QJortipU ilavu i>ri|0nl ffiibtary Cornell University Library KF 1414.C76 1908 The modern corporation :lts mechanism, m 3 1924 018 937 486 WW Cornell University Library The original of tliis book is in tlie Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924018937486 Hegal anb ^uiint66 ^ubltcattonsi of tBift lElonalti ^vtaa Cotntian^ 229 Broadway, New York CORPORATE ORGANIZATION. By Thomas Conyngton, of the New York Bar. 400 pp. 6x9 in. 1908. Buckram bind- ing. Prepaid price^ $3.00 CORPORATE MANAGEMENT. By Thomas Conyngton. Tliird Edition. 400 pp. 6x9 in. 1908. Buckram binding. Prepaid price, $3.00 .CORPORATION I,AWS OF ALI, STATES. By M. U. Overland, of the New York Bar. 500 pp. 6x9 in. 1908-9. Buckram binding. (Including 1909 supplement.) *■ Prepaid price, $4.00 MAINE CORPORATIONS. By H. M. Heath, of the Maine Bar. 300 pp. 6x9 in. 1907. Buckram binding. Prepaid price, $3.00 NEW YORK CORPORATIONS. By Richard Harrison, of the New York Bar. 431 pp. 6x9 in. 1906. Buckram binding. Prepaid price, $3.50 CONDITIONAL SALES. By Fred Benson Haring, of the Buffalo Bar. 370 pp. 6x9 in. 1907. Buckram binding. Prepaid price, $4.00 PARTNERSHIP RELATIONS. By Thomas Conyngton. 221 pp. 6x9 in. 1905. Buckram binding. Prepaid price, $2.00 FINANCING AN ENTERPRISE. By Francis Cooper. 543 pp. 534 x Zyi in. 1907; Second Edition, 2 vols. Buckram binding. Prepaid price, $4.00 CORPORATE FINANCE AND ACCOUNT- ING. By H. C. Bentley, C. p. a. SOO pp. 6x9 in. 1908. Buckram binding. Prepaid price, $4.00 Circulars oe any of the above BOOKS on application A PRACTICAL WORK ON THE CORPORATE FORM AS USED FOR PRIVATE ENTERPRISES THE MODERN CORPORATION Its Mechanism, Methods, Formation and Management BY THOMAS CONYNGTON OF THE NEW YORK BAR Author of "Corporate Organization/' Corporate Management,** etc. THIRD EDITION THE RONALD PRESS NEW YORK 1908 Copyright 1902 BY The Ronald Prsss Copyright 1905 BY The Ronald Press Company Copyright 1908 BY The Ronald Press Company PREFACE. The very friendly reception accorded the earlier editions of "The Modern Corporation" and the constantly increasing importance of its subject must be the author's justification for the appear- ance of the present revision. In the present edition the endeavor has been to follow out and extend the design of the original work, — to give a general view of the corporate sys- tem, to summarize the objects, methods and ad- vantages of the corporate form, to show the ready adaptation of the modern corporation to the needs of ordinary business, to outline the manner -of its formation and to give the important rules of its procedure, — in short to present from a practical standpoint, the facts, directions and general infor- mation concerning corporations that every man of affairs should know and that those responsible for or interested in corporations must know if they would properly perform their duties or protect their interests. In pursuance of this purpose special attention is given to the organization of the corporation and to the details of its management. The principal forms used in connection with corporate procedure have been included, and in every respect the work ni IV PREFACE. has been made as practical and complete as the limits of space would permit. Discussion- of statutes, which vary in the different states, has been avoided as far as possible. The author can only hope that the present edi- tion will be found as practically useful as its pre- decessors. Thomas Conyngton. New York, Sept. 1, 1908. TABLE OF CONTENTS. PART I. THE CORPORATE SYSTEM. Chapter I. The Corporation. § 1. Nature. 2. Classification. 3. (a) Corporations without Capital Stock. 4. (b) Corporations with Capital Stock. 5. (1) Corporations for General Business Purposes. 6. (2) Corporations for Public Service. 7. (3) Corporations for Financial Purposes 8. Joint Stock Companies. Chaptbr II. Stock Corporations. ■§ 9. Distinctive Features. 10. (a) Creation by the State. 11. (b) Ivimited Powers. 12. (c) Limited Liability. 13. (d) Legal Entity of Corporation. 14. (e) Permanence. 15. (f) Stock System. 16. (g) Corporate Mechanism. 17. (h) Attractiveness to Investors. Chapter III. Stock. I 18. Capital Stock. 19. Capital Stock vs. Capital. 20. Unissued and Issued Stock. 21. Full Paid Stock. 22. Common Stock. 23. Preferred Stock. 24. Treasury Stock. Vi TABLE OF CONTENTS. Chapter IV. The Charter. § 25. Definition — Synonyms. 26. Charter Powers — General. 27. (a) To Sue and be Sued. 28. (b) To Use a Seal. 29. (c) To Buy, Sell and Hold Property. 30. (d) To Appoint Directors, Officers and Agents. 31. (e) To Make By-Laws. 32. (f) To Dissolve Itself. 33. (g) To Do All Things Necessary. 34 .Charter Powers — Special. 3S. Things Ultra Vires. Chapter V. By-Laws. § 36. Definition. 37. Adoption. 38. Amendment. 39. Enforcement. PART II. CORPORATE ORGANIZATION. Chapter VI. Incorporation. 40. Subscription Lists. 41. Application for Incorporation. 42. (a ) Incorporators. 43. (b ) Name of Corporation. 44. ( c ) Purposes. 45. (d ) Capitalization. 46. ( e ) Shares. 47. ( f ) Location. 48. (g ) Duration. 49. (h ) Number of Directors. 50. ( i ) Directors for the First Year. 51. ( j ) Charter Subscriptions. 52. (k ) Classification of Stock. 53. ( 1 ) Cumulative Voting. 54. (m) Holding Stock in Other Companies. 55. (n ) Powers of Directors. TABLE OF CONTENTS. Vll 56. (o ) Limitations on Salaries and Indebtedness. 57. Execution of Certificate. 58. Filing and Recording. 59. Fees and Expenses. 60. Books, Stock Certificates and Seal. Chapter VII. First Meeting of Stockholders. § 61; Preliminary. 62. Opening the Meeting. 63. Adoption of By-Laws. 64. Election of Directors. 65. Proposal to Exchange Property for Stock. 66. Resolution Approving Exchange, 67. Other Business. Chapter VIII. First Meeting of Directors. § 68. Preliminary. 69. Opening the Meeting. 70. Election of Officers. 71. Exchange of Property for Stock. 72. Designation of Bank. 73. Other Business. 74. Adjournment. Chapter IX. Protection of Minority. § 75. General. 76. Cumulative Voting. n. Non- Voting Stock. 78. Classification of Stock. 79. Voting Trusts. 80. Limitations on Expenditures. 81. Restrictions on Amendments. 82. Restrictions on the Voting Power. Chapter X. From Partnership to Corporation. § 83. General. 84. Name. 85. Usual Arrangements. 86. Special Adjustments. 87. Preliminary Contract. VUl TABLE OF CONTENTS. 88. Organization of Corporation. 89. Transfer of Business. 90. Conduct of Business under New Form. 91. Ciianging Books. PART III. CORPORATE MECHANISM AND MANAGEMENT. Chapter XI. Stockholders. 92. Definition. 93. Rights of Stockholders. 94. Powers of Stockholders. . 95. Liabilities of Stockholders. 96. Annual Meeting. 97. Special Meetings. 98. Notice of Meeting. 99. Quorum. 100. Voting. 101. Proxies. 102. Election of Directors. 103. Officers of Meetings. Chapter XII. Directors. 104. Introductory. 105. Number and Authority. 106. Liabilities. 107. Qualifications. 108. Vacancies. 109. Classification. 110. Regular Meetings. 111. Special Meetings. 112. Notice of Meetings. 113. Quorum. '■' " 114. Election of Officers. 115. Compensation of Directors. 116. Power to Pass By-Laws. 117. Executive Committee. 118. Finance Committee. TABLE OF CONTENTS. IX Chapter XIII. Officers. § 119. Enumeration; Qualifications. 120. Vacancies and Removals. 121. Liabilities of Officers. 122. Compensation of Officers. 123. Duties of Officers. 124. The President. 125. The Vice-President. 126. The Secretary. 127. The Treasurer. 128. General Manager. 129. Counsel and Auditor. Chapter XIV. Stocks and Stock Books. § 130. Acceptance of Subscriptions. 131. Certificates of Stock. 132. Issuance of Certificates. 133. Transfers of Stock. 134. Lost Certificates. 135. Stock and Transfer Books. Chapter XV. Dividends and Finances. § 136. Dividends. 137. Working Capital. ' 138. Debt. 139. Bank Deposits. Chapter XVI. Sundry Details. § 140. Corporate Offices. 141. Corporate Seal. 142. Execution of Contracts. 143. Parliamentary Law. 144. Treasurer's Books. 145. Secretary's Books. 146. Minute Book. 147. Stock Certificate Book. 148. Transfer Book. 149. Stock Ledger. 150. Amendment of Charter. X TABLE OF CONTENTS. PART IV. CORPORATE FORMS. Chapter XVII. Subscription Lists. Form. 1. Subscription List. Usual Form. 2. Subscription List. Trustee's. 3. Subscription Blank. Individual. Chapter XVIII. Stock Certificates. Form. 4. Stock Certificate with Stub. 5. Preferred Stock Certificate. 6. Assignment of Stock Certificate. In Blank. 7. Assignment of Stock Certificate. Complete. Chapter XIX. Charter Forms and State Fees. Form. 8. New York Charter. 9. New Jersey Charter. 10. Arizona Charter. 11. Comparative Table. Organization Expenses. 12. Comparative Table. Annual Franchise Taxes. Chapter XX. By-Laws. Form. 13. By-Laws. Short Form. 14. Certification of By-Laws. 15. By-Laws. Extended Form. Chapter XXI. First Meetings. Form. 16. Proxy. First Meeting of Stockholders. 17. Call and Waiver. First Meeting of Stockholders. 18. Call and Waiver. First Meeting of Directors. 19. Issuance of Stock for Property. Proposal. 20. Issuance of Stock for Property. Stockholders' Resolution. 21. Issuance of Stock for Property. Directors' Resolution. Chapter XXII. Minutes of First Meetings. . Form. 22. Minutes. First Meeting of Stockholders. 23. Minutes. First Meeting of Directors. TABLE OF CONTENTS. XI Chapter XXIII. Calls and Notices. Form. 24. Notice of Annual Meeting. 25. Notice of Annual Meeting. Publication. 26. Call and Waiver. Special Meeting of Stockholders. 27. Call for Special Meeting. Stockholders'. 28. Notice of Special Meeting. Stockholders'. • 29. Call and Waiver. Special Meeting of Directors'. . 30. Call for Special Meeting. Directors'. 31. Notice of Special Meeting. Directors'. Chapter XXIV. Proxies. Form. 32. Simple Proxy. Unlimited. 33. Formal Proxy. Annual Meeting. 34. Revocation of Proxy. Chapter XXV. Minutes. Form. 35. Annual Meeting of Stockholders. 36. Regular Meeting of Directors. 37. Special Meeting of Stockholders. 38. Adjourned Meeting of Stockholders. 39. Special Meeting of Directors. Chapter XXVI. Motions and Resolutions. Form. 40. Motion. To Receive and File Report. 41. Motion. To Pay Bills. 42. Motion. To Pay Disputed Account. 43. Motion. To Purchase Engines. 44. Resolution Authorizing Contract. (Directors'.) 45. Resolution Declaring Dividend. (Directors'.) 46. Resolution Authorizing Sale of Assets. (Stockholders'.) Chapter XXVII. Signatures and Certifications. Form. 47. Oflficial Signatures. (a) Informal. (b) Formal. XU TABLE OF CONTENTS. 48. Corporate Signatures. (a) Incomplete. By Stamp. (b) Completed. (c) Attestation of Seal. (d) Testimonium and Formal Signatures. 49. Corporate Endorsements. (a) Simple. (b) For Deposit. 50. Acknowledgement of Corporate Instrument. 51. Treasurer's Affidavit. 52. Certified Resolution for Bank. 53. Certified Extract from By-Laws. Chapter XXVIII. Sundry Corporate Forms. Form. 54. Corporate Check. 55. Corporate Note. Signature by President. 56. Corporate Note. Signature by Treasurer. 57. Corporate Contract. 58. Resignation of Director. 59. Resignation of President. 60. Stock Ledger. 61. Transfer Book. 62. Treasurer's Bond. 63. Committee Report. THE MODERN CORPORATION. PART I.— THE CORPORATE SYSTEM. CHAPTER I. THE CORPORATION. § I. Nature. A corporation is an artificial per^oh, created or au- thorized by the law for sortie fiat-ticular purpose or purposes. It has, therefore, only those rights and powers which are given it by the liw. These rights and powers vary in the different states but are in all cases sufficient for the demands of oi-dinary business. A corporation is usually composed of a number of persons associated together though it may, and some- times does, consist of but one or two members. These members, or stockholders, are not, however, the cor- poration. They compose it but the corporatiori has a name, an entity and an existence of its own, ehtirely apart and distinct from th^t of these members. Under its corporate name it may conduct business, make con- tracts and bring suit. So absolutely different is the is 14 THE MODERN CORPORATION. corporation's existence from that of its stockholders that it may enter into contracts with these latter, may sue them or be sued by them. (See § 13.) In the famous case of the Trustees of Dartmouth College vs. Woodward, Chief Justice Marshall defined a corporation as "an artificial being, invisible, intan- gible, and existing only in contemplation of the law." In other words the corporation exists, and, through officers and agents, may carry on its business, but there is no individual or group of individuals who can legiti- mately claim to be the corporation. They may own or control or represent the corporation, but they can not be the corporation. § 2. Classification. Corporations are used for such a wide diversity of objects that any classification based on the purposes for which they are formed over-laps and is apt to be con- fusing. The government of a city or the management of a college, the activities of a church or the operations of an industrial combination, the administration of an estate or the control of a railway system may all be efficiently conducted under the corporate form. We speak generally of manufacturing, municipal, religious, educational and banking corporations and the like, thus roughly grouping them according to their purposes, but the classification is not entirely satisfactory. A logical classification is that which separates all corporations into (i) public and (2) private corpora- tions. Public corporations are those formed by the community for its own governmental purposes, as in THE CORPORATION. 15 cities, villages and towns. These are called municipal corporations. In the Dartmouth College case, already quoted, it was said that "strictly speaking, public cor- porations are such only as are founded by the govern- ment for public purposes where the whole interests belong also to the government." All other corporations are private corporations. Corporations formed to conduct public utilities, such as railroads, turnpikes and telegraph systems, or to sup- ply water, gas and electricity are sometimes called quasi-public corporations, but, if they are conducted for private gain, they are properly classed as private cor- porations, even though the State may own part of their stock. The present work treats entirely of private corporations. Private corporations may be divided into corpora- tions without capital stock and corporations with capi- tal stock. § 3. (a) Corporations without Capital Stock. Most religious, educational, charitable and social organizations belong to this class. They are non-stock, or membership corporations. In some cases certificates of membership are issued to the members, but these are not stock certificates and are not usually transferable. When corporate action is taken each member has one vote without regard to the amount of his financial in- terests, if any, in the corporation. Mutual insurance companies are non-stock corporations, as are also stock exchanges and other similar organizations. Curious 1 6 THE MODERN CORPORATION. questions sometimes arise as to the rights and interests of the members of such corporations, but the subject is not of sufficient general interest to justify its discus- sion here. The body of modern corporation law has to do with the stock corporation. § 4. (b) Corporations with Capital Stock. Stock corporations have a capital stock divided into shares, usually of like amount, which are evidenced by transferable certificates of stock. These stock cer- tificates are issued to the members of the corporation, who are termed stockholders, the certificates evidenc- ing the number of shares to which their owners are entitled. The ultimate control of the corporation rests with the stockholders, who act in meetings and by vote. Each share of stock usually entitles its owner to one vote in stockholders' meetings, hence those owning a majority of the shares control the corporation. When profits are to be divided, they are distributed arnong the stockholders in proportion to the number of shares owned by each. On account of the convenience of the system, all corporations intended for profit are organized as stock corporations. Stock corporations may be conveniently divided into the following classes : ( 1 ) Corporations for general business purposes. (2) Corporations for public service. (3) Corporations for financial purposes. THE CORPORATION. 1/ §5. (i) Corporations for General Business Purposes. This class includes the greater number of existing corporations. In most states of the Union general laws have been passed providing that upon compliance with simple prescribed formalities and payment of cer- tain moderate fees companies of this class may be in- corporated. In a few states corporations may also be authorized by special act of the legislature, but the practice prevailing in most of the states permits in- corporation only under the provisions of general laws, the benefits of which may be enjoyed by all alike. Many of the states have constitutional prohibitions against special incorporations. (See § lo.) The law and procedure relating to corporations for general business purposes, such as manufacturing, min- ing and industrial corporations, make up the great body of modern corporation law. The present work treats primarily of this class of corporations. The two sub-classes mentioned — public service and financial corporations — are governed by this same law and procedure, but in addition they are also subject to many special regulations and restrictions, designed to safeguard the public, which do not apply to the ordinary business corporation. § 6. (2) Corporations for Public Service. The corporations which control railways, telegraph and telephone lines and which furnish transportation, light, water and power in our great cities, form another exceedingly important class. These corporations are l8 THE MODERN CORPORATION. allowed, under certain restrictions, to exercise the right of eminent domain, and in some cases are given special and exclusive privileges in the public ways. The peculiar nature of the privileges conferred upon this class of corporations, and the not infrequent re- sulting abuse of their monopolistic powers, render them the subject of constant and increasing legislative restriction and regulation. The laws enacted for this purpose apply solely to this class of corporations and are mostly outside the scope of the present volume. It is to be noted, however, that these corporations are subject to the general corporate law and procedure applicable to all stock corporations, as well as to those special regulations applicable only to public service corporations. § 7- (3) Corporations for Financial Purposes. Under this head are included all banks, trust com- panies, insurance companies, guaranty companies, building associations and other similar institutions handling the funds, savings or investments of the pub- lic. The laws under which these may be organized usually require evidence of substantial financial respon- sibility and of actually paid in cash" capital. After organization certain detailed reports are required and the corporation is usually subject to some form of governmental supervision. In each state corporations of this class are subject to special statutory regulation, except national banks, which are created and super- vised only by the National Government. In the details of their management, not regulated by THE CORPORATION. I9 special statutes, these financial corporations are subject to the general statutory and common law rules and procedure by which all stock corporations are governed. § 8. Joint Stock Companies. A joint stock company is practically a partnership, authorized by law to act under a corporate name and to issue stock to its members. As existing under the laws of New York it has been defined by the New York Court of Appeals as "a partnership with some of the powers of a corporation." Its stock is transferable and represents the interests of the members in the profits and property of the business, as in the ordinary corporation. Here, however, the resemblance ceases, for the members are individually liable for the debts of the company exactly as in a partnership. The joint stock company is of little utility and is but seldom used. In some states the term is loosely and inaccurately ap- plied to ordinary stgck corporations. Joint stock cornpanies, like partnerships, may be formed merely by agreement of the members among themselves, whereas a corporation may only be formed by compliance with prescribed statutory requirements or by special legislative enactment. In some few states the laws permit special forms of partnership association in the nature of joint stock companies, of such indefinite character that their proper classification has puzzled the courts. Such associations are not commonly allowed or formed. On the con- trary the laws relating to corporations are constantly tending to greater uniformity and certainty, and the 20 THE MODERN CORPORATION. authorization of any form of association that is un- usual or indeterminate interferes with this desirable trend and is therefore distinctly unfortunate. It also leads to much confusion and uncertainty as to the rights of all concerned. CHAPTER II. STOCK CORPORATIONS. § 9. Distinctive Features. The distinctive features of a modern stock corpora- tion may be summarized as follows : — ■ (a) Its creation and regulation by the State. (b) The limitation of the corporate powers to the objects specified at the time of its creation. (c) The limitation of the liabilities of the stockholders to a definite amount. (d) The distinct entity of the corporation for all legal and business purposes. (e) The permanence of its organization. (f) The representation of the interests of the stockholders in the corporation by transferable shares of stock. (g) The corporate mechanism of directors, officers and agents, working under definite rules of action. These are the most important and characteristic features of corporate existence. They are possessed by every stock corporation and every organization possessing them is a stock corporation. They embody the peculiar advantages of the corporation over the partnership. They are discussed in the present chapter in the order given. 