloister. The internal regulation of the monastery as decreed by St. Benedict in 529 gave organi- zation and permanence to the corporate idea. Each mon- astery was a unit and the property of all of its members was held in common.^ Even the church itself was incap- able of absorbing them. " As often happens in the devel- opment of corporate life, the superior organization of society proved unable to absorb into its own structure the inferior corporate life it had called into being; it had to be content with annexing the subordinate structure." ^ In- deed, with the spread of the monastic principle, the church organization itself disintegrated into corporate units, so that cathedral and collegiate chapters also became subject to the canon rule of common life. The canon law developed co-extensively with the influ- ence of the church. It constituted, as it were, an advance guard of that later invasion of Roman jurisprudence which ' Davis, op. cit., pp. SO-51. 2 Ibid., p. 56. 30 [292 293] CORPORATE TYPES IN THE MIDDLE AGES 31 culminated in the peaceful conquest known as the " Recep- tion." The church applied the Roman law in its own courts, modified in accordance with ecclesiastical conscience, long before the acceptance of the Justinian law books in the secular courts.' Accordingly, the corporate organiza- tions of the church and the charitable entities developed from the piae causae of the Roman system were well recog- nized by European society before the final period of the reception in the sixteenth century had been reached. The Roman conceptions of legal entity were thus readily ap- plied to secular institutions. Vinogradoff says that the reception (in France) did " not start with the acceptance of an external authority from which all changes in detail should be derived, but from a kind of struggle for exist- ence between the concrete rules and institutions of German and of Roman origin." ^ The destruction of Rome and the infusion into European society of unorganized Germanic elements called into ex- istence a number of group types which served the imme- diate social and economic demands of the times. These must not be regarded as prototypes of corporate organiza- tion in the modern sense, for they neither possessed a com- mon fund nor were they devoted to a definite enterprise for profit. To this class belong the guilds and other in- dustrial societies, the objects of which were general welfare, regulation of prices, monopolization of particular vocations and the like. They were not antecedent corporate types, but developed concurrently. Sometimes, devices for the participation of profits formed part of the group-plan, and thus their experience influenced the development of more distinctly corporate types. On the Continent, as in Eng- 1 Sohm-Ledlie, op. cit., pp. I43-I44- ' Roman Law in Medieval Europe (1909), p. 65. 32 THE LAW OF CORPORATIONS [294 land, the same bond of common personal interest formed the basis of membership in the union. Cultivation of the land was often carried on within definite areas by agrarian associations (Mark-Genossenschaften; Real-Genossenschaf- ten) so as to control production and consumption in the interest of the community. At times, however, economic interests triumphed over social and communal considerations. This produced a type no longer identical with the guild, though but slightly ap- proaching corporate forms. Troplong ^ recounts that, as early as the twelfth century, certain mills in southern France had been transferred to associations of " pariers," or equal owners. The mill was divided into shares of equal value called " iicliaux;' or " saches" (sacks), originally measures of capacity. These terms were probably first used to denote the approximate income of a share. The organization was managed by a syndic, a number of direc- tors and a treasurer, elected b}' the pariers in general meet- ing. Troplong considers the iichan.r equivalent to shares of stock, an opinion which he finds justifiable in view of the fact that similar mill associations exist to-day in the same part of France with shares properly so-called. But there is no evidence that, in their original form, the liability of the shareholders was limited. Similar associations ex- isted in the neighborhood of Cologne and, as to these, Gierke has pointed out that the assignability of the partes was not inconsistent with a liability to pay assessments.^ An interesting stage in the development of the concept of a common capital is to be found in the operative asso- ciations (Gewcrkschaften) of the twelfth and thirteenth ' Commentaivc du contrat de socictc. p. xxviii, cited by Lehmann, op. cit., i, p. 22. - Genossenschaftsreclit, \, pp. 968-071. 2gs] CORPORATE TYPES IN THE MIDDLE AGES 33 centuries. Here again the primal consideration was per- sonal. In fact, originally, the enterprise was divided into parts, of which each member undertook to operate -one or more without central control and in separate ownership. The association had merely a privilege of purchase upon the withdrawal of a member, doubtless as an insurance of the personal bond to which Ave have drawn attention. Where co-ordinate management was essential, as in the operation of mines, the central organs undertook to engage laborers and incur expenses generally, which were met by levies {Samkost, expensa) on the members. In this way, the idea of separate ownership gradually disappeared in favor of ownership by the members jointly, leaving a right of participation only. With this growth of the capitalistic idea, the parts, no longer tangible, soon increased by divi- sion into smaller and smaller shares {Kuxe). These were measures of voting rights, of profits and of the duty to pay assessments ; as a result, they came to have a variable value per unit. In case of transfer of the shares, all further levies went against the new owner, but those already matured were personal obligations, to be met on pain of forfeiture of the share in favor of the association, or in favor of the person who had advanced the assessment.^ One would have surmised that a type so closely resem- bling a corporation in many of its outward features would have advanced to the final stage of participation, conceived as a chose in action or movable property right. This was never realized, doubtless because the enterprise was re- stricted to a definite physical object; so that it was not im- possible to conceive of a small undivided right in the par- ticular property which constituted its capital. ' Opet, " Das Gewerkschaftsrecht nach den deutschen Bergrechts- quellen des Mittelalters,'' in Zeitschrift fur Bergrecht, vol. 34; cited in Lehmann, op. cit., pp. 24-25. 24 THE LAW OF CORPORATIONS [296 The mill and mine operators' associations were devices largely, if not primarily, designed to limit the liability of members to the capital embarked. They were probably among the earliest instances of aggregations working upon this plan, a result to which the disappearance of slavery may have contributed. On the other hand, personal quali- fication was still the basis of membership and there were no external legal guarantees for the protection of the in- terests of the individual member as against the union. Indeed, these incidents were closely related; for member- ship was the result of connection with the craft, so that the members had full knowledge of, if not actual participation in, the enterprise itself. It cannot be said that either of these was the immediate forerunner of clearly corporate types. Indeed, the chain of development was not at all continuous. Early corpor- ations were the results of many antecedent trade devices developing concurrently in accordance with the particular group-form which each occupation or trade tended to as- sume. The maritime partnership of this period {socictas navalis) presents an example of a near-corporate organiza- tion. The ship itself constituted the capital, divided into partes owned by partionarii. The parts or shares were assignable, but often subject to a privilege or option of first purchase by the co-partionarii. Routine matters were determined by the majority, and liability was limited as against third parties to the interest of the partners in the ship (" tot ho paga la nau "). Assessments could be levied against the various owners of the partes, but any owner could escape further liability by abandoning his interest.^ A most interesting development from these maritime as- ' Goldschmidt, Universalgeschichte des Handelsrecht (1891), p. 340; Lehmann, op. cit., i, p. 28. 297] CORPORATE TYPES IN THE MIDDLE AGES 35 sociations was the colonna, the organization of which is described by the tables of Amalfi.' The colonna originally represented a maritime association in which the crew (nantae) were also partners. In the group-form of the Amalfi tables, these two classes united with a third, the members of which contributed capital in wares and money — so that the shipowners, crew, and contributors all became interested in the entire enterprise (una massa et unum cor- pus) and received a new general designation, " compagni," later, " colonnisti." Renaud sees in this a combination of the usual maritime association with the commenda. This was a form of un- disclosed agency by which the agent, entrusted with money or wares for speculation by one or many principals (com- mendatores) , was alone responsible as against third parties. Both institutions suffered a change, for the contributors of the wares or money presently became active members of the colonna, had a voice in its management, shared pro- portionately in the profits of the whole and were respon- sible for the losses to the extent of their contribution. The captain was the leader of the enterprise. The members enjoyed a certain protection through his obligation to make public the amount of the entire capital contributed and the purposes of the voyage.^ For all liabilities undertaken by the captain the creditors had recourse to all the assets of the colonna, as well as to the private fortune of the captain, but not to that of the other compagni.^ The captain was subject to the directions of a majority of the ^ Renaud, Das Recht der Actiengesellschaft, p. 13. See the authori- ties cited in note on p. 12 as to the origin and nature of the institution. ' Renaud, op. cit., pp. 13-17. ' Ibid. See also article by Laband, " Das Seerecht von Amalfi," in Zeitschrift fur das gesamte Handelsrecht, vii, p. 314. 36 THE LAW OP CORPORATIONS [298 crew, or of the members of the colonna as such.'- After each cruise, the members were entitled to an accounting from the captain, and the profits were divided among the various classes of the members, a definite proportion going to the captain, the crew and the owners of the ship re- spectively, the balance to the commendatores.^ A further approach to corporate formation is visible in the instrumentalities called forth by the Italian states in their indirect methods of tax gathering. We have already pointed out that the Roman societates publican- orum, though not continuing in their ancient character be- yond the Roman period, yet exerted an influence upon later group-forms created for similar objects. As early as the twelfth and thirteenth centuries, public loans were made upon the credit of specified taxes, such as those upon wine and salt. The entire loan (mons, massa, maona, or cam- per a) was divided into equal parts (loca, luoghi, or partes) of a definite par value and entered in a public register (carhilario) with the name of the holder of each part.' The parts were assignable and inheritable. The nature of the security required a joint management, to accomplish which the owners of the parts organized associations (societates comperarum) for their protection and advan- tage. These gradually developed into enterprises for profit, apart from the purpose of securing the return of interest and principal. Examples are to be found in the Genoese Maona of Chios and Phocea (sometimes designated as the Maona of the Giustiniani, 1346-1566) and that of Cyprus ( 1373-1408) both of which were organized as huge colonial ' Tahula de Amal£, art. 7, " omnium, nautarum vel sociorum saltern majoris partis." Laband in Zeitschrift fiir das, ges. Handelrecht, vii, p. 317, note 53. ' Renaud, op. cit., pp. 15-16. 3 Goldschmidt, Universalgeschichte des Handelrechts (1891), p. 292. 299] CORPORATE TYPES IN THE MIDDLE AGES 37 companies. The enterprise as a whole was directed by offi- cers (protettori) elected by the shareholders and under the orders of a general assembly and those of a smaller body, or council/ The nature of these organizations may be best observed in the operation of the monte or societd delle compere e de' banchi di S. Giorgio, or Bank of St. George, in which the system attained its highest development. This great institution was founded in 1497 as a result of the con- solidation into one great fund of the numerous comperae of the two preceding centuries. It continued down to the fall of Genoa as a free state, in 1816. At first, the old form of loan upon interest with security was adopted, but in 1418, instead of the usual high rate of interest (eight per cent), it was provided that the holders should be entitled merely to dividends (provento utile) ac- cording to the profits of the many activities and privileges enjoyed by the bank under its charter. The luoghi, or shares, were of the par value of 100 lire each, registered and transferable, and certificates were delivered when re- quired. Generally, however, the evidence of ownership was the public register. The organization of the Bank of St. George gives clear evidence of the fact that the early principle of corporate management was based upon control by the large share- holders. Those owning less than ten luoghi were deprived of a vote in the general assembly. The eight protettori were in turn elected by the largest shareholders of the gen- eral assembly. The protettori as well as the procuratori and syndicatori were obliged to hold a large number of shares.^ 1 Goldschmidt, op. cit., pp. 295-296. » lUd., pp. 297-298. 38 THE LAW OF CORPORATIONS [300 In express reliance upon the type of the Bank of St. George, a plan for refunding the debt of the city of Milan was proposed to the authorities by one Zerbi, at the end of the sixteenth century. Though the plan was originally ac- cepted as a method for conducting the city's own finances, it soon became operative as a separate bank under the name of the Bank of St. Ambrosius (1598). The type was es- sentially different from that of the Genoese institution; for, though we again have luoghi ^^'ith a par value, assign- able and evidenced by a certificate (cartella), yet there was no voice on the part of the holders in the management of the enterprise. The contributions were made to the bank and not directly to the state, as in the earlier type. Fur- thermore, the luoghi were repayable after certain periods and were not continuing obligations, without a date of maturity. The holders were not responsible for the obli- gations of the bank, and being entirely excluded from a voice in its management, must be deemed to have been limited partners rather than members of a corporate group-form.^ It is at this point that a continuity of juristic develop- ment seems to fail. The Bank of St. George, with the single exception mentioned, found no successors in history. Banks continued to be conducted by private individuals, without corporate existence, until the constitution of the Bank of England, in 1694. Perhaps the organizations pro- duced by the peculiar financing of the Italian city-state of the fifteenth and sixteenth centuries were unsuitable else- where. From this time the corporate form progressed among ship-owners and merchants engaged in colonial ex- ploitation. In this movement, practically every country in Europe bordering on the western and northern sea coasts participated. Very different, however, was the organiza- ' Lehmann, op. cit., pp. 46-50. 30l] CORPORATE TYPES IN THE MIDDLE AGES ^g tion of all the commercial group-forms by which these en- terprises were undertaken, from the financial group forms in Italy during the period immediately preceding. The type of practically all the Continental maritime companies was set by the Dutch East India Company. Its charter was granted in 1602 as a consolidation of eight smaller " companies " whose organization, like that cus- tomary in the Low Countries at the time, was that of part- nership, with a liability limited sometimes expressly by charterparty, sometimes by custom, to the value of the ship and freight.^ The right of each shareholder now lay, not in a claim for principal advanced to the state, as in the case of the Bank of St. George, or contributed for a period to the organization itself, as in the case of the St. Am- brosius Bank, but in a right against the company to receive dividends. The Italian types represented simply a collec- tion of creditors compelled to take on certain corporate characteristics to preserve their principal by ensuring its gradual amortization through profits. The Dutch East India Company received its grant of monopolies by charter and, incidentally therewith, its separate juristic existence as a body corporate and its rules of operation. The fact that its members were free from liability to third parties resulted from the nature of the enterprise, not from the nature of the organization. Following the example of this company in the Nether- lands, the Dutch West India Company was chartered in 162 1 ; in Denmark, the Danish East India Company, in 1616; in Sweden, numerous commercial companies, from 1615 onwards; in Portugal, the East India Company, in 1 Voet, Comm. ad xvii, 2, no. 15 : idque propter rationes easdem, ob quas usu obtinuit, exercitores liberari ob obligatione ex magistri con- tractu nata, si partes suas quas in navi hobent, derelinquere parati sint. Lehmann, op. cit. i, pp. 56-67. 40 THE LAW OF CORPORATIONS [302 1628; in France, the two great India companies, in 1664.^ As a result of the political and public nature of these or- ganizations and of the peculiar functions which they were expected to perform, the state exercised a more or less ex- tensive control. Thus, sometimes a part, sometimes the whole personnel of management was appointed by the state; the regulatory acts or by-laws were also subject to its control. Furthermore, both creditor and shareholder possessed a guaranty of fair treatment in that the state supervised, not only through its appointees among the man- agers, but also directly, the accounts of the organization and the apportionment of dividends. The clear establishment of a right of action for an ac- counting and for dividends, if any, and for the return of the investment only after a definite period, as opposed to a property right in the capital of the organization itself, is distinctive of this period and is originally referable to the Netherlands, rather than to England. We shall see that, in the early seventeenth century, the right of the stockholder was there limited to the profits of a particular voyage or series of voyages. While this tended to impede the juris- tic development of the idea in England, the Dutch type, wherein the interests were continuous, at least for a definite time, though the accountings were periodic, permitted its rapid growth in practice. It is to the Dutch then that we owe the term for share, "Aktie" (French, "action;" German, "Aktie;" Italian, " azione;" Spanish, "accione"). In these companies, the capital was not originally divided into equal parts, as in the Italian banks. A minimal statutory contribution was provided for, but grad- ually the equal-share idea came into practice and also a definite capital or " fond perpetuel." At first the dividends were paid out, without reserve, after each voyage. Later, " Lehmann, op. cit., i, pp. 59-60. 303 J CORPORATE TYPES IN THE MIDDLE AGES 41 with the development of a definite share capital, periodic dividends, mostly yearly, were provided for, and also the maintenance and accumulation of reserve funds for the equalization of dividends/ The Dutch type represented a clear departure from the precedent craft associations, in that the shareholder acquired no right in the capital, or other property of the organization as such. Creditors of the individual shareholder could therefore execute their de- mands, not against any part of the corporate capital, but only against their debtor's right to demand his quota in liquidation. The Dutch East India Company dealt with its share- holders through subordinate chambers located in each of the Dutch provinces. It accepted subscriptions in the name of the Company and distributed the dividends. The ven- tures, however, were under the separate management of the chambers, while the division of profit and loss was under the control of the central governing body, which dis- tributed dividends to the chambers in proportion to their respective contributions to the general fund {generale Masse) and these, in turn, to the individual shareholders after the separate expenses of the chamber had been pro- vided for." We are dealing with the period of ambitious commercial expansion. The program of most of these organizations demanded, at the outset, a huge capital as the sinews of exploitation. This, perhaps more than anything else, caused the democratization of corporate types by a process similar to that progressing in England at about the same period.* Subscriptions were invited by an offer (Angebot) ^ Lehmann, op. cit., pp. 63-64. ' Lehmann, Die geschichtliche Entzvickelung des Aktienrechts bis zum Code de commerce (1895), p. 34. 3 See infra, ch. iii. 42 THE LAW OF CORPORATIONS [304 to the public generally, and were payable in instalments. We have seen that, originally, the evidence of participation was to be found in the books of entry. The practice of de- livering an abstract of such entries led to the issue of a re- ceipt upon the payment of the first instalment, constituting a more convenient and public evidence of participation {billet d'acfion. Aktie-Brief, Obligation, Lott-Sedel)} Fre- quently, payment of all the instalments became a condition of the negotiability of a share. This resembles certain pro- visions in modern statutes protective of stockholders and creditors.^ At first there was no special form of assign- ment; later, entry of the assignment in the books of the compan)^ was required; finally, the memorandum of trans- fer was placed upon the certificate itself. In the seven- teenth century, therefore, certificates of stock were regis- tered and issued in the name of the owner. Not until the eighteenth century were certificates issued to bearer, a method accomplishing transfer by delivery and dispensing with entry in the books of the company. This type of stock, with its accompaniment of dividend coupons at- tached to the certificate, is the one most favored in prac- tice at the present day upon the Continent of Europe; it is quite neglected in England and the United States, where the older system of registered stock has been almost uni- versally adopted in practice. ^ Lehmann, op. cit., p. 65. - See post, ch. iv, subdiv. i ; ch. iv, subdiv. 2. CHAPTER III Origin and Development of Corporations in England In England, as in ancient Rome, the origin of the cor- porate idea is to be traced to the municipality/ Long be- fore the juridical conception of an artificial civic body came into being, the borough had what may be called a natural corporate existence. It was an aggregate body, act- ing as a unit, making by-laws, having a common seal, holding property in succession, and appearing in courts of law.^ Side by side with the community of the town, another community existed, possessing commercial privileges and representing the nucleus of town government as delegated by charter from the king. This was the Guild Merchant, or gilda mercatoria, which seems to have derived its origin from Norman custom.^ It represented an aggregate of privileges, chief of which was the monopoly of merchan- dising. But the existence of a Guild Merchant in a town or borough was distinct from that of its corporate entity, or communitas, and must not be identified with it. The Guild Merchant was simply an instrument of town govern- ment.^ Though Coke was of the opinion that the granting of the Guild Merchant was identical with incorporation, ^ Davis, Corporations, their Origin and Development (1905), ii, p. 217. 'Gross, The Gild Merchant (1890), i, 95. ' Ibid., p. 4. 30s] 43 44 THE LAW OF CORPORATIONS [306 modern authority seems to favor the view that these privi- leges existed separately/ Furthermore, the Guild Merchant is to be distinguished from the craft guilds vi^hich began to grow up as early as the reign of Henry I. It represented all traders and all crafts, while the craft guild represented the interest of a single craft. The members of these craft guilds enjoyed the monopoly of working and trading in a particular indus- try. With the specialization of industry they multiplied to the gradual disintegration of the old Guild Merchant.^ Where the local demands could be satisfied by one general association, there was a single " company of merchants." Sometimes such a general company of merchants existed concurrently with companies restricted to a particular busi- ness. At any rate, the Guild Alerchant, especially on its social and economic side, became superseded in many of its functions; so that by the sixteenth century the craft guilds and companies of merchants were the true centers of mercantile enterprise. Besides these bodies there existed the " Company of the Staple of England," the origin of which is uncertain. Gross ascribes it to the period following the reign of Ed- ward III. It has continued its existence down to the pres- ent day.^ The merchants of the staple had a monopoly of purchase and export. From about the reign of Edward I centers for the collection, trial, appraisal and assessment of goods, known as staples, were established in the Conti- nental ports bordering the Channel, and afterwards in English towns as well. Their privileges were confirmed in 1353 ; they had their own customs and tribunals and formed in fact " a subordinate estate of the realm." * 1 Gross, op. cit., p. 103. ' Ibid., pp. 115-117- ' Ibid., p. 145. * Stubbs, The Constitutional History of England (3d ed.), ii, p. 430. 307] CORPORATIONS IN ENGLAND 45 Beside the general company of the staple to which we have referred, separate companies were incorporated in Ireland during the fifteenth and sixteenth centuries, the members of which were permitted to elect a mayor and two constables, to make by-laws, to have charge of official weighings and to take recognizances.^ The privileges thus granted to the staplers were largely the result of merchandising privileges previously granted to foreign merchants of the Hanse towns. These were ever a fruitful cause of complaint among the English mer- chants,^ and the early beginning of the staple may be as- cribed to their desire for protection. One group of Eng- lish merchants seem to have united under the name of "Fraternity of St. Thomas a Becket" and to have fixed their staple for woolen cloth at Bruges, where they received privileges from the court of Flanders and a charter from Henry IV (1406).^ During the fourteenth and fifteenth centuries, the fraternity levied tolls and exactions on Eng- lish export to the Continent, to the great detriment of pri- vate traders. Their activities were no longer restricted to staple wares, but gradually extended to commodities in general. Notwithstanding complaints, a fresh grant of privileges was extended to them under the proud title of " the Merchant Adventurers of England." Under this charter, they were authorized to hold courts and marts at Calais, but were required to permit freedom of trade, sub- ject to certain fixed exactions.* ^ Gross, op. cit., p. 146. ' Keutgen, Die Beziehungen der Hanse zu England (1890), pp. 32-34. * Cawston and Keane, The Early Chartered Companies (i8g6), p. 21. ' Ihid., pp. 26-27. The Adventurers themselves laid emphatic claim to their origin in the earlier fraternity. This has indeed been contro- verted by recent authority, though -without definite proof, and the provisions of certain charters seem rather confirmatory than otherwise. 46 THE LAW OF CORPORATIONS [308 From this time forth, the company had a prosperous career. The business with the Lowlands was practically in their hands until the Spanish invasion. When their charter of privileges was extended (1586) to Germany, they established a distributing center for the greater part of Europe at Hamburg, where the society continued until the beginning of the nineteenth century.^ The success of the Merchant Adventurers in stimulating English trade in European ports induced other merchants to seek similar charters for enterprises in other parts of the world. The era of discovery had set in. For the purpose of trade with southern and central Russia, Queen Mary granted a charter, in 1554, to the " Merchant Adventurers for the Discovery of Lands, Countries, Isles, etc., not before known or frequented by any English," which cum- bersome title afterwards gave way to the " Russia Com- pany." In quick succession, charters with similar privi- leges were granted, in 1579, to the Eastland Company, to trade in the Baltic, and to the Turkey Company, " to trade to Turkey." ^ The transition from these types of " regulated " com- panies to that of the joint-stock company resulted not through any progress of juristic conception, but because of the nature of the commerce which the earlier type had gradually developed. " The forces by which they were brought into being were not dissipated, but only diverted into fresh channels." * The regulated companies repre- sented groups of free merchants trading subject only to See Lingelbach, The Merchant Adventurers of England, their Laws and Ordinances, with other Documents (1902), pp. xxiii, 199. ' Lingelbach, op. cit., p. 39. ' Cawston and Keane, op. cit., pp. 34, 61, 69. • Ibid., p. II. 309] CORPORATIONS IN ENGLAND .7 the " regulations " of the society. They were indeed but a modification of the craft guilds, adapted to foreign in- stead of domestic commerce. Membership was by no means purchasable by mere contributions of capital, but was the result of a long apprenticeship and of other neces- sary personal qualifications.^ Membership was not trans- ferable nor could a member withdraw his share of the funds without due notice; furthermore, each member was liable to the whole extent of his means for the debts con- tracted by the company.^ It was undoubtedly due to these restrictions and the necessity for a m.ore liberal employment of capital that the regulated system fell into abeyance. \^^ell might the pleaders for the joint-stock principle, in 1681, say that " it cannot be denied by a reasonable man that a joint stock is capable of far greater extension as to the number of traders and largeness of stock than any regulated company can be. Because in a joint stock, noblemen, gentlemen, shopkeepers, widows, orphans, and all other subjects, may be traders and employ their stock therein; whereas in a regulated company, such as the Turkey Company is, none can be traders, but such as they call legitimate or bred mer- chants." ' The spirit of the times demanded a change in the form of commercial organizations. The Tudor period had de- veloped internal concentration and a strong national con- sciousness. The regulated companies tended to become ex- clusive, a condition inconsistent with ambitious plans for 1 Cawston and Keane, op. cit., p. 10. 'Ibid., p. 12. The joint-stock principle eliminated the necessity for apprenticeship by reason of the unrestricted assignability of the shares. ' Ibid., p. 13. " The equipment for the India trade required a capital so large as a joint stock alone could afford." James Mill, History of British India, i, p. 50. 48 THE LAW OP CORPORATIONS [310 a commercial and political expansion national in scope. The discovery of America and the multiplication of voy- ages to the East Indies gave opportunity for enterprises of unprecedented magnitude. It was in response to the de- mand for a wider participation in the fruits of national expansion that the joint-stock principle gradually gained acceptance. The East India Company, or " Governor and Company of Merchants of London, trading into the East Indies," as the charter of Elizabeth (December 31, 1600) described it,^ appears to have been closely connected with the Levant, or Turkey Company, at the time of its formation; they seemed to have used a common minute book.^ The first charter gave no indication of any unusual change in the method of organization. About 215 merchants were con- stituted " one body corporate and politic," with power to have corporate succession, to admit and expel members and the usual incidents. The company was granted a monopoly of trade in the East Indies and could give licenses to non- members. From the first voyage (1601) to the eighth (1613) groups of members contributed varying amounts of capital for the particular enterprise, thus forming a " joint stock," in the profits of which the particular members shared pro rata. From 1612 onward, the contributions from members desiring to participate were placed in the hands of the gov- ernor and committees (directors), to be ventured in a series of voyages. Thus the "Company's First Joint Stock " was devoted to four separate voyages from 1613 to 1616; successively other joint stocks were formed with ^Cawston and Keane, op. cit., p. 87. ' Davis, op. cit., ii, p. 114 note, citing Hewins, English Trade and Pinance, p. 37. 31 1] CORPORATIONS IN ENGLAND ^g different subscribers and upon somewhat varying condi- tions. This resulted in confusion, as the voyages of the preceding joint stock had not been completed before new joint stocks were created, while each joint stock had its own proprietors and board of directors.