21 2,2 THE MODERN CORPORATION. § 10. (a) Creation by the State. A partnership may be formed by the mere agreement of the parties. A corporation, on the contrary, may be created only by the State. Formerly each corpora- tion was created by a separate legislative enactment. This made the grant of corporate powers a legislative favor to the recipients and caused much favoritism and corruption. To avoid this the various states of the Union have passed general laws governing the formation of corporations. These laws vary in the different states in minor details. All are alike in their general plan and scope. Under them qualified persons making due application and paying certain established fees to the state, are authorized to organize a corpora- tion for any specified legitimate purposes in accordance with the terms of their application. The instrument by which a corporation is created and receives its powers was formerly termed a charter. Now, it is also variously designated as the certificate of incorporation, articles of association, etc. (See Chap. IV.) Any amendment of the charter, increasing or reduc- ing the capital stock, changing the name or enlarging the powers of the corporation, must, in like manner with the original charter, be secured either through the legislature or by following the course prescribed by general laws. Usually such amendments must first be authorized by a two-thirds vote of the entire stock interest, though the details of this procedure vary in each state. STOCK CORPORATIONS. 23 § II. (b) Limited Powers. An individual or a partnership may engage in any business that seems best and may change from one business to another at pleasure. A corporation, on the contrary, is limited to those purposes enumerated in its charter, and has no authority to engage in any other business or venture unless authorized thereto by amendment of its charter. Formerly in most states a corporation could be or- ganized for only one purpose or line of business. Of late years the corporation laws of many states have been so changed that more than one purpose may be enumerated, and it is possible to give a modern cor- poration very broad powers. In the case of the great industrial combinations this enumeration of diverse purposes has been carried to such an extreme that almost every restraint has been removed, and it would be difficult to find any industry or business that can not be undertaken. (See § 26.) Directors of corporations have no power to under- take in the corporate name enterprises which are not permitted by the charter. Such matters are in legal parlance termed " things ultra vires." (See § 35.) § 12. (c) Limited Liability. Subscribers to the stock of a corporation are liable to the corporation for their subscriptions. If these have not been paid, creditors of the corporation can compel payment just as they can compel payment of any other amounts due the company. ' Beyond this liability, known as the subscription liability, there is 24 THE MODERN CORPORATION. in most states no individual responsibility whatsoever on the part of the stockholders for any indebtedness of the corporation. (See §§ 21, 95.) This freedom from liability is the great inducement to corporate investment and the use of the corporate form generally. It is the exact opposite of the rule that obtains in the partnership, where, if credit is given, it is extended on the individual responsibility of the part- ners and each is held legally answerable for all the partnership debts. In the corporation, on the other hand, if credit is given, it is extended on the reputation and solvency of the corporation alone, and, provided all stock subscriptions are paid, the corporation alone can be held. The stockholders have no individual lia- bility. In some few states this general rule has been varied and special liabilities have been created by statute. These liabilities are, however, exceptional and not characteristic of the corporation. In the great majority of the states the stockholder when once his stock has been paid for in full, is liable neither to assessment by the corporation nor to action by its creditors. If his corporation becomes insolvent he may lose his invest- ment, but he need fear no further involvement. § 13. (d) Legal Entity of Corporation, The distinct legal entity of the corporation may best be shown by comparison with the partnership. The difference between the relations of stockholders to a corporation and members of a firm to the partnership is radical STOCK CORPORATIONS. 25 A partnership is an association of which each part- ner is an integral and inseparable part. Hence each partner represents the partnership fully, can make con- tracts for it without consultation with other partners and can bind it by his action. On the other hand he can not contract zvith his partnership, bring suit against it, or be sued by it, any more than he could so act with or against himself. A corporation on the contrary is itself a legal entity, distinct from its stockholders. These stockholders as individuals do not represent it, can not make contracts for it, nor bind it in any way. Each may deal with the corporation as with a stranger, may contract with it, may sue it, may be sued by it. A partnership, even though it may have a trade name can not sue or be sued under this name, but in every action at law the name of every partner must appear. The corporation, on the contrary, may bring suit in its own name and may be sued in like manner, without the necessity of naming its stockholders or any of them. In short the partnership is merely an association of the people who compose it, while the corporation is a new creation having a legal existence and rights of its own, apart from its members and stockholders. It is true that this doctrine of the distinct legal entity of a corporation is a legal fiction, but for all practical busi- ness purposes it is an actual fact upon which is based almost all of the existing corporate law and procedure. The courts recognize this doctrine fully, and, except 26 THE MODERN CORPORATION. in certain cases of fraud, treat the corporation as a complete and competent legal personality. § 14. (e) Permanence. A partnership may be dissolved at any time, at the will of any partner, and is necessarily dissolved if a partner dies, becomes insolvent or sells out to a stranger. A corporation, on the contrary, continues for the term of its existence, uninterrupted by the dis- satisfaction, financial embarrassment, death or retire- ment of its stockholders. Its entire membership may change again and again, but the corporation continues. The old writers were fond of comparing it to a river, which remains always the same though the water that composes it is constantly changing. In some states corporations are only chartered for a limited period such as twenty or fifty years. Unless the charter or statutes limit the term of existence, or unless the constitution or statute law of the state ex- pressly reserves the right to repeal or amend charters, the duration of a corporation would technically at leasit be perpetual. Many modern charters state boldly that the duration of the corporation shall be perpetual. The duration of a corporation is usually terminated (i) by voluntary dissolution, (2) by the expiration of the period for which it was formed, (3) by its insol- vency or (4) by forfeiture of its charter to the State for misuse, non-use or abuse of its power. These are the only legal methods by which a corporation may be terminated. (See §§ 32, 48.) In most of the states, the right to repeal or amend STOCK CORPORATIONS. 2/ corporate charters is reserved by the state. This power, however, may not be exercised arbitrarily or unreasonably. § 15. (f) Stock System. The division of the stock of the corporation into shares represented by stock certificates, transferable by indorsement, is one of the most convenient features of the modern corporate system. It permits the invest- ment of varying amounts, and gives each investor a proportionate interest in the management and resulting profits of the business. It provides a ready method for withdrawal of the investment by the sale of part or all of the stockholder's interest to some other investor. In case of the death of a stockholder it renders the transfer or division of his interest a simple matter. It is in striking contrast to the complexity, cumbersome- ness and difficulty of transferring an interest in an ordi- nary partnership. All stockholders who have paid their subscriptions in full are entitled to receive transferable certificates of stock, signed by the proper officers of the corpora- tion and setting forth the number of shares to which they are entitled. These certificates are transferable by indorsement, or they may be exchanged for other certificates issued in the names of other persons. A stockholder's interest may be represented by one cer- tificate for the entire number of shares owned by him, or by a varying number of certificates, each for one or more shares, the aggregate representing his total in- terest. The transfer of these stock certificates is a 28 THE MODERN CORPORATION. purely individual matter between the parties and has no effect upon the business of the corporation. (See Chaps. Ill, XI and XIV; also Forms 4 to 7.) § 16. (g) Corporate Mechanism. A corporation is created by the grant of a charter from the state. This instrument in general terms de- fines the rights and powers of the corporation. After this charter has been allowed the incorporators hold a meeting, and adopt by-laws, which are the general rules for the government of the corporation and which lay down the lines along which the business of the cor- poration is to be conducted. The stockholders also elect a board of directors, who, under the limitations and regulations of the charter and by-laws, control and manage the business and property of the corporation. The directors then hold their first meeting, elect offi- cers and take such other action as may be necessary to inaugurate the corporate activities. Thereafter they hold their meetings from time to time as may be re- quired by the by-laws or the necessities of the business. In addition to the elected officers, they may appoint such other agents as may be necessary. These officers and agents are subordinate to the board and must obey its instructions. The respective powers, duties and relations of the stockholders, the directors and the officers are all well understood and clearly defined. The board of directors is the sole managing and controlling authority of the corporation. The stock- holders, as has been said, make the by-laws by which STOCK CORPORATIONS. 29 the directors are controlled, and elect the directors by whom the corporate affairs are conducted, but beyond this they do not interfere in any way with the transac- tion of the corporate business or the management of the corporate property. All this rests with the board. The officers and agents of the company carry out the instructions of the board, and, outside the routine duties assigned them by the by-laws, have no inde- pendent powers or authority of any kind. § 17. (h) Attractiveness to Investors. As a consequence of the advantages enumerated, and because of the liabilities and inconveniences of the partnership, the corporate form is peculiarly attractive to the investing public. It is created by the State, is for a continued period and is not liable to sudden or unexpected termination. It moves in well defined grooves and the rights and liabilities of all concerned are defined by law and well settled by custom. It per- mits investment to a definite extent without indefinite or further liability and without the necessity of the in- vestor becoming identified with the management. Also an interest may be secured and then sold, transferred or transmitted to posterity with a minimum of for- mality and at nominal expense. For these reasons, whenever outside capital is to be secured for an enterprise, or capital already engaged is to be increased, recourse is naturally had to the cor- porate form. CHAPTER III. STOCK. § 18. Capital Stock. The capitalization or capital stock of a corporation is the nominal capital authorized by its charter. As shown later this may be the same or may be entirely different from its actual capital. For the sake of ac- curacy and convenience in expressing the interests of the stockholders in the capital stock, and in the corpor- ate property and business for which this capital stock stands, it is regarded as divided into equal shares which are termed "shares of stock." When by pur- chase or otherwise an interest is acquired in the capital stock, the person acquiring such interest becomes a stockholder in the corporation, and his interest is ex- pressed in these shares of stock which are then said to be issued. The corporation is authorized to issue these shares of stock up to the total amount of its capital stock. Certificates are given — or issued — to stock- holders evidencing the fact that they own a specified number of shares of its stock. These certificates of stock are popularly, though, incorrectly, referred to as "stock." The interest they represent in the corporation is also, and correctly, designated "stock." 30 STOCK. 31 The par, or face value of the shares of stock is fixed by the charter and is usually one hundred dollars each, though, unless expressly limited by statute, this value is optional with the incorporators. In mining com- panies one dollar is a common par value, adopted with a view to impressive offerings and the reception of smaller subscriptions than could be taken with larger shares. In close corporations, or where a general sale is not desired, the face value of the share will some- times be fixed at $500 or even $1,000. Shares are not issued in fractional parts, but only in amounts of one or more whole shares. (See § 46.) As the holdings of the stockholders of a corporation are expressed in these shares, the number of shares owned by any individual gives an accurate measure of his interest in the corporation. For instance, if a man owns ten shares of the par value of $100 each in a corporation with a capitalization of $10,000, he owns a total interest of $1,000, or one-tenth of the entire capitalization, and therefore has an undivided one- tenth interest in the entire corporate property and busi- ness. The interest of a stockholder in his corporation is always an undivided interest. No particular part of the property, or the business, or the capital stock be- longs to the particular stockholder, but he owns his proportion of all these. If the corporation, from in- solvency or other reason, were liquidated, any property remaining to the stockholders, or its proceeds, would be divided among them in the proportion of their stock holdings. In that event the undivided condition of 32 THE MODERN CORPORATION. their interests would terminate, but so would the cor- poration. As long as any corporate property exists their interests are in the undivided common property. It may be noted that the par value and the actual value of a share of stock may be very different. A hundred dollar share of stock in a prosperous corpora- tion will frequently be worth several times that amount, while in an unsuccessful corporation it may be worth little or nothing. In either case the par value remains the same. (See § 19.) As a convenient evidence of the stockholders' inter- ests in a corporation, stock certificates are issued and every stockholder whose stock is paid for has a right to such a certificate. These certificates state the num- ber of shares owned, their par value, and usually any other material facts affecting the stock in question, as, for instance, if such be the fact, that it is full paid, or that it is preferred stock. These certificates of stock are signed by the president and secretary, or president and treasurer of the corporation and are sealed with the corporate seal. In the absence of fraud, they are, if in due form, conclusive evidence of the ownership of the stock represented by them. It is to be noted that the stock certificate is merely the evidence of ownership of stock and is not the stock itself. The stock of a corporation and the ownership of this stock may and usually do exist before stock certificates are issued at all. Nor if the stock certificate be lost is the ownership of the stock affected in any way. The party in whose name the stock stands on the books of the company is still a stockholder and may STOCK. 33 attend meetings, vote and draw his dividends just as before. The loss of his certificate may be embarrass-, ing, just as would be the loss of a deed to land, but does not further involve or affect in any way the title to the stock it represents. (See § 92; also, generally, Chap. XIV.) Each share of stock usually entitles the owner of record (See § 131) to one vote in all proceedings of the stockholders, whether assembled in annual or special meeting. In most states by proper charter pro- vision the voting power of stock may be restricted, or stock may be issued without the voting power. Pre- ferred stock is very frequently so issued. Unless ex- pressly denied or restricted by proper provision, all stock has the usual voting power and this right may be exercised by the owner of record in person, or, usually, by proxy. (See §§ 45, 46.) § 19. Capital Stock vs. Capital. The "capital stock" or capitalization of a corpora- tion should be very clearly distinguished from its "capital." The capital stock is the total amount of stock the corporation is authorized by law to issue. It is fixed by the parties organizing the corporation — who are termed the incorporators — and, once accepted and au- thorized by the State, may only be changed by formal amendment. It is but seldom that the capital stock of a corporation is changed. The capital, on the other hand, is the actual amount of property owned by the corporation, — that is, its 34 THE MODERN CORPORATION. assets. It is obvious that the value of these assets is liable to change with the fluctuations of the business or from other causes. The capital stock of the corpora- tion and its capital, therefore, even though equal at first, may and frequently do differ greatly in amount. For instance, the capital stock of the Chemical Bank of New York City is but $300,000 while its capital is over $7,500,000. In conservative incorporations the capitalization usually corresponds with the initial capital. That is, for every dollar of stock the corporation issues at the time of its formation, it receives a dollar in cash or property. Later this relation will vary as the capital increases or diminishes with the fluctuations of the business. In corporations of a speculative nature, as well as in some others, the capital stock is usually and intention- ally fixed far in excess of the initial capital. This is done in order that the stock may be sold profitably at prices far below its apparent value, or in the expecta- tion that the future earnings will support and justify the capitalization, or in some cases with the purpose of concealing the profits actually earned by the particular corporation. Companies with these excessive capitali- zations are said to be over-capitalized, and the stock is said to be watered. Each share of stock issued by a corporation repre- sents both the undivided ownership of its proportion of the assets and the right to its proportion of all divi- dends declared. The selling price of stock therefore is usually governed by these two factors and fluctuates STOCK. 35 within limits according to the amount of capital and the rate of dividend. The stock of the Chemical Bank with over $7,500,000 of assets and annual dividends of 150 per cent., sells at over $4,000 for a share of the nominal, or face value of $100. If the dividends were decreased without any diminution of the assets the price would decline. Or if the assets were decreased, the price of the stock would decline even though the earnings and dividends remained the same. § 20. Unissued and Issued Stock. Unissued stock is in itself a nullity. Until it is issued it represents nothing. It is not treasury stock and is not an asset of the company. It is merely an unexer- cised right to issue stock. Unissued stock usually represents excess capitaliza- tion. For instance a corporation organized to take over property worth $20,000 might perhaps be capitalized at $25,000 with the idea of selling this additional stock to raise working capital. Or perhaps a corporation will be capitalized with a view to its future needs at $100,- 000, when but $50,000 will meet all immediate require- ments. This $50,000 alone is then issued. The differ- ence of $50,000 is unissued stock entirely without value except for the power it gives of issuing this additional stock at any time it may be necessary without the for- malities that would otherwise be required. Issued and outstanding stock is that stock which has been properly issued for cash, property, labor, services or other values, or which has been subscribed for and the subscriptions accepted by the company. The actual 36 THE MODERN CORPORATION. certificates by which this stock is represented may not have been issued, but as soon as a purchase is duly consummated or a subscription properly accepted, the stock affected is issued stock, and the subscribers or purchasers are stockholders of the company. Should a subscription then be canceled by mutual consent of the interested parties, or by due procedure of the di- rectors of the corporation, the stock affected would resume its character of unissued stock. Certificates for stock should never be issued to the purchasers until the corporation has received the full agreed price. Sometimes stock issued and paid for will be regained by the corporation by direct purchase, by gift or by other means. Such stock is not thereby retired, or classed as unissued stock, but is designated "treasury stock," and may be issued again as full-paid stock at less than the original price without involving the pur- chaser in any liability. Such stock is usually regarded as an asset. (See § 24.) § 21. Full Paid Stock. If the corporation has received the full face value for issued stock, such stock is termed full paid. If it has not received this full face value, the stock is but partly paid, and the purchaser of such stock may usually be held liable for the amount necessary to render the stock in his possession full paid. This liability may be enforced either by the corporation, or, in event of its insolvency, by any creditor of the corporation. It is to be noted, however, that if the corporation has agreed to accept less than the face value of stock in STOCK. 37 full payment, it is thereby estopped from collecting the deficiency, though the rights of creditors would not be affected by such agreement. Nor even if the corpora- tion entered into such an agreement and issued certi- ficates marked "Full Paid" for stock sold thereunder, would a creditor be estopped from collecting the defi- ciency if the stock were in the hands of the original purchaser. If, however, such certificates had passed into the hands of innocent purchasers both the corpora- tion and its creditors would be estopped from any fur- ther exactions no matter what the price originally paid for such stock. After stock has once been issued for full value, it may be sold at less than par without involving the pur- chaser in any liability for the difference. The certi- ficates for full paid stock should always bear on then- face the statement that they are full paid. In most states it is provided that payment for stock may be made in anything of value. Watered stock is stock for which the corporation has not received full payment in cash, services or property. Generally the term is applied to any stock for which the corporation has not received an equivalent in assets. Stock is said to be more or less watered according to the real amount of value it represents. It is usually created by the issuance of stock in payment for prop- erty or services which have been overvalued; some- times also it is created by the issue of stock insuf- ficiently supported by the corporate property, as for instance, in some cases of stock dividends or of stock given as a bonus with bonds. 38 THE MODERN CORPORATION. § 22. Common Stock. Common stock is the general or ordinary stock of a corporation witli neither special privileges nor restric- tions. If any portion of the stock is given special privileges or restrictions, that portion is thereby re- moved from the class of common stock and the re- mainder is alone common stock. Any statements made concerning stock are usually understood to apply to the common stock, unless some other class or classes are specified. § 23. Preferred Stock. Preferred stock is that which has some preference as to dividends or assets over other stock of the same corporation. This preference is usually secured to it by special provisions in the certificate of incorporation, though in some states this may be done by by-law pro- vision. Preferred stock may be either cumulative or non- cumulative as to dividends. If the latter, it must in any year receive its preferred dividend before any divi- dend is paid the_ common stock, but if in any year its dividend fails or is only partly paid it loses the unpaid amount. The dividends of a cumulative preferred stock are, on the other hand, a charge against the profits of the company, accumulating in case of failure from year to year until paid, in preference to any claims of the common stock. If its dividends are not paid in any year or are but partially paid, the amounts unpaid go over, or cumulate, and must be satisfied, STOCK. 39 together with any other dividend amounts due, before the common stock receives anything. Cumulative preferred stock is sometimes called guar- anteed stock, but this is a misnorner as its dividends are not guaranteed and are not payable unless profits are earned. The better use of the term "guaranteed" is to designate the stock of one corporation the divi- dend payments on which have been guaranteed by another corporation; an arrangement common among railroad companies. Preferred dividends are usually paid in full before the common stock receives any dividend. If there are further profits after the preference dividends are paid, it is sometimes provided that the preferred stock shall share equally in these with the common stock. More often — and always, unless otherwise expressly pro- vided — after the preferred dividends are paid, the com- mon stock receives an equal dividend if the profits are suiificient, and both kinds of stock then share alike in any further profits. At times, however, the preferred stock receives its preferred dividend, but does not par- ticipate at all in any further profits. In some states it is provided by statute that preferred dividends shall not exceed eight per cent. Sometimes the charter provides that preferred stock may be re- deemed out of the profits of the company after a certain number of years. It is often provided that in case of dissolution preferred stock shall be satisfied out of any assets of the company before the common stock re- ceives anything. If this provision is not made, either by statute or by charter, the preferred stock in any 40 THE MODERN CORPORATION. liquidation of the corporation would first receive any dividends then due, but thereafter would fare exactly as does the common stock. It is to be noted that preferred dividends may only be paid from profits. If there are no profits, or if the profits are needed for purposes of the business, pre- ferred stock either receives no dividend, or if cumula- tive, its dividend passes over until profits are made. Unlike a bond, it is not a debt or liability of the cor- poration. Its owners are stockholders and not credi- tors, and failure of dividends ordinarily gives no cause of action against the company or its directors. For this reason preferred stock when available is usually considered a better means for raising money than an issue of bonds. § 24. Treasury Stock. Treasury stock, strictly speaking, is stock which has been issued for value and has by gift or purchase come back into the possession of the company. It may be held in the name of the treasurer, of a trustee, or of - the company itself. It is usually accounted an asset of the company. It differs from unissued stock in the fact that it may be sold below par without involving the purchasei^ in any liability for the unpaid balance. So long as the treasury stock is held by the company it can neither vote nor draw dividends. Treasury stock is most commonly found in those numerous cases in which corporations are organized to take over and exploit a mine, an invention, or other speculative veriture. The owners of the property to be^ STOCK. 41 taken over assign it in exchange for the entire capital stock of the corporation as soon as this latter is organized. The stock is thereby supposedly full paid and its holders are not liable to either the corporation or its creditors. In order to raise funds for the other- wise impecunious corporation, the holders of this full paid stock donate back to the corporation, or to some trustee for the corporation, a certain proportion of their stock. This stock, being full paid, may be sold by the corporation for whatever it will bring, and the fact that it is sold below par does not impose any liability on the purchaser. This is the end desired. The term "treasury stock" is sometimes loosely and inaptly applied to unissued stock and even to stock subscribed for but as yet unpaid. As unissued stock represents nothing but the unexercised right to issue stock, and has no value whatsoever in itself, its desig- nation as treasury stock is inaccurate and misleading. CHAPTER IV. THE CHARTER. § 25. Definition — Synonyms. The terms, certificate of incorporation, articles of association, etc., are synonymous with the older and briefer word, charter. A charter is the formal author- ity from the State for the existence of a corporation, — the legislative fiat by which it is created. It is to the corporation what a constitution is to a civil govern- ment. It is the foundation upon which the corporate structure is built. (See Forms 8, 9, 10.) Charters for ordinary business corporations are not granted by the national government, the matter being left entirely with the states. The general government does, however, grant charters for national banks, has chartered sundry railway companies to build interstate lines and it is probable that it could constitutionally in- corporate companies for other purposes, — that is for the purposes of ordinary business. Important advan- tages would result from a national incorporation law accompanied by some measure of governmental super- vision. As it is, the corporation laws of the various states differ greatly as to detail and this lack of uni- formity occasions much inconvenience. 42 THE CHARTER. 43 The charter creates the corporation and authorizes certain specified individuals to organize it and conduct its operations. Such charter may include the grant of a franchise, as, for instance, for the construction of a bridge, a railway or other work, or may merely give the right to conduct some ordinary specified business. As has been stated, charters were formerly granted only by special legislative enactment. Now they may be secured under general laws and in many states may be secured in no other way. (See § 41.) Under these general laws incorporation has become a comparatively simple matter, the number of incorporations has enor- mously increased and the corporate form is now em- ployed for almost every variety of human effort and enterprise. § 26. Charter Powers — General. The grant of a charter bestows upon a corporation all proper powers specified in the charter application. In addition to these specified powers — which are usu- ally those necessary to conduct the business or enter- prise to be undertaken by the corporation — the charter confers certain general powers whether specified or otherwise. These general powers are as follows : (a) To sue and be sued. (b) To use a seal. (c) To buy, sell and hold property. ■(d) To appoint directors, officers and agents, (e) To make by-laws. ( f ) To dissolve itself, (g) To do all things necessary. "44 THE MODERN CORPORATION. These are discussed in order in the following sec- tions. § 27. (a) To Sue and be Sued. A partnership may be sued only by joining all the partners. That is, each partner must be named sepa- rately and made a party to the action. A corporation may sue or be sued under its corporate name just as may an individual. No mention need be made of its stockholders. A summons may be served on any man- aging officer, on any director or on an agent in charge of the corporate affairs. § 28. (b) To Use a Seal. This vs^as once a highly valued privilege, but its original significance has largely disappeared. Formerly the seal was the essential feature of the corporate signature. Now the corporate signature may be affixed by any properly authorized agent without the use of the seal except in those cases where an individual must use a seal, as in the conveyance of real estate or the execution of a bond. The seal of a corporation is still, however, an im- portant adjunct. It is used, without regard to its legal necessity, in the execution of all formal instruments and is impressed on every certificate of stock. It is also used in the certification of resolutions, by-laws, etc. The custody of the seal usually rests with the secretary of the corporation. (See § 141 and Form 48.) THE CHAkT66. 45 § 29. (c) To Buy, Sell and Hold Property. The general statement of this power must be taken with some qualifications. The property must be such as pertains to the business of the corporation and such as it is permitted to hold under the laws of the state. In some states the ownership of land by corporations is restricted. Also in many states a corporation may not hold shares of stock in another corporation. This was formerly the general rule but in recent years it has been modified in some states, as in New York where such power is granted if set forth in the charter, or has been abrogated altogether, as in New Jersey where a corporation may hold stocks as freely as an individual. § 30. (d) To Appoint Directors, Officers and Agents. This power is absolutely necessary as the corpora- tion can act only through such representatives. The stockholders at their annual meeting elect a board of directors. ^ These directors then meet and elect a presi- dent, a treasurer, a secretary and such other officers as may be desired. Agents may be appointed by the di- rectors or by the officers, when authorized thereto. Stockholders can not appoint agents or otherwise act directly for the corporation. A contract signed by every stockholder would not be the contract of the cor- poration and would not bind the corporation, unless also signed by its proper officers, or otherwise formally accepted by its directors. 4-6 THE MODERN CORPORATION. § 31. (e) To Make By-Laws. The by-laws are adopted by the stockholders. They are the working rules of the corporation and provide for the details of its operation. The by-laws are sub- ordinate to the charter, and their provisions must be in harmony with the charter requirements. Under this limitation, however, the by-laws have wide scope. The management of the corporation rests in the hands of its directors, and, as has been said, the stock- holders can not interfere directly in any way. They can, however, through their power to make by-laws, exercise a general control over the corporation and its affairs and this is the only way in which they can make their wishes effective. The by-laws therefore occupy a very important position in matters corporate. (See Chap. V; also § 116 and Forms 13, 15.) §32. (f) To Dissolve Itself. When a corporation has failed in its object, or has become unprofitable, or has completed its intend'ed course, or has disposed of its business and property, its dissolution may become desirable. Formerly this was a proceeding of some difficulty as the unanimous consent of all the stockholders was generally required. Now, however, in most states special laws have been enacted whereby some specified majority of the stock- holders by simple statutory proceedings may dissolve the corporation, the assets being sold, and, after pay- ment of any corporate debts, any remaining funds be- ing divided pro rata among the stockholders. THE CHARTER. 