^ The charter of Elizabeth does not of itself give evidence of the transition from the regulated type, with its element of separate undertakings and lack of unity, to that of a joint stock with all the adventures embraced in a single "voyage," enuring to the common good of all the sub- scribers. No mention is made of a fixed capital, nor even of shares. The enlarged powers given to the directorate may, indeed, be taken as indicative of a ten- dency toward greater unity. All ventures in the nature of contracts, operations of factories, acquisition and exploi- tation of lands, were to be undertaken in the name of the company. The principle of participation by stock, how- ever, was a result of internal development, not of legis- lative (executive) intent. Bruce lays the adoption of the joint-stock plan to " the evil consequences of internal oppo- sition." ^ It is not at all improbable, however, that the example of the Dutch East India Company had been ob- served and its advantages in practice already demonstrated. The charter of the Dutch Company proclaimed the joint- stock principle in the method by which it provided for ac- counting to its subscribers. Its organization under the '"Afterwards the directors had in their hands, at one and the same time, the funds of several bodies of subscribers, which they were bound to employ separately, for the separate benefit of each; . . . they, as well as their agents abroad, experienced great inconvenience in preserv- ing the accounts and concerns separate and distinct . . ." Bruce, /i»«o/j of the East India Company, cited in Davis, op. cit., p. no. See also Mill, op. cit., p. 44. '' Op. cit., i, p. 162. 50 THE LAW OF CORPORATIONS [312 chamber system was, as we have seen, more decentralized than that of the English Company. But while the operation of the various ventures were conducted separately by the Dutch Company, each chamber was responsible for its profits and losses to the central board. The short period of the English voyages, however, and the succession of joint stocks, taken together with a loose- ness of accounting caused a conflict of interests as be- tween the various joint stocks of the English Company. The confusion of the several joint stocks related not only to the keeping of accounts and the distribution of the profits, but even to the right to exercise jurisdiction over terri- tories occupied by the company as a result of the voyages; also to the right to share in acquests not strictly associated with mercantile ventures.^ This condition threw serious doubt upon the wisdom of the joint-stock plan. Furthermore, merchants interested in some of the various joint stocks obtained from James I, in 1604, and from Charles I, in 1635, licenses to trade in parts of the Indies in which the old company had not settled any factories. One of these bodies, known as the Assada Merchants, united their interests for a time with the old company, in subscribing to a " united " joint stock. It is not known whether the directors were thereafter chosen by the contributors to all the separate stocks, or whether the contributors to each fund met separately.^ We do know, however, that certain groups of contributors were dissatisfied with the exclusively corporate nature of the joint-stock principle and petitioned for a return to the plan of the regulated companies and freedom of trade among the members. This demand was refused by Crom- ' James Mill, History of British India (1817), vol. i, p. 52. ' Ibid., i, p. 48. 3 13 ] CORPORA TIONS IN ENGLAND 5 1 well, but it had its effect in a plan for " a prodigious im- provement on the preceding confusion and embarrassment, when several stocks were managed and as many contending interests pursued at once." ^ The holders of the old joint stocks were bought out by the company, and such as would not sell had their accounts carried forward to the credit of the united issue, after a specified term; on what basis, however, does not clearly appear. Upon the accession of Charles II, a new charter was granted (1661) confirming the exclusive privileges, but further democratizing the joint-stock plan. Though the capital still remained variable and not divided into equal units, the shares were made transferable " even to such as were not free of the Company, upon paying £5 for admis- sion." ^ Later (1693), a further modification was made in placing a definite limit of twenty-one years upon the dura- tion of the joint stock, during the last year of which period books for the continuance of the joint stock were to be kept open.^ It is unnecessary to pursue the history of the company further, except to point out that henceforth Parliament began to claim the right of controlling the exclusive privi- leges granted by the Crown and to grant charters of a similar nature to rival companies. A charter was granted (1698) to a rival group of finan- ciers who had subscribed a government loan of two millions sterling. The constitution and powers of the new company, which bore the title of " General Society of Traders to the East Indies," were almost identical with the old. In fact, the two companies soon merged under the title "United Company of Merchants in England trading to the East 1 James Mill, op. cit., ii, p. SS- ^Ibid., ii, p. S7. ' Davis, op. cit., p. 129, citing Letters Patent Granted to the East India Company, pp. 141-151. 52 THE LAW OF CORPORATIONS [314 Indies," and the older company surrendered its charter to the Crown/ The history of the East India Company may be taken as typical of other companies formed upon the joint-stock plan. Charters were granted by James I upon a joint stock to an African Company, in 1618, and successively, three more charters were granted to companies for similar purposes by James I and Charles I. These companies, with the Hudson Bay Company, chartered in 1670, also grew out of association types of regulated companies. Their main purpose was territorial or colonial development, rather than direct commercial profit, and by degrees their func- tions, operating under corporate form, became more and more governmental. Joint-stock companies were created for the purpose also of carrying on domestic enterprises such as mining and manufacturing, as early as the sixteenth century. Origi- nally, mining was conducted by organizations similar to the Continental Gewerkschaften. " The Society of Mines," authorized in 165 1, was formed with the object of more effectually carrying out an industrial community of interest among its members. The capital consisted of twenty-four " parts," each selling at a different price.^ Later, the type of mining association became quite similar to that of the colonial joint-stock company. In 1691, a charter was granted to the " Governor and Company of Copper Miners in England." An annual meeting was provided for, at which the shareholders were permitted to elect a governor, deputy governor and ten or more " assistants." Tjie shares were issued in aliquot parts. Votes were required to be in 1 Cawston and Keane, op. cit., pp. 116-119. ' Scott, The Constitution and Finance of English, Scottish and Irish Joint Stock Companies, 1720 (1910), ii, p. 383. 315] CORPORATIONS IN ENGLAND 53 writing and any member whose calls were in arrear was subject to disenfranchisement.^ A noteworthy step in the development of the English corporation type is represented in the charter and prac- tise of the Bank of England. The early chartered com- panies were expected to prove advantageous to the gov- ernment by providing money in large amounts at short notice. Thus, both the colonial and the domestic com- panies, besides being trading organizations, were also much against their will compelled to act as financial agents and provide the government with short-term loans. It was the need for government funds, taken together with the weak- ness of private banking institutions and the consequent failure of merchants to obtain grants of credit at reason- able rates, which led to the organization of the Bank of England.^ Differing from the East India and other early charter companies, the Bank of England was incorporated by Act of Parliament (1694). The total amount of capitalization was £1,200,000, consisting of one hundred pound shares, it being provided that no person could subscribe for more than £10,000, or hold more than £20,000. The bank was precluded from owing more than the amount of its capi- tal, on pain of rendering the individual stockholders liable for thrice the amount so borrowed. It was not to trade in merchandise, but might lend on the security of merchants. While prior to this time the members of the managing board were more frequently referred to as " assistants " or members of " the Committee," the official term of " di- rector " now made its appearance, the qualification being the holding of stock of at least £2,000. Only one vote was permitted to any stockholder, irrespective of the amount 1 Scott, op. cit., p. 430. - I^id., iii, p. I99- ^4 THE LAW OF CORPORATIONS [316 of stock held by him, but a minimum holding of £500 was required in order to entitle the shareholder to vote. Not more than two-thirds of the directors retiring in any year might be re-elected in the following year. The charter was granted in 1694, and was to terminate in nine years. ^ The corporation type of the Bank of England set the standard for English companies by reason of the success which the venture attained almost from the start. The be- ginning of the eighteenth century saw a period of great activity in corporate enterprise and was accompanied by tremendous speculation in shares. This was fostered by the fact that from the reign of William and Mary it was customary for individuals to carry on business with capi- tal stock and under corporate forms without obtaining a charter from the Crown. Under the common law, all such organizations were probably regarded as mere partnerships without the privilege of limited liability, although Maitland says that " very little is known as to how their affairs were regarded by lawyers and courts of law." ^ Numerous com- panies were formed in this manner between 1692 and 1695, and their existence was tolerated for the time being. The active speculation going on at this period in the shares of these non-incorporated companies awakened the jealousy of the directors of the South Sea Company. This was the first great private company for foreign trade that had not had previous development as a regulated company.' Though ostensibly organized for foreign trade, 1 Scott, op. cit., p. 205. , ^Collected Papers, 191 1, iii, pp. 389, 390. Lindley states: "By the common law, every association of persons formed for the sake of sharing the profits is either a partnership or a corporation — a company which is neither a partnership or a corporation is a thing unknown to the common law of England." On Companies (6th ed.), p. 2. ' Davis, op. cit., ii, p. 155. 317] CORPORATIONS IN ENGLAND 55 its activities became financial rather than industrial. In 1720, its directors, in aid of the speculation in which they themselves were engaging, sued out writs of scire facias against a number of unincorporated companies with the view of discouraging speculation in their shares and in the hope that attention would thus be centered on those of the South Sea Company. Greatly to the chagrin of the South Sea Company's directors, however, this unexpectedly forced marginal holders of the unincorporated companies' stock to part with their securities in the South Sea Company. Thus the " South Sea Bubble " finally burst and a disas- trous panic ensued. In the same year, Parliament passed the " Bubble " Act, prohibiting the operation of unchartered joint-stock asso- ciations with transferable shares.^ From this time for- ward. Parliament grew more and more jealous of the un- restricted functioning of the corporate type and gradually assumed to control it by general Acts. This legislation is described in a subsequent chapter.^ ' The Bubble Act was extended over the American Colonies in 1741. Some of the Colonies owed their existence to charters granted by the Crown to trading companies. During the colonial period only six busi- ness corporations were organized of a strictly American origin or char- acter, all of them following the plan of the early English chartered type. Baldwin, "American Business Corporations before 1789," in An- nual Report of American Historical Association, 1902, vol. i, pp. 255 et seq. ' Chap. V. CHAPTER IV Protection of Creditors and Shareholders in Conti- nental Europe — Organization I. FRANCE Legislative Development. — The Napoleonic Code de commerce of 1807 was the first general statute to regulate corporations as independent legal entities. Its provisions were, however, of the most fragmentary nature. The arrangement of the articles as well as the terminology- employed indicate that the legislator considered the cor- poration (societe anonyme) merely as a species of limited partnership (societe en commandite) , wherein all partici- pants were protected by limited liability. The articles of the Code applicable to the former are intermingled with those of the latter as well as with simple partnership {societe en nom collectif) under the general heading " Des societes."^ The French Code was probably the first general statute to provide expressly that " the members are liable only for the loss of the amount of their interest in the company." ^ The capital of the corporation was divided into shares of equal value, registered or payable to bearer.^ Differing from companies of the Dutch type, no preference was given to the large shareholders as such in respect of the right to become directors. The mandate of the directors was revocable.* Nothing was provided as to the meetings of 1 See Code de comm., arts. 19, 29-38, 40, 45. 'Ibid., art. 33. 'Ibid., arts. 34, 36. * Ibid., art. 31. 56 [318 319] CREDITORS AND SHAREHOLDERS cj Stockholders nor as to their rights in general. The con- cessionary principle still prevailed and, accordingly, the administrative authorities exercised a certain control, especially over the articles of association.^ Whenever this administrative control was relaxed, we find that both creditors and shareholders suffered severely. Thus at the beginning many speculative ventures, instead of being incorporated, were floated in the form of limited partnerships (societes en commandite par actions) for which no governmental authorization was necessary. The only partner whose liability was unlimited was usually a dummy.^ The evils resulting from the use of this form finally led to the enactment, in 1856, of a special law.^ Shortly afterwards, in 1863,* greater encouragement was given to the organization of strictly corporate types by dispensing with governmental authorization for limited companies (societes a responsabilite limitee) after the pat- tern of the English Companies Act of 1862. The evils of overspeculation soon called for more dras- tic provisions. The Law of 1863 gave way to the more detailed Law of July 24th, 1867, which finally adopted the normative or non-concessionary system. This law, with certain modifications introduced by the Laws of August 1st, 1893, November i6th, 1903, and January 30th, 1907^ still regulates corporations in France. Existing Law. — The Law of 1867, dispensing with gov- ernmental authorization, prescribes certain formalities com- pliance with which eo ipso constitutes the entity in law.^ These requirements may be briefly stated as follows : ' Lyon-Caen and Renault, Traite de droit commercial, ii, no. 669. ^ Lehmann, op. cit., i, p. 71. ' L. of July 17, 1856. * L. of May 23, 1863. ^ Art. 21. ^8 THE LAW OF CORPORATIONS [320 1. No company may be organized with less than seven members.^ 2. The shares must be in denominations of at least 25 francs, if the entire capital does not exceed 200,000 francs and of at least 100 francs, if the entire capital exceeds this amount.^ 3. The entire share capital must be subscribed,^ 4. Shares of a denomination of 25 francs must be en- tirely paid up and those of a higher denomination must bt; paid up to the extent of at least one-quarter.^ 5. The subscription and payments must be verified by the organizers and to this verification must be annexed the agreement of organization.^ 6. Although bearer shares as well as registered or nomi- native shares are permissible,' the shares must remain nominative until fully paid up.* Vendors' (apporteurs) shares must be fully paid up before the corporation is com- pletely organized. They must remain in the treasury, and are not negotiable until two years after the complete or- ganization of the corporation.* The Law of August ist, 1893, compels directors, during this interval, to see that the partly paid and vendors' shares are stamped so as to indi- cate their character as such and the date of organization. The holders, the intermediate transferees and the original subscribers are all made jointly and severally liable for the balance unpaid upon the shares. But subscribers or stockholders who have transferred their shares cease to be liable for calls made more than two years after such transfer.^ 1 Art. 23. 2 ^^^5 j_ 2^ ^ Code de comtn., arts. 35, 36. * L. 1867, arts. 3, 24, as amended by L. 1893, art. 2. 5 Ibid. 321] CREDITORS AND SHAREHOLDERS 59 These provisions are protective of the stockholder who has fully paid his subscription and inure to the benefit of creditors also, as they are thus enabled to trace transfers of the stock and identify the new holders for at least a period of two years from the time of organization. The vendors remain liable during this period, so that the fact of full payment may be questioned without having to proceed against the new transferees, who may prove to be irre- sponsible. These provisions have an intimate connection with the rules governing apports, or contributions in property, which we discuss infra. It is remarkable, however, that, having gone so far, the legislator failed to designate any period within which calls to the full extent of the capital must be made. 7. The apports, or transfers of property by the vendor- organizers in payment of subscriptions, also all other agree- ments for the special advantage of organizers (such as per- centages on profits, salary agreements, etc.), must be ap- proved by the first meeting of stockholders. Thereafter, a second meeting must be held, at least five days before which a printed report relating to the apports or other particular advantages shall have been placed at the disposal of the stockholders. The resolution of approval must be passed by a majority of stockholders present, representing at least one-half of the capital stock. The organizers interested in the resolution are disqualified from voting. In default of such approval, the organization is void in respect of all parties. But the confirmatory resolution, if passed, does not prevent an action on the ground of fraud.^ The object of these provisions is to prevent promoters from selling at inflated values, and from burdening the ^L. 1867, arts. 4, 24, 30. 6o THE LAW OF CORPORATIONS [322 corporation with unfair contracts for salaries and the like, omitted in the prospectus. We shall see how the same evils are dealt with in the most recent legislation of England by provisions relating to the prospectus itself/ 8. Within one month from the date of organizing the corporation, a duplicate, or (if verified by notarial act) a copy, of the articles of association must be filed in the office of the justice of the peace or tribunal of commerce of the district in which the corporation is established. To this must be annexed (a) a copy of the subscription and proof of payment of at least one-fourth; (b) a certified copy of the resolutions passed at the general meeting (required in the case of apports of property) ; (c) a certified list of the name, address and occupation of each subscriber and the number of shares subscribed for.' 9. Within one month, an extract of the articles of asso- ciation must be published in the ofificial journal, the ad- vertisement to contain the title and duration of the cor- poration, its principal office, the name and address of the persons entrusted with its management and the power of signature, the amount of money or property to be contrib- uted, the date of beginning business, and the date when the documents were officially filed.^ Comment. — The Continental systems, differing from those of England and the American states, lay stress upon the importance of obtaining subscriptions to the entire amount of the authorized share capital before the corpor- ation is authorized to do business. This may be accom- plished by simultaneous act or by a series of successive acts. French law, differing from that of Germany, does not especially provide for a simultaneous and complete subscrip- 1 Infra, chap, v, tit. " Over-capitalization." ^ L. 1867, art. 55. » Arts. 56, 57. 323 J CREDITORS AND SHAREHOLDERS 6 1 tion (souscription integrale), although the method is some- times followed in practice. The method contemplated by statute is by open offer to the public continuing until the capital is completely underwritten. Meanwhile, the cor- poration is denied the right to do business. If a rigorous enforcement of this prohibition were made and adequate sanction provided for the protection of money stockhold- ers against the possibility of fictitious subscriptions, the sys- tem would be admirable in assuring economic strength to the corporation before commencing to operate. Vve shall see that these sanctions are more adequately provided under the German system than under the French. A specific provision, no matter how clear or categorical, is ineffective unless accompanied by a device for its enforce- ment. This is evident especially in respect of the French provisions designed to prevent the overvaluation of prop- erty transferred to the corporation in payment of sub- scriptions. The nullity of the corporatioiji is stated to be the penalty of an original organization in which some of the subscriptions have been paid in property at a ficti- tious valuation. Nullity will be decreed, however, only in the event of fraudulent intent, and the difficulty of prov- ing fraud to the satisfaction of a French tribunal is re- garded by some as one of the chief dangers threatening confidence in corporate organizations in France.^ The privilege extended to any of the organizers by the articles of association to pay for their subscriptions in property tends to destroy equality among the share- holders from the very beginning. The system introduced to prevent this by the Law of 1867 seems ingenious, and the cause of its failure is not at first apparent. The shareholders who pay for their subscriptions in money are made the arbiters of the value of property brought in iNouel, Les Societe par actions; la Reforme (19"), V- 128 and note. 62 THE LAW OF CORPORATIONS [324 (apportee) by other stockholders. The value of the prop- erty may be lawfully certified by resolution of these sub- scribers only after the report made thereon by experts designated by the money subscribers. The system is thus theoretically just and fair; yet recent writers do not approve of its practical results, for the reason that a critical ap- praisal is rarely made. The stockholders seldom reject a valuation suggested by the promoters. At most, the money stockholders delay their approval for a time, during which negotiations ensue between themselves and the apporteurs. This usually results in a compromise by which the money stockholders receive additional consideration in stock (i. e. a bonus) without strengthening the financial condition of the corporation. Another cause for the failure to control the valuation of property transferred is due to the fact that the money stock- holders are frequently interested in syndicates promoted in conjunction with the apporteurs, with the object of ulti- mately placing the stock with the public. Accordingly, the original shareholders have but little interest in proving the value of the property contributed. The appraisers often make their report solely upon information furnished by the organizers. Indeed, at the Corporations Congress of 1900, Rousseau stated that the report was frequently made after the articles are executed.^ The chief restraint upon indiscriminate overvaluation of property transferred in payment of subscriptions lies in the provision of the Law of 1893 prohibiting the negotia- tion of shares paid for in property during a period of two years." This has somewhat discouraged the flotation of apporteurs' shares. It fails, however, to cure the evils we have described, operating to the detriment of bona-fide ' Congres des societes de 1900, p. 78, cited Nouel, op. cit., p. 133. ' Law of August I, 1893, art. 2, amending Law of 1867, art. 3. 325 J CREDITORS AND SHAREHOLDERS 63 money subscribers. It also fails to protect creditors who are induced to extend credit to the corporation in the be- lief that the capital has been fully paid in. Furthermore, many provisions of the Law of 1867, as modified by that of 1893, though salutary in themselves, are not applied rigorously by the French courts. Not- withstanding the provisions of article 15, visiting the penalties of criminal deceit upon those who publish false statements for the purpose of obtaining subscriptions, the courts have not applied the article to exaggerations and misrepresentations contained in the prospectus. Thus in one case the court said that certain representations "regrettable indeed as they were, did not transgress the limit of those adventurous statements and even falsehoods which are frequently met with in commercial prospectuses ; " " that mere false statements, however multiplied, do not of them- selves constitute fraudulent practices in the sense of article 415 of the Penal Code." ^ Another defect admitted by modern French writers is that the Law of 1867 does not provide for immediate re- sponsibility of the organizers or managers in the event of a violation of the provisions relating to corporate organiza- tion. Their responsibility results only indirectly from a judgment declaring the corporation a nullity. Further- more, the adjudicated cases show that a judgment of nullity is rarely decreed until long after the time when the cor- poration begins to do business. During this period the money of the cash subscribers has been transformed into dead capital, such as machinery, merchandise, etc. Debts have been incurred in the purchase of property, or in de- fraying the running expenses of the business. As against creditors, neither the corporation nor the 1 Trib. of Commerce, Paris, Mar. 23, 1887, Dalloz, 1887, part ii, p. 251. 64 THE LAW OF CORPORATIONS [326 Stockholders can set up the defense of nullity/ Accord- ingly, creditors have the option of treating the corpora- tion as null, or as validly constituted. If they choose the latter, the evil day is postponed; if the former, the court is compelled to deal with a corporation in fact, if not in law, and must proceed to liquidate by selling the assets and distributing the proceeds. If action has not been too long delayed, the creditor may suffer little, if any, loss. The money stockholder, however, is met with the principle of French jurisprudence that the court has no power to dis- tribute the assets otherwise than as agreed upon by the parties themselves, notwithstanding the nullity of the cor- poration. For example, where the court has annulled a corporation for violation of article i by reason of the share capital not being fully subscribed, or by reason of the sub- scriptions not being paid in to the extent of one-quarter, the shareholders who have contributed property cannot be compelled to take back their apports, but may participate in the proceeds of all the assets to the same extent as the other subscribers. ^ Accordingly, the creditors and money stockholders, who are entitled to the greatest amount of protection, have the least incentive to avail themselves of the sanctions provided for by the law and intended for their benefit. ^ The action of nullity is employed only as a condition precedent to holding the organizers or managers responsible for a violation of either formal or substantial provisions. It is a proceeding relied upon as a formality, very much as judgments are obtained against corporations under Eng- lish and American law and prosecuted to execution where 1 Art. 7, L. 1867. Nouel, op. cit., pp. 119-122. ' Marinesco, Des Conditions exigees pour la constitution des societes anonymes (1889), p. 220. This author is of the opinion that the Law of 1867 has failed in the protection of creditors and later shareholders. 32/] CREDITORS AND SHAREHOLDERS 65 there is no dispute and no possibility of realizing, but where all legal remedies must be exhausted as a technicality de- manded by equity courts prior to proceedings against di- rectors for malversation of corporate funds. Thaller has said that the action of nullity is frequently used as a sword by unscrupulous persons to compel recog- nition of doubtful claims.^ It is true that under the Law of 1893, this evil has been mitigated by introducing a short statute of limitations. The law also permits the cure of defects prior to action brought. But close observ- ers still regard the law as unnecessarily severe against the organizers. On this account, experienced and financially responsible persons often refrain from undertaking the or- ganization of corporations. This works injuriously and not beneficially in the interests of creditors and stockhold- ers. The action of nullity might well be replaced by meas- ures more effective though less severe. Responsibility for compliance with the law should be made independent of the action of nullity, and original money subscribers should be protected against inflated contributions of property. 2. GERMANY ' Legislative Development. — The Napoleonic codes were extended, in 1807, to Baden, the Rhenish Palatinate. Rhenish Hesse and the Prussian provinces of Posen, Rhen- ish Prussia and Westphalia. Despite the fall of the French Empire, they continued in force until replaced by German legislation. Accordingly, the corporation type of the Code de commerce exerted important influence upon all subse- quent legislation in Germany. Prussia was the first state of Germany to provide separate legislation for general cor- porate regulation, at first in respect of railroad corpora- tions ^ and afterwards for all corporations.' Austria, ' Journal des societes, 1884, p. 764. ' L. of November 3, 1838. ' L. of November 8, 1843. 66 THE LAW OF CORPORATIONS [328 Hamburg, Saxony and Bremen still continued to pass laws relating only to certain specific questions of corporation law. Saxony had in preparation a draft of a general law during 1836 and 1837, but it was not adopted.^ After 1838, the commercial requirements of the German states led to the preparation of a number of drafts for a commercial code. The Wurtemberg draft of 1839, the Prussian draft of 1857, the Austrian draft of 1858 and the so-called Frankfort draft of 1859 all contained provisions relating to corporations and followed the type established by the Code de commerce, with the distinguishing charac- teristic of limited liability. The basis of the modern German law of corporations, is to be found in what is now known as the Old Com- mercial Code, adopted in 1861 in most of the German states — separately, but in an uniform text. It was the re- sult of a conference for uniform commercial legislation called by Bavaria in 1856, held at Nuremberg. The draft prepared by the conference was adopted as a federal sta- tute of the North German Confederation ^ and, two years later, as a federal statute of the German Empire.^ In the meantime, a special statute had been passed, amending the code in respect of corporations,^ the principal character- istic of which was the definite adhesion to the free or non- concessionary principle. Theretofore, corporate entity had proceeded from a public act of the state (constitutio per- sonalis) ; thereafter, it resulted from the observance of normative regulations laid down by general statute. The abuse of corporate forms as instrumentalities of business and the panic of 1873 which resulted partly there- ' Lehmann, op. cit., i, pp. 77-78. ' L. of June S, 1869. » L. of April 16, 1871 ; for Bavaria, April 22, 1871. * L. of June 11, 1870. 329] CREDITORS AND SHAREHOLDERS 67 from, led to the demand for a stricter regulation of cor- porate organization. The ministry of justice prepared a draft statute which was presented to the federal council on September 7th, 1883/ The draft was iinally adopted by the Law of July 1 8th, 1884. A final revision of the Commercial Code was made as part of the series of federal laws passed just prior to the opening of the present century, designed to unify and modernize the entire private law of Germany. The provisions of the Commercial Code had to be brought into harmony with those of the new Civil Code, and, ac- cordingly, a draft was presented in July, 1896, when the Civil Code was adopted by the Reichstag. A second draft, in line with suggestions made in the Reichstag, was pre- sented at the next session and became a law on May loth, 1897.' In the Commercial Code thus revised in 1897, the pro- visions relating to corporations ^ grew much more de- tailed. The principal additions are those which provide for a more thorough administrative control over organization, increase and decrease of capital stock, transfer in bulk of the entire property of a corporation and proceedings for dissolution. Corporations under German law are distinguished from associations with limited liability (Gesellschaften mit beschrdnkter Haftung), provided for by the law of April 20th, 1892. These organizations, which play an important part in the commerce of Germany at the present day, may ^ The draft was thoroughly digested and criticized by Goldschmidt in Zeitschrift fur Handelsrecht, vol. xxx; by Bahr in Ihering's Jahr- hiicher, vol. xxi; and by Wiener, Der Aktiengesets-Entwurf von 1883. ' Staub, Kommentar zum Handelsgesetzbuch, i, pp. 1-2. = Secs. 178-319- 68 THE LAW OF CORPORATIONS [330 be compared to limited partnerships in which all of the parties are limited partners. The company represents a separate juristic entity/ but the share capital is not divided into shares of stock and no part is transferable without the consent of the company.^ Accordingly, this type will not be treated of in the succeeding pages. ^ Existing Law. — The German Commercial Code (Han- delsgesetzbuch) does not provide a definition of corpor- ations. It simply outlines the prerequisites for the exist- ence of a corporation and defines the legal relations of parties interested as organizers, stockholders, or creditors. The provisions of the Code are contained in a separate division entitled " Aktiengesellschaften." * In order to form a corporation under German law, at least five per- sons must verify articles of association in the presence of a court, or notary, subscribing for a certain number of shares. The article? must contain: 1. The name and the situs of the corporation. 2. The purposes for which it is organized. 3. The amount of capital stock and the par value of the shares. 4. The officers to be elected and the manner of their election. 5. The manner in which the general meeting of stockholders is to be called. 6. The manner in which official notice by the corporation is to be given.' As in the French Code, a general provision declares ■ L. of April 20th, 1892. "Ibid., sec. 17. ' See generally upon these organizations, Staub, Kommentar zum Gesetz betreffend die Gesellschaften mit beschrdnkter Haftung (1909). * German Comm. C, sees. 178-319. ° Ibid., sec. 182. 33 1 ] CREDITORS AND SHAREHOLDERS 69 that all stockholders are limited in their liability to the amount of their shares/ Differing from the practice in England and the United States, bearer shares are customary; accordingly they are expressly recognized by statute.^ Fractional shares are not permitted. As bearer shares can be freely negotiated without transfer on the books of the corporation, the hold- ers of such shares are not known to the corporation until the coupons attached have been presented for the payment of dividends declared. Accordingly, the legislature, in order to insure full liability of the shareholder up to the amount of the price agreed to be paid for his shares, has prohibited the issuance of bearer shares of which the sub- scription price has not been completely paid in. This is required even in cases where the amount agreed to be paid for the shares is greater than par. Registered shares on which only part payment has been made, must contain a statement on the face of the certificates, of the amount paid.^ A notable provision of the law requires all shares to be of a par value of at least one thousand marks, except in certain special cases not necessary to mention, in which the shares must be of the par value of at least two hun- dred marks.* This provision is intended to discourage speculation by persons of limited means; accordingly, there is now but little speculation by the working classes in shares of small denominations, so frequently encountered in mining and other companies in England and America.^ 1 German Comm. C, sec. 178. ^ Ibid., sec. 179. s Ibid., sec. 179. * Ibid., sec. 180. ' Modern German writers point to the fact that the very class least able to bear the burdens of loss through reckless or fraudulent issues of securities is often the first to become interested in them. Bohm, Ueber Aktionarschuts nach deutschem, englischem und fransosischem Recht (1910), pp. 44-45- ■JO THE LAW OF CORPORATIONS [332 The articles of association serve both as a subscription agreement and as a constitution or organic law of the corporation. The Code mentions only the minimal re- quisites of the articles of association. It is customary to include in the articles a detailed regulation of the in- ternal organization of the corporation under the heading of " Statuten." Such statutes or regulations establish the powers and compensation of the supervising council (Anf- sichtsrath) and directorate (Vorstand), the object and duration of the corporation, the powers of the stockholders in general assembly ; the nature and value of the business or property to be turned over to the corporation in payment, in part or in whole, of subscriptions not payable in cash; and many other provisions which are found both in the certificate of incorporation and by-laws of corporations or- ganized under English or American practice.^ If the articles do not state the character of the shares, they are deemed to be nominative. The articles, however, may provide that, upon the demand of a stockholder, shares which are nominative may be made bearer shares and those which are bearer shares may be registered in the name of the owner.^ The articles may also provide for the classification of the stock, preferred and common. The Code does not state all of the varying rights which may be provided for by the articles. It recognizes varying rights in the divis- ion of profits and capital ; * it also recognizes that the articles may provide a maximum of shares upon which any one stockholder may vote; that certain classes of stockholders, as for instance, holders of preferred stock, ' See, for example, Senftner, Wie griindet man eine Aktiengesell- schaft? p. 17, where a form of articles is given. 2 Comm. C, sec. 183. 3 Ihid., sec. 185. 333] CREDITORS AND SHAREHOLDERS 71 may have greater voting capacity than those of a dif- ferent class/ Accordingly, German law gives a free hand in all matters of varying agreement by which minority shareholders may be protected and by which preferential and proportional voting may be effected. German law differs from the French in its method of dealing with purchases of property. Where contributions in kind are permitted by the articles, it is customary to speak of a " qualified " organization {qualifiziertc Gritn- dung).^ The Code requires the articles of association to state the particular advantage which any individual stock- holder (mentioning his name) is to receive. Payments made by stockholders upon the capital stock otherwise than in money, with the name of such stockholders, the basis of payment and the number of shares thus issued must be stated in the articles.* All agreements of this character not specifically set forth are invalid as against the corporation. German law is peculiar in providing a definition of per- sons to be regarded as organizers (Griinder). The Code provides that stockholders who adopt the articles of as- sociation, and those who pay for their subscription other- wise than in money, shall be regarded as (gelten als) the organizers of the corporation.^ The purpose of this de- finition is to identify the persons upon whom the legis- lature elsewhere places the burden of responsibility under penalities both of a civil and of a criminal character.^ The execution of the articles of association does not in 1 Comm. C, sec. 252 ; see Staub, Kommentar sum Handelsgesetzbuch (1900), i, pp. 760-1. 2 Gierke in Holtnendorff's Encyklopadie der Rechtswissenschaft (1904), i, p. 948. 3 Comm. C, sec. 186. "'Ibid., sec. 187. « Staub, op. cit., i, p. 578- 72 THE LAW OF CORPORATIONS [334 itself constitute the corporation a legal entity. All of the authorized capital stock must be subscribed for before the corporation is authorized to do business. Two methods of accomplishing the subscription in full are provided for. The first is that by which the organizers subscribe for the entire capital stock in the articles.^ This is by far the most usual proceeding and is known as " simultaneous " organization {Simultangrilndung) . The second method is complicated and is seldom em- ployed in practice.^ It is known as successive organization (Successivgriinduiig) and consists in obtaining subscrip- tions during a period of time after the signing of the ar- ticles, until the capital stock is completely subscribed for. The document of subscription (Zeichnuiigsschein) con- sists of a written declaration containing reference to the date of the articles of association, the name, occupation and residence of each organizer, the subscription price of the shares and payments to be made thereon, and the date at which the subscription shall become invalid if the entire amount has not been underwritten.^ If the organization is simultaneous, the organizers desig- nate the first supervising council in the articles, or by separ- ate document verified in the presence of a court or notary.* If the organization is successive, the supervising council must be elected at a general meeting of the stockholders after the capital stock has been completely subscribed.^ Beside the supervising council, German law provides for a directorate (Vorstand) consisting of one or more persons to be appointed in the manner provided for in the articles. If the articles provide for the appointment of the 1 Comm. C, sec. 188. ' Senftner, op. cit., p. 11. ^ Comm. C, sec. 189. * Ibid., sec. 190. 335] CREDITORS AND SHAREHOLDERS 73 directorate through the general meeting of stockholders, the first board is appointed in the same manner as the super- vising council.^ As a further protection to the public against the flota- tion of watered securities, the new Commercial Code has introduced a somewhat novel guarantee of the good faith of the organizers. Whenever subscriptions are to be paid otherwise than in cash, the organizers must sign a declara- tion stating the essential circumstances which tend to show the reasonableness of the agreement so far as the same relates to the acceptance of property instead of cash. This declaration must set out the transactions by which the com- pany came to acquire the property and the average cost price over a period of two years. If the company is to ac- quire the business of a going concern, the declaration must state the results of operating the same during the previous two years. ^ After the election of the supervising council and the directorate, it is their first duty to examine and certify as to the legal organization of the company. If, however, any of the directorate or supervising council are likewise organizers, or recipients of any particular advantages or compensation by reason of the organization, or have trans- ferred property other than money in payment of shares, the certification of the proper organization of the corporation must also be made by auditors (Revisoren) appointed by the oiificial board of trade of the district, or in the absence of any such, by the court. ^ The examination must relate particularly to the correct- ness and completeness of the declaration made by the or- ganizers with reference to the subscriptions to and pay- 1 Comm. C, sec. 190. 2 Ibid., sec. 191. ^ Ibid., sec. 192. 74 THE LAW OF CORPORATIONS [336 ment of the capital stock. It must also relate to the facts constituting the basis for the declaration of the organizers with regard to the reasonableness of agreements to trans- fer property in exchange for shares. A report embody- ing the results of the examination must be made by the supervising council and directorate jointly, and, in the event that auditors have been appointed, they must also execute the report, a copy of which must be delivered to the board of trade which appointed them. The report is accessible to the public.^ If differences arise between the auditors and the or- ganizers as to the scope of the examination, the board of trade or court which appointed the auditors must determine whether the demand for further information is justified.^ All the foregoing provisions are reinforced by the requirements of publication demanded by the Code. The corporation must be registered as such in the commercial registry of the court of the district in which it has its situs, pursuant to an application signed by all of the organ- izers, members of the supervising council and directorate. The application for registration must include : ^ 1. The articles of association and subscriptions to the cap- ital stock; 2. all contracts relating to special advantages and compen- sations of stockholders and organizers; 3. in the event that all shares are not subscribed for by the organizers, a duplicate of all subscriptions must be registered, together with a list of all subscribers and the amounts still owing on each share ; 4. the documents relating to the election of directorate and supervising council. ^ Comm. C, sec. 193. ^Ibid., sec. 194. ^Ihid., sec. 195. 337] CREDITORS AND SHAREHOLDERS 75 5. the report as to the legal organization of the corporation and the documents upon which it is based; if the report is made also by auditors, a certificate that a report of the audi- tors has been delivered to the board of trade ; 6. whenever the particular nature of the undertaking re- quires governmental consent, a document showing such consent must also be filed. The application for registration must also contain a dec- laration that every share has been paid for in money and that the directorate is in possession of the same, except such subscriptions as were agreed to be paid for in prop- erty. The price at which the shares were issued and the amount of money paid thereon must also be stated; this must be at least one-quarter of the par value and in the event of issuing shares at a price above par, at least one quarter of the actual price. The members of the direc- torate must send their signatures for filing with the courts ; all documents presented with the application for registra- tion must also be filed in court either in their original form, or by certified copies.^ The registration of the corporation as provided for by law constitutes a condition precedent to the existence of the corporation as such.^ Every person assuming to act in be- half of the association prior to its entry in the commercial register at the seat of the corporation will himself be per- sonally liable, and no shares or interim certificates can be issued prior to that time, nor can any subscription right be transferred. The organizers are responsible to the company as joint debtors for the correctness and completeness of the state- ments made in their reports relating to the subscriptions and 1 Comm. C, sec. 195. ^ Ibid., sec. 200. 76 THE LAW OF CORPORATIONS [338 payments of the capital stock, and to the advantages which they or any stockholders are to receive, either directly, or through payment of subscriptions in kind. They are liable for all balances due on subscriptions and must take over any balance of stock remaining unsubscribed for. If the company has been injured by reason of their accept- ance of property in payment of subscriptions, with fraudu- lent intent, all of the organizers are liable as joint debtors; provided, however, that if an individual organizer had no knowledge of the incorrectness or incompleteness of the statements made, or of an intentional injury to the corporation, or could not have known of it by exercising the ordinary care of a business man, he may be held free of liability.^ Liability is incurred jointly with the organizers by any person who receives a benefit, as part of the cost of or- ganization, not mentioned in the schedule of charges re- quired to be published, provided he knew or must have known that such information was wilfully withheld; the same applies to all parties who knowingly withhold such information, or who knowingly aid in the wilful injury of the company by transfer of property in payment of subscriptions.^ The Code goes further than any prior legislation in protecting the public against fraud or negligence in the organization of corporations, by placing a liability even upon the bankers who offer the shares for sale. All per- sons who have made a public offering of the shares before the registration of the corporation or within two years thereafter shall be jointly liable with the organizers in case of the incorrectness or incompleteness of the report of the organizers relating to the subscription or payment of the capital stock, or to the advantages agreed to be given to 1 Comm. C, sec. 202. ^ Ibid. 339] CREDITORS AND SHAREHOLDERS 77 certain of the shareholders or organizers, or in case of wilful injury to the corporation through payments in kind, provided such persons knew of the incorrectness .or in- completeness of the statements, or of the wilful injury, or might have had such knowledge by the exercise of the ordi- nary care of a business man.^ This practically makes the issuing banker a guarantor of the correctness of the statements made by the organ- izers in connection with their report for the registration, and requires him to make an independent investiga- tion in order to be satisfied that all of the legal and economic requirements have been complied with. The provision is applicable also to all persons endeavoring to make sales by public offering of stock already issued and on the market, irrespective of the fact that they took no part in the original issue. ^ The statute is intended to prevent general distribution of shares regarding which the advertiser or banker may have little information. It is designed to prevent the irresponsible dissemination of worthless shares by puffing and extravagant promises. In fact, the responsibility of the banker is in many re- spects placed on the same basis as that of the organizer. The Code makes both jointly liable to the company; indeed, redress must be sought against them before recourse is had against members of the supervising council or directorate, for any failure properly to verify compliance with the law. The latter become liable for their negligence only in the event that redress cannot be obtained from the organizers or the bankers.* A cause of action against the organizers, issuing bank- 1 Comm. C., sec. 203. ' Staub, op. cit., i, p. 619. ^Comm. C, sec. 204. 78 THE LAW OF CORPORATIONS [340 ers, members of the supervising council or directorate for failure to verify compliance with the law as already out- lined, is prescribed after a period of five years from regis- tration in the commercial registry/ Prior to the Law of 1884, it was not unusual for the organizers to enter into agreements disadvantageous to the company and, after the period of organization had been completed, effect a compromise of their liability. This was easily accomplished by reason of the fact that they were likely also to have a majority of the stock; thus, at the first general meeting of stockholders, they obtained the adoption of a resolution granting decharge.^ It is now pro- vided that no waiver or compromise of claims against any of the persons responsible for the proper organization of the company is permissible until after five years from the period of registration and then only by vote of a general meeting of stockholders; a minority of one-fifth of the capital stock may veto the resolution.^ A resolution of the general meeting of the stockholders is recjuired for the acquisition within two years from the time of registration, of any equipment intended for per- manent use in the business of the company, or of immov- ables exceeding in value one-tenth of the capital stock. Be- fore the resolution is passed, the supervising council must examine and report in writing upon the proposed acquisi- tion; and the resolution requires a majority of three-quar- ters of the capital stock represented at the meeting. If the contract is undertaken within one year from registra- tion, the three-quarters majority must represent at least one-quarter of the entire capital stock. The resolution itself must in all cases be registered.* 1 Coram. C, sec. 206. ' Staub, op. cit., i, p. 624. * Comm. C, sec. 205. * Ibid., sec. 207. 341 ] CREDITORS AND SHAREHOLDERS ■jg As a corollary to the obligation placed upon banks of issue, a further protection against reckless flotations of new and untried securities is found in the prohibition laid upon all stock exchanges from listing the shares of any cor- poration prior to one year from registration in the com- mercial registry and the publication of its first annual bal- ance sheet and profit-and-loss account.^ In addition to safeguards found in the method and pro- cedure of organization, German law is characteristic in the precision with which it has provided for criminal penal- ties applicable to offenses committed by the organizers or others in connection with the organization of the company and the flotation of its securities. The Commercial Code of 1870 added penal provisions in the division relating to corporations; it defined the of- fenses and punishments concretely instead of referring to the general provisions of the Criminal Code. These special provisions were amplified by the Law of 1884 and were in- corporated, practically without change, in the new Com- mercial Code.^ Punishment by imprisonment and at the same time by fine not exceeding twenty thousand marks is imposed as a penalty upon : 1. organizers or members of the supervising council or directorate who, for the purpose of entering the corporation in the commercial registry, knowingly make false statements in respect of the subscription or payment of the capital stock, or of the price at which the shares are issued, or in respect of the payments of subscriptions otherwise than in money ; 2. any persons who knowingly make false statements in re- spect of any of the foregoing matters in a prospectus publicly offering the shares of a corporation for sale ; ^ L. of June 22nd, 1896, relating to Stock Exchanges {Borsengesets), sec. 39. • Staub, op. cit., i, p. 934. 8o THE LAW OF CORPORATIONS [342 3. members of the supervising council or directorate who, for the purpose of entering in the commercial registry an in- crease in the capital stock, knowingly make false statements in respect of the payment of the stock already issued, or of the subscription or payment of the increased stock, or in respect of the amount at which the shares are issued, or in respect of payments upon the increased stock made otherwise than in money. ^ In addition to the penalties already mentioned, managers and directors may incur the loss of civil rights. If, however, there be extenuating circumstances, sentence may be confined to the imposition of a fine.^ Under the general provisions of the Criminal Code, the length of im- prisonment may vary from one day to five years.^ Members of the directorate or supervising council are punishable with imprisonment not exceeding one year and also by fine not exceeding twenty thousand marks, if they have knowingly issued nominative shares, partly paid up, not mentioning the amount actually paid thereon ; or issued shares or interim certificates before the company has been registered in the commercial registry; or issued shares or interim certificates of less than one thousand marks par value, as provided by law. These officers, and also liqui- dators, are subject to the same penalties if they have know- ingly made false reports or statements as to the condition of the company's afifairs. If there be extenuating circum- stances, punishment may be restricted to the imposition of a fine.* Comment. — The detailed and conservative nature of German legislation governing corporations may be ascribed to the severe experiences of the German people following the Franco-Prussian War. Their victory in that contest and in particular the large indemnity paid by France ^ Comm. C., sec. 313. ' Ibid. 3 Sees. 16, 27. * Ibid., sec. 314 343] CREDITORS AND SHAREHOLDERS gl led to an enormous increase in commercial enterprise; it also gave opportunity, however, for dangerous speculation with which the existing laws of corporations were then ill- designed to cope. Ihering, writing in 1877, said : The corporation in its present form is one of the most incom- plete and dangerous devices of our entire jurisprudence. Most of the evil which has overtaken commercial relations during the past few years results either directly from this source, or is at least closely related to it. . . . The attacks which it has incited against private property have been more serious than if fire, drought, famine, earthquake, war and hostile occupa- tion had all conspired to ruin the welfare of the nation.^ When such was the warning of one of Germany's lead- ing jurists, it is not surprising that every possible safe- guard was thrown round the organization of corporations during succeeding revisions of the law. The capstone of the structure provided by the new Com- mercial Code is publicity. Some authors, even in Germany, are of the opinion that the requirements of publicity have been somewhat overextended ; ^ that the system has thus become ponderous and that those who would inform them- selves of facts necessary for their protection are compelled to wade through a mass of material much of which could be dispensed with. The express provisions of the Code are evidence of the fact that the legislature gave paramount consideration to the rights of the creditors and ordinary stockholders (as distinguished from the organizers). Thus it is provided that as soon as the organizers take over all of the shares, the company is organized (errichtet) .^ And yet, before the ' Ihering, Zweck im Recht ; translated from i, pp. 227-228. 2 Rehm, " Die Uebertreibung des Offenheitsprinzips im Aktien- rechte," Deutsche Juristenseitung, 1904, pp. 34 et seq. » Comm. C, sec. 188. 82 THE LAW OF CORPORATIONS [344 organization of the company has been registered in the commercial registry at its situs, the corporation does not exist (besteht nicht) as such/ Just what is the legal nature of the organization in the meantime is not expressly stated in the Code. The best authorities are of the opinion that before registration, even though all other requisites have been complied with, it has no capacity to acquire rights or incur obligations, although as an association regulated by the Civil Code certain rights may accrue and certain obli- gations attach to its members as individuals, i. e. they may become joint creditors and joint debtors.^ An act per- formed in the name of the association prior to its cor- porate existence is uncjualifiedly stated to render the indi- vidual personally liable.^ What benefits, if any, may ac- crue to the organization during that period by reason of acts undertaken in its name are not made clear. It is m.anifestly intended to discourage all activity prior to full compliance. This is consistent with the system of issuing the stock which, as under the French code, must all be subscribed for before registration can be made. Thus economic strength is assured to its authorized capital; intending purchasers of stock and creditors know the amount which may be relied upon before the company is committed to liabilities and before any of the funds already contributed have been used as working capital.* Gierke considers that the chief value of the scheme lies in the fact that an individual duty is laid upon all those charged with verifying compliance with the law, whether 1 Comm. C, sec. 200. 2 Staub, op. cit., pp. 605-606. 3 Comm. C, sec. 200. ^Cf. Gareis, Das Deutsche Handelsrecht (1909), p. 219; Bohm, op. cit; p. 13. 345] CREDITORS AND SHAREHOLDERS 83 as organizers or promoters, supervisors or auditors.^ The distinction as regards rights and duties between subscribers who have undertaken to pay their subscriptions in kind and those who pay in money is taken over, with modifications, from the French Law of 1867; but the feature of verifi- cation by the supervisors of the corporation, if disinter- ested, or by auditors, if the supervisors are interested, is novel. Modern experience teaches that it is neces- sary to have some independent test in order to prove compliance both with formal requirements and with the demands of sound business finance. The organizers as well as the initial officers are frequently also the majority stockholders, or able to control a majority at the first meet- ing. Even if they do not, they usually have a sufficiently large interest in the taking over of property or entering into contracts to prevent an impartial judgment in these matters. It is important that the administrative device in- tended to remedy this should be free from great expense, complication or delay. We shall see that, in some coun- tries, a judicial tribunal is clothed with the power to ap- prove the various steps taken in organizing.^ It is doubtful whether courts of law are so constituted as satisfactorily to perform duties of this nature, although some recent ex- pressions of opinion tend in this direction.* It is noticeable, indeed, that in the United States, especially within the past decade, questions of a business nature have been referred to or voluntarily considered by the courts. Thus the de- i.See article by him in Goldschmidt's Zeitschrift fur das gesamte Handelsrecht, " Entwurf des neuen Handelsgesetzbuch," 1896, p. 488. 2 E. g. Italy, see infra, chap, iv, subdiv. 3. ' " In these days the most useful function of our courts should be to control business within just and honest bounds." Untermyer, Some Needed Legislative Reforms in Corporate Management, Ad- dress delivered before the New York County Bar Association (1911), P' IS. ; j 84 THE LAW OF CORPORATIONS [346 termination of the reasonableness of rates, or prices, and the fairness of competition, both of which questions involve also, indirectly, the question of a fair return upon capital invested, represent functions similar to that which courts would be compelled to exercise in determining whether the capital stock has been fairly paid up by contributions of property other than money. To insure formal and substantial compliance with the law in the organization of corporations, German legis- lation has created a control independent of the "organ- izers, initial ofificers and stockholders; but it has not im- posed this duty upon the courts. At most, the court has the duty of appointing the auditors, in default of their appoint- ment by the board of trade. The German law thus wisely leaves to independent business men, through their disinter- ested appointees, the verification of the various steps of organization. We have seen that the French system places great reliance upon the remedy of nullification for insur- ing compliance with the requirements of the law. We have already called attention to the fact that this often oper- ates to the injury of stockholders and creditors rather than to their benefit. German law has not entirely eliminated the action of nullification ; it may be instituted by any stock- holder, director, or supervisor, if the articles, as recorded, are defective.^ But an error in the articles, unless it relate to the amount of the capital, or of the par value of the shares, may be cured by amending the articles.' Though the German law is much less stringent in this respect than the French, it is difficult to see where any real interest is neglected. The German Code appears needlessly harsh in denying to subscribers the right to transfer their interests prior to 1 Comm. C, sec 309. ^ Ibid., sec. 310. 347] CREDITORS AND SHAREHOLDERS gc the registration of the corporation. The codes of the Latin countries make all intermediate holders responsible, in ad- dition to the original subscriber; thus added security is given for the collection of the original subscription. Au- thority in Germany is divided as to the wisdom of the German provision.^ Its sole advantage appears to be that of limiting the number of interested parties, during the period preceding complete organization, to those who may be supposed to have some knowledge of the enterprise. Finally, it is noteworthy that the German law of cor- porations closely follows the actual conditions of the busi- ness world. Business experts assisted in modeling the drafts of the Commercial Code and thus a practical trend, often lacking in other systems, has been given to it. Tlie recognition given to boards of trade and their auditors, the appreciation of the important part played by bankers and brokers in the flotation of shares and by stock ex- changes in providing a ready market, all testify to the fact that the legislature has attempted to deal with the corpora- tion as an important factor in the social and economic evo- lution of the nation and not merely as a legal phenomenon. As Ihering has expressed it, the association type is to be recognized not merely as an isolated relationship arising out of contract, but as an underlying form subserving the purposes of human existence.^ 3. ITALY Legislative Development. — The French Code de com- merce constituted the basis of the various provincial legisla- tions of Italy during the first half of the last century, with ' Gierke favors it while Lehmann considers it of no practical ad- vantage. Gierke in Zeitschrift fur Handelsrecht, 1896, p. 488. 2 Op. cit., i, p. 222 : "nicht bloss uni ein einselnes Vertragsverhaltniss sondern um eine Grundform menschlicher Zweckverfolgung . . . ." 36 THE LAW OF CORPORATIONS [348 such modifications as were effected by local special laws and general provincial codes. The kingdom of Sardinia, for example, adopted a general commercial code (Codice di commercio Albertino) bearing date December 30th, 1842. Following close upon the creation of the united kingdom of Italy, a commercial code (Codice di commercio del Regno d'ltalia) was formulated after careful preliminary studies, and became a law June 25th, 1865. In the main it followed the trend of the Sardinian code, which in turn was much affected by Napoleonic precedents/ The provisions re- lating to commercial associations, and particularly to cor- porations, were found, however, to be inadequate after a few years of practical operation. In June, 1869, Mancini pro- posed a revision, for which a commission was appointed by administrative decree. The commission reported a projet in April, 1872, for revising the code, and later, in 1874, a separate projet for commercial associations. The absolute necessity for an adequate law of associations influenced the movement for a new commercial code generally, and in 1876, a new commission was appointed; it reported in 1880, its projet was finally approved April 2nd, 1882, and became effective January ist, 1883.^ Existing Law. — Following the French system, the Ital- ian Code prohibits the typical corporation type (societa ano- niiiia) from using any other than a fanciful title or one descriptive of the enterprise.* It deviates from the French system and resembles the German, in that it differentiates the methods of organization by simultaneous act of organ- izers and by successive acts of subscribers.