47 It sometimes occurs, and more particularly among corporations formed for speculative purposes, that a corporation fails and has absolutely nothing left of ma- terial value. Under these circumstances the trouble and expense of a formal dissolution are at times avoided by the very simple expedient of abandoning the corporation. This, while not recognized by the law, works a virtual dissolution. (§§ 14, 48.) § 33. (g) To Do All Things Necessary. A corporation organized for some specified purpose has the legal right to do all proper things necessary to carry out that purpose, as, for instance, a corporation organized to build and operate a factory would with- out special authorization thereto have the right to buy and hold the real estate required for the erection of its plant. In modern charters it is customary to specify many purposes and to amplify each to the utmost extent. This is done largely because it pleases and impresses stockholders and investors. Most of the powers usu- ally specified would be included and secured without mention, as being incident to the main purpose or pur- poses. § 34. Charter Powers — Special. The special powers of a corporation are those specifi- cally mentioned in its charter which, if not so men- tioned, it would not possess. The usual purposes with their customary extensive amplifications are included among these, but modern corporation law allows many 48 'i'HE MODERN CORPORATION. further powers that add much to the value of the cor- porate system. Among these may be mentioned the varied provis- ions as to the issue of preferred and other special stocks, the system of cumulative voting, the pOwer to hold stock of other corporations and the like. Also restrictions may be embodied in the charter that are often useful, such as the limitations of the salaries to be paid officers, or restrictions on the power to mort- gage the corporate property or to contract indebted- ness generally. (See §§ 52, 56, 80, 81, 82.) As a rule special powers may only be secured when expressly allowed by the statute law, and in the differ- ent states the laws will be found to vary widely in re- spect to the special powers permitted. In some states certain powers which are usually special privileges have been conferred by statute, so that all corporations enjoy them whether mentioned in the charter or other- wise. For instance, in New Jersey any corporation may acquire the stock of other corporations, and in Pennsylvania, Illinois, California and some other states cumulative voting at all corporate elections is prescribed by constitutional provision. § 35. Things Ultra Vires. An individual or firm may do anything not forbid- den by the law. A corporation, as a creature of the law, may only do those things expressly permitted to it under the law. All other things are beyond its powers, or in legal parlance, ultra vires. Contracts in- volving matters ultra vires can not be enforced by the THE CHARTER. 49 corporation, though if the other parties to such a con- tract have performed their part, the contract may be enforced against the corporation — that is this latter can not evade its obligations by the plea of ultra vires. Directors and officers may make themselves personally liable for involving the corporation in transactions of this nature. It must be said, however, that such exceedingly broad powers are now allowable under the laws and are so generally claimed by modern charters that the doc- trine of ultra vires has not the importance it once had. Also, in a private business corporation without cred- itors almost any legitimate business transaction, whether authorized by the letter of the charter or not, may be undertaken without risk of interference from the law, if it has the assent of every stockholder. CHAPTER V. BY-LAWS. § 36. Definition. By-laws are the permanent rules of corporate action as distinguished from motions and resolutions, these latter usually applying only to particular occasions and special matters. A corporation is controlled (i) by the corporation laws of the state in which it is domiciled, (2) by the provisions of its charter and (3) by its by-laws, these three ranking in the order given as to authority. Hence all by-laws must be in harmony with the statutes of the state and also with the provisions of the charter of the particular corporation. Any by-law that does not ac- cord with these higher authorities is void and of na effect. By-laws are enacted by the stockholders and by them alone, unless, by statute, by charter provision or by action of the stockholders themselves, such power has been delegated in greater or less degree to the directors of the corporation. (See Forms 13, 15.) § 37. Adoption. There is usually no law, save the law of necessity, compelling a new corporation to adopt by-laws. Its 50 BY-LAWS. 51 operation without by-laws would, however, be prac- tically impossible — so much so that the law confers the power to adopt by-laws and takes it for granted that this right will be exercised by the corporation. It is true that when the incorporators meet for the organization of a corporation they already have the provisions of the state statutes and of their charter for the corporate guidance. These control as far as they apply, but, alone, they are incomplete and utterly in- adequate and the by-laws must he added to provide for the many details of organization, administration and business routine yet to be covered. The by-laws also usually include a systematic state- ment of the more important provisions of the charter and of the state law applicable to corporations. This is done in order to provide a convenient and accessible memorandum of these provisions. Without this they might be overlooked or forgotten. A reasonably complete set of by-laws is usually adopted by the stockholders at their first meeting, and these by-laws are added to, amended or repealed from time to time thereafter as may be necessary. In those states where power to make by-laws may be delegated to the directors, the privilege is very gen- erally exercised. Such delegation of power ranges from the mere right to make by-laws in conformity with those adopted by the stockholders up to the wide and unrestricted power to make and alter by-laws at will. This latter power may be conferred by proper charter provision in New Jersey and some other states and is not unusual among the larger industrial combinations. 52 THE MODERN CORPORATION. In the absence of delegated power, the by-laws ma,y only be added to or otherwise modified by formal ac- tion of the stockholders in duly assembled meeting. In the larger corporations with their numerous and widely scattered stockholders, such meetings are necessarily a matter of tim^^nd difficulty, and wide power over the by-laws musfbe given the directors to permit proper freedom of action under unforeseen circumstances. In the smaller corporations, however, such power should be granted with cauti^, if at all, as it practically re- sults in divesting the stockholders of all power of con- trol, removing the usual restrictions upon the actions of the directors, leaving the property and affairs of the corporation unreservedly in the hands of these latter and radically altering the whole corporate scheme. (See § ii6.) By-laws should be carefully drawn, properly adopted and accurately recorded in the minute book of the cor- poration. (See § 63 and Form 14.) They should fully provide for all the important details of corporate pro- cedure, such as the issuance and transfer of stock, the meetings of stockholders and directors, the election of directors and officers, the 'respective duties and re- sponsibilities devolving upon these, and the care and management of the corporate property and finance. They should also include the more important provis- ions of the charter and of the statute law as far as applicable. The by-laws of a corporation should be adapted to its particular needs. It is obvious that a small corpora- tion with most of its stockholders at hand and with its BY-LAWS. 53 officers and directors engaged personally in its busi- ness, requires very different by-laws from a great in- dustrial corporation with thousands of stockholders widely scattered over the country and operating plants in half a dozen different states. It may be said gener- ally that the by-laws should be clear, simple and direct and as few in number as can be made to efficiently serve the purpose of the particular corporation. ( See § 63 ; also Forms 13, 15.) § 38. Amendment. The by-laws usually prescribe the method of their repeal or amendment. Unless otherwise provided by statute, charter or by proper provision of the by-laws themselves, these by-laws may always be repealed or amended, either in whole or in part, by a majority vote of a quorum of stockholders at any regular meet- ing, or at any special meeting duly called for that pur- pose. The directors have no power to repeal or amend by-laws under any circumstances unless such power is expressly given them by the laws of the state of incor- poration, by the charter of the corporation or by its by- laws. It should be noted that by-law provisions requiring unusual formalities or specified majorities for the re- peal or amendment of the by-laws are, in themselves, of but little effect. A majority at any regular meeting of the stockholders, or at any special meeting properly called for the purpose may repeal any such provision, if unsupported, and then proceed with desired amend- ments or modifications of the by-laws at will. To be 54 THE MODERN CORPORATION. effective such provisions must be legally sustained in some way, as by inclusion in the charter or by vested rights. By-laws if carefully drawn in the first place with due regard to the needs and conditions of the corpora- tion and its business will seldom require material al- teration. Any changes that are found necessary will usually be limited to such additions and amendments as are required by new or changing conditions. § 39. Enforcement. Every stockholder, and, in many cases, every credi- tor of a corporation may demand as a right that its business and procedure be conducted in strict accord- ance with the provisions of the statutes, of its charter and of its by-laws. Infractions of the laws or of the charter require- ments are comparatively infrequent and are safely left to be dealt with by the law of the land. Infractions of the by-laws, and disregard of their provisions are much more frequent and are more properly within the scope of corporate regulations. Direct penalties for the violation or non-observance of by-laws are sometimes provided. These usually take the form of fines, but are as a rule unsatisfactory and very difificult of enforcement. In practice the smaller infractions and omissions on the part of direc- tors and officers are usually passed over, or their too frequent recurrence prevented by the substitution of more reliable ofificials at the next election. The more serious vJofetions bring their own penalties in the legal BY-LAWS. 55 liabilities and entanglements that necessarily follow. For instance, a special meeting called without proper formalities would be illegal and its action void. Con- tracts entered into without proper authorization may be summarily set aside. Corporate action taken in dis- regard of by-law provisions is for that reason not only illegal but may at times involve the directors and offi- cers concerned in personal liabilities. In this general connection it is to be noted that a corporation has no power to expel a stockholder, nor to deprive him of his rights of membership no matter what his offence. Any such penalties, if imposed, could not be enforced. PART II.— CORPORATE ORGANIZATION. CHAPTER VI. INCORPORATION. § 40. Subscription Lists. Formerly when the organization of a corporation was contemplated, subscription lists were almost in- variably circulated as a preliminary. Then if sufficient subscriptions to the stock were secured, application was made for a charter and the corporation was or- ganized. This plan is pursued but rarely now. Corporatioms are in most cases organized to take over particular properties or businesses and the subscription list is not brought into play. In such cases the only prelimin- ary subscriptions are the formal subscriptions of the incorporators who sign the application for the charter. When the subscription list is employed its form varies with the circumstances. Subscriptions under it are held to be agreements by the subscribers to take the number of shares specified, and, unless otherwise stated, at par and for cash. Usually the terms of pay- 56 INCORPORATION.. 57 ment are set forth in the instrument. All the condi- tions of subscription should appear on the list and any material change of these will release the subscriber. It is also customary and safe to have all the essential features of the proposed incorporation appear upon the subscription list. Then there can be no question on either side as to the terms under which subscriptions were made. Under the usual form, subscriptions may be can- celed at any time before the organization of the cor- poration. To render them binding from the time they are made, agreements with trustees and other special forms of subscription lists are sometimes employed. (See generally § 130 and Forms i, 2,. 3.) § 41. Application for Incorporation. In former days application was made direct to the state legislature when a charter was desired. The grant was then a special charter to specified persons, authorizing them to conduct some particular enter- prise under the corporate form. Usually these charters conferred some franchise or special privilege, as the right to erect a toll bridge, establish a bank, construct a railroad or build a dam. The abuses resulting from this method of granting charters have resulted in the prohibition of special char- ters in most states. Instead, general laws have been provided under which corporations for any legitimate purposes may be formed by any qualified persons upon compliance with prescribed formalities. In some few states special charters are still granted on occasion, S8 THE MODERl^T CORPORATION. though the majority of their corporations are formed under general laws. (See § 25.) The form of application for a charter under these general laws is usually merely a copy of the charter desired, or, in other words, the charter application itself when allowed becomes the charter. This applica- tion sets forth the names of the applicants and the name, purposes and other required details of the pro- jected corporation. It is executed by the incorporators, and, if allowed by the Secretary of State, is filed in his office. It must also usually be filed in the office of the Clerk of the County in which the corporation is domi- ciled or has its home. If the proposed corporation is for proper purposes, if all fees have been paid, and the application is in due form, it is accepted and filed as a matter of course, and the parties are then authorized to proceed With the organization of the corporation. (See § 58.) The details usually required in an application for a charter are discussed in the sections which follow. (For Charter Forms see Chap. XIX.) In most of the states the requirements are much more severe when charters are to be taken out for financial and public service cor- porations. § 42. (a) Incorporators. The parties applying for a charter must be competent persons of full age, and, ordinarily, some proportion of them must be citizens of the state in which the ap- plication for charter is filed. Minors, firms or corpora- tions, and, generally, persons not able to contract are INCORPORATION. 59 not competent parties, though they may usually hold stock after the corporation is formed. The minimum number' of applicants required is in most states three, though in some few states five are required. Each incorporator is ordinarily required to subscribe for one or more shares of stock and all must sign and acknowl- edge the application. As a matter of convenience incorporations are usu- ally effected with the smallest number of incorporators permissible, other interested parties coming in after organization. "Dummy" incorporators, or incorpora- tors without any special interest in the matter, are fre- quently employed both as a matter of convenience, and, at times, to conceal the identity of the real parties in interest. (See §§ 64, 88.) § 43. (b) Name of Corporation. Wide latitude is usually allowed in the selection of the corporate name. The principal restriction is the prohibition of names like, or nearly like those of cor- porations already rightfully doing business in the par- ticular state. In some states all corporate names must begin with "The" and end with "Company." In others the name must be followed by "Limited" or "Incor- porated." In many states firms may become incor- porated under the partnership name without change or addition of any kind. (See § 84.) In most states companies organized for ordinary business purposes are not allowed to use the words "guarantee," "trust," "bank," "insurance" and the like in making up the corporate designation. 6o The modern c6kp6RATlON. For practical reasons corporate names should be distinctive and not too long. § 44. (c) Purposes. The purposes for which a corporation is to be formed must be set forth in the application and must be such as are permitted by the laws of the particular state. Ordinary business corporations are allowed much latitude in stating their purposes and are not usually confined to one business or line of activity. In some of the leading corporation states the only im- portant restriction is the prohibition against extending the charter purposes to banking, insurance, transporta- tion and those similar enterprises which are only al- lowed to corporations organized under special laws and with special formalities. Outside of these any number of purposes and diverse businesses may be in- cluded in one application. (See § 26.) Since a corporation has no legal right to do any busi- ness not permitted by its charter, care should be taken to make the purposes sufficiently comprehensive to meet all proper corporate needs. The insertion of illegal purposes, or of purposes not permissible under the statutes, is ground for the rejection of a charter application. Even if such an application were inad- vertently or wrongfully accepted and filed by the state officials, it could give the incorporators and their cor- poration none of these improper powers. § 45. (d) Capitalization. The capital stock of the proposed corporation must be specified in the application and may be changed INCORPORATION. 6l thereafter only by amendment of the charter. In most of the states there is no maximum Hmit to capitahza- tion, though a minimum amount is usual ; thus in New York there is a requirement that it shall not be less than five hundred dollars, and in New Jersey that it shall not be less than two thousand dollars. In many states there is no limitation of capitalization in either direc- tion. (See § 1 8.) § 46. (e) Shares. In most states of the Union the par value of, shares of stock may be fixed by the incorporators at discretion. General restrictions are found in some few states as in New York where the par value of the share must not be less than five dollars nor more than one hundred dollars. One hundred dollars is the most convenient and most generally adopted par value for shares of stock. Min- ing companies, however, frequently issue shares as low in value as one dpllar, and shares of the par value of ten dollars are not uncommon. The small share is con- venient when small investments are to be invited, or when an impressive offering for a small amount of money is a desideratum. (See § 18.) § 47. (f) Location. A corporation must have a principal office in the state in which it is incorporated, and the location of this office must usually be specified in the application for its charter. It is customary to specify in the appli- cation that the company is to have the right to main- 62 THE MODERN CORPORATION. tain other offices and to do business elsewhere either within or without the state. Unless expressly prohib- ited by the laws the corporation would, however, have this right without specification in the charter. In the state of its incorporation the company is a "domestic" corporation. Elsewhere it is a "foreign" corporation. In its own state it has certain legal rights as an incident of incorporation. In other states it has no such rights except as a matter of courtesy or as they may be granted it by the legislation of such other states. This is so because as an artificial person it does not come under the protection of those constitutional provisions which guarantee to the citizens of one state "all privileges and immunities of citizens in the several states." It may therefore be absolutely prohibited from doing business in another state, save in so far as it may be engaged in interstate commerce, with which state law can not interfere. § 48. (g) Duration. In some states the duration of corporations is limited to some fixed maximum as twenty, thirty or fifty years. In most states, however, while a corporation may be limited to any term specified by its charter, it is per- missible to express its duration as perpetual. At the expiration of the term fixed by the law, or specified by its charter, the corporation terminates and then, unless its charter be extended, must be wound up. If this were not done the stockholders might be held liable as partners in any transactions subsequent to the expira- INCORPORATION. S}, tion of the corporation's allotted period. (See §§ 14, 2,2.) § 49. (h) Number of Directors. The number of directors of the corporation must usually be specified in the charter application. The minimum allowed by law is usually three. Generally no maximum number is specified. In most of the states the number of directors may be fixed or altered by the by-laws. A large board of directors is apt to be cumbersome, difficult to assemble and ineffective. For this reason a small board is preferable where the conditions will permit. Where a large board is unavoidable it usually necessitates the formation of an executive committee which manages the affairs of the corporation, and, practically, takes the place of the board. (See §§ 105, 117.) §50. (i) Directors for the First Year. Under the laws of many of the states the directors for the first year must be designated by the charter. The plan is a convenient one. In the greater number of the states, however, the first board of directors is elected by the stockholders at their first meeting. Usually one or more members of the board of directors must be citizens of the state of incorporation, though this is not necessary unless expressly required by the statute law. (See § 64.) 64 THE MODERN CORPORATION. §51- (J) Charter Subscriptions. In a majority of the states the incorporators of a corporation must be subscribers for one or more shares of the company's stock. The names of these subscrib- ers, their post office addresses and the number of shares subscribed for by each must be specified in the charter apphcation. (See § 130.) § 52. (k) Classification of Stock. Under the laws of most of the states, stock may be classified in various ways. The most common classi- fication is into common and preferred stock. (See Chap. III.) Sometimes it is divided into voting stock and non-voting stock. At other times it is classified so that each one of these classes of stock elects one or more directors. (§§78 and 86.) §53- (1) Cumulative Voting. The cumulative system is a modification of the ordi- nary system of voting designed to secure a more equit- able composition of the board of directors than is otherwise usually possible. It is employed only in the election of directors. The distinction between the ordinary system of vot- ing and the cumulative system lies entirely in the man- ner in which the votes are cast. Under the ordinary system each share of stock entitles its holder to one vote for each director to be elected, but this vote may only be cast in the prescribed manner — one vote to a candidate up to the number of directors to be elected. In the cumulative system on the contrary, while each INCORPORATION. 65 share entitles its holder to but one vote for each direc- tor to be elected as before, these votes may be cast en- tirely at the discretion of the voter. The number of votes to which he is entitled is determined by multiply- ing the number of his shares by the number of the di- rectors to be elected and these votes may then be cast one for each candidate, or all for one candidate, or may be apportioned out among them at the discretion of the voter. As a result the holders of minority stock who are ordinarily left absolutely without representa- tion among the directors, may, if their holdings are at all material, unfailingly elect one or more directors and thereby secure due representation on the board. Such board representation is usually of much ad- vantage to the minority and to the corporation as a whole. On occasion it is vital. Cumulative voting secures this and on this account the system is regarded with much, and increasing, favor. In some states it is now prescribed by statute and must be used by all cor- porations. It may be obtained by proper charter or by- law provisions in almost all the states. (See § 76.) § 54. (m) Holding Stock in Other Companies. For one corporation to hold the stock of another is contrary to the general principles of corporation law, and is not allowable unless the right is expressly con- ferred. In New Jersey and some other states, the right is granted by statute to all corporations organized under their laws. In some other states it may be se- cured by the insertion of special provisions in the charter application. 66 THE MODERN CORPORATION. The original prohibition against the holding of cor- porate stock by corporations was intended to prevent the control of one corporation by another. In the present day this very end has on occasion been found desirable and the existing relaxation of the rule is for the express purpose of permitting corporations to secure control of other corporations by purchase of their stock. By this method many of the great in- dustrial combinations of recent times have been formed. § 55- i^) Powers of Directors. The general powers of the directors are secured to them mainly under the common law. In many of the states these powers can not be enlarged or extended by charter or by-law provisions. In some states, how- ever, as in New Jersey, they may be materially in- creased by suitable charter provisions. In this way the directors may be given power to make and amend by- laws and do other things not permitted under the gen- eral law. In most of the states the powers of the directors may be restricted to a greater or less extent by charter or by-law provisions. Some of the more usual of these limitations are noted in the next section. (See Chap. XII for general powers of directors.) § 56. (o) Limitations on Salaries and Indebted- ness. Limitations on the powers of the directors, if not so restrictive as to interfere with their proper freedom INCORPORATION. 6/ of action, are in some cases of material advantage to the stockholders. The most usual of these limitations are regulations as to the amounts to be paid in salaries and as to the total indebtedness that the directors may incur on behalf of the corporation. Some flexibility is generally given to these regulations by a provision that the limits set may be exceeded with the consent of some specified majority of the stockholders. For instance, the maximum salary to be paid any official may be fixed at $1,500 per annum, or some specified sum may be named as the limit of the corpor- ate indebtedness, these bounds not to be exceeded un- less the directors are authorized thereto by a two-thirds vote of the entire outstanding stock of the corporation. At times the same end will be attained by a by-law provision that some specified majority of the board, as two-thirds, three-fourths or even the entire board, must concur in any increase of salaries or indebtedness above the by-law limits. Sometimes the salaries to be paid officers will be made dependent in a measure on the profits earned, or upon the dividends paid, and the power to incur debts or liabilities will be limited to some definite proportion of the assets of the company. (See § 80.) § 57. Execution of Certificate. The charter application having been duly made out in conformity with the laws of the state of incorpora- tion, is signed — usually in duplicate — by the incorpor- ators. It is then acknowledged before some officer 68 THE MODERN CORPORATION. authorized to take acknowledgements to deeds and is ready for filing. (See Forms 8, 9, 10.) § 58. Filing and Recording. Under the usual procedure, the duly executed appli- cation, accompanied by the proper fees, is sent to the office of the Secretary of State while another copy is filed with the County Clerk of the County in which the proposed corporation is to have its principal office. Each state has its own minor variations in procedure, which will be found in its statute law. In New York the state fees must be sent to the State Treasurer. When these fees are received, the Treasurer certifies that fact to the Secretary of State and this latter official will not file the charter until this certification is received. In New Jersey the application is filed with the County Clerk first, and a copy certified by him is then filed with the Secretary of State. In some states, the application must receive the approval of the judge of a specified court before it will be filed. If the application for charter is in due shape and all fees are paid, it is accepted and filed as a matter of course. Having been drawn in the form of a charter, or certificate of incorporation, the application becomes when filed the charter of the corporation, the existence of the corporation dating from such filing. In some states as soon as filed a copy of the charter under the great seal of the Secretary of State is forthwith sent to the incorporators as a matter of course and is evidence of the due incorporation of their company. In other INCORPORATION. 69 states, the incorporators are merely notified that their application is accepted and filed. Then if they desire copies of the charter, certified by the Secretary of State, they may secure them by the payment of certain addi- tional fees. (See § 41.) § 59. Fees and Expenses. The different states regulate the fees for incorpora- tion according to the varying views of their legislators, and there is for this reason wide differences in the cost. In some states — more particularly in the western part of the country — one uniform state fee is charged for all incorporations, as in Washington where fifteen dol- lars is the fijjed fee regardless of the amount of capitali- zation/; In most of the states, however, the fees vary with the capitalization and are usually a certain small percentage upon the total amount of the capital stock. In all the states there are sundry minor fees that are paid to different officials for their services. (See Com- parative Table, Form 11.) In most of the states after incorporation special an- nual taxes are imposed. These taxes are in addition to the taxes levied on property, which are the same for a corporation as for an individual. They are in some states a fixed amount imposed without regard to capital stock, but usually vary with the capitalization. Ex- emptions are often granted to manufacturing corpora- tions employing all or the greater portion of their capital within the state limits. (See Comparative Table, Form 12.) yO THE MODERN CORPORATION. § 60. Books, Stock Certificates and Seal. It is desirable that a corporation shall keep a stock ledger. For the larger corporations a transfer book will be found necessary. In some states these books are required by statute. The stock ledger is a record showing who are stockholders, when they became stockholders and how much stock they hold. The transfer book consists of blank transfers which are filled out and executed when stock is transferred from one person to another. Sometimes the transfer book will be omitted, the secretary relying upon the assignment upon the back of the stock certificate for his authority to make transfers. (See §§ 135, 145, 148, 149.) The stock certificate book consists of certificates of stock partially printed and numbered from one up, each attached to its respective stub and with blanks left to be filled in at the time of issue with the name of the owner, number of shares owned, date of issue and signatures. (See §§ 131, 132, 147.) A seal is also a necessary feature of the corporate equipment. (See §141.) Likewise a minute book. (See § 146.) A neat and serviceable outfit • consisting of stock books, minute book, stock certificates and seal may be had for ten dollars. Even cheaper outfits may be obtained, but are not advisable. From these mini- mum figures the cost of an outfit ranges far upward, depending upon the style and binding of the books and the character of the certificates. CHAPTER VII. FIRST MEETING OF STOCKHOLDERS. § 6i. Preliminary. In the great majority of the states the allowance of the charter must precede the organization of a corpor- ation. In a few states under the statute requirements this procedure is reversed, the incorporators meeting and arranging the organization of the corporation be- fore its charter application is even filed. When a corporation is created by the allowance of its charter, it already has the statute law and the pro- visions of its charter for its guidance, but it has usually neither directors, officials nor by-laws. All these must be provided before the corporate operations may prop- erly begin. The adoption of by-laws and election of directors and officers are the essential features of the organization of the corporation, and are the first mat- ters demanding the attention of its stockholders. Under the usual procedure as soon as the charter is allowed the stockholders meet, adopt by-laws and elect directors. These directors meet as the next step and complete the corporate organization by the election of officers. The corporation is then equipped for the proper exercise of its corporate functions. 71 72 THE MODERN CORPORATION. In a few states the directors for the first year are named in and appointed by the charter. In such case the first meeting of stockholders loses much of its im- portance and is sometimes omitted. In practice, how- ever, it is generally found better that this meeting be held. The, election of directors is then dispensed with, but by-laws are adopted and such other action taken as may be necessary, as in other states. The first meeting of the stockholders is simply a special meeting, its particular purpose being the organi- zation of the corporation. (See § 97.) As a special meeting it must be called with all due formality. The simplest and most convenient plan for its assembling and the one usually employed, is for all the incorpora- tors to join in a call and waiver (Form 17) designating such convenient time and place for the meeting as may be agreed upon, stating its purposes, and expressly waiving any further requirements as to notice. When for any reason this method is not available, any method prescribed by the statute must be followed. In the absence of statutory prescription, a call might be issued by the majority of the incorporators and be duly served by advertisement or by personal service upon those entitled to attend this first meeting. In most states the incorporators are authorized by express statute provision to call and hold this first meeting of stockholders, though in the absence of such provision they still have this necessary authority. The incorporators may usually give proxies if they wish and it is not uncommon for a first meeting to be held without a single member of the company being present FIRST MEETING OF STOCKHOLDERS. 73 in person. Those who are in attendance act and con- duct the meeting solely by virtue of the proxies given them by the absent incorporators. (See § loi and Form 16.) The first meeting of stockholders is usually purely formal, the organization of the company being decided, and any important action agreed upon in advance. The attorney in charge of the incorporation then pre- pares the minutes in accordance with the arrange- ments already made and at the meeting the minutes are followed to the letter. To such an extent is this prac- tice carried at times, that the attorney in charge merely reads his prepared minutes to the assembled incorpora- tors and no other action of any kind will be taken. If such a meeting is properly called, if a majority of the incorporators are present, and if no objections are offered, the minutes as read are held to be a record of the proceedings of such meeting and can not be later set aside. Usually, however, the first meeting is less perfunc- tory, and, while the minutes may be prepared in ad- vance, they are used merely as a memorandum of the necessary proceedings, the actions of the meeting being carried through in due form. This is the better prac- tice and is the procedure outlined in the present chap- ter. § 62. Opening the Meeting. Pursuant to the call and waiver, or such other due notice as may have been given, the incorporators as- semble at the appointed time and place and choose a 74 THE MODERN CORPORATION. temporary chairman. With the consent of the meet- ing the chairman appoints a temporary secretary, or the meeting may choose this official. The chairman then asks for the call and waiver, or such other call or notice as has been used to assemble the meeting, and, in the absence of objection, usually orders this entered in the minutes. The same end may be attained by formal motion if preferred. The names of those present should be recorded in the minutes, and the fact that all, or a majority of the incorporators were present, or that a quorum was present should be stated. If any are present by proxy that fact should also be noted. The charter is then presented to the meeting with a statement that it has been allowed — the date of allow- ance being given — and that all statutory requirements have been fulfilled. The instrument is then usually ordered spread on the first pages of the minute book. § 63. Adoption of By-Laws. The next step is the adoption of by-laws. The pre- paration and full consideration of these by-laws is generally too forrriidable an undertaking to be left until the time of the meeting. Usually, therefore, they are drafted by the attorney in charge and are fully considered by the incorporators and any other interested parties, prior to the meeting. If the by-laws have been prepared with careful con- sideration and have been fully agreed upon in advance and all are familiar with their provisions, they will fre- quently be presented to the meeting as a whole, and FIRST MEETING OF STOCKHOLDERS. 