* It differs, > Lehmann, Das Recht der Aktiengesellschaft, i, p. 73. ' Bing, La societe anonyme en droit italien (1887), pp. 32-35. 'Italian Commercial Code [revised to 1909] art. 77; comp. French Commercial Code, arts. 29, 30, according to which the nature of the enterprise must appear in the title. * Italian Comm. C, arts. 128, 129. 349] CREDITORS AND SHAREHOLDERS 87 however, from the German system and resembles the Swiss, in placing the period of registration after the first general meeting of stockholders. "■ The Italian system is unique in requiring the execution of articles of subscrip- tion as well as of articles of incorporation. The articles of subscription vary according to whether the plan of or- ganization is simultaneous or successive. If the former, one or more public documents must establish the fact that the organizers (promotori) have subscribed the entire capital stock.^ The existence of conditions demanded by the law must be verified and administrators or agents designated who are entrusted with representation until the first general meeting.^ If the organization be successive, i. e. effected by pub- lic subscription, the organizers execute a prospectus (pro- gramma) stating the objects of the corporation, its capital, the principal clauses which are to be embodied in the articles of incorporation and the personal benefits which the or- ganizers are to receive pursuant to the corporate statutes, or from the profits of operaition. The prospectus must be filed in the commercial court at the situs of the company.* Subscriptions may then be taken, either upon copies of the prospectus, or by some instrument embodying certain es- sential statements of the proposed corporate statutes. In either case, the subscriptions must be notarially verified.^ Each shareholder must pay at least three-tenths of the amount subscribed by him. No stock may be issued for less than par and no new stock may be issued before the original capital has beep entirely paid up.' After the entire 1 Italian Comm. C, art. 91 ; cf. Swiss Code of Obligations, arts. 618, 623. ' Italian Comm. C, art. 128. ^Ibid., art. 128. * Ibid., art. 129. ^Ibid., art. 130. « Ibid., art. 131. 88 THE LAW OF CORPORATIONS [350 capital stock has been subscribed, the organizers must pub- lish the period determined by them within which payment of the subscriptions must be made. Two weeks there- after, a first meeting must be convened at which money payments must be recorded and an appraiser appointed to verify payments in kind (conferite). It must also adopt the corporate statutes and elect directors (amministratori) unless this has already been accomplished by designation in the articles. It also elects the syndics {sindaci) and must ratify all agreements providing for particular advantages in favor of the organizers.^ An interesting provision, protective of minority interests at the first meeting, accords the right to any subscriber to demand delay in order that further information concerning the organization be obtained. If the demand is supported by subscribers representing at least one-quarter of the capital stock, an adjournment not exceeding three days must be granted ; if a majority support the demand, a delay of not exceeding one month must be granted; if the demand be supported by at least three-quarters of the capital stock a longer delay may be obtained.^ If no adjournment is de- manded, the meeting proceeds to the adoption of the articles of incorporation {atto costitutivo) } Differing from the Swiss system but in line with that of Germany, the Code expressly provides that no right in the subscription may be transferred prior to complete organization.* The organizers are liable jointly for all obligations as- sumed in connection with the organization, even though they may have recourse against the corporation for reim- 1 Italian Coram. C, art. 132. » Ibid., art. 135- ' ^^'d., art. 136. *■ Ibid., art. 137; comp. Swiss Code of Obligations, art. 636 and German Comm. C, sec. 200. 35 1 J CREDITORS AND SHAREHOLDERS 89 bursement when it is completely organized; if organization is not effected, they have no recourse against the sub- scribers/ Recourse against the corporation is made de- pendent upon approval of their acts by the first general meeting.^ The organizers are prohibited from obtain- ing personal advantages by reason of organizing the com- pany, except such as are computed on the net profits result- ing from the operation of the company, not to exceed cer- tain percentages mentioned in the Code.^ The Code provides certain minimal requisites for the articles of incorporation.* A noteworthy provision re- quires that verification of compliance with all the legal requirements shall be made by a judicial body, viz., the civil tribunal at the proposed situs of the corporation. The articles must be filed within fifteen days following their adoption in the office of the clerk of the court. The court thereupon deliberates in chambers with the public minister, and, if it determines that full compliance has been made, it issues its decree that a transcript of the articles of incor- poration be published with the corporate statutes.^ The details are regulated by royal ordinance. Publication is made in an official bulletin relating to stock companies.** The Italian Commercial Code also contains criminal sanctions for its mandatory provisions relating to the or- ganization of corporations, though these are less detailed than those of the German Code.' 1 Italian Comm. C, art. 126. ^ Ibid., art. 138. ' Ibid., art. 127. * Ibid., art. 89. ^ Ibid., art. 91. ' Ibid., art. 95. ' A person who makes false statements in respect of subscriptions obtained, payments made, or persons associated with the company, for the purpose of obtaining subscriptions to its shares, or payments thereon, is guilty of swindling {la truffa) and subject to the penalties go THE LAW OF CORPORATIONS [352 Like the German Code, Italian law requires that the organizers remain individually liable for all obligations in- curred in the name of the corporation until it has been offi- cially registered and its articles of incorporation have been published ; and if this is not done within three months from the general meeting, the subscribers may demand repay- ment of the amounts paid on their subscriptions/ 4. SPAIN Legislative Development.- — Notwithstanding the brief duration of the Napoleonic regime, Spanish legislation has been greatly influenced by the French codes. The French Code de commerce was the model of the Spanish Codigo de comer cio of May 30th, 1829. The classifications and defi- nitions are almost entirely those of the French code, though many of the administrative devices are peculiar to the pen- insula. The Code of 1829 in turn formed the basis of the codes of Bolivia, Colombia, Costa Rica and other Latin- American states.^ After much deliberation and delay, a new commercial code was adopted August 22nd, 1885, and went into effect on January ist, 1886.'' This code still contains the basic law applicable to corporations.* As in the French code, cor- porations are treated in a subhead under the general divi- prescribed in the criminal code. Comm. C, art. 246. A person who fails to perform any of the duties imposed upon him by law — viz. to file the articles of incorporation or corporate statutes, or modifications of the same, or the monthly report, or the balance sheet in form as provided by law and within the prescribed period — is punishable by a fine of fifty lire for each day in which he remains in default. Ibid., art. 248. 1 Italian Comm. C, arts. 98, 99. ' Lehmann, op. cit., i, p. 374. 5 Translated into French by Prudhomme, Code de commerce espag- nol, 1891. * Arts. 151-169. 3S3J CREDITORS AND SHAREHOLDERS ' gi sion, " Commercial Associations " (Companias Mercan- tiles) . A general revision of Spanish law is now in the hands of a commission appointed by royal decree on March nth, 1910. It is its purpose to revise and amplify the Civil Code, Penal Code, Codes of Civil and Penal Procedure and the organic law of the tribunals. It is possible that the commercial law of the country will also be revised in con- nection with this movement/ Existing Law. — The Spanish Commercial Code contains provisions applicable both to commercial associations in general ^ and to corporations in particular * (companias anonimas). It also contains regulations applicable to par- ticular types of corporations, such as credit banks, banks of issue and discount, railroads, warehouses, building-and- loan associations and the like.* A corporation is organized in Spain by registering ar- ticles of association at the commercial registry. The articles must contain its corporate regulations and all agree- ments and conditions by which the rights of its members (two or more) ° are to be governed." The articles (escritura social) must state : 1. The name and residence of the members. 2. The name of the corporation. 3. The persons charged with its administration and the method of filling vacancies. 4. The share capital and the value of contributions in kind (bienes aportados) or the basis of valuation of the same. ' Annual Bulletin of the Comparative Law Bureau of the American Bar Assoc., 1910, p. 201. " Comm. C, arts. 1 16-124, ' Ibid., arts. 151-174. * Ibid., arts. I7S-2I7- ^ Ibid., art. 116. * Ibid., art. 119. 52 THE LAW OF CORPORATIONS [354 5. The number of shares constituting the capital. 6. The period within which the balance due on the shares, if any, must be paid, or the designation of the person or per- sons who have the power to fix the final date. 7. The duration of the corporation. 8. Its purposes. 9. The time and manner of convening and holding the gen- eral meeting of stockholders {junta generate) ; the circum- stances under which special meetings are to be called and the manner of convening and holding them. 10. The subjects reserved to the general meeting and the manner of computing a majority therein. 11. All agreements and particular conditions which affect the rights of the shareholders.^ There is no obligation to pay in a certain amount of the capital, prior to the registration of the company, but one- half must be paid in before registered shares may be con- verted into bearer shares.^ As in the French law, the original subscribers and all intermediate holders are respon- sible for payment up to the face value of the shares. If a conversion into bearer shares has been made prior to full payment, the apparent possessors {los qfie se muestren como tenedores) of the shares are alone responsible; if these are unknown, the corporation may annul the shares unpaid for and may issue and deliver new ones to satisfy the unpaid balance; it must then account for any surplus to the owner in default.^ No new series of shares may be issued until the ante- cedent issues have been wholly paid up, and no purchases 1 Comm. C, art. 151. The eleventh clause (supra) is expressed in facultative form in this article but under art. irg it would seem to be mandatory — " deherd hacer constar." ' Ibid., art. 164. 355] CREDITORS AND SHAREHOLDERS g^ of its own shares may be made by a corporation even out of profits, except for the purpose of amortization/ If any subscription remains partly unpaid, the corpora- tion has the option of attaching the property of the sub- scriber for the balance due, or of rescinding the subscrip- tion agreement and retaining the amount already paid.^ Contributions in kind must be appraised in the manner provided for in the articles and, in default of any special provision in this respect, by experts chosen by the parties, or by an umpire, should the experts fail to agree.^ 5. SWITZERLAND Legislative Development. — Prior to June 14th, 1881, cor- porations, as indeed, many other branches of the civil and commercial law of Switzerland, were regulated by cantonal laws, fragmentary in character and differing widely from each other. After a long period of deliberation, a Federal Code of Obligations was enacted pursuant to the Constitu- tion, of 1874. This law regulates corporations under a special title (Actiengesellschaften; societes anonymes) ^ Swiss law does not recognize the strict separation of commercial as distinguished from civil transactions, as in France ; nor does it draw a sharp distinction between com- mercial and civU persons, as in Germany. Accordingly, the law of corporations is not treated in a separate body of commercial law. The general provisions of the Civil Code, adopted December loth, 1907, effective January ist, 191 2, are applicable to corporations wherever appropriate. The Code of Obligations still exists as a separate statute, al- though a general revision is now pending. Existing Law. — Under Swiss law, the general meeting 1 Comm. C., arts. 165, 166. = Ibid., art. 170. ^ /ji^;^ art. 172. * Code of Obligations, arts. 612-677. 94 THE LAW OF CORPORATIONS [356 of subscribers (Zeichner) for organization must be held before registration, after all the stock has been subscribed. The general meeting must adopt a resolution that the capital has been fully subscribed and that twenty per cent has been paid in upon each share. The meeting adopts corporate statutes and elects the board of directors (Verwaltung) to serve for the first three years.'' The managers do not constitute a separate organ of the corporation but derive their powers through delegation from the board of di- rectors.^ Another variation from the German system is found in the permission granted to subscribers to transfer their sub- scriptions to new holders prior to the constitutive meeting. The new stockholders may vote at this meeting provided a resolution to that effect be adopted. The original sub- scriber, however, continues liable for his subscription.^ It is unnecessary to enlarge upon the system. In the main it follows that of Germany. Certain important var- iations from the German system relating to the operation of the company will be noted in a subsequent chapter.* Comment. — The similarity in the laws of Italy, Spain ^ .Swiss Oode of Oblig., art. 649, subdiv. 4. Silbernagel points out that the strong control exercised under German law prior to the first general meeting has no equivalent in the provisions of the Swiss law. Op. cit., p. 323. 2 Art. 650, subdiv, 2, in which it is provided that the mandate is re- vocable at all times, subject to the right of the manager to demand redress in damages. It is quite customary to designate one or more members of the board as a managing committee {Ausschuss, or Direktion). They, not the members of the board, are termed the " Directors ". ' Arts. 636-637 ; Lehmann, op. cit., i, p. 390 ; Silbernagel, op. cit., p. 325. Under German law, interim certificates must be nominative, whereas in Switzerland (Code of Oblig., art. 636) and in Austria (Comm. C., art. 222) they may be issued to bearer. * Infra, ch. viii, subdiv. 5. 357] CREDITORS AND SHAREHOLDERS gg ' and Switzerland in the organization of corporations may- be ascribed to the fact that the legislation of each of these countries dates from the same period. It is to be noted that in both the Italian and the Swiss system, emphasis is laid upon the first general meeting of subscribers or share- holders. The resolutions and appointments of this first or constitutive meeting form the principal elements of the documents for the registry. This has an advantage, because prospective stockholders and creditors are apprised of the policy of the corporation and the character of its manage- ment from the very beginning, whereas in Germany, the corporation may come into existence before the directors and supervisors are elected. The Spanish Code resembles the German in postponing the first general meeting until after registration. The Spanish Code furnishes but slight protection to creditors as it permits the organization of companies with little or no capital actually paid up. No specific percentage of the share capital need be paid prior to registration and even bearer shares may be circulated if one-half of the amount of the capital has been paid. Fur- thermore, there is no check upon organizers and appor- teurs; the French legislation of 1867 seems to have had but little influence in Spain. Italian legislation lays great stress upon the importance of a judicial control over the payment of the capital. In committing this function to the courts, it has gone even be- yond the French system, which attempts to accomplish the purpose by placing increased power in the hands of stock- holders other than organizers. The Swiss Code demands acceptance of the corporate statutes in toto, with the very act of subscription. The legislative purpose is to prevent any change whatever in the nature of the organization between the period of obtaining subscriptions and the actual consummation of the organi- 96 THE LAW OF CORPORATIONS [358 zation/ In this it is even more stringent than the German law, which requires simply a reference to the essential pro- visions of the corporate statutes in the subscription agree- ment. ' Silbernagel, op. cit, p. 119. CHAPTER V Legislation and Reform in England and America. — Organization Legislative Development in England. — We have seen that the so-called "Bubble" Act of 1720^ prohibited the transfer of shares of any unincorporated company; so that unincorporated joint-stock companies, as far as we know, were treated as ordinary partnerships. This condition continued till 1825. By reason of the cessation of the Napoleonic wars, trade had devel- oped anew. The complications and difficulties connected with the grant of a charter from the Crown or Parliament, together with the mani'fest convenience of the corporate form of association, induced Parliament to repeal the Bubble Act,^ which revived the state of law prior to that act. The common law, with its prohibition against the transfer of any shares without the consent of all of the as- sociates, necessitated the insertion of a clause in the articles of. association permitting the transfer of shares with the consent of the officers. The shareholders continued, how- ever, to remain liable to an unlimited extent.^ The next step was taken by the statute of 1844,* under ' 6 George I, c. 18. 2 Cf. Lindley, On Companies, p. 3 ; the repealing statute is 6 George IV, c. 91- ' See Cunningham, The Growth of English Industry and Commerce, Modern Times, part i, p. 279; Lehmann, op. cit., p. 84. *7 & 8 Vict., c. no. 3S9] 97 98 THE LAW OF CORPORATIONS [360 which associations consisting of more than seven members might become invested with corporate entity by fulfilHng certain conditions and registering the by-laws and other particulars. The statute did not permit the issue of shares payable to bearer nor did it provide for a limited liability; practically, therefore, it accorded only the right to sue and be sued under the corporate name. In 1855, the Limited Liability • Act ^ provided for limited companies with shares of a par value of at least ten pounds. This was followed in the two succeeding years by statutes extending the privilege of limited liability to all companies except certain classes mentioned, such as bank- ing and insurance companies.^ The concessionary system was abandoned from 1844 onwards, but it was not until 1862 that a complete system of incorporation and control was enacted, in the form of a consolidation and revision of all prior acts.^ The statute was practically a code of company law and regulated the three classes of companies recognized in English law, viz: (i) the unlimited company having a capital divided into shares, (2) the company limited by guaranty and having a capital divided into shares, and (3) the company limited by shares. It prohibited bearer shares ; but the statute of 1867 * permitted the issuance of " share warrants " to bearer. Frequent amendments, additions and revisions of the Companies Act of 1862 have been made since that time, de- tailed reference to which is unnecessary. It is sufficient to say that in 1900, under the form of an act amending that of 1862, an entirely new system of company law was ' 18 & 19 Vict., c. 133. ' 19 & 20 Vict., c. 47 ; 21 Vict., c. 17. » 25 & 26 Vict., c. 29. ' 30 & 31 Vict., c. 131. 361] LEGISLATION AND REFORM qq introduced. This was made necessary by the abuses which had arisen in connection with the large number of com- panies launched for exploitation in the colonies. A rigor- ous regulation of the company prospectus was made one of the principal features of English legislation.^ The statute of 1900 was the result of patient research, originally carried on by a private commission, afterward by a committee of Parliament itself.^ It represented one step in a progressive legislative policy primarily concerned with the protection of creditor and stockholder and culminating in the consoli- dated statute of 1908 known as the " Companies (Con- solidation) Act, 1908." * Legislative Development in America. — After the Revo- lution, the states succeeded to the power of the Crown to grant charters of incorporation. The old concessionary system continued uninterruptedly until 1837, when Connec- ticut passed the first general act of incorporation for busi- ness companies. Corporations could be organized under the statute for purposes limited to those necessary or proper for the accomplishment of a single object; the corporation was given a lien on the stock of its members for debts due to it; and the stockholders were personally liable for all capital refunded or dividends illegally declared.* By 1850, about twenty states had passed general incor- poration statutes, modeled more or less closely on the Con- necticut act. This legislation proved so satisfactory that constitutional prohibitions against the creation of business corporations by special act of the legislature were adopted ' See Segnitz, Prospectus dans les societes anglaises par actions (1908), p. 8. ' Ibid., p. 32. » 8 Edw. VII, c. 69. ' Frost, A Treatise on the Incorporation and Organisation of Cor- porations (1908), p. 2. lOO THE LAW OF CORPORATIONS [362 in most of the states. This right is now reserved to the legislature in only six states, all of them being of the origi- nal thirteen.^ The next development was toward the enlargement of the corporate purposes and powers permitted by the articles. Statutes were passed granting the right to do business out- side the state, to hold stock in other corporations, even when not directly necessary to the immediate purpose of the holding corporation, and to amend the charter in any manner lawful for an original incorporation. The taxes derived from corporations both at the time of incorporating and during their operation became a considerable item in the revenue of the states. Therefore a sort of competition grew up among them in devising and passing " liberal " incor- poration laws, thus inducing corporators to take advantage of their benefits.^ During the past two decades, abuses of the greater liber- ality of corporate statutes have been frequent. This, to- gether with the tendency of our industrial system toward centralization and combination, has influenced public opin- ion in favor of a stricter control of business corporations. The important revenue derived by the states from corpor- ations organized under local authority continues to be a real obstacle in the way of progress. The states have begun to feel the concurrent taxing powers of the Federal Gov- ernment, and therefore few of them are willing to enact stricter corporation laws which might cause the loss of revenue from a source at present both important and certain. Initiative in reform is therefore to be sought from the Federal Government, with its power of control over interstate commerce. ' Horack, op. cit., p. 26 n. ' This applies particularly to laws of Delaware, Maine, New Jersey, New York, and West Virginia. Frost, ibid., pp. 2-3. 363 J LEGISLATION AND REFORM loi Existing Law and Reforms. — England has partially returned to the legislative policy of the Bubble Act of 1720, directed against the association of large numbers of per- sons without corporate form. It is recognized that the cor- poration, when properly regulated and controlled, is more easily held under governmental supervision and restraint than unincorporated aggregations of individuals; accord- ingly, associations or partnerships of more than twenty persons are prohibited.^ English law still retains the classification introduced in 1862, vis. companies limited by shares, which are the ordi- nary business companies known to the laws of the American states ; companies limited by guaranty, in which the liability of the members is limited in the articles to such amount as the members may undertake to contribute to the assets of the company in the event of its being wound up; and un- limited companies. In a company of the first or second type, the memorandum of association must state the name of the company with " Limited " as the last word of its name. Corporate Title. — The requirement of some designation to show the limited character of the company is doubtless intended as a protection to prospective creditors. The atti- tude of legislatures in America would, however, seem to indicate a difference of opinion as to the importance of this feature, many states permitting the use of a corporate title similar to that of an individual or partnership.^ On the other hand, many other states require that the name 1 Companies (Consolidation) Act, igo8, sec. i, (2). 2 Ark. Dig. of Stats., 1904, sec. 855; Cal. Code, 1907, sec. 290; Ga. Code, 1910, sec. 2822 ; 111. Gen. Corp. L., sec. 2 ; Ind. Burns Stats., 1908, sees. 4286, S062; Me. R. S., c. 47, sec. 7 (1907) ; Mich. Corp. Act, 1903, sec. 2, par. i ; N. J. Corp. Act, as amended to 1910, sec. 45 ; N. Y. Gen. Corp. Law, as amended to 191 1, sec. 6; Penn. Corp. Act, 1874, sec. 3. I02 THE LAW OF CORPORATIONS [364 shall indicate that the association has been incorporated, either by commencing with the word " The " and ending with the word " Company " or " Corporation," or by plac- ing the word " Incorporated " or " Limited " immediately after the name, or by some other form of designation.^ The Commissioners of Uniform State Laws, in their draft bill for a uniform law of incorporation,^ propose that the name shall " be such as to indicate that it is a corporation, as dis- tinguished from a natural person or partnership." A busi- ness might thus be continued under an old individual or partnership title by simply adding the letters " Inc.," to the old title. This would permit the good-will to be preserved and seems sufificient for all purposes.* The manner in which the memorandum or certificate of incorporation shall be executed is a matter of form, rather than of substance, and does not affect the interests of stock- holders or creditors. The content of the certificate, how- ever, is of great importance, for it is in legislating upon what the certificate shall contain that the statutes usually regulate the amount of the capital stock and the proportion which must be subscribed for prior to filing the certificate. The English Act simply requires that the memorandum 1 Ala. Code, 1907, sec. 3447; Conn. Pub. Acts, 1907, c. 155; Ky. Stats., 1909, sec. 2161 (it need not be a part of the name but must ap- pear on all signs and on printed and advertising matter, under penalty of fine) ; Mass. Bus. Corp. ,L., sec. 5; Md. Rev. Corp. Act, 1908; Minn. ■R. L., 190S ; sec. 2849 ; R. I. Gen. Laws, 1909, c. 212, sec. 9 ; Wis. San- born's Stats., sec. 1772, as amended by L. 1911, c. 341. ' Second Tentative Draft of an Act to Make Uniform the Law of Incorporation of Business Corporations, July, 191 1, p. 14. * The bill introduced ( 1910) , under the auspices of the national ad- ministration, for federal incorporation of interstate or international business, provides that the words "national incorporation" shall be the last words of the name. The name itself must be approved by the Commissioner of Corporations. Senate Bill, no. 6186, 6ist Cong., 2nd session, sec. 2. 365] LEGISLATION AND REFORM 103 shall state the name of the company, the part of the United Kingdom in which the office is to be situated, the objects of the company, the limited liability of the members, the amount of share capital and the number of shares which each subscriber takes. ^ Capitalization. — Legislation in the United States gener- ally requires a minimum amount of capital with which a corporation may commence business, but it is interest- ing to note that a few states also fix a maximum limit of capitalization.^ The provision seems to have found favor with the Com- missioners of Uniform State Laws, for in their draft a minimum and maximum limit are provided for, although the amounts are not stated.* We have seen that no limita- tion of such a character exists in any Continental European statute, nor does it exist in England. The amount of the capitalization has no direct bearing on protection to stock- holder or creditor, and the considerations in its favor would seem to be of a political rather than legal character. No limitation of the par value of the shares is contained in the English statute, and the same is true in most of our states. A number, however, have placed a minimum limit on the par value of shares to be issued.* The Com- 1 Companies Act, 1508, sec. 3. 2 Mich. $25,000,000; Corp. Act, 1903, sec. 2, par. i. N. H. $5,000,000; L. of 1907, c. 129. Pa. $1,000,000 except manufacturing or mining corporations which may be incorporated with a capital not exceeding $5,000,000 and thereafter increased to any amount; Corp. Act, 1874, sec. 39; L. 1889, p. 180; L. 190S, p. 280, sec. i. Vt. $10,000,000 unless a judge of the Supreme Court shall determine that there is no monopoly or restraint of trade; Pub. Stats., 1906, sec. 431 1, amended L. 1910, no. 143, sec. 4. » Second Tentative Draft, p. 14. 4 Conn. $25 ; Pub. Acts, 1903, c. 194, sec. 63. Mich. $10 ; Corp. Act, 1903, sec. 2, par. 5. Mass. $5; Bus. Corp. L., 1903, sec. 8. N. Y. $5; Bus. Corp. Law, 1910, sec. 2. I04 THE LAW OF CORPORATIONS [366 missioners of Uniform State Law have proposed that the par value shall not be less than $10 nor more than $100/ A provision for a higher minimum might well be protective of small investors inclined to make investments of reckless character merely because the denomination of the shares accords with the limited amount of funds at their disposal. The German statute has adopted a high denomination ($50 approximately) with the object of discouraging specula- tion in wildcat ventures and the exploitation of that part of the public least able to bear the loss. Publicity of Personnel. — It is, of course, of great im- portance at the tiine of organization that prospective cred- itors and stockholders be apprised by some public record of the fiduciaries who are to manage the corporation.^ Contrary to the system of most of the countries of Con- tinental Europe, as well as many of the American states, English law does not require that the memorandum shall state the names of the directors for the first year. It is true, a consent signed by the persons who are willing to be directors must be filed with the registrar on registering the memorandum; but these persons are not necessarily the directors actually elected for the first year.^ The " articles of association " in England, which embody the " regula- tions " (corresponding to the " by-laws " of corporations organized in the United States), usually contain some pro- vision with regard to the number and qualifications of di- rectors and a statement of the names of the directors for the first year. The adoption of articles for a company limited by shares is, however, merely optional.* The act '^ Second Tentative Draft, sec. 2, iv. ^ See Horack, The Organization' and Control of Industrial Cor- porations, p. 61. * Companies Act, igo8, sec. 72. *Ibid., sec. 10, subdiv. 2. 367] LEGISLATION AND REFORM 105 contains a schedule of standard forms of articles and in the event that no other articles are adopted and registered, or if the articles as registered do not exclude or modify the regulations in the schedule, it is declared that the latter shall be deemed the regulations of the company so far as applicable/ The schedule provides that the first directors shall be designated in writing by a majority of the sub- scribers to the memorandum of association.^ Every com- pany must keep at its registered office a register of the names, addresses and occupations of its directors and man- agers; it must send a copy to the registrar and notify him of any changes.^ In most of our states, the names and addresses of the first directors must be inserted in the certificate of incorpora- tion.* Although the matter, perhaps, lies outside the scope of the present chapter, it is of equal importance that the names and addresses of directors subsequently elected should also be subjected to publicity. The New York law approaches but does not accomplish this purpose. The oath of the inspectors of election, together with a cer- tificate of the result of the vote, must be immediately filed in the office of the clerk of the county in which the ^Companies Act, igo8, sec. 11. - Ibid., First Schedule, Table A, sec. 68. 3 Ibid., sec. 75. ^Cal. Code, sec. 290, amended 1907; Col. R. S., 1908, sec. 847; Ind. Burns Ann. Stats., 1908, sec. 5062; Minn. R. L., 1905, sec. 2849; N. Y. Bus. Corp. L., 1910, sec. 2, subdiv. 2; Wis. Sandborn's Stats., 191 1, sec. 177s b. Many states leave the number to be determined by the by-laws and the election takes place at the first meeting of shareholders. Conn. Pub. Acts, 1903, ch. 194, sec. 193 ; Ga. Code, 1910, sec. 2822 ; 111. Gen. Corp. L., sec. 2; N. J. Corp. Act, rev. to 1910, sec. 8; Ohio. Gen. Code, 1910, sec. 8625; see also Second Tentative Draft of Comms. of Uniform State Laws, p. 16, n. 7. Io6 THE LAW OF CORPORATIONS [368 meeting is held. But there is no penahy imposed, or other sanction created, for the enforcement of this pro- vision, and it therefore remains practically unobserved.^ The preferable system is to compel, under penalty, the filing of an annual report containing the names and ad- dresses of officers and directors for the ensuing year.^ We have seen that in Germany and in other Continental Euro- pean countries, any change in directorate or management, from whatever cause, must be promptly filed at the com- mercial registry. Subscription to and Payment of Capital Stock. — Prob- ably the most important feature of organization affecting creditors and stockholders relates to the subscription to and payment of the capital stock. Professor Burgess has said that " when the government confers upon a number of people, uniting themselves in corporate capacity, the privi- lege of limited liability, sound political science ascribes to the government the duty of seeing that the capital stock is all paid in and that it remains corporate property." ' The corporation should not operate until a sufficiently large amount of stock has been subscribed to insure a de- gree of economic strength bearing some relation to the amount of its authorized capital. Under English law, the organizers fix the minimum sub- scription upon which the directors may proceed to allot- ment ; and no allotment may be made until payment of the sum payable on application for the amount so fixed.* The ^ N. Y. Stock Corp. Law, rev. 191 1, sec. 31; White, On Corporations, 1909, pp. 270-271. 2 Ind. Burns Ann. Stats., igo8, sec. 4080; N. J. Corp. Act, rev. 1910, sec. 43. ' " Private Corporations from the Point of View of Political Science", in Pol. Sci. Quar. (1908), xiii, p. 205. * Companies Act, 1908, sec. 85. 369] LEGISLATION AND REFORM io7 amount payable on application must not be less than five per cent of the par value. The company may not begin any business, or exercise any borrowing powers, unless the shares allotted and subscribed for amount to not less than the minimum subscription; furthermore, every director must have paid on the shares subscribed for by him a proportion equal to that payable on the application and allotment of shares to the public. In most of the American states, on the other hand, corporations are permitted to begin business (and incur debts) although only an insignificant proportion of the capital stock has been subscribed. Thus New York re- quires no more than $500, payable in money or property.^ Delaware and New Jersey require $1,000, which must be subscribed, but not necessarily paid for." West Virginia requires ten per cent of the shares subscribed to be paid at the time of subscription, but does not require any fixed pro- portion of the capital stock to be subscribed, so that, appar- ently, a payment of ten per cent on one share will authorize the commencement of business.^ Georgia, Michigan and Pennsylvania require ten per cent of the authorized capital to be paid in.* Many of the states have no provision what- ever as to the amount of subscription or payment required before the corporation is authorized to do business. The result of this lack of statutory protection to creditors is that a corporation capitalized for a huge amount may begin operations with but a few shareholders, and but a paltry sum, or perhaps nothing at all, in its treasury. The dan- 1 Bus. Corp. L., sees. 2-3. 2 Del. G. Corp. L., sec. 5 ; N. J. Corp. Act, sec. 8. 3 Code, 1906, c. S3, sec. 25. .*Ga. Code, 1910, sec. 2822; Mich. Corp. Act, 1900, sec. 2, par. 6; Penn. Act of 1874, sec. 39, par. 3. Io8 THE LAW OF CORPORATIONS [370 ger which a corporation organized under such auspices may cause to the community, especially when in the hands of un- scrupulous promoters, cannot be overestimated. In order to prevent this evil, some of the states have pro- vided that a certain percentage of the capital stock shall be subscribed before the certificate is filed, twenty-five per cent in Alabama,^ fifty per cent in South Carolina ^ and Michigan.^ Wisconsin * requires that fifty per cent be sub- scribed for and twenty per cent paid in before the corpora- tion may begin business; Illinois,'' that the stock be fully subscribed. The Commissioners of Uniform State Laws, in their draft act, have provided that fifty per cent of the capital must be subscribed before the filing of the certificate; that the corporation shall not begin business or incur debts until twenty-five per cent of the authorized capital shall have been paid in; and that seventy-five per cent of the capital stock must be paid in within one year, or the corporation shall be ipso facto dissolved.^ The provision for dissolu- tion, like the similar provisions of the French law with re- gard to " nullification " of corporations,' is of doubtful value, as it paves the way for injury to innocent parties. A provision permitting dissolution, if the proportionate amount has not been paid in within one year, is found in the New York law. The power given to the attorney- '^ Code, 1907, sec. 3447. 2 Civ. Code, igo2, sec. 1884. * Corp. Act as amended by Act 146 of 1907, sec. 2. * L. 190S, p. 940. ^ Gen. Corp. L., sec. 4. ' Second Tentative Draft, sec. i, subdiv. 3, sec. 8. ' See supra, chap, iv, subdiv. I. 371 J LEGISLATION AND REFORM log general to bring the proceedings has, in practice, operated as a sufficient sanction for this provision.^ Overcapitalization.- — The overcapitalization of corpora- tions has ever been one of the chief sources of evil result- ing from the corporate form. All countries in which cor- porations have played a large part in commerce and finance have suffered at times from the effects of overcapitalized securities. It is obvious that the same danger to the sta- bility of the financial community as a whole may result from a prevalent condition of overcapitalization, as though all corporations were permitted to extend their credit obligations unreasonably beyond the amount of their net resources. The difference lies simply in the fact that in the one instance the crisis is apt to come sooner, be- cause the creditor may demand the sum due him within a limited period of time, whereas the stockholder liquidates his investment by transferring the evidence of it to an- other. Thus the day of reckoning is postponed, but the last purchaser suffers most of the loss. The danger to society through the collapse of the market values of se- curities in a period of great depression is too widely appre- ciated to require further mention. To prevent overcapitalization, many devices have been proposed. Among these is a general limitation upon the amount of capital stock which corporations may be author- ized to issue. We have seen that a number of states have enacted maximum limitations. It is plain, however, that the mere limitation of capitalization is not a corrective; a corporation capitalized at a moderate figure may be propor- tionately more inflated than one capitalized beyond the maximum. The bill for federal incorporation does not provide for any limitation upon the capital, nor is there any in England or in Continental European countries. 1 Business Corp. Law, sec. S- White, On Corporations, igog, pp. 367-369. no THE LAW OF CORPORATIONS [372 If, as was said after the Civil War, the best way to re- sume is to resume, the best way to prevent overcapitaliza- tion is to prohibit the issue of capital stock in excess of the actual market value of the resources supporting such capi- tal stock. The English Act does not directly attempt to prevent overcapitalization. It assumes to correct the evils of over- capitalization by insisting that the consideration in payment of the subscription, if not in money, shall be publicly re- vealed in a prospectus or statement equivalent to a pros- pectus. The prospectus, if issued, besides stating the facts relating to founders, directors, subscribers, division of the shares, minimum aggregate subscription, etc., must also give the names and addresses of the vendors of any prop- erty proposed to be acquired by the company, either out of the proceeds of the issue of the shares or in exchange for shares or debentures, specifying the amount, if any, pay- able for good will, also the amount paid for under- writing and to promoters, the estimated amount of pre- liminary expenses and the nature and extent of the interest of every director in the promotion of the com- pany or in the property proposed to be acquired.^ A company which does not issue a prospectus must file with the registrar in lieu of a prospectus a statement embody- ing practically the same information, signed by every di- rector or proposed director.^ A direct liability for com- pensation to all persons who subscribe for shares or deben- tures on the faith of a prospectus is imposed upon every director or promoter and every person who has authorized the issue of the prospectus.* This covers loss or damage 1 Companies Act, 1908, sees. 80, 81. ^ Ibid., sec. 62. ' According to English law and the laws of the American states, the 373] LEGISLATION AND REFORM m sustained by reason of any untrue statement therein, unless it be proved that there were reasonable grounds for believ- ing it to be true and that the defendant believed it to be true up to the time of the allotment of the shares or de- bentures. Though English law is thus much in advance of prevail- ing legislation in most of the American states, it still per- mits wide latitude in the organization of companies partly or wholly capitalized upon the value of property trans- ferred, insisting only that the disclosure of pertinent facts be full and truthful. In this respect, it fails to give stock- holders and creditors the degree of protection that is af- forded by Continental European law, particularly by that of Germany and Italy, where an independent body is charged with the duty of valuing the apports, and untrue statements are visited with criminal penalties. Certain of our states have indeed made an attempt to control overcapitalization by prohibitive clauses, more or less general, contained both in constitutions and statutes. The constitution of Delaware provides that " no corpora- tion shall issue stock, except for money paid, labor done, or personal property, or real estate or leases thereof actu- ally acquired by such corporation." ^ Notwithstanding this clause, the statute ^ makes the judgment of the directors decisive, in the absence of fraud, as to the value of such labor or property. A similar provision exists in New Jer- term " organizers " is not technical. In English law the term " pro- moters " is made use of more frequently than in the United States, where it has obtained a popular rather than definite signification. Lindley defines the class as : " those persons who bring the company into existence, i. e. by taking an active part in forming it or in procur- ing persons to join it as soon as it is technically formed." (i, p. 481.) ^ Art. ix, sec. 3. 2 Act of 1901, sec. 14. 112 THE LAW OF CORPORATIONS [374 sey.^ We also find expressions such as the following: prop- erty may be received in payment of stock " to the amount of the value thereof";^ "actual value";' "at its true money value " ; * cash, or " land at a fair cash value " ; ° " at a just valuation to be fixed by the corporators, or by the directors " ; '' " the valuation placed by the stockhold- ers " is, in the absence of fraud, " binding upon any and all creditors of the corporation." ' All of these devices, however well-intentioned, must prove abortive unless some administrative body exercises a power of control in execution of the statute. Usually a breach of the plain provisions of the statute will give rise only to an action at law brought on behalf of the creditors, acting vicariously through a receiver, against the original subscribers or ultimate holders of shares. The gravamen of such an action must necessarily be that the assessment or call has not been fully paid. It is frequently directed against innocent purchasers of the shares. The statutes furnish no protection to shareholders who have fully paid for their subscription in money. In some states, the beginning of an administrative con- trol over the transfer of property in payment of shares is discernible. Thus, in Iowa, the executive council of the state is created an official appraiser.' In Rhode Island, under certain circumstances, the tax appraisers of the town 1 Law of 1896, revised to 1911, sec. 49. 2 Penn. Act of 1874, sec. 17. ^ Conn. Pub. Acts, 1903, c. 194, sec. 12. * N. D. Code, 190S, sec. 4195. ^ Tenn. Code, 1903, sec. 2335. * Fla. Gen. Stats., sec. 2653. ^ Md. Rev. Corp. Act, 1908, sec. 36. 832 Gen. Acts, c. 71, sees. 1-3 ; 34 Gen. Acts, c. 76, sec. i. 375] LEGISLATION AND REFORM 113 wherein a manufacturing company is situated act as ap- praisers of property purchased for stock.' The variance in legislation is ascribable to a variance of legislative policy. During the period after the Civil War, great inducements were offered to encourage investments in constructive enterprises. It was deemed desirable to permit overcapitalization, in order that corporations might " grow up " to the valuation artificially placed upon their resources. This is probably still the legislative policy in England, with its many ambitious schemes of colonial expansion and ex- ploitation. It probably continues to be the policy of most of our states. But with the advance in the development of the country, capital has shown an increasing tendency to concentrate, and with greater abundance of capital the origi- nal motive for liberality in respect of capitalization has largely disappeared. The proposed bill for federal incorporation has dealt with the subject in a thoroughgoing manner. It provides that while the board of directors may issue stock for prop- erty purchased to the amount of the value as fixed by them, every certificate of stock so issued shall contain a statement 1 Gen. Laws, 1909, c. 214, sec. 8. The Commissioners of Uniform State Laws in their draft act propose the following solution : Second Tentative Draft, sec. 3 : " Where subscriptions to the capital stock of a corporation organized under this act shall consist in whole or in part of property, there must appear in the articles of incorporation a description thereof, together with a statement of its fair cash value, as appraised by the directors, supplemented by affidavits of at least three disinterested persons, that they are acquainted with the said property, that they have personally examined the same, or in such other manner as may be authorized by law, and that it is reasonably worth the amount in cash for which the incorporators have ac- cepted it; if made subsequent to incorporation, a similar description and appraisement must be filed in the office of the (secretary of state) and in the ofifice of the (county clerk) wherein the principal place of business is located within ten days after the subscription is approved. Stock so issued shall, in the absence of fraud, be full paid stock." 114 THE LAW OF CORPORATIONS [376 that it was issued for property purchased and the stock must be so reported in subsequent reports. It is fur- ther required that a statement, signed and sworn to by a majority of the board of directors, be filed with the bureau of corporations before such stock is issued, giving a full description of the number of shares to be issued, the names and addresses of the vendors and whether they are officers or directors of the company and owners of any of its shares of stock, the terms of agreement for the transfer of prop- erty (including the amount payable for good will), and, if the vendors are directors of the corporation or owners of any of its stock, a statement of the prices originally paid by them for the property.^ The plan seems to have been taken from the provision of the English statute relating to the prospectus. In addi- tion, an attempt has been made to secure an official valuation by the commissioner of corporations, whenever the shares of stock have a par value. An appraisement of the value of the property by two disinterested appraisers must be filed and approved in writing by the commissioner; he may ap- point one or more other appraisers to value the property at the expense of the corporation, and no stock may be issued in payment of property to an amount in excess of the value as approved by the commissioner after such appraisement.^ The approval of the commissioner of the value of property shall be conclusive as against the corporation and its stock- holders and creditors. This does not absolve the directors for damage caused by a false statement to subscribers, holders and purchasers of the stock issued ; and the burden is thrown upon the defendants to show that the shareholder or creditor had no knowledge of and did not rely upon the statement.' ''■ Senate Bill, no. 6186, 6ist Cong., 2nd session, sec. 17. "Ibid., sec. 17, f. ^ Ibid., sec. 17, g. 277] LEGISLATION AND REFORM ng The bill, therefore, unites the features of the English statute, so far as relates to disclosure of details in connec- tion with the purchase of property, with that of the Iowa statute in regard to an administrative valuation, and it adopts the German feature of a direct joint and several liability of the directors or supervisors to an injured stock- holder or creditor. One of the devices suggested in recent years to avoid overcapitalization is that of issuing stock in aliquot parts without a par value. It is assumed that when the par value disappears, the fictitious value thus given to the share will also disappear. The federal incorporation bill provides optionally throughout for shares of capital stock without par value. A recent amendment to New York laws is also designed to encourage the issuance of this type of shares.^ A general adoption in practice (which does not seem likely) would bring us back to the joint-stock type of the 1 6th, 17th and i8th centuries. Historical experience teaches that the aliquot shares attained values as fictitious as those often found at the present time, producing all of the evils attending overcapitalization. By depriving the divisional parts of a nominal value we do not cure the evil of the overcapitalization of the whole. Only the most ignorant will assume that the par value of a share of stock must necessarily be its real value. The par value is simply a convenient fraction into which the share capital has been divided. A decimal system of currency is more convenient than one based upon the actual value of various units of gold or other precious metal. If the same evils were per- mitted in respect of a capitalization without par value as exist at the present time, the creditor and stockholder would be no better off in respect of security. The incidents of an evil are often mistaken for its cause. What is re- quired is an effective control over organization and admin- istration; not a mere change in the association type. ^N. Y. Laws of 1912, ch. 351. CHAPTER VI Protection of Creditors and Shareholders in Con- tinental Europe. — Operation I. FRANCE Existing Lazv. — The Commercial Code in its original form contained only a few rules in respect of the manage- ment of corporations. It provided that corporations should be administered by mandataries serving for a limited per- iod. They might or might not be shareholders and were to serve with or without compensation, under a revocable mandate. They were made responsible for the execution of the mandate, but in contracting in the name of the cor- poration they were not to incur any liability.^ The Law of 1867 created three organs of corporate management, viz., the directors (administrateurs) , the general meeting of stockholders {assemblee generate), and the auditors (commissaires) . The first general meeting elects the directors and auditors for the first year, or for a period not exceeding six years, and both classes are eligible for re-election.^ The directors constitute a board of management but, as a rule, delegate the actual manage- ment of the business to a committee of one or more of their own number. If the corporate statutes specifically so per- ^Cotntn. C, arts. 31, 32. Art. 31 has been incorporated into art. 22 of the L. of 1867; art. 32 retains its position. ' L. of 1867, art. 25. 116 [378 379] CREDITORS AND SHAREHOLDERS ny mit, the management may be delegated to one or more not members of the board.^ All of the directors must be stockholders and must de- posit a certain number of shares, fixed by the articles of association, as a guaranty for their acts as managers.^ The directors may not be interested directly or indirectly in any undertaking or agreement made on behalf of the cor- poration, unless specially authorized by the general meet- ing. In the event that the general meeting authorizes a transaction in which any director is interested, a report must be made in regard to the transaction and agreements finally entered into.* For breach of the fiduciary obligations of a director, the law provides for either an individual or a joint and sev- eral liability, as the case may be, according to whether the act was performed with or without the concurrence of other directors.* As they are declared to be mandataries, it follows that the provisions of the Civil Code apply. They are therefore held responsible not only for fraud (dot), but also for errors (fautes) committed by them as such; except that mandataries serving without compensa- tion are subjected to a less rigorous test of responsibility than those who are compensated.^ ■■ L. of 1867, art. 22. Goirand says : " This measure has been con- sidered expedient in order that the society may benefit by the services of a person possessing the necessary special technical requirements, even though such person be not possessed of the number of shares required by law." French Commercial Law and Practice of the Courts, and ed., p. 81. ^ L. of 1867, art. 26. The original Code de commerce permitted the directors to be chosen dehors; cf. art. 31. ' Ibid., art. 40. * Ibid., art. 44. Court of Appeal, Paris, August ist, 1868. See also Lyon-Caen and Renault, Manuel de dr. comin., p. 208. 5 Civ. C, art. 1992. Il8 THE LAW OP CORPORATIONS [380 As the general meeting determines whether an action shall be instituted against a director, the protection ac- corded the shareholder, especially a minority shareholder, is much less effective than under the law of Ger- many.^ The shareholder has no right to institute the proceedings either in his own name, nor in the name of the corporation, until after ratification by the general meet- ing.' The law does not specifically make the directors re- sponsible to creditors for illegal acts, such as depleting the funds of the corporation through the payment of un- earned dividends, yet the courts find no difficulty in award- ing damages to creditors, or third parties generally, who have suffered special damage by reason of the illegal act of a director.* A salutary check upon the board of directors has been instituted by the Law of 1867, in its provision that no resolution of the general meeting approving the balance sheet and accounts shall be valid unless preceded by a re- port of the auditors.* The annual general meeting ap- points the auditors who are charged with the making of the report for the ensuing year. In default of their ap- pointment by the general meeting, any person interested may request that they be appointed, after due notice to the directors, by the president of the tribunal of commerce at the situs of the corporation.^ During the three months which precede the date fixed by the articles for convening the general meeting, the audi- 1 Infra, chap, vi, subdiv. 2. 2 Court of Appeal, Paris, April i6th, 1870; Dalloz, Recueil periodique, 1870, part 2, p. 121. 3 Court of Cassation, May 7th, 1872 ; Dalloz, ibid., 1872, part i, p. 233 * L. of 1867, art. 32. ^ Ibid. 381 J CREDITORS AND SHAREHOLDERS ng tors have free access to the books and records of the cor- poration. They may convene the general meeting at any time and are responsible to the shareholders for negligence in the performance of their duties.^ It is the duty of the directors to prepare an annual inventory and a profit-and- loss account, and to place it at the disposal of the auditors. They must create out of the net profits a reserve fund, equal annually to at least one-twentieth of the net profits; but this amortization ceases to be obligatory when the re- serve reaches one-twentieth of the capital stock. " In the event of loss of three-quarters of the share capital, the directors must convene the general meeting of share- holders, in order to determine whether the corporation shall be dissolved, in default of which any person inter- ested may demand the dissolution of the corporation in the courts.^ It has been held that if the insolvency of the corporation is due to the wrongful act of its directors, two classes of action are open to stockholders or creditors. The one must be instituted in a corporate capacity {action sociale) against the director, as a mandatary under the pro- vision of articles 1991 and 1992 of the Civil Code : the other is individual {action individnelle) by reason of the provi- sions of articles 1382 and 1383 of the Civil Code. These are framed in general terms and create a liability against all persons who have caused injury to another by their fault, negligence or imprudence.* Thus, for example, a person who had been induced to become a stockholder by publication of a false prospectus, or balance sheet, would have a right of action in his indi- vidual capacity, even though the defendant were not guilty 1 L. of 1867, art. 33. ' Ibid., arts. 34 and 36. ' Ibid., art. 37. * Court of Appeal, Rennes, August ist, 1900, Dalloz, ibid., 1901, part 2, p. 300. I20 THE LAW OF CORPORATIONS [382 of a breach of duty toward the corporation. On the other hand, the remedy of a shareholder or creditor for injury to his security by reason of a declaration of un- earned dividends would necessarily be by action brought in the name of the corporation, because arising out of the breach of the director's mandate.^ In order that the shareholder may not be put to inor- dinate expense in protecting his rights against the direc- tors or managing committee, a special exception has been made in the law of corporations to the French rule of procedure that actions must be brought by the real party in interest. Accordingly, stockholders who represent at least one-twentieth of the share capital may appoint a man- datary to represent the interests of all before the court.^ Comment. — The system of administration and control devised by the legislation of 1867 was doubtless far in ad- vance of any other Continental European system prior to that time. Even the German Commercial Code of the pres- ent day has retained many of its features. Experience teaches, however, that the French system of a single organ of management, vi::., the board of directors, is inferior to a bi-organic control, each organ acting independently, with separate powers and responsibilities. The board of directors of a business company may contain men of large experience, yet with small opportunity for ob- taining precise information in regard to the affairs of the corporation over which they have control. This is usu- ally left to one, or a few, who thus exercise practically the entire power of the board. It has been said that 1 Silbernagel, op. cit., p. 42s ; Lyon-Caen and Renault, Manuel de dr. comm., pp. 207-208. * L. of 1867, arts. 17, 39; Vavasseur, Traite des societes civiles et commerciales (1897-1904), ii, pp. 400, 403; Lyon-Caen and Renault, Traite du droit commercial, ii, p. 710. 383] CREDITORS AND SHAREHOLDERS 121 "the principal defect of corporations (under the French system) is that they are without control, either from with- in or without." ' It is true that the law provides control by the auditors; but this applies only to the period imme- diately preceding the annual meeting, and many errors may be committed in the interim periods. Furthermore, the audi- tors are designated by the same majority which appoints the directors themselves. Indeed, it would seem to be the practice in France to consider the auditor as a candidate for future election to the directorate; accordingly, he is not desirous of incurring the enmity of those who may be influential in obtaining his election.^ Unless the auditors are exceedingly well paid, which is not often the case, they have no incentive to enter into a careful examination of the detailed transactions of the corporation for the fiscal year, and, more often than not, they make a report based upon a conventional performance of their duties. A con- trol exercised in this manner is worse than no control at all, because it gives the stockholders and creditors a false impression of security. It was for this reason, doubtless, that the Corporations Congress of 1900 expressed a desire that the control by auditors be entirely eliminated.' In addition to these defects, there is much dissatisfac- tion with the attitude taken by the courts in actions against the directors for mismanagement. In the absence of pal- pable fraud, it is difficult to obtain redress in the courts. Thus, it has been said that the degree of severity which the courts exercise in repressing the evils of corporate man- agement depends largely upon whether the losses have been sufficiently great to draw the attention of the general public. 1 Revue des societes, 1894, p. 169. ' Nouel, op. cit., p. 148. ' Nouel, op. cit., p. ISO. 122 THE LAW OF CORPORATIONS [384 This applies even to transgressions coming within the defi- nitions of the Penal Code.^ 2. GERMANY Existing Law. — The many safeguards thrown round the interests of stockholders and creditors in the organization of corporations in Germany are reinforced by the control which the legislature has provided over the management. The distinctive right of the shareholder is, of course, that of receiving a share of the profits of the corporation when earned. The shareholder has a more immediate control over the declaration of dividends than in England or America, as dividends are declared by the general meeting of stockholders and not by the supervising council or the di- rectors.^ German law is rigorous in its protection of the capital of a corporation from unwarranted disbursements to shareholders out of funds other than net profits. The Code expressly provides that interest cannot be paid upon shares except during a period preceding the beginning of oper- ations; thereafter a distribution among shareholders can only be paid out of the net profits shown by the annual balance sheet.^ The sanction for this is found in making the shareholder himself responsible for the obligations of the company if he has accepted payments not permitted by the Code. Good faith, however, excludes such personal liability.* Of course, in addition to the liability of the shareholder himself, the members of the supervising council 1 Nouel, op. cit., pp. 154, 155. 2 German iComm. Code, sec. 260. The general meeting has also the exclusive right of accepting the annual balance sheet and discharging the directors and supervising council from liability for acts done in behalf of the corporation during the preceding period. Ibid. Cf. Staub, op. cit., p. 787. 3 Comm. C, sec. 215. * Ibid., sec. 217. 385] CREDITORS AND SHAREHOLDERS 12- and directorate are also responsible if they have proposed the unlawful disbursements of dividends. The nature of their liability will be discussed herafter. A further guaranty that the capital of the corporation shall be employed only for the legitimate operations of the company is found in the provision prohibiting corporations from purchasing their own shares in the regular course of business, or accepting them in pledge.^ The motive of the provision is stated to be two-fold: first, because it is re- pugnant to legal concepts that a corporation to be its own shareholder, and secondly, because the provision tends to prevent speculation in the shares of the corporation by its officers and managers, who might thus obtain unfair ad- vantages on the credit of the organization.^ It is to be noted that shares may not be purchased even out of the surplus. An exception is made where the purchase of shares is nec- essary to carry out plans of retirement or amortization. This, however, must have been stipulated in the articles of association. Unless a reduction of capital is contemplated, the purchase of shares for amortization must be made out of surplus profits only.^ Differing from the plan of corporate organization within the Anglo-American sphere, the management of the cor- poration is entrusted, not to a board of directors executing its mandates through officers, but to a managing directorate (Vorstand) consisting of one or more persons elected by the general meeting of stockholders (Generalversamm- lung), each being subject to recall at all times. The Code does not state whether the general meeting or the super- vising council shall exercise the power of recall, but it is doubtless within the power of the council where the articles '•Comm. C, sec. 226. ' Staub, op. cit; i, p. 679. 3 Comm. C, sec. 227. 124 ^^-^ -^^^^ ^^ CORPORATIONS [386 of association have transferred to it the power of appoint- ing the directors/ The important element is that the board of directors or managers constitutes the official representa- tive of the corporation both in and out of court and is a necessary organ thereof.^ Acts of the directorate, like those of the trustees of an express trust under English law, require the cooperation or consent of all 'the members. This is carefully ob- served in practice, especially for transactions evidenced in writing. Of course, the articles . of association (as the equivalent of the deed creating the trust) may provide otherwise; it is also permissible for the director- ate to designate one of their number to have the power to engage singly in certain transactions or classes of trans- actions. Furthermore, the articles may provide that a per- manent representative (Prokurist) of the corporation may act in conjunction with one of the members of the direc- torate.