75 adopted as presented. The usual and the safer plan is, however, to have them read, article by article, each article being adopted as read ; then at the conclusion a motion is made adopting them as a whole and direct- ing that they be entered on the minutes immediately succeeding the certificate of incorporation. (See § 37 and Forms 13, 14, 15.) These by-laws are the working rules of the company. They become effective as soon as adopted and the next proceedings of the meeting are conducted in accordance with their provisions. § 64. Election of Directors. As has been said, in some few states the directors are named in the certificate of incorporation. In these states the election of directors at the first meeting of stockholders is, necessarily, omitted. In the other states it is one of the most important features of the stock- holders' first meeting. It usually follows the adoption of the by-laws. Tellers or inspectors of election should be appointed and the election should be by ballot. Nominations may be made, or the matter may be left open, each incorporator voting for such qualified per- sons up to the number of directors to be elected as he sees fit. The number of votes each casts will be de- termined by the amount of his stock subscription, usually one vote for each share subscribed. Care should be taken that those elected be legally qualified to act. In the greater number of states it is required that each director shall own one or more shares of 76 THE MODERN CORPORATION. stock. Also that one or more of the directors shall be citizens of the state of incorporation. Where stock requirements exist and persons whom it is desired to have upon the board are not stockhold- ers, it is a common practice to place one or more quali- fying shares of stock in their respective names. This results in the so-called "dummy directors" — that is, directors who have no material interest in the corpora- tion, but who are elected to represent or act in the in- terests of others. If sufficient stock has been given these dummy directors to make them eligible and the laws of the state have been complied with in the details of election, they have the- same rights and powers in the management of the corporation that any other directors would have. Usually it is either known or ascertained in advance that the persons voted for will accept the position of director if elected. Awkward contingencies occasion- ally arise from the refusal of some director-elect to accept the position to which he has been elected. It is better to forestall such possible difficulties by determin- ing the matter as far as may be in advance. (See Chap. XII "Directors.") § 65. Proposal to Exchange Property for Stock. Most modern corporations are organized to take over an existing business, or some special property, or to operate a mine or exploit a patent. In all such cases, it is a part of the proceedings of the first meet- ing to arrange the transfer of the stock for the prop- erty to be acquired. FIRST MEETING OF STOCKHOLDERS. "]•] The simplest method of accomplishing this result is for the owners to make a written proposal to the cor- poration, offering the business or other property in ex- change for all or a part of its stock. This proposal is brought up in the stockholders' meeting and is read in full. After this reading it may be ordered spread upon the minutes, but, as the same proposal is presented to the first meeting of directors a little later and it is not necessary that it should appear in full upon the minutes of both meetings, it is usually, and better, left for entry in the minutes of the directors' meeting. In such case the proposal is merely read and the meeting then passes on to its consideration. (See Form 19.) § 66. Resolution Approving Exchange. If the proposal for exchange of stock for property is acceptable as presented, a resolution is adopted, ap- proving the proposed exchange and specifically author- izing and directing the board to take such action as may be necessary for its consummation. (See Form 20.) The preamble of this authorizing resolution usually recites or refers to the main features of the proposal, agrees to its acceptance with the direct statement that the property to be so acquired is necessary for the pur- poses of the company, endorses the valuation placed upon this property and concludes with specific instruc- tions to the directors to accept the proposal and to do all such things as are necessary to make their accept- ance effective. The adoption of this resolution effectually commits 78 THE MODERN CORPORATION. the stockholders to the purchase of the property, to the valuation placed upon it and to the issuance of the specified stock in exchange therefor. They and their assignees are thereby debarred from any later objec- tion. In most cases the directors would have power to accept a proposal of this kind for the exchange of stock, for property without direct authorization from the stockholders. The matter is, however, so impor- tant that it is usually deemed best to have the assent of all interested parties. § 67. Other Business. The adoption of by-laws, election of directors and authorization of these latter to any specially important action, completes the usual business of the stockholders' first meeting. Other matters may be brought up for the stockholders' consideration, but it is seldom that any further action of moment is taken. It is to be noted that the wishes of the stockholders as to the future conduct of the company or its business should be embodied in the by-laws. Resolutions in- structing or restricting the directors are of doubtful or none effect. Embodied in the by-laws the same direc- tions would, if proper in themselves, be binding upon and control the board of directors. With the completion of the business brought before the first meeting, the stockholders usually adjourn sine die, not to again assemble until the regular annual meeting, or until sooner called together in special meet- ing. If, however, the business before the meeting is FIRST MEETING OF STOCKHOLDERS. 79 not completed, or other matters are coming up shortly which will require the action of the stockholders, the first meeting may be adjourned until some fixed future date. It will then reassemble at the appointed time without formality and resume its session. It is merely a continuation of the original meeting and as such does not require any further call or notice to the stock- holders. (See Form 22.) CHAPTER VIII. FIRST MEETING OF DIRECTORS. § 68. Preliminary. As the by-laws are usually adopted prior to the elec- tion of the directors, these latter when elected will have the by-laws for their guidance. Their first meeting is merely a called meeting for special purposes, — i. e., the election of officers and such other action as may be necessary in this early stage of the company's affairs. It may therefore very properly be assembled under the by-law provisions for special meetings of the board. Usually, however, and most simply, it is convened, as in the case of the stockholders' first meeting, by all entitled to be present joining in a call and waiver of notice. (See Form i8.) When all are agreed as to the matters to be transacted at this first meeting the minutes may with propriety be written out in advance. They will then serve as a program of the meeting and may usually be followed to the letter. § 6g. Opening the Meeting. When the directors assemble at the appointed time and place for their first meeting, they have as yet no officers. They will, therefore, choose a presiding offi- 80 FIRST MEETING OF DIRECTORS. 8 1 cer pro tern and he will appoint, or the meeting will choose a temporary secretary. A director can not be represented by proxy at a board meeting and the secre- tary will therefore only note the number and names of those in actual personal attendance. If a quorum is shown to be present the chairman will then ask for the call and waiver, or other call or notice by which the meeting was assembled, and will direct, or motion will be made, that it be entered in the minutes, or that record be made of its due execution and service, or publication. The meeting is then ready to proceed to the next order of business. This is usually the election of officers. § 70. Election of Officers. The by-laws should contain full provisions as to the officers to be elected and the method of choosing them. Usually the election is by ballot, though if all present agree to waive this requirement any other suitable method is permissible. Where there is but one candi- date for an office the secretary will frequently be in- structed to cast the single ballot of the meeting for the person named. Two positions, if their duties are not incompatible, may be conferred upon one person. The offices of secretary and treasurer are often filled by one individual, but it would always be awkward and in some states legally impossible for one person to be both president and secretary. The salaries of officers should be arranged at the time of election. If they are to re- ceive no compensation it should be so stated in the by- laws, or the fact should be specified by resolution, or 82 THE MODERN CORPORATION. put Upon record in some other way to avoid any subse- quent misunderstandings. As soon as the results of the election of officers have been announced, the neWly-elected president and secre- tary, if present, will usually take charge of the meet- ing. If they are absent, or if other causes prevent the immediate assumption of their official duties, the tem- porary officers will continue to act until the close of the meeting, unless sooner relieved by the permanent offi- cers. § 71. Exchange of Property for Stock. The consideration of the proposal for exchange of property for stock usually follows the election of offi- cers. The proposal as submitted and read to the first meeting of stockholders, and the stockholders' resolu- tion authorizing its acceptance (Forms 16 and 17) should be presented to the meeting and read in full. Unless already recorded in the minutes of the stock- holders' meeting the proposal should be ordered spread upon the minutes. Then a resolution accepting . the proposed exchange and directing the officers of the company to receive the transfers of the property and to issue the necessary stock in exchange therefor is adopted. (See Form 21.) This places the matter in the hands of the officers of the company with full power for its consummation and no further action on the part of the board is usually necessary. § 72. Designation of Bank. The election of officers and the acceptance of the proposal for exchange of property for stock are usually FIRST MEETING OF DIRECTORS. 83 the most important matters coming before the first meeting of the directors. Its further action is mainly- directed to the arrangement of those details necessary for the proper operation of the corporate business. Those relating to the corporate finances are among the more important of these. It is most desirable that the financial operations of the new corporation should from the first be conducted in a business-like manner. All moneys coming into possession of the company should be promptly de- posited in a designated bank in the name of the com- pany. No money should be withdrawn save as au- thorized by the directors and the actual withdrawal should be only by check, duly signed and countersigned by the proper officials. The by-laws adopted by the stockholders at their first meeting usually provide in detail for the deposit and withdrawal of the company's funds, but leave the selection of the depositary to the directors. Accord- ingly a formal resolution is adopted at this first meet- ing of directors, designating the bank or banks in which the funds of the company are to be kept and providing any other necessary details as to the hand- ling and management of the corporate moneys. It might also recite the by-law provisions relating to the finances, under which the action of the board is taken. A copy of this resolution, duly certified by the secre- tary, should be prepared and be filed with the selected bank at the time the account is opened. (See Form 52.) If the directors' resolution does not contain the provisions of the by-laws relating to the company's 84 THE MODERN CORPORATION. finances, a certified copy of the by-laws, or of the par- ticular by-law or by-laws- in point, should also be prepared and filed with the resolution. Usually arrangements will have been made to pro- vide the new company with funds, by stock subscrip- tions already made, by sales, of stock or through other means. Whatever the plan the board will take the proper action at this time to make the arrangements efifective. § 73. Other Business. Sundry other matters will properly come before the first meeting. Arrangements must be made for office accommodation. The officers should be directed to take charge of the property and business of the cor- poration. Specific authority should be given them if money is to be borrowed or anything else done outside the usual routine of the corporate business. The ex- penses of incorporation, including the fees to the state, the legal fees and the incidental expenses incurred by those having charge of the matter should be approved and ordered paid. A form of stock certificate should be chosen, or, if already selected, approved. The secre- tary should be directed to procure the books and sta- tionery necessary for his work. Any other requisite supplies and equipment should be authorized. The bond of the treasurer, if this is required and is pre- sented in acceptable form, should be approved. In some states inspectors for the next annual election of directors must be chosen. If reports must be made or if there are other statutory requirements to be complied FIRST MEETING OF DIRECTORS. 85 with either in the state of domicile or in the state where the corporation expects to do business, proper provision should be made. In short all those matters should be attended to that are necessary to begin or facilitate the operations of the company. § 74. Adjournment. If the first meeting of directors adjourns sine die, it can not be reassembled. No other meeting will then be held until the next regular meeting, unless a meet- ing is sooner specially called as provided in the by-laws. It frequently happens that business under considera- tion at this first meeting of the board can not be com- pleted at its session, or that other matters requiring board action are likely to come up within the near future. In such case to save the trouble and formality of calling a special meeting for the consideration of these matters, the meeting will be adjourned till the next day, or the next week or other convenient desig- nated time. Then, as a continuation of the original meeting, it will reassemble without formality and re- sume its work. If desirable it may again adjourn to meet at some specified future date. Usually the only object of such continued adjournment is to save the formality and delay attendant upon the calling of special meetings. If an adjourned meeting does not reassemble at the appointed time and place, it lapses and can not again reassemble. Then if a meeting be necessary before the date of the next regular meeting, it must be con- vened as a special meeting in accordance with the re- quirements of the by-laws. CHAPTER IX. PROTECTION OF MINORITY. § 75. General. The rights of the smaller, or minority, stockholders of a corporation are somewhat scant. They are en- titled to an honest and efficient administration of the corporate affairs. They are entitled to such publicity of management as will enable them to judge whether the corporate affairs are so administered. Also they are entitled to such knowledge of the actions and in- tentions of the majority as will give them time and opportunity to avert or avoid any threatened action injurious to their interests. This is practically the measure of the minority's rights. They may neither dictate nor interfere in the corporate management in any way, save for the direct protection of threatened interests. While the rights of the minority are few, it is of vital importance that these few be properly protected. This is best provided for when the arrangements for incorporation are in progress. At that time all con- cerned are, as a rule, ready to accede to any fair and reasonable demands. If those who will be in the minority are then in evidence and know how their in- 86 PROTECTION OF MINORITY. 8/ terests may be protected, they may usually secure any proper concessions. If not provided for at this time efficient protection can hardly be secured later. Unfortunately in many cases corporations are or- ganized by those who expect to control and the rights of the minority receive small attention or are entirely ignored. In such event the only safe course for the minority is the sale of their stock, or, better still, an avoidance of the situation by a refusal to purchase stock in such corporations. If this latter course w^ere more commonly pursued the rights of the minority w^ould receive far more respectful attention than is now the case and the whole status of the minority stockholder would be much improved. When, however, the prospective minority interests are in evidence and in a position to enforce their due rights at the time of incorporation, or when those in charge are willing to include proper protection of the minority in the general corporate scheme, the matter resolves itself into a choice of means. There are a number of methods employed for the protection of the minority. Most of these are founded upon minority representation upon the board of directors. Practice has shown that this is usually the most effective method possible. The board is the managing body of the corporation. All active direction of the corporate affairs for good or for bad emanates therefrom. If then the minority have one or more capable representatives in this body they are in a position to know all that is done, or proposed to be done, and to be heard in regard thereto. The $8 THE MODERN CORPORATION. mere presence of their representatives will usually operate to prevent any flagrant invasion of their rights. If injurious action is threatened they will be informed and may act with all necessary promptness in protec- tion of their interests. Through their representative they will at all times have access to the corporate books and accounts, and, generally, they are in a position to enforce their rights intelligently and effectively should the necessity arise. Experience has shown that the minority have small cause for apprehension if they have an able representative on the board. § 76. Cumulative Voting. Cumulative voting is one of the simplest and most efifective means whereby minority representation on the board may be secured. It is a modification of the usual plan of voting whereby the minority interests — if their holdings are at all material — may unfailingly elect one or more members of the board. Under the usual plan of voting, each share of stock has one vote for every director to be elected, but may only give one of these votes to a candidate. As a con- sequence the majority elect the entire board, and, un- less by grace of those in control, the minority are left absolutely without representation. Under the cumula- tive system each share of stock still has one vote for each director to be elected, but these votes may be cast all for one candidate or may be distributed among the candidates as the voter sees fit. In other words each stockholder has the right to cast as many votes as shall equal the number of his shares of stock multiplied PROTECTION OF MINORITY. 89 by the number of directors to be elected, and to cast this number of votes for one or more candidates at his discretion. For instance, if five directors are to be elected, each share has five votes. Under the ordinary system these five votes must be divided among five candidates, one vote to each. Under the cumulative system the num- ber of votes is the same, but they may be cast exactly as the voter pleases. The whole five may go to one candidate or be divided between two, or be scattered among them all in such way as the voter sees fit. If then one hundred shares of stock participated in such an election, a total of five hundred votes would be cast. If a minority controlling twenty shares were acting together, they would cast one hundred votes, and, if they cast these all for one candidate, he would infallibly be elected. The remaining eighty shares would cast four hundred votes, and, if they acted to- gether, would elect four directors, but they could not by any possible combination prevent the minority from electing the fifth. If the majority divided their votes among four candidates each would receive.one hundred votes and all would be elected, together with the minor- ity candidate who also receives one hundred votes. If they divided their votes among five or more candidates the total for each would fall below one hundred votes, and, while they would probably elect four of their candidates, the minority candidate would also be elected as before. It is apparent that to secure the greatest advantage from cumulative voting the minority must act together 90 THE MODERN CORPORATION. with intelligence and must so cast their votes as to secure the best possible results. If they do not, the whole benefit of the system may be lost to them. In the preceding example if the minority divided their votes between two candidates, giving fifty shares to each, the majority might apportion their votes among five candidates, and giving eighty votes to each, elect the entire five and thereby Exclude the minority from the board. On the other hand it is also necessary for the ma- jority to vote with discretion. If the minority are strong and well handled it is entirely possible for the majority by a careless scattering of their votes to actu- ally lose their control of the board. Cumulative voting is allowed in most states of the Union. In some it is prescribed by statute and must be employed in all corporate elections. The system is much esteemed where understood and its use is ex- tending. (See § S3.) § 77. Non-Voting Stock. This arrangement is not infrequently employed where the parties to an incorporation, notwithstanding their varying interests, wish to preserve an equality of power in the management. The occasion usually arises in the incorporation of a partnership when the partners with smaller investments become minority stockhold- ers, and, without some arrangement to prevent, would be largely, if not entirely, deprived of the management of their own affairs. In this cage the same equality of management in the PROTECTION OF MINORITY. 