^ It is one of the objects of the commercial legislation of Germany, as indeed of that of many countries of the Conti- nent of Europe, to protect corporations, partnerships and individuals against unauthorized acts, by compelling the designation of all authorized agents by written instrument registered at the commercial registry. This device is es- pecially valuable for corporations, as it presents the oppor- tunity for a system of checks and counterchecks upon the acts of officers. It also protects the public, in that the au- thorized agents of any corporation may be easily ascer- tained. The signatures of the members of the directorate ' Staub, op. cit., p. 692. Ring, Das Reichsgesets befr. die Kom- manditgeselUchaften auf Aktien und die Aktiengesellschaften, note 10 to article 2270 ; Behrend, Lehrbuch des Handelrechts, sec. 124, note 20. 2 Comm. C, sec. 231 ; Staub, op. cit., p. 689. ^ Ibid., sec. 232. 387] CREDITORS AND SHAREHOLDERS 12S must be deposited at the court having charge of the regis- try.^ Indeed, the Code makes the interest of the public paramount; for, -while it permits the corporation to limit the operations of the directors, making them respon- sible to the corporation for any act ultra vires, third parties are not compelled to take notice of any limitation upon their powers. Thus, if the articles of incorporation limit their powers to certain classes of transactions, or permit them to act only under certain circumstances, or for a certain period of time, or at certain places, or subject to the consent of the general meeting, the supervising council or any other organ of the corporation, the limitation may be deemed in- effective as against third parties.^ The directors must devote all their time and skill to the business of the corporation. The corporation may either demand the benefits of any transaction outside the busi- ness or it may elect to claim damages.^ The directors may be compensated by a share of the annual profits, but all amortization and reserves must first be deducted.* The directors are also charged with the keeping of proper books of account.' If, in the preparation of any balance sheet, it appears that the corporation has lost half its capi- tal, the directors must immediately call a general meeting of stockholders; whenever the corporation becomes insol- vent, it is their duty to place it in bankruptcy." They must use the ordinary care of business men in the exercise of their office. U-pon a breach of their duties they are liable for damages as joint debtors. The Code 1 Comm. C, sec. 234. 2 Ibid., sec. 235. ^ Ibid., sec. 236. * Ibid., sec. 237. ^ Ibid., sec. 239. * Ibid., sec. 240. 126 THE LAW OF CORPORATIONS [^gg specifically mentions certain examples of violations of the general duties already referred to.^ The supervising council consists of three persons elected by the general meeting of the stockholders, unless the articles provide for a larger number.- It is not necessary that they be stockholders.^ It is customary on the Continent of Europe to compen- sate directors and supervisors by certain royalties {tan- tiemes) computed upon the net profits of the business. The German Code provides that no compensation shall be made to members of the supervising council until all amorti- zation and reserves have been provided for and, in addition thereto, an amount set aside for distribution to stockhold- ers equal to at least four per cent of the paid-in capital.* It is stated to be the specific duty of the supervising coun- cil to keep watch over the management of the business of the company in all its branches and to be informed of the course of its affairs. It may demand a report from the directorate at any time; it has access to its books and writings, and may examine the condition of the cash account, securities and merchandise. It is its duty to verify and report upon the annual accounts and balance sheets, to make proposals for declarations of dividends and to advise the general meeting on all these subjects. It must convene the general meeting of stockholders when necessary for the interests of the corporation. Its further duties are determined by the articles of association. Its members may not delegate their functions to others, nor are they permitted to act one for another by proxy.° ^ Comm. C, sec. 241. 2 /j,,',;,^ sec. 243. ' Staub, op. cit., p. y^y. * Comm. C, sec. 245. ^ Ibid., sec. 246. Staub explains that it is not objectionable for the board to assign certain duties to committees of their own number, but 389] CREDITORS AND SHAREHOLDERS 127 As the directorate constitutes a separate organ of the corporation under the German law, the legislature has de- vised a system of checks and balances between that body and the supervising council. In most systems, the managers represent only a committee of the board of directors. Under German law, the members of the managing direc- torate have independent powers, but also separate respon- sibility. The supervising council represents the company in dealing with the directors and may bring suit against them when so authorized by the general meeting. If the responsibility of members of the supervising council is affected, it may bring suit against the directors, even though the general meeting may be opposed to the proceeding.^ The separation of powers and responsibilities is carried out logically. The supervisors are prohibited from acting as directors, or as their permanent representatives; neither can they conduct the business of the company directly as its officers. A member of the supervising council may in- deed become a director for a limited period in the place of an incapacitated director, but during this period he is not permitted to act as a member of the council. It is the clear intention of the legislature to secure at all times a complete separation of the two organs, in order that the one may control and be a check upon the acts of the other.- The members of the supervising council are obliged to use the ordinary care of business men in the performance of their duties, and, in default thereof, they are responsible the responsibility for final action is ascribable to the council as a whole. Votes upon resolutions cannot be made by proxy. Op. cit., p. 748. This is contrary to the practice in some other European coun- tries, e. g. Switzerland, where proxies at board meetings are permissible and customary. See Schneider and Pick, Schweis. Obligationenrecht, pp. 498-501. I'Comm. C, sec. 247. ''Ibid., sec. 248; Staub, op. cit., p. 750. 128 THE LAW OF CORPORATIONS [390 to the corporation as joint debtors with the directors, for damages caused to the corporation.^ A most salutary protection is provided against the exer- cise of voting rights in opposition to the liabilities which a shareholder may have incurred toward the corporation, while acting as a member of one of its organs. A shareholder may not vote upon a resolution which dis- charges or relieves him from the performance of a duty ; nor can he vote as a proxy thereon. He is also pro- hibited from voting on a resolution relating to a trans- action or litigatian between the company and himself.^ The rule of publicity is applicable to all corporations. It is the duty of the directorate within three months from the close of each fiscal year to prepare a balance sheet and profit-and-loss account; also a report to the supervising council upon the financial condition and affairs of the com- pany. These are presented to the general meeting with the comments of the council. The general meeting passes upon the report and acts upon the proposals for distribution of the profits. It discharges {entlastet) the directors and supervisors in the event of the complete performance of their duties.* The Code provides in detail for the manner of preparing the annual balance sheet, imposing the duty upon the man- agers to take up the inventory at market values ; where no market values are obtainable, the valuation must be no greater than cost. The amount of capital stock, as well as all reserves and renewal funds, must be taken up as liabili- ties; and, at the close of the balance, the profit or loss re- sulting from the difference between the assets and liabilities must be separately stated.* In order to insure the permanency of dividends, the leg- 1 Comm. C, sec. 249. 2 /jjj/,^ sec. 252. ' Ibid., sec. 260. * Ibid., sec. 261. 391] CREDITORS AND SHAREHOLDERS 129 islature has made the creation of certain reserve funds ob- ligatory. The reserves must include: 1. at least one-twentieth of the annual profits until the reserve amounts to at least one-tenth of the share capital ; 2. a sum to cover the premium, if any, at vifhich the shares were issued in excess of their par value; 3. a sum to cover assessments, if any, paid by share- holders in return for preferred rights, provided such assess- ments have not been made for the purpose of extraordinary amortizations or to replace extraordinary losses/ A minority of stockholders representing not less than one-tenth of the capital stock has power to adjourn the gen- eral meeting for the purpose of obtaining further informa- tion upon the specific items of the annual balance, and may continue to exercise this power until the report is fully ex- plained.^ It is true, the majority may determine that suffi- cient explanation has been given, but it does so at the risk of having the court nullify all subsequent resolutions of the meeting, if the demand of the minority is found to have been justifiable.^ A majority at the general meeting may appoint auditors for the purpose of testing the accuracy of the balance sheet, or of investigating transactions relating to the organization or management of the corporation. The legislature has here again protected minority interests in according to sharehold- ers owning one-tenth of the capital stock the right to de- mand that auditors be appointed by the court, provided there be reasonable cause for believing that there has been unfairness, or gross violation of the law, or of the articles, in the preparation of the report.* The managers must 1 Comm. C, sec. 262. Subdivision 3 is for the purpose of assur- ing the application of the assessments to the objects for which they were levied. Staub, op. cit., p. 808. ^ Comm. C, sec. 264. 3 Staub, op. cit., i, p. 814. * Comm. C, sec. 266. I30 THE LAW OF CORPORATIONS [392 submit the books and writings of the company to the au- ditors and permit them to examine into the condition of the company and of its securities and merchandise. The auditors must, without delay, file the results of their exami- nation at the commercial registry/ As soon as the balance sheet and profit-and-loss account have been approved by the general meeting, they must be published in the official publications designated in the ar- ticles, and the entire report, with the comments of the super- vising council, must be deposited at the commercial registry. The penal provisions sanctioning the regulations of the Code relating to the management of the corporation are also specifically set out in the Commercial Code itself. Thus, members of the supervising council or directorate (or liquidators) who have wilfully acted contrary to the in- terests of the corporation are punishable by imprisonment not exceeding five years and by fine not exceeding twenty thousand marks, in addition to the loss of civil rights. In the event of extenuating circumstances, a fine alone may be imposed.^ In this connection it is interesting to note that the courts are not inclined to impair the salutary effect of the criminal provisions of the statute by mild or lenient interpretation. Contrary to the practice of the courts in France, the penal provisions have been rigorously applied. Thus, directors have been punished even for in- jury to the corporation resulting from their wilful omission of duty.* Misrepresentations made by members of the board of directors, supervising council (or liquidators) in their offi- cial capacity in respect of the financial condition of the cor- poration, more especially when made at the general meet- ing of stockholders, subject the offender to imprisonment 1 Comm. C, sec. 267. ^ Ibid., sec. 312. ' Decisions of the Imperial Court, Crim. Div., xi, p. 414. 393] CREDITORS AND SHAREHOLDERS 131 not exceeding one year and to a fine not exceeding twenty thousand marks. Extenuating circumstances may permit the court to limit the punishment to a fine.^ A penalty of imprisonment not exceeding three months and fine not ex- ceeding five thousand marks is imposed upon members of the supervising council and board of directors (or liqui- dators) if the corporation has been permitted to continue without a council for a period of three months, or if the number of supervisors has been permitted to fall below the legal requirements. The same penalty is imposed upon directors (or liquidators) for failing to place the corpora- tion in bankruptcy when it has become insolvent. These penalties apply, however, only to individual wrong- doing. It may well be that a member may have under- taken to act and been opposed by the other members ; ^ or may have obtained advice of counsel as to his duty in the premises and may have been informed that no action was necessary. In such cases defendants have been held blame- less.* The proper exercise of voting rights is safeguarded by a provision imposing imprisonment not exceeding one year and fine not exceeding ten thousand marks upon any person who knowingly falsifies or forges a certificate of deposit of shares or interim certificates for the purpose of voting thereon at a general meeting.* Furthermore, any share- holder who has agreed, in consideration of special ad- vantages, to cast his vote in a certain manner at a general meeting, or to abstain from voting, is punishable by a fine not exceeding three thousand marks, or imprisonment not exceeding one year; the same penalty is imposed upon 1 Comm. C, sec. 341. ^ Staub, op. cit., i, 942. s Decisions of the Imperial Court, Crim. Div., v, 161. ^ Comm. C, sec. 310. J 22 THE LAW OF CORPORATIONS [3^4 the person offering the bribe/ The section applies not only to shareholders, but also to their proxies. Any person who assumes to vote upon the shares of an- other without authorization, or who borrows the shares for a consideration for that purpose, is punishable by fine of from ten to thirty marks upon each share voted upon or borrowed, and the fine shall be not less than one thousand marks.^ The law regulating stock exchanges imposes a penalty of imprisonment and fine not exceeding fifteen thousand marks upon any person who knowingly and with fraudu- lent intent makes a false statement in a prospectus or pub- lic advertisement, for the purpose of obtaining subscrip- tions to corporate securities, or for the purpose of effecting a purchase or sale thereof.* Comment. — The social tendencies of modern legislation are observable even in the domain of purely private law. Nowhere is this more marked than in the body of laws promulgated in Germany at the end of the nineteenth cen- tury. The corporate form of business is manifestly re- garded by the legislator as a facile means of exploiting the less favored classes and, accordingly, a strict control is exercised over all administrators of industrial cor- porate wealth.- It is therefore the internal regime of the corporation which is made the object of regulation, rather than the functioning of the corporation as a legal entity. Legislative consciousness has not reached this development in the United States, where regulation continues to be qua the corporation rather than qua its administrators. The need for a change of legislative attitude is evidenced by the increasing number of small shareholders of moderate means holding corporate securities. ^Comm. C, sec. 317; cf. note to Staub, op. cit., p. 943. 2iComm. C, sec. 318. ^ Borsengesets, sec. 75. 395] CREDITORS AND SHAREHOLDERS 13, Ihering pointed out that the status of an administrator of group property is the most dangerous to society of any known to the law. Immediate contact with the property of others gives him both the desire and the opportunity of appropriating it to his own use. No thief can steal so easily as an administrator ; nor can any swindler so readily arrange and accomplish a fraud. Ihering concludes by demanding the greatest number of guaranties where the danger is most imminent.^ The tripartite organization of the German corporation is especially designed to prevent the breach of the fidu- ciary relationship of its administrators. The three organs are respectively those of general administration, operative management and financial control. While each acts as a check upon the other, the court exercises a supervision over all. Nor is its control merely negative. German courts do not hesitate to issue affirmative mandates in the interest of sound business.^ The German Code is complete in respect of the sanctions which it establishes to secure the performance of the duties of the corporate functionaries. In all aggravated cases, criminal penalties are provided. In any event, creditors and shareholders have a direct interest in being watchful and diligent, because their rights of action are individual as to themselves and direct as to the functionary. This theory of direct remedy continues until the period of bankruptcy, when it is assumed that the official liquidator will protect the interest of all.^ ' Der Zweck im Recht, i, 226. 2 See e. g. 64 Decisions of the Imperial Court, Civil Cases (1907), p. 258, interpreting sec. 271 of the Commercial Code so as to effectuate the right of shareholders to compel the administrators to make the proper reserves and amortizations. The court's action did not limit itself to nullifjring an irregular act but directed the proper one. *74 Decisions of Imperial Court, Civil Cases (1911). P- 428. 134 THE LAW OF CORPORATIONS [396 German legislation thus surrounds the operation of cor- porations with the most effective guaranties for the protec- tion of investor and creditor. Its critics, especially in for- eign countries, accentuate its complexities and severities, but few question its adequacy.^ i 3. ITALY Existing Law. — The management of corporations in Italy is entrusted to a board of directors who may, if they so choose, delegate executive functions to one or more of their own number acting as a managerial com- mittee.^ The Commercial Code provides also for a separate organ of supervision, as in Germany.' It provides, there- fore, a much more effective control over the acts of the directors than the French Code. The directors serve for a period designated by the articles, not exceeding four years. If the articles fail to mention a period, the directors serve for two years.* If all the directors are elected at the same time, the term of one-half of their number must not exceed one-half the period desig- nated by the articles. The directors must qualify by de- positing shares of the company as security, amounting in the aggregate to at least two per cent of the capital stock.' Italian law is explicit in defining the direct responsibility of directors to shareholders and creditors (" terzi," lit. third parties). Directors are subjected to a joint liability ' Marinesco, op. cit., p. 341. 2 By the Italian law, the power of engaging and discharging employees {impiegati) is specifically entrusted to the board of directors unless the corporate statutes reserve it to the general meeting of share- holders. Comm. C, art. 143. 3 Syndics ; cf. infra, pp. 137 et seq. * Comm. C, art. 124. " Ibid., art. 123. The articles may provide for the deposit of a definite sum not to exceed 50,000 lire. 397] CREDITORS AND SHAREHOLDERS 135 for a violation of their duties in connection with the fol- lowing SLibjects : ^ 1. in respect of the actual payment of the share capital; 2. in respect of the payment of dividends from earnings only; 3. in respect of the keeping of books of account as pre- scribed by law; 4. in respect of the faithful execution of the resolutions of the general meeting; 5. in respect, generally, of the exact observance of the duties imposed upon them by law, by the articles and by the corporate statutes, unless such duties result from a limited and individual mandate. Wherever the duty of the director is individual, the joint liability of the other members ceases, notwithstanding the fact that the individual duty is subject to the control of the board/ So, too, even where the duty is joint, an individual director may avoid responsibility by refusing to unite with his co-directors and disavowing their acts.^ Directors are prohibited from acting as proxies for stock- holders ; * from voting upon resolutions in which they have a personal interest ; ^ and from voting upon resolutions re- lating to acceptance of the annual balance sheet or affecting their responsibility as directors.^ They, as well as the syndics ' and other representatives of the corporation are relieved of their functions, as a matter of law, when they 1 Coram. C, art. 147. ' Ibid., art. 148 ; similar in this respect to the French L. of 1867, art. 44. ^ Ibid., art. 149 ; similar in this respect to the German law. Cf. Staub, Kommentar, i, p. 730, n. 7. •• Comm. C, art. 160. '° Ibid., art. ISO. ^Ibid., art. 161. ' The functions of these officers are described infra. 136 THE LAW OF CORPORATIONS [398 lose capacity to act, or have been sentenced for a criminal offense, or for a correctional offense involving fraud, em- bezzlement, or swindling (truffa).^ The general meeting determines whether action shall be brought by the corporation against the directors. The action itself is then prosecuted by the syndics. The indi- vidual stockholder, however, may complain to the syndics of an act of the directors deemed by him to be irregular. The syndics must make mention of the complaint in their annual report, and if the complaint is made by shareholders holding at least one-tenth of the capital stock, the syndics must report conclusions and proposals in respect of the same. If the syndics deem the complaint well founded and action urgent, a general meeting must be immediately con- vened.^ Besides the protection afforded to the stockholders by complaint to the syndics, a direct appeal to the commercial court may be made by stockholders holding one-eighth of the capital stock against grave irregularities in the per- formance of the duties of the directors. The court may order an examination of the books by experts, and if the complaint be substantiated, the court may take such emer- gency steps at may be called for, and immediately convene a general meeting of stockholders.® Italian law is noteworthy in the protection which it ac- ^ Comm. C, art. 151. ' Ibid., art. 152. A vote of the general meeting in violation of some provision of the corporate statutes, even though by an overwhelming majority, 'may be nulhfied at the suit of a single stockholder before the courts. Court of Appeal, Turin, Sept. 5, 1887; Annali di giuris- prudenza, xxi, pt. ii, p. 423. ' Ibid., art. 153. The credit of the corporation is conserved by a provision that if the complaint be not sustained, that fact shall be pub- lished in the official journal. The complainants must furnish security for the costs of the proceeding. Ibid. 399] CREDITORS AND SHAREHOLDERS 137 cords to minority interests. A three-quarters quorum, with an affirmative vote of a majority of all the outstanding stock, is required in the following instances : 1. Dissolution prior to expiration of the term. 2. Extension of duration. 3. Merger. 4. Decrease of capital stock. 5. Reclassification or increase of capital stock. 6. Change in the objects of the corporation. 7. Any other amendment of the articles.'- Minority stockholders opposing a resolution which ex- tends the duration of the corporation, or authorizes a fusion, or reclassifies or increases the capital stock, or changes the objects of the enterprise are entitled to retire (recedere) by redeeming their shares on the basis of their value as shown by the balance sheet last accepted.^ The share certificates of Italian corporations, whether bearer or registered, are required to state (besides the usual data, namely, title and capitalization) the date of the ar- ticles and of the publication thereof, the place where pub- lished and the duration of the corporation.^ The shares must remain registered until fully paid up.* A salutary check upon the overissue of funded securities is found in the provision that no corporation may issue bonds for an amount exceeding the unimpaired paid-up capital stock unless the excess is guaranteed by a deposit of national, provincial, or communal bonds. The so-called " syndics " (sindaci) provided for by the Code ° occupy a position of much greater importance than 1 Comm. C, art. 158. ' Ibid. » Ibid., art. 165. * Ibid., art. 166. ' Ibid., art. 183. Their number is three or five, [with two substitutes] appointed at the constitutive meeting and at each regular meeting 138 THE LAW OF CORPORATIONS [400 the auditors or revisers of the other Continental systems. Their duties are as follows : ^ 1. To determine the form of the balance sheet and the con- dition of the capital stock ; 2. to examine the books of account at least once a week and to be informed of the operations of the company and the validity of its written documents ; 3. to verify the cash at unexpected moments {improvisto) at least quarterly; 4. to control the possession of securities held as pledge, guaranty, or in the treasury ; 5. to insure compHance with the conditions mentioned in the articles and corporate statutes for participation of stock- holders in the general meetings ; 6. to examine and test the correctness of the balance sheet and make report thereon to the general meeting; 7. to superintend liquidation ; 8. to convene the general meeting where the directors fail to do so; 9. to participate in all general meetings; 10. generally to observe that the directors comply exactly with the provisions of law, of the articles and of the corporate statutes. They have the right to demand that report be given them monthly of the operations of the company; they may be present at all directors' meetings and may suggest the sub- jects which shall constitute the order of business. It is to the syndics that the annual report of the directors is presented, one month before the annual meeting.^ The syndics base their proposals upon the report, which, together thereafter. They need not be stockholders but must not be related by blood or marriage within the fourth degree to any of the directors. Their functions are very similar to those of the German Aufsichtsrath. 1 Comm. C, art. 184. ^ Ibid., art. 176. 40l] CREDITORS AND SHAREHOLDERS 139 with the balance sheet and the minutes of the meeting, must be filed within ten days after the meeting with the clerk of the commercial court. Publication of the balance sheet is compulsory/ In Italy, as in other Continental European countries, a reserve fund must be created. Five per cent must be cred- ited to the reserve annually before dividends can be de- clared, until the fund amounts to one-fifth of the capital stock.^ Like the German Code, the Italian Commercial Code includes among its provisions the criminal penalties appli- cable to violations of the mandatory rules of corporate management.^ 4. SPAIN Existing Law. — The management of the operations of corporations is entrusted by Spanish law to the directors (administradores) , whose tenure and manner of election by the shareholders (exclusive of the members of the board) is determined by the articles and the corporate sta- tutes and regulations.* The phraseology employed by the Code indicates that the practice prevailing elsewhere of 1 Comm. C, arts. 180, 94, 95. ' Ibid., art. 182. Of course no dividends can be declared except out of earnings. Ibid., art. 181. ' Any organizer, director, syndic or liquidator who makes a wilfully false statement to the general meeting in respect of the condition of the company's affairs, or who is responsible for distribution of unearned dividends, or for issuing stock below par, or for pur- chasing shares of the company except as permitted by law, or for issuing obligations exceeding in the aggregate the capital stock, or for reducing the capital stock or consolidating otherwise than per- mitted by law, is punishable by a fine not exceeding 5,000 lire, in addi- tion to such other and more severe penalties as the Penal Code may prescribe under its general definitions. Art. 247. * Codigo de comercio, art. 155. 140 THE LAW OP CORPORATIONS [402 appointing a managerial committee prevails also in Spain, but there is nothing to show that the managers {los ger- entes) ^ have any powers or duties other than those con- ferred on them by delegation from the board. Corporations must publish monthly in the Gaceta, or offi- cial newspaper, a detailed balance sheet of operations, with an inventory stating the value of all property and effects capable of being estimated.^ Shareholders may verify the accounts and have access to the vouchers proving the same.* This right is greatly limited, however, by the provision of the Code restricting its exercise to such times as may be prescribed by the cor- porate statutes and regulations.* In order that the general meeting may validly vote an increase or decrease in the capital stock, at least two-thirds of the entire number of stockholders must be present, representing two-thirds of the par value of the outstanding stock. If the capital of the company remaining unimpaired exceeds seventy-five per cent of the debts and obligations of the company, at the time a resolution is passed in favor of such increase or decrease, it may be immediately ef- fectuated, provided all creditors holding claims at the time assent or are paid.° 5. SWITZERLAND Existing Law. — Swiss law provides three independent organs through which the operation of corporations are conducted. Instead, however, of a board of management controlled by an independent council of supervision, as in Germany and Italy, it provides a board of directors whose 1 Comm. C, art. 173. ' Ibid., art. 157- ° Ibid., art. 173. • Ibid., art. 158. ' Ibid., art. 168. 403] CREDITORS AND SHAREHOLDERS x^ i duty it is to manage the company either directly, or through a committee of their own number, subject only to an annual audit by a board of control (Controlstelle) or auditors who report to the general meeting upon the acts of the board of directors. Accordingly the organs recognized by law are the general meeting, a managing board or board of di- rectors and a board of auditors/ The general meeting must be called either by the board of directors or, if necessary, by the auditors, within six months after the close of the fiscal year. It has ex- clusive power to pass upon the balance sheet submitted by the directors, and to declare dividends ; its resolutions must, however, be preceded by a report of the auditors.^ Shareholders holding one-tenth of the capital stock may, by request in writing, compel the convening of special meet- ings of stockholders.^ It is quite customary in Switzerland to elect the directors for a longer period than one year; they may indeed be elected for a period not exceeding six years and are then re-eligible thereafter.* The representation of the corporation is exclusively in their hands. They may, however, delegate their authority to a managing committee (Direktion) or to individual representatives (Prokuristen). Such a delegation of au- thority must be evidenced by documents registered at the commercial registry, in the absence of which all the direc- tors must assent or subscribe to acts done in the name of the corporation. ° Switzerland contains a large number of industrial es- 1 Code of Oblig., arts. 642-663. ' Ibid., art. 644. ' Ibid., art. 645. * Ibid., art. 649. ^ Ibid., arts. 651, 653; Schneider and Kick, op. cit., p. 500. 142 THE LAW OF CORPORATIONS [404 tablishments of great importance ; indeed, the operations of its financial institutions extend throughout the world. Owing to its limited natural resources, the energies of its people have been directed to mercantile enterprises both within and without the national territory, most of which, however, are controlled by domestic corporations. It is not surprising, therefore, that its corporation laws should contain detailed provisions gained from practical experi- ence, tending to secure a conservative system of man- agement and accounting beneficial to stockholder and creditor alike. Its compulsory system relating to annual accounts is worthy of special mention. The annual balance sheet must be prepared so as to give the shareholder " a true insight into the actual financial condition of the corporation " : ^ (i) Costs of organization and administration must be charged as expenses. ^ Such organization expenses as have been provided for in the corporate statutes or resolutions of the general meeting may be divided into equal parts and writ- ten off over a period not exceeding five years. (2) Lands, buildings and machinery must not be valued above cost, less the proper amortization according to circum- stances. The amount of insurance carried must be stated. (3) Securities having a market value must not be valued above the average market price for the month prior to the date at which the balance is taken. (4) Merchandise must not be valued above the cost price, nor, if this be higher than the market value, above the market price. (5) The aggregate of doubtful accounts and the aggregate of amortizations must be stated. 1 Code of Oblig., art. 656. ' This provision contrasts favorably with the practice so often met with in the United States of carrying the organization expenses as an asset, at least over a considerable period of years. 405] CREDITORS AND SHAREHOLDERS 143 (6) The amount of the capital stock as well as reserves and renewal funds must be taken up as liabilities. (7) Bonds issued by the company must be stated at the full amount necessary for their payment. However, the difference between the issue price and the amount to be repaid, which must be liquidated by annual amortizations to the date of maturity, may be taken up as assets.^ The provisions governing the civil responsibility of di- rectors and auditors are so similar to those of the German Commercial Code as not to require detailed consideration. It is interesting to note, however, that the criminal sanc- tions could not be made part of the Code of Obligations because, penal law not being within the scope of federal legislation, they would have been unconstitutional.