9I corporation that obtained in the partnership may be preserved only by equal representation on the board. Cumulative voting would probably insure representa- tion but not equal representation and therefore would not in itself be effective. The desired end may be at- tained by a division of the company's stock into two classes, one a voting stock, the other non-voting. The amount of each class would depend on the particular conditions. The voting stock must be apportioned equally among the parties interested, while the non- voting stock is so distributed as to properly provide for the varying interests of the different participants. As a result all the parties are exactly equal in voting power and therefore if coupled with cumulative voting are equal in the management of the corporation. In any division of profits, however, as the non-voting stock participates in dividends just as does the voting stock, the parties with the larger interests receive prop- erly the larger returns. This arrangement is very effective and may be modi- fied in sundry ways to protect or give special rights to the minority. (See § 86.) § 78. Classification of Stock. Another method of providing equal, or special representation on the board of directors, in those states where permitted, is found in the division of the cor- porate stock into voting classes or groups, usually un- equal in size, but each possessing the power to elect one or more members of the board. For instance, if a partnership with three members g2 THE MODERN CORPORATION. is to be incorporated, and the management is to be shared equally while the investments are different, a board of three directors might be provided. The capitalization would then be fixed at the total amount of the partnership assets and this stock be issued to the partners in proportion to their investments. The amount of stock each held would differ from that of the other two, but the stock issued to each would by charter provision, be constituted a class or group with power — irrespective of its amount — to elect one di- rector. Then each partner while holding his proper interest in the corporation, and participating in profits accordingly, elects one director and has therefore equal power in the management. He may elect himself a director, or elect someone else to represent him. Fur- ther he may sell any amount of his stock short of the fifty-one per cent, required to control his class, and still retain his power to elect one director. This system of classification is a very efficient means of minority protection. In those states where per- mitted, it is worked out in many forms by lawyers skilled in such matters. (See § 86.) § 79. Voting Trusts. The voting trust is an arrangement or disposition of the majority of the voting stock of a corporation under which for a definite period its vote must be cast in its entirety for certain specified ends. Its usual purpose is to maintain the existing, or an agreed management for a term of years. So used it may serve as an effi- cient means for the protection of the minority. PROTECTION OF MINORITY. 93 In the early days of an incorporation all parties in interest are usually disposed to be fair. A manage- ment acceptable to both majority and minority may then be obtained. With the concurrence of the ma- jority, this management may be fixed by means of the voting trust for a specified period without danger of changes injurious to minority interests. To form a voting trust, sufficient stock to control must be actually placed in the hands of voting trustees. This stock is held by them under the terms of the vot- ing trust agreement which specifies how its vote must be cast and this vote may then be cast only in accord- ance with these specifications. If then the agreement provides that in the election of directors the vote of this stock shall be cast for certain specified persons, those persons will be elected unfailingly and the mem- bership of the board preserved unchanged during the life of the agreement. Provision is usually made for possible vacancies caused by the death, inability or re- fusal to serve of any of the designated directors. Also the trustees are usually given authority to vote the trust stock held by them, on any general matters com- ing before the stockholders for their action. The trustees usually issue trustees' certificates for the stock placed in their hands under the trust agreement, and they must account to the equitable owners of that stock for any dividends declared thereon during the continu- ance of the trust. Voting trusts are allowable under the laws of most of the states. In New York and some other states their period is limited to five years. In most of the 94 THE MODERN CORPORATION. other states they would be upheld for any reasonable period. § 80. Limitations on Expenditures. Limitations are sometimes inserted in the charter in the interests of the minority, providing that the salaries of officers shall be some certain amount, or shall not exceed a specified sum save with the consent of two- thirds of the voting stock, or shall be limited to some moderate prescribed figure until dividends have been paid regularly at a certain per centum for one or more years. Or it is sometimes specified that no indebted- ness beyond a given proportion of the appraised value of the assets shall be incurred without the consent of a specified majority of the stock. Under some circumstances these restrictions and the sundry other variations of which they are capable are found to be materially advantageous. Such limitations should not, however, be so tightly drawn as to restrict the proper corporate action of the company or to inter- fere with its successful business operation. ( See § 56. ) §81. Restrictions on Amendments. Sometimes as a means of minority protection it is provided in the certificate of incorporation that a specified majority shall be required for the election of directors. At times the provision will be extended to also include amendment of the charter and by-laws. These majorities are placed high enough to require the participation of a material proportion of the minor- ity interests and the requirement therefore acts directly PROTECTION OF MINORITY. 05 for their protection. Then an acceptable board of directors having been once selected, no change of any kind can be made in the management thereafter with- out the assent of the prescribed majorities of the out- standing stock. For example, the charter of the American Tobacco Company contained the following provision : "It is hereby provided that it shall require a majority of seventy-five per cent, of the outstand- ing voting stock to amend the charter, to amend the by-laws, or to elect directors in this company." It is a fair inference that when the American To- bacco Company was organized, a strong minority in- terest would enter only on condition that the provision quoted was incorporated in the charter of the com- pany, and that this charter and the by-laws and the first board of directors, should be satisfactory to them. When all this was accomplished there could be no change in the existing state of affairs without the con- sent of the minority interests, provided they controlled at least 26 per cent, of the voting stock. If a new board were proposed they might merely refrain from voting; there would then be no election and the old board would hold over. Neither could there be any change in charter or by-laws not approved by them. Under such conditions the minority were undoubtedly in a position to fully protect their interests. It should be noted, however, that the arrangement is allowable under the statutes in only a few states. 96 THE MODiERN CORPORATION. § 82. Restrictions on the Voting Power. Under the English Companies Act, which controls in England, every stockholder has one vote for each share of his stock up to ten. If he holds more than ten shares he has one vote for each five shares above that number up to one hundred shares. Above that num- ber he has one vote for each ten shares he may hold. As will be seen this has the effect of materially les- sening the power of the larger stockholders. The ar- rangement, or any desired modification of it, might be had under the New Jersey law and probably in some other states of the Union, but the plan is not generally available. It is undoubtedly effective but would prob- ably render an election of directors a complicated pro- ceeding. CHAPTER X. FROM PARTNERSHIP TO CORPORATION. § 83. General. The conversion of a partnership into a corporation under the usual plan is a comparatively simple matter, accomplished without interruption to the general busi- ness and without material change in its mode of opera- tion. Almost any feature that characterized the part- nership may be continued in the corporation. Even the name may usually remain unchanged. The legal rela- tions and liabilities of the members of the organiza- tion are modified, but the general method of work and the personal relations and responsibilities of its mem- bers may for all practical purposes be left unaltered. Generally a partnership should be incorporated in the state in which its principal operations are con- ducted — that is, the state in which the headquarters of the firm have been located. Occasionally conditions will exist that render incorporation in another state advisable. In such case the corporation will operate in what would naturally have been its home state, as a foreign corporation. The advantages of such an ar- rangement should be obvious, and material to justify its adoption. (See § 47.) 97 98 THE MODERN CORPORATION. The capitalization of the incorporated partnership is usually determined by the amount of the firm assets. A fair valuation of the business is made, in which good-will may be properly included, and the capital stock, or capitalization, is fixed at the amount so de- termined. Occasionally the capitalization is placed at an amount much less than the real value of the assets in order to avoid taxation. § 84. Name. The partnership name should in itself represent a considerable trade value. To avoid its loss the part- nership name on incorporation is usually retained in some form as the corporate name. In some states the firm name may be adopted without change of any kind. This practice is, however, open to objection as there is then nothing in the name to indicate that the concern is a corporation, and parties transacting business with it might, unless informed in advance of its corporate character, be able to hold the stockholders as partners. Usually the firm name is retained with the addition of Company, the firm of "Wilson & Brown" becoming on incorporation the "Wilson & Brown Company," or perhaps the "Wilson-Brown Company." Another method of avoiding any possibility of liability is to add the word incorporated, as "Wilson & Brown, In- corporated," this last word being abbreviated in written or printed matter to "Inc." In most of the states the word "The" may be made part of the corporate name if desired. In a few states FROM PARTNERSHIP TO CORPORATION. 99 it is obligatory. Very awkward constructions some- times occur when it is employed. (See § 43.) § 85. Usual Arrangements. When a partnership is incorporated the obvious arid customary arrangement is to fix the corporate capitali- zation at the value of the partnership business. The entire capital stock is then issued to the partners as full paid stock in exchange for the business, which is thereupon transferred to the new corporation. This general method of arranging the matter is the simplest possible and, where the partners' interests are equal, is equitable and satisfactory. The partners may have the stock issued in the firm name, or to one of the partners as trustee, later allotting it among themselves in pro- portion to their respective interests in the old firm, or may have it issued direct in proper proportion to the respective partners, or to their order. Sometimes in order to provide for, or increase the working capital of the corporate business, the capital stock is placed at a figure in excess of the assets. The excess stock is then sold and the proceeds turned into the treasury of the company. If the equality of voting power among the partners is to be preserved and this additional stock is a voting stock, it might either be purchased by the partners in agreed proportion, or each partner might be assigned his proportion to sell among his friends. If it is sold to outsiders, this addi- tional stock under such circumstances would usually be a non-voting stock — probably some form of pre- ferred stock. 100 THE MODERN CORPORATION. § 86. Special Adjustments. Where the partnership interests are not equal, the apportionment of stock in the incorporated business in direct proportion to these interests without adjustment of any kind would sometimes work great injustice. For instance, one partner may have supplied the larger proportion of capital, but the other partner — if there be but two — may have contributed more time, or such skill, repute, business knowledge, or connection as fully to entitle him to an equal share in the business, or otherwise to such control, or proportion of the profits, or other advantageous arrangement as may have ex- isted under the partnership agreement. In such case to give the greater financial interest absolute control by an allotment of a majority of the voting stock would be obviously inequitable. Such a contingency may be easily provided for un- der the flexible conditions of incoi-poration. Equality of management may be preserved by the issuance to each partner of an equal amount of voting stock. The larger investment of the one may then be provided fof by an issue to him of non-voting stock to the athount of his excess investment. This stock might participate ■ fully in dividends, but usually would be a preferred stock drawing a fixed limited dividend. Under such an arrangement both partners are on the same footing as far as the control of the corporation is concerned, and in all other corporate matters, except that before any division of profits is made the partner with the larger investment receives the agreed interest or return on his excess investment; also, if his extra stock be FROM PARTNERSHIP TO CORPORATION. lOI . preferred, this would usually give him the right to re- ceive back his excess investment in full in case of dis- solution before the other partner received anything. (See § ^T.) The same end might be attained by the issuance of bonds for the excess investment of any partner. An- other plan is to divide the stock into as many classes as there are partners, each class representing in value the investment of the partner to whom it is allotted, but — without regard to this value — ^having the right to elect one director. If then the board of directors is the same in number as the partners of the incorporated firm, this secures an absolute equality of management regardless of the differing investments. (See §§ 52, 78.) The same end will sometimes be secured by the formation of a voting trust. (See § 79.) Special official salaries are also sometimes employed to adjust the varying interests of the incorporated partnership. In short there is no legitimate arrangement of the partnership which can not be transformed into some equivalent, or equally satisfactory corporate arrange- ment by a skilled attorney. § 87. Preliminary Contract. Any special features of the partnership interests and relations that are to be retained in the new organiza- tion, should be embodied in a preliminary contract be- tween the partners. Even if the usual arrangements are to prevail, a memorandum of the agreement is fre- quently advantageous. It is to be noted that the charter and by-laws are I02 THE MODERN CORPORATION. supposed to contain and usually do contain everything outside the statute and common law that affects the new company. Therefore, any agreements and under- standings between the interested parties as to the powers of stock and the general management of the corporation must be expressed either in the charter or by-laws, and if not so expressed, are usually invalid or incapable of enforcement. § 88. Organization of Corporation. If the number of partners is less than the smallest number required by statute as incorporators, the ser- vices of relatives, friends or employees may be enlisted for the incorporation and these same parties may also later act as directors if desirable. In this latter event the usual statute requirement that directors must be owners of record of at least one share of the company's stock is commonly satisfied by those in control assign- ing one share to each of the acting parties. Such assigned stock is usually actually and permanently transferred as an equivalent for the time and trouble involved in a "dummy" directorship. At times, how- ever, while given in due form, such stock is after proper assignrnent by the receiving party, at once taken back and held by the donor. The recipient then appears on the books of the company as the owner of record of such stock and is therefore legally qualified to act as a director. As a matter of fact, however, the actual ownership of the stock rests with the party to whom it was re-assigned, and he may at any time assert this ownership by presenting the assigned certificate and FROM PARTNERSHIP TO CORPORATION. IO3 demanding that the stock it represents be placed in his own name. To do so would, however, disqualify the "dummy" director and necessitate some new arrange- ment of the directory. Often the wives of the partners are brought into the corporation as incorporators and as directors and are, at times, made stockholders to considerable amounts. This is on occasion a most excellent arrangement. In case of the death of the husband it leaves the corporate holdings exactly where they should be, without danger of failure and without legal proceedings of any kind. If the firm were incorporated in an outside state, a resident director would be necessary. This person would also usually act as one of the incorporators. As a matter of course, the active partners of the firm will usually be elected as directors and also as officers of the incorporated business. If the required number of directors be more than the number of partners, as where a partnership of two is incorporated and three directors are necessary, additional directors must be secured. Usually these are "dummy" directors quali- fied as described for the purpose. Also if the partners are of even number, as two or four, they will probably wish additional directors to make the number of the board uneven. This is not essential but is customary to prevent the possibility of dead locks. At times, however, the even board may be preferred, the occa- sional dead locks that are liable to occur being fought out as was done in the partnership. If the partners are but two in number, and, upon the incorporation of the firm, wish the equality of power 104 THE MODERN CORPORATION. between them preserved, while the statutes require a board of three, a dummy director may be elected and then resign, his place being left unfilled. The two former partners then have full power to act for the corporation as they constitute a majority of the board. The only objection to the plan is found in the fact that the continued absence, disability or death of one of the directors would leave the board without a quorum and without power to fill the vacancy. This would necessi- tate action by the stockholders to re-establish the board. Sometimes the third director will be retained on the board, but it will be provided that no important board action — or any board action — may be taken except by unanimous vote of the entire board. Then no action may be taken without the concurrence of the two former partners, and the equality of power in the man- agement is maintained. The arrangements indicated while entirely possible and proper and in common use require the services of a thoroughly qualified and skilful lawyer as otherwise statute law may be inadvertently violated, or the cor- poration itself may be so tied up that the conduct of its business becomes impossible. § 89. Transfer of Business. As soon as the directors and officers of the new corporation have been elected and its organization is thus completed, it is ready to take over the business and property of the old firm and assume full control. At their first meeting the stockholders pass a resolution in accordance with the agreement previously entered into Prom PARi-isrSRSHip to corporation. 