^ Ac- cordingly, criminal penalties, if any, must be sought for in the laws of the separate cantons. 1 Code of Oblig., art. 656. 2 Schneider and Fick, op. cit., p. 519, n. 2. CHAPTER VII Legislation and Reform in England and America. — Operation Publicity. — The English law, unlike that of Continental European countries, contains no special provisions with respect to the preparation of an annual balance sheet. There is, however, a " statutory report " which must be forwarded to all shareholders seven days before the iirst general meeting. This must contain a detailed state- ment of the receipts and disbursements on account of capital.^ The first meeting must be held not less than one nor more than three months from the time at which the company is entitled to begin business. Al- though a general meeting of every company must be held at least once every calendar year,^ the act does not provide for a compulsory financial report. Peculiarly enough, however, the appointment of an auditor or auditors at each annual meeting is compulsory. x\s on the Continent of Europe, the auditors constitute a true board of control, directors and officers being ineligible.' Every auditor has the right of access to the books, accounts and vouchers of the company and is entitled to such information as the di- rectors and officers may be able to give in connection with the audit. It seems to be assumed that a balance sheet will be laid before every company at general meetings, for it is provided that the auditors shall make a report to the share- holders, not only on accounts examined by them, but also on the balance sheet, stating : 1 Companies Act, 1908, sec. 65. ^ Ibid., sec. 64. ^ Ibid., sec. 112. 144 [406 407] LEGISLATION AND REFORM 145 (a) Whether or not the auditors have obtained all the re- quired information; (b) Whether in their opinion the balance sheet exhibits a true and correct view of the condition of the company's af- fairs as shown by the books. The act therefore accomplishes indirectly what the Ger- man statute makes compulsory/ It is provided under pen- alty of a heavy fine that whenever a balance sheet is issued, circulated or published, it must be accompanied by a copy of the auditors' report. This is analogous to the indirect control which the act provides over the issue of shares for property by its regulations in respect of the prospectus. The legislation of the American states is far less pro- tective of the interests of creditors and stockholders than either that of England or that of other European states in the matter of making and publishing reports. Most of the legislation referring to the publicity of the affairs of industrial corporations relates to reports made obligatory for the purposes of taxation. These vary greatly, accord- ing to whether legislation demands detailed statements of assets and liabilities, or a general statement of assets and liabilities, or a general statement of the amount of capital paid in and the proportion invested within or without the state.^ These reports are disclosed neither to the general public nor to parties interested. Under ordinary condi- tions, access can be had only by mandamus proceedings.' But even were they entirely open to inspection, reports made for the purpose of taxation are apt to be manipu- lated, if not directly falsified, and would be of little service to creditor or stockholder in judging the operations of the ' See Buckley, Company and Limited Partnership Acts, (1900). P- '^7- ' Horack, op. cit., p. 88. ' Ibid., p. 87. 146 THE LAW OF CORPORATIONS [408 company and the conservation of its assets. During the past two decades, a strong popular movement has been tending toward publicity in favor of persons entitled to the information in addition to reports made to the state. The Report of the Industrial Commission appointed by Con- gress in 1898 recommends: The affairs of a corporation or industrial company should be carried on without detriment to the public, in the interest of its members and under their lawful control, and to this end the directors or trustees should be required: (a) To report to the members thereof its financial condition in reasonable detail, verified by a competent auditor, at least once a year; (b) To inform members regarding the methods and conduct of business by granting, under proper restriction, access to records of directors' meetings, or otherwise; (c) To provide for the use of members, before the annual meeting, lists of members with their address and their several holdings ; and (d) To provide, in whatever other way may be named in the certificate of incorporation, means whereby the members may prevent the misuse of their property by directors or trustees.^ An approach toward compulsory publicity in favor cf the stockholder is already discernible in some states. A gen- eral provision is sometimes found requiring a true state- ment of the accounts of the corporation to be rendered annually to the stockholders/ But these provisions are 1 Report of Industrial Commission, vol. xix, p. 649, being House Doc. no. 380, S7th Congress, ist Session. 2 Wis. Sanborn's Stats., sec. 1750 ; Mich. Corp. Act 1903, sec. 15 ; Mo. R. S. 1909, sec. 3349. The law of Ohio requires that a full statement of the condition of the company's affairs together with a list of stock- holders be mailed to each stockholder at least ten days before the election. Gen. Code, 1910, sec. 409] LEGISLATION AND REFORM j^y either directory only, or else a penalty of moderate amount is provided to be recovered at the suit of a stockholder for non-compliance. The Draft Act of the Commissioners of Uniform State Laws provides that annual reports be filed in the office of the secretary of state, giving the amount of assets and debts; a fine shall be imposed if the report is not made and filed within ten days after written request by any creditor or stockholder/ -The draft fails to distinguish between reports made for state and those for private purposes; it confounds the usual tax report with such a financial state- ment as interested parties should be entitled to. The publicity provided for by the proposed bill for fed- eral incorporation is of a wider character than any gen- eral provision found in the state statutes. An annual report is to be filed with the commissioner of corporations, setting forth such details as the commissioner himself " shall from time to time prescribe," the report to be signed by at least three directors. The commissioner is given the power to call for special reports whenever in his judgment the same are necessary for a full and complete knowledge of the con- dition of a corporation.^ Nowhere does it appear, how- ever, that such information, when given, or on file, is in- tended for the benefit of and accessible to creditors or stockholders. This should not be left open to conjecture. As a whole, publicity should be compulsory at or shortly before the annual meeting. Moreover, legislation should adjust itself to the actual processes of business. For ex- 1 Second Tentative Draft, p. 26, sec. 25. The provision is similar to that of the New York statute, except that the latter permits the debts to be stated by maximum and the assets by mininium figures and suit to recover the penalty prescribed must be brought by the people of the state. Stock Corp. L., rev. 1910, sec. 34. 2 Senate Bill no. 6186, 6ist Cong. 2nd 'Session, sec. 18. 148 THE LAW OP CORPORATIONS [410 ample, we have seen that Switzerland and Germany, by regulating the form and scope of the balance sheet in ac- cordance with the principles of skilled accountancy, have caused the statement to conform to an uniform system com- prehensible to all/ The rules of the principal stock ex- changes in the United States have helped to bring infor- mation to interested parties which they would never have received under the present condition of the law; but as there are only a comparatively small number of corpora- tions whose securities are listed, general relief must be sought in legislation. Protection of Minority Shareholders. — Professor Bur- gess has said : " When the government confers upon a number of persons, forming a corporate body, the power to do business by the will of a quorum and majority of them, sound political science requires the government to insure that the majority shall not so abuse this power as to deprive the individuals who happen to constitute the minority of any of their civil or political rights, as guar- anteed to them by the constitution and laws of the coun- try." = The rule of the majority is usually considered essential to the existence of democratic institutions.^ But this should not mean that the minority is to be placed at the absolute mercy of the majority. In order to prevent this in the man- agement of corporations, means analogous to those em- ployed in political elections have been adopted for giving the minority proportional representation in the board of di- rectors. 1 See supra, chap, vi, subdivs. 2 and 5. ' Op. cit. Political Science Quarterly, 1908, xiii, p. 205. ' Savigny intimates that the right of the majority to determine the will of the corporation is a result of natural law. System des heutigen romischen Rechts, bk. ii, ch. ii, sec. 97. 411 ] LEGISLATION AND REFORM i^q The English statute does not provide for proportional representation, although nothing would seem to prevent the regulations from granting to the stockholders the right of cumulative voting. This may well be accom- plished also by the by-laws under the laws of the states; but some states have gone further and have provided for a compulsory proportional representation. Thus, in Illinois, Kansas, Missouri, Michigan, Nebraska, Ohio, South Caro- lina and some other states, in all elections of directors or managers of corporations, every stockholder shall have the right to vote in person or by proxy for the number of shares owned by him for as many persons as there are directors or managers to be elected, or to cumulate his vote by giving one candidate as many votes as the number of di- rectors or managers multiplied by the number of his shares of stock shall equal, or to distribute his vote on the same principle among as many candidates as he shall think fit.^ This device has not been accepted by the Commissioners of Uniform State Laws. Neither is it to be found in the bill for federal incorporation. Its use in practise, however, would constitute a salutary check upon the arbitrary or selfish acts of directors, since it at least permits the minority to be apprised of matters concerning which they would otherwise be left in total ignorance. Holding Companies. — Undesirable as it is for the ma- jority to manage the company to the detriment of the in- terests of the minority, it is equally undesirable that cor- porations, through the device of a holding company, should 1111. Gen. Corp. L., sec. 3; Kans. Gen. Stats., 1909, sec. 1746; Mo. Const, art. xii, sec. 6; Mich. Pub. Acts as amended 1907, no. 141 and 191 1 no. 268; Neb. Const, art. xiii, sec. S; Ohio, Gen. Code, sec. 8636; S. C. Civ. Code, 1902, sec. 1846. Optional in Minn. R. L. 1905, sec. 2862; N. Dak. Const, art. vii, sec. 135; N. J. Corp. Act rev. to 1910, sec. 35a; N. Y. Gen. Corp. L. rev. to 1910, sec. 24; Utah, Comp. L. 1907, sec. 335 ; and other states. 150 THE LAW OP CORPORATIONS [412 be placed in the control of persons holding a minority of its capital stock. The power of corporations to hold the shares of other corporations for all purposes is of prac- tically recent origin. It was denied them by the common law unless necessary to subserve the purposes for which the corporation was organized. However, legis- lation during the last half century generally favored it, as tending to promote and enlarge the usefulness of the corporate form. It has been said that in America it has resulted from the competition between the states in bidding against one another for the patronage of corporations.^ The power is recognized by the English Act and exists also on the European Continent.^ Where one corporation holds stock in another the shares may be and frequently are voted upon in the interest, not of the subsidiary, but of the parent corporation. There- fore, when the parent corporation holds a majority of the stock, injustice to the minority interests of the subsidiary is frequently the result. The device of the holding company also provides a method by which even a minority may be in control of the subsidiary. If A. owns 26 per cent and B. 25 per cent of the stock of a corporation, making together 51 per cent, and if they transfer their holding to a company formed for the purpose of holding the stock of A. and B., then A. as the owner of the majority of stock in the new company, ' Untermyer, Some Needed Legislative Reforms in Corporate Man- agement, (1911), p. 3. 2 Companies Act, 1908, sec. 68. Germany, see Staub, op. cit., sec. 182, n. 4; sec. 210, n. 4, according to which a corporation may even be one of the organizers of another corporation. In Switzerland, Italy, etc., the power is not expressly granted but follows as one of the in- cidents of legal entity. The corporate statutes may acknowledge it or limit it. Lehmann, op. cit., i, p. 255 and note. 413] LEGISLATION AND REFORM 151 which he receives in exchange for the 26 per cent of the subsidiary, is left in control of the subsidiary. The scheme has actually been adopted in practice, both in respect of rail- roads and industrial companies, thus circumventing the prohibition contained in the statutes against voting trusts/ The Federal Incorporation Bill prohibits any corpor- ation organized under the act to acquire or hold stock in any other corporation; and no corporation organized under a state law or that of a foreign country may hold stock in a corporation organized under the federal act if en- gaged in carrying on a like business.^ Although the primary purpose of this enactment would seem to be to prevent monopolies and combinations, it would also tend to con- serve the interests of stockholders generally, by returning to the era of a group type composed of individuals, oper- ated according to the checks and balances of human inter- est. If indeed a corporation has no soul, the device of the holding company presents a soulless group-type of members themselves soulless. The President of the United States seems to have re- garded the prohibition against holding companies contained in the Federal Incorporation Bill as one of its most salu- tary features.* Direct Responsibility of Officers and Directors. — We have seen that under Continental European law a direct lia- bility is created in behalf of an injured creditor or stock- holder against a director or manager guilty of the breach of a specific duty. This is not the rule of English and Amer- 1 See Untermyer, op. cit., p. 12; N. Y. Gen. Corp. L. sec. 25 limits these agreements to five years and extends the privilege of participa- tion to all stockholders equally. " Senate Bill, no. 6186, 61 st Cong. 2nd Sess., sec. 8. ^ See Special Message of President Taft, January 7th, 1910. 152 THE LAW OP CORPORATIONS [414 ican law. The liability of a director is primarily to the corporation, and he is responsible only to it for a breach of trust. Action must therefore be brought in the name of the corporation or of all stockholders equally interested.' In such a proceeding the plaintiff has a diminishing interest in proportion to his obligation to share the advantages of his diligence with others. Of course, a manager or di- rector should not be harassed with litigation brought on account of fancied injuries. The creditor must prove his claim against the corporation. If judgment is returned un- satisfied, a specific breach of duty resulting in a loss to the corporation might very well constitute a direct cause of action, if the breach was the proximate cause of the credi- tor's inability to collect his claim. The shareholder should have a direct remedy also where the value of his shares has been impaired by a specific breach of duty, not a mere error of judgment, on the part of the director or manager. This ideal has not been definitely evolved in our juris- prudence, although suggestions for reform point toward es- tablishing direct remedies in certain cases. The draft of the Commissioners of Uniform State Laws provides that if the bonded indebtedness of a corporation exceeds the amount of its paid up stock, or if any dividends are declared other than from net profits, or if a reduction of capital be made under the guise of a loan to stockholders, or if any report or statement required by law is false in any material representation, all assenting directors shall be jointly and severally liable to the creditors of the corporation for any loss or damage arising therefrom.^ Criminal Penalties. — We have asserted that the trust ' Menier v. Hooper's Teleg. Works, 1874, L. R. 9 Ch. App. 350; Mason v. Harris, 1879, L. R. 11 Ch. D. 97; Hawes u. Oakland (1881), 104 U. S. 450. 2 Second Tentative Draft, sec. 22. 415] LEGISLATION AND REFORM 153 relation may be made most effective by recognizing a direct responsibility to the real parties in interest. Where the breach of the relation is willful, the fiduciaries should be subjected also to criminal penalties; and the wrongful acts should be defined and the penalties stated in the statute en- acting the duty, not left to the broad and vague provisions of general codes of criminal law. The criminal sanctions form an integral part of the law of corporations in Ger- many and Italy.^ Many of the states have made a begin- ning in this direction in respect of penalties for declaration of unearned dividends or for making false reports. Re- cently a number of the states have gone far beyond thiS; and have enacted what might be termed a petty code of criminal law applicable to the officers of corporations. Thus, California makes the penal rules regarding embezzle- ment applicable to any officer, director or agent of a corporation who fraudulently appropriates to any use or purpose not in the due and lawful execution of his trust any property which he has under his con- trol.^ Any officer or agent of a corporation who know- ingly exhibits any false, forged or altered book or paper to any public officer authorized to examine its affairs is punishable by imprisonment in the state prison for not less than three nor more than ten years.' The Code defines as a misdemeanor the act of any person who inserts the name of another in any prospectus, circular or other advertise- ment of a corporation, in order to lead persons into the erroneous belief that the person whose name is so inscribed is an officer, agent or promoter of such corporation." Every 1 See supra, subdivs. 2 and 3. 2 Penal Code, sec. 504. ^Ibid., sec. S58. < Ibid., sec. 559 ; semble, Wash. 1903, p. 141 ; Ore., Lord's Laws, sec. 2024, 2025. 154 THE LAW OF CORPORATIONS [416 director, officer or agent who receives any money or prop- erty of the corporation otherwise than in payment of a just demand, and who, with intent to defraud, omits to make true entry thereof in the books, or who falsifies any of the books or papers of a corporation, is punishable by imprison- ment in the state prison for not less than three and not more than ten years/ An examination of the various criminal provisions found in the legislation of the American states shows a striking lack of uniformity and an absence of any definite rule upon which to predicate criminal responsibility. In some states, the legislation is minute and specific, in others merely fragmentary.' 1 Cal., Penal Code, sec. 563. 2 See e. g., Me. R. S. ch. 47; Md. Rev. Corp. Act, 1908; N. J. Pub. L., 1906, p. S49; N. Y. Pen. L. sees. 8go, 661, 662, 665, 667. In Wash- ington, fraudulent " puffing " in a prospectus or advertisement is made punishable with imprisonment of not less ih&n one nor more than five years, or by fine not exceeding $2000, or both. L. 1903, sec. i,, par. 141. CHAPTER VIII Protection to Creditors and Shareholders in Conti- nental Europe — Dissolution I. FRANCE Existing Law. — The dissolution of corporations is not regulated in the Commercial Code, nor in any succeed- ing statute. Certain provisions applicable to associations generally are considered applicable also to corporations. Of course, the expiration of the period of duration of the corporation, as mentioned in the articles of associa- tion, effects a dissolution of the corporation. The general meeting, by its power to alter the corporate statutes, has thus the indirect power of accomplishing a dissolution.^ Other methods by which dissolution may be effected are provided in the Law of 1867.^ In the event of an impair- ment of the capital stock to the extent of three-quarters, the directors are compelled to call a general meeting of all of the shareholders, and the shareholders may then decide whether the corporation shall be dissolved. The general meeting has power to continue the corporation notwith- standing the impairment of its capital. If the directors fail to convene the meeting as provided by law, any inter- ested party may demand the dissolution of the corporation before the courts. 1 Civil C, art. 1865 ; Lyon-Caen and Renault, Manuel de droit com- mercial, p. 245. » Art. 37. 417] JSS 156 THE LAW OF CORPORATIONS [418 Any party may demand a dissolution of the corporation if the number of the shareholders has been reduced to less than seven and remains so reduced for a period of at least one year/ French law is equally fragmentary in its provisions relating to the publication of the dissolution. The only express provision is to be found in article 61 of the Law of 1867, which requires that all documents and deliberations having for their object the dissolution of a corporation shall be published. Accordingly, publication is essential only in the event that is occurs through the vol- untary act of the shareholders, as by a change in the corporate statutes respecting the duration of the corpora- tion. On the other hand, no publicity would seem to be required where the corporation is dissolved by expiration of the time originally fixed; it is even doubtful whether a decree of dissolution pronounced by a court requires pub- lication.^ French law also lacks any express provision relating to the process of liquidating a corporation. It would seem to be determined by the general principles of law and by such rules as are deducible from the " very intent " of the liquidation.^ In general, it may be stated that the court will be gov- erned by the will of the shareholders in the appointiTient of liquidators, provided there be substantial agreement, in the absence of which the court will appoint its own liquidators. In Paris, there exists a syndicate of professional liquidators under the supervision of the tribunal of commerce, from whose number the liquidators of corporations are custom- arily chosen.* 1 L. 1867, art. 37. ^ Lyon-Caen and Renault, op. cit., pp. 250-251. ' Ibid., p. 2jl. ' Ibid., pp. 251, 252, note 2. 419] CREDITORS AND SHAREHOLDERS 157 The equitable principles developed by the French courts, not any specific provisions of the statutes, must be relied upon to safeguard the interests of stockholders and credi- tors during the period of liquidation. The board of direc- tors continues to exercise its functions notwithstanding the appointment of liquidators/ But the courts have held that the functions of the auditors cease as soon as the corpora- tion has entered the period of dissolution.^ Finally, it is to be noted that, although nothing in the bankruptcy provisions of the Commercial Code, or in the special Law of March 4th, 1889, relative to judicial liqui- dation, compels a corporation to dissolve in the event of in- solvency, nevertheless bankruptcy proceedings may often destroy every purpose for which the corporation was created, taking away all its property and leaving it a mere shell. Under such circumstances, the dissolution of the corporation will be decreed upon the request of any party in interest. 2. GERMANY Existing Law. — The causes for the dissolution of a cor- poration anticipated by the German Commercial Code are : 1. the limitation of its duration as fixed in the articles; 2. a resolution of the general meeting adopted by a major- ity of three-quarters of the outstanding capital stock; 3. the initiation of bankruptcy proceedings.^' The Code also speaks of " other grounds " for dissolu- tion without mentioning them specifically. The commen- ' Bohm, op. cit, p. 109. 2 See cases cited by Lyon-Caen and Renault, TraitS de droit com- mercial, ii, p. 909. 3 Comm. C, sec. 292. 158 THE LAW OF CORPORATIONS [420 tators have interpreted this to refer to causes such as merger {Fusion), the abandonment of the situs within the state/ the amortization of all outstanding capital stock.^ The nullification of a corporation is to be distinguished from its dissolution, although it is expressly provided that, for the purpose of liquidation, the same provisions apply to nullification as to dissolution.' Except in the case of dissolution on account of bank- ruptcy, it is the duty of the managers to give notice to the commercial registry that the corporation is about to be dis- solved for the specific cause provided by law.* In default of such registration of notice, innocent third parties are not affected by the dissolution.^ After the proper basis for dis- solution has been established, the corporation exists only for the purpose of liquidation, and is subject to the rules of the Code made specifically applicable thereto. Liquidation in the event of bankruptcy is conducted according to the bank- ruptcy statute (Konkursgesets).^ Liquidation is regularly conducted by the members of the directorate, as liquidators, unless the articles of asso- ciation, or a resolution of the general meeting, has desig- nated other persons. Stockholders who have held their shares for a period of six months are protected against an unfriendly management. Holders of stock for the period mentioned and representing at least one-twen- tieth of the capital stock may, for good reasons shown, request the court to appoint liquidators. The court may, under the same conditions, remove liquidators already ap- 1 Decisions of the Imp. Ct., vii, p. 70. ' Staub, op. cit., i, p. 884. 8 Comm C, sec. 311 * Ibid., sec. 293. ° Staub, op. cit., i, p. 886. <"' "Comm. C, sec. 294. 42 1 ] CREDITORS AND SHAREHOLDERS i^g pointed and the general meeting may also recall liquidators not appointed by the court. ^ The liquidators must notify the creditors to prove their claims and must reduce the property of the corporation to money/ The amount left over after payment of debts is di- vided among the stockholders in the usual way, accord- ing to the class of the security.* In carrying out the liqui- dation, the liquidators are subject to the same control on the part of the supervising council and to the same degree of civil and criminal responsibility as directors of a corpora- tion prior to dissolution.* The distribution among the stockholders may be made only after notice to the creditors to prove their claims has been thrice published in the official newspaper and one year has elapsed thereafter. If a person known to be a creditor has failed to prove his claim, the amount of the claim must be deposited.. If a proven claim is disputed, or if performance of the obligation is impossible at the time, security must be given to the creditor before distribution. ° After the liquidation has been completed and final ac- counting made, it is the duty of the liquidators to give notice to the commercial registry of the discontinuance of the corporate title and to deposit the books and papers of the corporation in a place of security to be designated by the court, there to remain for a period of ten years, ac- cessible to stockholders and creditors by proper authoriza- tion from the court." A sale in bulk of the property of the company is per- missible only on resolution of the general meeting by vote of at least three-quarters of the outstanding shares. A sale ^ Comm. C, sec. 295. ^ Ibid., sec. 297. 5 Ibid., sec. 300. * Ibid., sees. 298-299. ^ Ibid., sec. 301. " Ibid., sec. 302. l6o THE LAW OF CORPORATIONS [422 in bulk operates as a ground of dissolution even in the ab- sence of other grounds.^ German law has anticipated the tendency of corporations to consolidate, at least where this is effected by the acquisi- tion by one corporation of the entire property of another. Although the device of the holding company is not expressly provided for by German law, the Code establishes a method by which the entire property of one corporation may be acquired by another without the continued existence of the share capital of both corporations, while at the same time it protects the interests of the shareholders of the corpora- tion whose existence is to be merged. This is accomplished by raising the capital of the vendee corporation without re- quiring any payment upon the increased capital other than the transfer of the property of the vendor corpora- tion ; the consideration for the property passes to the share- holders of the vendor corporation by an exchange of shares, the shares of the vendor corporation being thereupon can- celled and the corporation itself subjected to dissolution.^ Adequate protection is given to the creditors of the ven- dor corporation in that its property must be kept apart and managed separately until the creditors have been notified of the consolidation and the same provisions made for their benefit as in the ordinary cases of dissolution. The credi- tors have recourse against the property of the vendor cor- poration as if there had been no consolidation.* 3. ITALY Existing Law. — The Italian Commercial Code recognizes the following grounds for the dissolution of commercial associations (including corporations) :* 1 Com. C, sec. 303. ^ Ihid., sec. 305. ^ Ihid., sec. 306. * Codice di commercio, art. 189. 423] CREDITORS AND SHAREHOLDERS 161 1. Expiration of the term fixed by the articles. 2. Lack or disappearance of corporate purposes, or the im- possibility of attaining them. 3. Accomplishment of the purposes for which the corpora- tion was formed. 4. Adjudication in bankruptcy, even though accompanied by a composition. 5. Loss of the entire capital, or of a considerable part thereof,^ unless the shareholders agree to make good {rein- tegrar) the loss, or limit the capital to the assets remaining. 6. Consent of the shareholders. 7. Consolidation. In the event of a consolidation of two corporations, the documents effecting the same must be published in the same manner as the articles of incorporation.^ Both com- panies must publish their final balance sheets according to a uniform plan, and the company to be merged must add a statement of the manner in which it is proposed that the debts shall be paid. The consolidation does not become ef- fective, however, until three months thereafter, unless all the creditors have consented, or all the debts have been paid, or a sum sufficient to cover them has been deposited. Dur- ing this period, any creditor may oppose the consolidation ; its execution is thereupon suspended until opposition is withdrawn or overruled by a judicial decree from which no appeal has been taken.^ 1 Art. 146 provides that if the capital be impaired by one third, the general meeting may decide to dissolve; if impaired by two-thirds, the company must be dissolved unless the capital is replaced or the capital stock reduced to the amount of actual assets. Ibid., arts. 194, 91, 94, 95. ' Ibid., arts. 19S, 196. If there be no opposition during the pre- scribed period, the consolidation becomes effective and the continuing corporation is subrogated to all the rights and obligations of the merged corporation. Art. 196. l62 THE LAW OF CORPORATIONS [424 When a corporation is undergoing dissolution/ liquida- tion proceeds according to the provisions of the articles or corporate statutes. The general meeting appoints the liquidators.^ After publication of the resolution of the general meeting or decree of the court ordering the disso- lution, the directors are prohibited from entering upon any new transaction, under penalty of personal responsibility.* Actions for and against the company must be conducted by or against the liquidators.* All documents must recite that the company is " in liquidation." * The provisions of law, of the articles, and of the corporate statutes, continue to regulate the affairs of the company wherever consistent with liquidation, and the liquidators are under the same responsibilities as were the directors.* The liquidators must, with the cooperation of the di- rectors, immediately prepare an inventory and balance sheet ; they must obtain and preserve the books kept by the directors; they must keep account chronologically of all their transactions relating to liquidation and, upon demand of the shareholders, give information of the condition and progress of the liquidation.^ ^ Dissolution begins with the resolution of the general meeting of stockholders, or decree of the court, even though the liquidators have not as yet been appointed. Court of Cassation, Turin, Sept. 23, 1886; Annali della giurisprudenza, xx, part i, p. 487. ^ Ibid., arts. 197, 210. A quorum of three-quarters of the capital stock is required and an affirmative vote of a majority of the capital stock. ^ Ibid., art. 192. * Ibid., art. 198. The mandate of the directors ceases with the appointment of the liquidators, but they must cooperate if the latter so require. Art. 211. 5 Ibid., art. 200. If the liquidation continues for longer than a year, the liquidators prepare annual balance sheets in the same manner as directors prior to the dissolution. Art. 214. 425] CREDITORS AND SHAREHOLDERS 163 The directors must render to the liquidators an account of their transactions from the date of the last balance sheet accepted by the shareholders to the beginning of the disso- lution ; the liquidators may accept or contest the same. If one or more directors become liquidators, this account must be published at the same time as the definitive inventory and balance sheet of the liquidators.^ When the assets have been liquidated, the liquidators must prepare a final balance sheet indicating the dividend upon each share of stock. This, with the syndics' report, is filed in the office of the commercial court and published ; within thirty days, the shareholders may file objections, which must also be published. Two weeks thereafter, all of the objections are submitted to the court, which passes upon them in one judgment; any shareholder may intervene and the judgment, when pronounced, operates in rem. If no objection is filed, the balance sheet is deemed approved, and the liquidators are discharged, except in respect of the distribution of assets.^ As in the German law, sums due to stockholders in liqui- dation but not reclaimed by them are deposited in court, and the books of account of the company are preserved for inspection of interested parties for a period of five years.* 4. SPAIN Existing Law. — There are no provisions of the Spanish Commercial Code especially applicable to the dissolution of 1 Com. C, art. 213. ' Ihid., art. 215. 3 Ihid., art. 216. The acceptance of the final dividend is also deemed an approval of the accounts and distribution, irrespective of any period to elapse. Ibid. * Ihid., arts. 217, 218. Semhle, German Comm. C, sees. 301, 302. 164 THE LAW OF CORPORATIONS [426 corporations. The Code provides in a general way for the liquidation of commercial associations including corpora- tions. During liquidation, the corporate statutes continue to regulate the activities of the general meeting, which, it is intimated, has control over the progress of the liquida- tion and power to adopt such resolutions as may be neces- sary for the common interest.'' 5. SWITZERLAND Existing Law. — The provisions of the Swiss Code of Obligations ^ relative to the dissolution of corporations have been taken over from the German Commercial Code with practically little modification, so that it is unnecessary to refer to them at length. Commentators on the Code of Obligations refer to the corporation as changing its juristic nature by entering into the period of dissolution, so that it no longer remains a corporation in the proper sense of the word, but becomes an association in liquidation in which the several interests of the associates are proportioned to their shares (Liquida- tionsverein auf Actien)} Comment. — The period of dissolution and liquidation is one which requires extraordinary protection for the inter- ests of both creditor and stockholder. The protection to be afforded to the stockholder ought to be based upon two de- siderata, somewhat conflicting, yet both of equal import- ance. On the one hand, it is important that the corporation shall wind up its affairs as nearly in the regular course of business as possible, so as to realize the most for its assets. On the other hand, the corporation should en- deavor to discontinue operations at the earliest possible moment, so as not to incur greater loss. ' Codigo de comercio, art. 238. ' Arts. 664-670. ^ Schneider and Pick, op. cit., p. 511. 427] CREDITORS AND SHAREHOLDERS 165 All legislations agree in extending to the stockholders' meeting the right to decide upon a dissolution at any time. German law differs from the French in requiring a three- quarters vote, instead of a bare majority. It is difficult to decide which plan affords greater protection. The necessity of obtaining a three-quarters majority may result in con- tinuing operations for a period beyond that in which the corporation will be able to do so with safety, whereas, on the other hand, a bare majority may be able to take advan- tage of its power to compel a dissolution to the injury of the minority. Though the statutory provisions of French law are but fragmentary, the individual shareholder receives ample pro- tection in practice. We have seen that when the general meeting has not been convened by the directors or, having been convened, cannot completely organize itself, any shareholder may petition the court for dissolution. Prac- tice has gone further and has extended a right to the share- holder individually to petition for a dissolution where equitable grounds have been made to appear therefor, irre- spective of any statutory provisions.^ In this the French system approaches the English, and differs from the Ger- man. The draft of the German statute of 1884, relating to corporations, also contained a provision giving a single shareholder the right to initiate the proceedings It was subjected to unfavorable criticism on the ground that it might lead to unfounded petitions for dissolution affecting the credit of solvent corporations. It was therefore elimi- nated from the draft. ^ 1 Lyon-Caen and Renault, Traite de droit commercial, i, 906, bis; Vavasseur, Traite des societes civiles et commerciales (Sth ed.), ii, P- 915. 2 Bohm, op. cit., p. 106, citing Motive to the draft of this law. Berlin, 1883, pp. 366-367. CHAPTER IX Legislation and Reform in England and America. — Dissolution The management of corporations under all the systems with which we are concerned is confided either to a board of directors acting through officers or through a committee, or else to a directorate in conjunction with a supervising coun- cil, as in Germany and Italy. While the corporation is a going concern, the discretion in all matters appertaining to its management must be left to its operating organs, subject to such restrictions as are necessary to insure to creditors and stockholders honest management of its affairs and a just distribution of its profits. Government, at least under our present system, does not assume to interfere with the freedom of either individuals or corporations in the con- duct of business, so long as they act lawfully and meet their obligations. Once it is determined, however, either by the will of the members, or by court decree, that a corporation shall be wound up, its character as a free organism ceases. The rights and liabilities of all interested parties may be deemed fixed, even though not definitely ascertained; and the estate of the corporation becomes a trust to be admin- istered in such manner and for such purposes as the law may determine. This ideal has been most completely realized by English legislation. " Winding up " may be either ( i ) by the court, or (2) voluntary, or (3) subject to the supervision of the court. A company may be wound up by the court on 166 [428 429] LEGISLATION AND REFORM 167 certain contingencies set out in the statute, the important ones being: (a) when the court thinks it just and equitable, (b) when the company is unable to pay its debts, and (c) when the company, by special resolution, resolves to be wound up by the court/ Application for winding up may be made by any contributor {i. e. any person liable to con- tribute to the assets of the company in the event of its being wound up), or creditor, or any prospective or con- tingent creditor, or by the company. The court has full power to grant or refuse the petition for winding up. Upon granting the order, all actions against the company are stayed, except those continued by leave of the court. ^ At the time of the winding-up order, a report of the condi- tion of the company's affairs must be made to a person connected with the bankruptcy court who is styled the " official receiver." The court has power to appoint one or more persons called " liquidators " to carry out the winding-up order, the official receiver being usually ap- pointed to serve only until (or pending) a winding-up order, the court (after an order is issued) afterwards ap- pointing a liquidator. The liquidator (unless he be the official receiver) must give security to the satisfaction of the board of trade, which, in England, is an official body.* As soon as practicable, he must make a report of the con- dition of the company, stating whether it has failed and the cause thereof, and whether in his opinion further in- vestigation as to the formation and conduct of the business is necessary. The liquidator takes into his custody and control all the property and things in action to which the company appears entitled.* He has power, with the consent 1 Companies Act, 1908, sees. 122, 129. 2 Ihid., sec. 142. ^ Ibid., sees. 146, 147, 149, 153, 154. * Ibid., sec. 150. 1 68 THE LAW OP CORPORATIONS [430 of the court, to bring or defend any action or other legal proceeding, to carry on the business of the company, and to employ a solicitor or other agent to assist him/ A committee of inspection is chosen from the creditors and contributories. This committee meets from time to time and may act by a majority of its members, and, subject to the provisions of the law, the liquidator shall have regard to its directions in the administration of the assets of the company.^ All sums received by the liquidator must be deposited by him, at such times as the board of trade shall direct, to the " companies liquidation account " at the Bank of England, unless the committee of inspection shall satisfy the board of trade that an account with another bank is desirable. The liquidator must, at least twice a year, make a report in usual form and send it to the board of trade for audit. The board of trade is given supervisory power over the liquidator, his books and vouchers.* As soon as the winding-up order is made, the court settles a list of contributories. Every present member is liable to contribute to the assets of the company, but not in excess of unpaid subscriptions ; and all past members for the year preceding are liable to contribute for the payment of all debts contracted while they were members, but not in excess of unpaid subscriptions, and not unless it is proved to the court that the existing members are unable to pay the contributions required of them.* A voluntary winding up may be had when the period fixed by the articles of the company for its duration has ex- ^ Companies Act, 1908, sec. 151, ^ Ibid., sees. 158, 160. ^Ibid., sees. iS5, 159. * Ibid., sec. 123. : 43 1 J LEGISLATION AND REFORM 169 pired, or an event fixed as the limit of its duration has occurred, and the company, by special resolution, resolves that it shall be wound up.^ As in Continental European countries, the winding-up period is deemed to begin from the time of passing the resolution.^ Generally speaking, the only difference between the voluntary and judicial winding up is that the appointment of liquidators is made by the company in general meeting instead of by the court. The liquidator appointed by the company in voluntary winding up has the same rights and duties as if appointed by the court. The court may at any time make an order that the vol- untary winding up shall continue, but subject to the super- vision of the court, and with liberty to contributories, creditors and others to apply to the court to exercise its supervisory functions.^ Where the court assumes super- vision, the liquidator has the same rights and duties as if the court had not stepped in, except that the court may re- move him. In general, this third method of winding up is similar to the first, except that certain designated sections of the Companies Act do not apply.* The great value of the English statute, as far as it relates to the dissolution of corporations, lies in its completeness. It creates an uniformity in the method of liquidation that makes for efficiency and economy. At the same time it gives a wide amount of control over the progress of liquidation 1 Companies Act, 1908, sec. 182, ^Ihid., sec. 183. ^ Ibid., sec. 199. * Ibid., sec. 203. In preparing this resume of the provisions of the English act referring to the winding up of companies, the author has had the use of MS. prepared by Dr. William Draper Lewis and his assistants R. C. Heisler and H. Shapiro, on behalf of the Legislative Drafting Association, and submitted to the Commissioners of Uniform State Laws. 170 THE LAW OF CORPORATIONS [432 to the persons most interested in safeguarding the assets, namely, the creditors and the particular stockholders liable for contribution. In the United States, dissolution is effected by various methods, according to whether it results from the operation of state insolvency statutes, or from proceedings in equity, or from some voluntary act of dissolution. The Fed- eral Bankruptcy Act does not provide for the dissolution of insolvent corporations. The state statutes are seldom complete; provisions relative to the various methods and causes for dissolution must be sought for in separate sta- tutes and in the practice of the courts of equity. In California, a corporation may be dissolved by the court on voluntary application, as evidenced by the reso- lution of two-thirds of the members, or of the holders of two-thirds of the capital stock. In this proceeding, the directors or managers of the affairs of the corporation are considered to be trustees of the creditors and stockholders, and have full power to settle its affairs.^ The corporation may also be dissolved at the instance of any creditor in the event that it lose or dispose of all its property and fail for a period of two years to elect officers and transact busi- ness.^ In Illinois, courts of equity are given power to dissolve or close up the business of any corporation in the event of insolvency or in the event that the corporation shall allow any execution to be returned unsatisfied and remain thus for not less than ten days. Suits in equity may thereupon be brought against all persons who were stockholders, to 1 Cal. Code Civ. Pro., sec. 1228 ; by amendment approved March i6th, 1907, all claims and demands against the corporation must be satis- fied and discharged before the application is made. So in Wash.^ Ballinger's C, sec. 4275; and in Mont., Code Civ. Pro., sec. 7324. 2 Cal. Civ. C, sec. 358. 433] ■ LEGISLATION AND REFORM lyi the extent of unpaid subscriptions, but only after exhaust- ing the assets of the corporation/ In New Jersey, a voluntary dissolution must be voted first by a majority of the whole board of directors and thereafter by a vote of two-thirds in interest of all stock- holders. The court has full power to continue the directors as trustees or to appoint one or more persons to be re- ceivers of the corporation and conduct the winding up; this applies both to voluntary and involuntary proceedings.^ Under New York law, a corporation may be dissolved involuntarily, at the suit of the attorney-general, if its capi- tal stock be not paid up within the time prescribed, or in the event of abandonment of the use of its franchise.'' It may also be dissolved by action, either at the suit of the attor- ney-general, or, in default thereof, by a creditor or stock- holder, after obtaining leave of the court. The grounds of such action must either be that the corporation has re- mained insolvent for one year; that it has neglected or refused for at least one year to pay or discharge its notes or other evidences of debt; or that it has suspended its ordi- nary and lawful business for at least one year.* The court appoints one or more receivers for the purpose of winding up. In addition to these proceedings, directors, trustees, ' 111. Gen. Corp. Law, sec. 25. In Minnesota, stockholders of all ex- cept manufacturing corporations are liable for its debts to the amount of stock held by them in addition to the amount originally paid in. See Kuhn in Yale Law lournal, April, 1908, p. 457. 2 N. J. Corp. Act, sec. 56. Semble, Del. Gen. Corp. L. 1899, sec. 39. ^ N. Y. Business Corp. L., sec. S- ■* N. Y. General Corp. L., sees. loi, 102. Semble, Wis. Sanborn's Stats, sec. 1763. In Minnesota, stockholders owning not less than 40 per cent, of the capital stock may pray for dissolution, if the cor- poration has continued in business for at least three years, during which it has sustained losses impairing the capital stock to the extent of 25 per cent. Rev. L. 1905, sec. 3175. 172 THE LAW OF CORPORATIONS [434 or other officers must present a petition to the Supreme Court for voluntary dissolution whenever directed so to do by a majority in interest of the stockholders. The court may entertain or dismiss the application, and the proceed- ings are conducted in the usual way, through appointment of a receiver and the exercise of the ancillary powers of a court of equity. It is noticeable in all this legislation that very little official cooperation is sought from or permitted to the creditors and stockholders themselves. The management of the corporation at its most critical period is thus left in the hands of the court, which, of necessity, must act through its receiver. This involves great expense and the waste of corporate assets in a routine procedure. Further- more, the system has made it customary if not absolutely essential to appoint as receivers members of the legal pro- fession or other persons familiar with the legal machin- ery incident to receivership, but frequently ill-fitted to en- gage in business transactions requiring business rather than legal judgment. The assets of a corporation in liquidation, therefore, are sacrificed to the demand for immediate liqui- dation. This is neither the fault of the courts nor of law- yers, but is ascribable to the lack of constructive legislation conducive to a business administration of the affairs of corporations during the dissolution period. The Federal Incorporation Bill does not provide any comprehensive system for the dissolution of corporations to be formed under it. If shareholders owning two-thirds of the stock determine to dissolve, the board of directors must give notice to creditors to present their claims. By implication of the statute, the directors then proceed to liquidate. '^ The bill also proposes a reform of consid- ^ Senate Bill, no. 6186, 61 st Cong. 2nd Sess., sec. 29. 435] LEGISLATION AND REFORM 1 73 erable novelty as applied to industrial corporations, taken from the federal statutes in respect of national banks. Whenever a corporation shall have failed to pay off any of its written obligations, or has permitted an execution to be returned unsatisfied, the commissioner of corporations may appoint a special agent who shall ascertain whether or not the corporation is in an unsound financial condition. If the commissioner is satisfied that the corporation is either insolvent, or of such unsound financial condition as to make its continuance in business contrary to the public welfare, he may appoint a receiver, who shall become entitled to pos- session of all the real and personal property of the cor- poration, and have all the powers of a receiver appointed by a court of equity.^ The notable feature of present-day demands for reform is the emphasis laid upon the necessity for supervision by an administrative body, rather than by a court. The nature, importance and complexity of modern business requires that the affairs of corporations in the dissolution period be conserved by bodies assuming special functions. The American constitutional system as developed over a period of little more than a century has already concentrated many quasi-administrative duties into the hands of courts. If functions connected with ordinary business administra- tion are to be added, the orderly procedure of regular judi- cial business will suffer, while corporations will be dissolved under a routine or conventional system, administered with- out regard to the requirements of sound business and finance. This will be productive of sacrifice rather than conservation. The English law presents a plan both prac- tical and safe, to which American legislatures should give earnest consideration. 1 Loc. cit., sec. 31. INDEX Abuse of corporate forms, 66, 99 Actio doli, 21 Action sociale, 119 Action individuelU, 119 Administrateurs, 116 Administr adores, 139 African Company, 52 Agent, authorized, 124, 141 Aktiengesellschaften, 68, 93 Alabama, 108 Allotment of shares, 106, 107 Amendment of articles, 84, 1 37 America, 97, 144, 166 ; see individual states America, discovery of, 48 American law and English, III, 133 Amortization, 93, 119, 123, 125, 142, 158 Annual balance sheet, 1 28 ; see Balance Sheet Annual meeting, 52 ; see General Meeting Annulment of unpaid shares, 92 Apforteurs, 58, 59, 62, 95 Apports, 59, 64, III AJticles, amendment of, 84, 137 Articles of association, 70, 91, 104 Assada merchants, 50 Assemblie Gintrale, 116 "Assistants," 52, 53 Associations, commercial, 91 Associations, limited liability, 67 Atto costitutivo, 88 Attorney-general, 109, 171 Auctor emptionis, 23 Auditors, 73, 74, 117-119. I2«. '44 Auditors appointed by court, 129 Auditors, dutite of, 130, 138, 145 Aufsichtsrath, 70 Authorities, list of, 9 Austria, 65, 66 Baden, 65 Balance Sheet, 128, 138, 139, 140, 142, 144, I4S, 162, 163 Bank of England, 53, 54, 168 43SA] Bankers and brokers, 76, 77, 85 ; see Stock Exchange Bankruptcy, 133, 157, 161, 170 Banks in Spain, 91 Bavaria, 66 Bibliography, 9 Board of management, 140 ; see Directors' Council Board, proportional representation in, 148 Bolivia, 90 Bonds as guarantee, 137 Borough a corporation, 43 Bremen, 66 Bruce, 49 Bruges, 45 Bubble Act, 55, 97, loi Building associations, 91 Bulletin, official, 89 Burgess, Prof., 13, 106, 148 Calais, markets at, 45 California, 153, 170 Capital, amount paid within year, 95, 103, 108 Capital, authorized, 82 Capital, loss of, 119, 161 Capital, reduction of, 123, 152 Capitalization, 103 Centralization of industry, 100 Certificate of incorporation, 102, 103, 105 Charles I, 50, 52 Charles II, 5 1 Charter of Elizabeth, 49 Charter from Crown, 97 Charter firom Parliament, 51, 53, 55, 99 Gives, 19 Civil War, 113 Classification of corporations, 15 Code, Civil, 67, 93, 117, 119 Code de commerce, 56, 65, 66, 85, 90 Code, German, 122, 160 Code of Obligations, 93, 143, 164 Code of 1829 (Spain), 90 Code of 1886 (Spain), 90 173A I73B INDEX [435» Codes of Spain, 90, 91 Codice Albertino, 86 Codice d' Italia, 86 Codigo de commercio, 90 Coke on Guild Merchant, 43 Colltgia, i8, 21 Columbus, 90 Commerce, tribunal of, 156 Commercial associations, 91 Commercial Code, 66, 67, 73, 79, 1 16, 128, 157 Commercial court, 87, 136 Commercial registry, 130 Commissaires, 116 Commission, Industrial, 146 Commissioner of Corporations, 1 14, 147 Commissioners of Uniform Laws, 103, 108, 147, 149, 152 Communitas, 43 Community in Italy, 20 Companias anonimas, 91 Companias tnercantiles, 91 Companies act as bankers for govern- ment, 53 Companies Act (Eng.), 98, 99, 104, 169 Companies, guaranty, loi Companies, holding, 149, 150 Companies, joint-stock, 46 et seq Companies, officers of, 52, 53, 54 Companies regarded as partnerships, 54 Companies, regulated, 45, 46 Companies, share, loi Companies, unchartered, 54 Company, limited, 98 Company of staple, 44 Company, unlimited, 98 Concessionary system, 98 Conference of Nuremberg, 66 Connecticut passes first general act, 99 Consolidation, 51, 99, 137, 160, 161 Constitutio personalis, 66 Continental systems, 60, 61 Contributions in kind, 93 Control, direct, 144 Control, indirect, 145 ControlstelU, 141 Copper Mines in England, 52 Costa Rica, 90 Corporate title, 10 1 Corporate types in Ancient times, 17 Corporate types in Middle Ages, 30 Corporation authorized to do business, 72 Corporations, classification of, 15 Corporations, commissioner of, 114, 147 Corporations, consolidation of, 99, 160, 161 Corporations, dangerous, 81 Corporation, definition of, 13 Corporation, designation of, 102 Corporations, encouragement of, 150 Corporations, government and, 166 Corporations, operation of, 1 16-140 Corporations, organization of, 56-93 Corporations, name of, 102 Corporations Congress, 121 Corporations, defect of French, 121 Corporations, dissolution of, 155, 164 Corporations, industrial, 145 Corporations in England, 43 Corporations in France, 56 Corporations, taxation of, in U. S., 100 Corporations, theory of, 20 Corpus, 21 Council and liquidators, 159; , see Liquidators Council, designated, 72, 73 Council responsible to corporation, 128 Council, supervising, 74, 126, 127, 140 Courts and dissolution, 157 ; see Dissolution Courts and organization, 83 ; see Organization Courts, commercial, 87, 136. Courts in Switzerland, 95 Courts, mandate of German, 133 Courts, mild in France, 130 Courts, powers of, 136, 166, 167 Courts, powers of German, 84 Courts, severe, 130 Craft guilds, 44 Creditors, not protected, 107 Creditors, protection of, 56-93, 1 16-140, 155-164 Criminal code, 80 Criminal penalties, 79, 89, 133, 139, 143. IS* Crisis, 109 Cromwell, 50, 51 Cumulative voting, 149 Curia, 21 Dtcharge, 78 Declaration of organizers, 73, 74 Decuriones, 21 Definitions, obscurity of, 14 Delaware, 107, iii Directorate, 72, 73, 74, 94, 123, 124 Directorate and council, 126, 127 Directors allot stock, 106, III Directors and liquidators, 157 43SC] INDEX 173c Directors, breach of duty of, 125 Directors, direct liability of, 151 Directors, duties of, 56, 126, 135, 146 Directors, election of, 149 Directors, election of, for more than year, 141 Directors liable, 114, J15, 117, 118, 151 Directors may not delegate functions, 126 Directors may not proxy, 135 Directors must give entire time, 125 Directors named in by-laws, 104, 105 Directors not named, 104 Directors pay on shares, 107 Directors, rights of individual, 135, 136 Direktion, 141 Discovery of America, 48 Dissolution, 108, 119, 137, 145, 164 Dissolution in Continental Europe, 155- 164 Dissolution in England, 166 Dissolution in U. S., 170 Dissolution, voluntary, 172 Dividends, unearned, 153 Dol, 117 Draft act, 108, 147 Dutch companies, 56 Dutch East India Company, 49 East India Company, 48, 53 East India Company, joint-stock princi- ple, 48 East Indies, voyages to, 48 Eastland company, 46 Edward III, guilds under, 44 Elizabeth, 48 Elizabeth, charter of, 49 Embezzlement in California, 153 Enforcement of corporation law in France, 61-63 England, 43, 97, lio. III, 144, 166 Expansion, colonial, 113 Expiration of articles, 155, 161 Extension, 137 Factories, 49 False statement, 79, 80, 114, 145, 153 Fautes, 117 Federal incorporation, 13, 109, 113, 115. '47. IS" Federal Incorporation Bill, 151, 172 Filing of annual report, 106 Financial company, first, 55 Fiscus, 19 Flanders and Henry IV, 45 France, corporations in, 56 et seq, 1 16, '55 Franchise in Rome, 22 Franco- Prussian War, 80 French Code, 56, 82, 83, 85, 90 French Law of 1867, 57, 59, 63 Fusion, 158 Gaceta, 140 General corporation laws, 99 General meeting, 119, 126, 128, 129, 130. '36. «40, 14'. '44. '55. '65 General Society of Traders, 5 1 Gtnerahiersammlung, 1 23 Georgia, 107 Girentet, 140 German attitude, 85, 133 German Commercial Code, 66, 67, 89, 133 Germany, 65, 122, 157 Gewerksckaften, 52 Gierke quoted, 14, 82 Gilda mercatoria, 43 Gray on definition of corporation, 14, IJ Greek city-state, 17, 19 Group forms in ancient times, 17 Group forms in middle ages, 30 Grundtr, 7 1 Guaranties, German, 133, 134 Guild merchant, 43, 44 Guilds, craft, 44 Hamburg, 66 Handtlsgesetibuch, 68 Hanse towns, 45 Henry I, 44 Hesse, 65 Holding companies, 149, 150 Hudson Bay Company, 52 Ihering, 81, 85, 108, 133 Illinois, 149, 170 Imperial period, 22 Imprisonment, 79, 130, 131 ; see Criminal Penalties Incorporation, federal, 113, 115, 147, '5' Indemnity to France, 80, 81 Industrial commission, 146 Introduction, 13 Iowa, 112, 115 Ireland, staples in, 45 Italian Code, 86, 89, 138, 139 Italy, 20, 85, 94, 134, 139, 160 Italy, cities of, 20 James I, 50, 52 Joint stock companies, domestic, 52 Joint stock, confusion in, 50 Joint stock in Dutch Company, 49, 50 Joint stock principle, 48 I73D INDEX [435° Judicial control, 95 Junta Generate, 92 Kansas, 149 Konkitrsgeseti, 158 Land, exploitation of, 49 Latin-American, states, 90 Law of 1844 (England), 97 Law of 1855 (England), 98 Law of 1862 (England), 98 Law of 1867 (France), 57, 59, 63, 116, 118, 120, 155, 156 Law of 1884 (German), 67, 78, 165 Law of 1889, 157 Law of 1893 in France, 65 Law of 1900 (England), 98, 99 Legislation, social, 132 Legislative development in America, 99 Legislative development in Germany, 65 Legislative development in Switzerland, 93 Legislative Drafting Association, 5 Levant Company, 48 Liability, 119; see Shareholders, Directors Liability, limited, 66, 98 Liability of bankers, 76, 77 Liability of organizers, 75, 76 Liberal laws, 100 Limitation of par value, 103, 104 Limitation of powers, 125 Limitations, maximum, 109 " Limited," 101 Limited companies, 57 Limited liability, 66, 98 Limited Liability Act, 98 Liquidation, 156, 157, 159, 163, 164, 165, 168 Liquidators, 130, 131, 133, 162, 167 Liquidators notify creditors, 159 Liquidators, removal of, 158, 159 Majority rule, 148 Managers, 64, 94, 1 24, 140, 149 ; see Directors Management, double organ, I20 Management, single board, 120 Managing committee, 141 Manceps, 23 Mancini, 86 Mandamus, 145 Mandataries, 116, 117 Meeting, annual, 121 ; see Meeting, General Meeting, General, 116, 117, 118, 119, 123, 126, 128, 129, 130, 136, 140, 141, 144, 155. "65 Memorandum, 102, 103, 104 Merchant adventurers, 45, 46 Michigan, 107, 108, 149 Middle Ages, ideas of, 14 Minimal requisites, 70 Minimum subscription, 1 10 Minority stockholders, 88, 137, 148 Misrepresentation, 130; see False Statement Missouri, 149 Municipality, 21 Municipium, 19 Napoleonic Code, 56, 65 Nebraska, 140 New Jersey, 107, 171 New York, 107, 115, 171 Nominative shares, 70, 80 North German Confederation, 66 Nullification, 84, 108, 158 Nullity of corporation, 61, 64, 65, 84 Nuremburg, conference at, 66 Officers of companies, 52, 53, 54 Ohio, 149 Operation in Continental Europe, 1 16- 142 Operation in England and America, 144-153 Organization, 56-115, 142 Organization in England and America, 97-116 Organization, simultaneous, 72, 86 Organization, successive, 72, 86 Oi^anization, tripartite, 133 Organizers, 71, 72, 73, 95. m Organizers, liability of, 64, 65, 75, 76, 79, 88, 90 Origin of corporations in England, 43- SS Overcapitalization, 107, 109, 113, 115, 137 Overspeculation, 57 Panic, 109 Palatinate, 65 Paris, liquidators in, 156 Partnerships, 57, 66, 97 Penal Code, 63, 122 Penalties, see Criminal Penalties Pennsylvania, 107 Permanency of dividends, 128 Persons in Switzerland, 93 Populus, 18, 21 Posen, 65 Preferential voting, 71 Preferred stock, 70 435E] INDEX 173E Projet, 86 Prokuristen, 124, 141 Promoters, 62, 108, in Property in Egypt, 22 Property in Greece, 17, 18, 22 Property in Rome, 19, 22 Property, overvaluation of, 62 Property, purchase of, 71, 114 Property, purchase of shares by, 61, 62, 84, 114 Property, sale of, 114, 159 Property, social, 19, 22 Property, state, 19 Prospectus, no, in, 114, 119, 153 Protection of creditors, 56-93, 1 16-140, 155-164 Prussia regulates corporations, 65 Publicity, 81, 104, no, 114, 115, 119, 121, 128, 144-147. 156 Punishment, 133, 139, 143, 152; see Criminal Penalties " Qualified " organization, 7 1 Railroads, 65, 91 Rates, and the courts, 84 Recall by meeting, 123 Reduction of capital, 152 Registered shares, 69, 70 Registration, 74, 75, 82, 91, 98, 104, no Registration of agent, 124 " Regulated " companies, 45, 46 " Regulations," 104 Report for private purposes, 147 Report for public purposes, 147 Report of auditors, 145 Reports, annual, 106, 138, 144, 147 Reports, false, 153; see False Statement Reports, special, 147 Representation, proportional, compul- sory, 148, 149 Representative, 124, 141 Republican period, 20 Reserves, 119, 129, 143 Rtt publUae, 19 Revenues from corporations, 100 Revisoren, 73, 74 Revisors, duties of, 138 Revolution, 99 Rhode Island, 112 Right to do business outside state, 100 Rome, corporations in, 43 Rome, property in, 18 Rule of majority, 148 Sardinia, 86 Savigny, 19 Saxony, 66 Seal of borough, 43 Separate entity, 20, 21 Separation of persons, 20 Shareholders, consent of, 1 24 Shareholders elect officers, 52 Shareholders, few, 107 Shareholders, liability of, 53, 85, 97, 99, 103, no, 122, 131, 168 Shareholders, list of, 146 Shareholders, loan to, 152 Shareholders, meeting of, see General Meeting Shareholders, minority, 78, 129, 141, 148 Shareholders, protection of, 56-93, 116- 140, 155-164 Shareholders, rights of, 53, 112, 140 Share capital, 103 Share certificates, 137 Share warrants, 98 Shares, bearer, 69, 70, 92, 98 Shares issued, 52, 75 Shares, nominative, 70, 80 Shares, number of, 103 Shares, par value, 69 Shares, registered, 69, 70 Shares, transfer, 94, 97, 112 Simultaneous organization, 86, 87 SimuUangruendung, 72 Sindaci, 137, 138 Situs of company, 87, 158 Societd anonima, 86 Societas, 23 SocUte en commanditt, 56 Societes anonymes, 56, 93 Society of Mines, 52 Socii, 23 Sodalitas, 18 Sohm quoted, 18 Souscription integraU, f>i South Carolina, 108, 149 South Sea Company, 54, 55 ; see Bubble Spain, 90, 94, 139, 163 Spanish codes, 90, 91, 95 Spanish invasion, 46 Spanish law, 90, 91 Special Act, 99 Speculation discouraged, 69 Staples, 44, 45, 46 State, business outside, 100 State, sovereignty of, 18 Statement, 79, 80, 114, 145, 146; see Report, False statement I73F Staiuten, 70 Stock, amount of, 102 Stock, appraisers of, 112, 113 Stock, common, 70 Stock, decrease of, 137 Stock exchange, 132, 138 Stock for property, 61, 62 Stock, increase of, 137 Stock, payment of, 107 Stock, preferred, 70 Stock, rule of issue of, 87 Stock watering, 79 Stockholders, see Shareholders Stocks not to be hsted, 79 Subscription, 72, 87, 106, 107, 1 10 Subscriptions repaid, 90 Successive organization, 72, 87 Succtssvugr&ndung, 72 Supervisors, 126, 176 Swiss code, 87, 88, 95, 140 Switzerland, 93, 140, 164 Syndics, 135-138 Tantiemes, 126 Thaller, 65 Third parties, 125 Thomas A. Becket, 45 Title, corporate, 10 1 INDEX [435F Tribunal of commerce, 156 Truffa, 136 Trustees, 146 ; see Directors Tudors, the, 47 Turkey Company, 46, 47, 48 Uniform Laws, 103, 108 Uniform State Laws, Commissioners of, 147. "49. 151 Unincorporated companies, 97, loi United Company of Merchants, 51 Verification, 82, 83, 84, 87, 88 Verwaltung, 94 Vorstand, 70, 72, 123 Voting by proxy, 149 Voting, cumulative, 149 Voting of shares, 71, 131, 132 Voting, proportional, 71 Westphalia, 65 William and Mary, 54 Wilson, Woodrow, 17 Winding up, 166, 167, 168 Winding up, judicial, 168, 169 Winding up, voluntary, 168, 1 69 Wisconsin, 108 Wurtemburg draft of 1839, 66 Zeichner, 94 Zeichnungsshein, 72