105 by the partners, authorizing and instructing the direc- tors to purchase the partnership property and business and issue the stock of the corporation in exchange therefor. The directors at their first meeting in pur- suance of the stockholders' resolution then formally accept the proposition to take over the business and property of the firm, and authorize the officers to re- ceive the same and issue the stock of the corporation in payment therefor in accordance with the accepted terms. (See Chaps. VII and VIII; also Forms 19, 20, 21.) By due assignment the business is then transferred to the corporation. Usually the assignment includes all goods and other stock, cash on hand and in bank, accounts and bills receivable, real estate, leases, fix- tures, patents, trade marks, good-will and anything else of value belonging to the firm. Any desired reser- vations, however, may be made, as for instance the cash on hand, or certain accounts, or particular real estate. Usually it is specified that all debts, contracts and liabilities of the firm are to be assumed by the new corporation. These assignments are executed in the firm name by the partners and are handed over to the officers of the corporation. These latter then deliver in exchange the duly issued stock of the corporation in accordance with the agreed terms. This transaction makes the stock full paid. It also vests the business and property of the former partnership in the corporation. The offi- cers of the company then take charge of the business and the transaction is complete. The business is the I06 THE MODERN CORPORATION. same as it was before and is in the hands of the same persons, but the Habilities and method of operation are from the legal standpoint entirely dififerent. After its stock in the new corporation has been re- ceived and distributed among the partners, the old firm is usually dissolved. § go. Conduct of Business Under New Form. After incorporation the business of the former part- nership is usually conducted much as before, especially if there were but two or three partners and all were actively engaged in the business. Usually after the organization meetings, the former partners, as officers and directors, take entire charge of the corporate busi- ness and manage it as they did before its incorporation by informal conferences and mutual agreement as oc- casion arises. This laxity of corporate management may be carried too far, but where the officers and di- rectors constitute all the parties in interest and all are agreed, there is but little danger from the informality of the method. The treasurer should, however, handle the funds of the corporation and perform his other duties in strict accordance with the by-laws and the I'esolutions of the board of directors. A corporation of this kind where no stock is sold to outsiders, where but few are interested and those few are, in the main, either officers or directors, is called a "close corporation." Such a company rarely takes the trouble to hold annual meetings unless some dissatis- faction, or other cause makes a change in the directory advisable. Otherwise the directors and officers hold FROM PARTNERSHIP TO CORPORATION. ID/ over from one year to another, and until one of the parties active in the management dies or retires, no changes are made. When such an emergency does arise the advantages of the corporate form are mani- fest. Its neglected formalities are then at once brought into play and the corporate mechanism is readily ad- justed to the changed conditions. § gi. Changing Books. Though not strictly relevant, it may be said that the changing of the partnership books to corporation books is usually a matter of no great difficulty. The capital or stock account is kept in the corporate name there- after, and the individual accounts with the partners are closed. A dividend account will probably be necessary. The accounts as a whole will, however, be kept as be- fore the incorporation, save that when the books are balanced, the profit and loss account is closed into an undivided profit account, and whenever a dividend is declared, its amount is taken from the undivided profits. Apart from the regular book of accounts, a new book called the "Stockholders' Ledger" is opened in which each stockholder is credited with his proportion- ate amount of any dividends declared, and is debited when these dividends are paid him. Specific directions for changing partnership books to corporation books are found in most of the modern works on bookkeeping. PART III.— CORPORATE MECHANISM AND MANAGEMENT. CHAPTER XL STOCKHOLDERS. § 92. Definition. The stockholders of a corporation are those who actually hold its stock, or who have subscribed for its stock and have had their subscriptions duly accepted by the corporation. At the time the corporate charter is granted, the in- corporators are the only stockholders, the allowance of the charter having the effect of an acceptance of their subscriptions by the corporation. Any other subscrib- ers, whether prior to incorporation or otherwise, must await the acceptance of their subscriptions by the com- pany before they become stockholders, or are entitled to act as such. The mere acceptance of their subscriptions consti- tutes the subscribers stockholders of the corporation. Neither payment of the amount subscribed, nor the issuance of stock certificates is necessary to the estab- 108 Stockholders. 109 lishment of their status. If they fail to pay their sub- scriptions, they have no right to stock certificates and their general rights as stockholders may be forfeited, but until this is done by due proceeding, they are stock- holders, entitled to vote and to exercise the other rights incident to membership in the corporation. When outstanding stock is purchased and the certi- ficate is transferred to the purchaser by endorsement, the transfer must be entered on the books of the com- pany before such purchaser becomes a stockholder of record, entitled to vote, to share in dividends, and to receive a certificate of stock in his own name. Until that time he is the equitable owner of the stock, but he has not entered'into formal possession and is not known or recognized in any way as a stockholder. § 93. Rights of Stockholders. The individual stockholder has but little part in the active management of the corporation. At the annual meeting each year he has the right to appear and vote in the election of directors and upon any amendment of the by-laws or other general matters brought before the meeting. The actual management then devolves upon the board he has helped to elect and he does not usually have any further direct concern with the affairs of the company until the next annual meeting. The rights of holders of common stock may be stated as follows: — I. To be notified of and to participate in all stockholders' meetings, in person or by proxy, and to cast one vote for each share of stock held. no THE MODERN CORPORATION. 2. To share, in proportion to the amount of stock owned, in all dividends declared on the com- mon stock. 3. In event of the dissolution of the corpora- tion to share in like proportion in any assets re- maining after all the corporate debts and obliga- tions have been paid. 4. To inspect the corporate books and ac- counts. It should be said, however, that this last right has been so restricted by late decisions and legislation as to amount to little more than the right to inspect the list of holders of stock as shown by the stock ledger. Holders of preferred stock have the same rights, except so far as extended or restricted by the condi- tions under which the stock was issued. § 94. Powers of Stockholders. The powers of the stockholders are limited and apply to but few matters. They may be summarized as fol- lows : — Adoption or amendment of by-laws. Election of directors. Amendment of the charter. Dissolution of the company. Sale of the entire assets of the company. The exercise of any specially conferred charter powers. In matters like the amendment of the charter or the dissolution of the company, the power of the stock- holders is usually regulated by statute and in most STOCKHOLDERS. Ill cases two-thirds of the stockholders must agree before effective action may be taken. If any illegal action is about to be taken by the direc- tors, or by the officers or the other stockholders of the company, the individual stockholder may appeal to the courts for such relief as is possible. Sometimes pro- posed action of the directors that is distasteful to the majority of the stockholders may be prevented by the calling of a special meeting of the stockholders, and the amendment of the by-laws thereat in accordance with the necessities of the case. This course is, how- ever, somewhat radical and is not available in most cases of disagreement between stockholders and direc- tors. Except as specified, the individual stockholder has neither the right nor the power to interfere in any way with the management of the company or of its property. § 95. Liabilities of Stockholders. Any stockholder is liable to the company, or to its creditors, for any instalments remaining unpaid upon stock subscribed for by him. He may also be liable to creditors on any stock held by him, which is not full paid. (See § 21.) Should dividends be paid from capital, instead of from. profits, stockholders would be liable to creditors for any amount so received by them. The stockholders of New York corporations are personally liable for all debts due to laborers, servants or employees for services rendered the corporation. This is an unusual provision not found in other states 112 THE MODERN CORPORATION. and proceedings under it are infrequent. Stockholders of California corporations are liable for their propor- tion of any corporate debts even though their stock may have been paid in full. Unusual liabilities are also found in a few other states. Also stockholders of national banks and of most state banks and trust companies are held liable in case of the insolvency of their institutions for an amount equal to their original subscriptions. These liabilities are, however, exceptional and as a rule in the ordinary business corporation the holder of full paid stock is in no danger of losing anything more through corporate failure or involvement than the amount he has actually invested in his stock. That is, if the corporate business is an utter failure, the holder of full paid stock will have lost the money he paid for this stock, but his risk is limited to this amount and may not in any way be increased save by his own action or consent. (See § 12.) § 96. Annual Meeting. The annual meeting is the only usual regular meet- ing of stockholders and is as a rule the one occasion on which the stockholders participate actively in the affairs of the company. It must be held in the state of incor- poration, unless the laws of such state expressly provide otherwise, and is usually required to be held in the principal office of the company. At the annual meeting the directors for the ensuing year are elected, the reports of the officers are pre- sented, any amendments to the by-laws may be sub- STOCKHOLDERS. II3 mitted and acted upon, and any affairs of the company requiring the action or attention of the stockholders may be presented for consideration. If any sweeping change in the business or policy of the company is de- sirable, it is usually authorized by action of the stock- holders at this meeting. (See Forms 24, 25.) § 97. Special Meetings. If action by the stockholders is necessary in the in- terim between the annual meetings, a special meeting must be assembled. Such special meeting of the stock- holders is called by resolution of the directors, or by a call signed by the majority of the stockholders, or in any other way the by-laws may prescribe or permit. (See § 98.) This call is followed by a notice to the stockholders, giving the necessary details of the meet- ing to be held. The method of calling special meetings and of notifying them to the stockholders, as well as the general procedure in connection with such meet- ings, is usually prescribed in the by-laws and must be carefully followed. The call for a special meeting (Form 27), and also the notice issued pursuant to this call (See Form 28), must recite the three essentials, viz. ; the time, place and purposes of the meeting called, and every stock- holder must have due notification. No business except that specified in the call and notice may be legally transacted at a special meeting. Where the stockholders are not too numerous, much time and trouble in assembling special meetings may often be saved by the stockholders uniting in a call and 114 THE MODERN CORPORATION. waiver of notice. (See Form 26.) If all will sign this, no further formality need be observed, and the meeting may be held forthwith. This is the usual pro- cedure in the case of organization meetings which are, in fact, merely special meetings of the stockholders. § 98. Notice of Meeting. A clear distinction must be made between the call for a meeting and the notice by which such meeting is actually assembled. Colloquially the two terms are often confused. The call is a formal request or de- mand from the president, or some proportion of the directors or stockholders as may be prescribed by the by-laws, for the assembling of the stockholders or di- rectors for specified purpose in special meeting. It is preliminary to the notice and is the authority under which notice of a special meeting is sent out. Regular meetings are not called, except in so far as the provis- ion of the by-laws in regard thereto serve as a standing call, and in sending out notices of regular meetings the secretary ordinarily acts under authority of these by- law provisions alone. Special meetings must, however, be formally called and this call when properly issued, authorizes the secretary to send out notice of the de- sired meeting. Notices of special meetings should always specify the authority under which they are issued. (See Form 28.) The by-laws should provide very explicitly the man- ner in which notice of both special and annual meetings is to be given stockholders. Every stockholder is en- titled to due notice of the time and place of meetings STOCKHOLDERS. II5 in which he is interested and this notice should be given such reasonable time in advance of the meeting — usually five to ten days — as will enable him to attend conveniently. The statutes in many of the states provide for notice of annual meetings by publication in some suitable newspaper of the vicinity. In a large city this is, how- ever, a very uncertain method and should be supple- mented by notice sent by mail to the last known ad- dress of each stockholder. If the by-laws specify the time and place of regular meetings, the neglect of the secretary to send out or publish the prescribed notice will not ordinarily invali- date the proceedings at such meeting. The proper notice should always be sent, and particularly if im- portant action is to be taken, but, unless the conditions are unusual, the by-law provisions are held to act as a sufficient notice of the time and place of such regular meeting. A special meeting would, however, be in- validated by failure of notice. Notices of regular meetings generally specify the purposes of the meetings they announce. This is not essential — unless matters of special importance are to •be considered — but is customary. Notices of special meetings should always state the purposes of the meet- ings called and no business may be legally transacted at such meetings — save by consent of every stockholder of the corporation — unless it has been stated in -the notice. § 99. Quorum. The quorum, or proportion of the outstanding stock which must be present to enable the transaction of Il6 THE MODERN CORPORATION. business at a stockholders' meeting, should be prescribed in the by-laws. The usual provision requires the pres- ence of a majority of the outstanding stock. Once a quorum is present, however, a majority of this quorum has power to decide any question that is brought be- fore the meeting. If a quorum is not present at any meeting, the stock- holders in attendance are not able to transact business, but they may adjourn from day to day, until a quorum is secured, and the meeting held. This saves the trouble, formality and possible delay of calling another meeting and is sometimes a very convenient procedure. In the absence of statutory regulation, any desired proportion of the stock may be designated by the by- laws as a quorum for the transaction of business. For obvious reasons a quorum should usually require a majority of the outstanding stock. If there are no by- law, charter or statutory requirements as to the pro- portion of stock necessary to constitute a quorum, the common law rule prevails and any number of stock- holders present — more than one — ^form a quorum cap- able of transacting business. § 100. Voting. Only stockholders of record are entitled to vote at annual and special meetings of the stockholders. Each stockholder of record is entitled to one vote for each share of stock held in his name. In elections of direc- tors this means that for each share of stock held the stockholder is entitled to cast one vote for each director to be elected, — that is, if five directors are to be elected STOCKHOLDERS. II7 he may cast one vote for each of these. Under the cumulative system of voting, which is designed to se- cure minority representation on the board, the stock- holder still casts one vote for each director to be elected, but he may cast all five votes — if five directors are to be elected — for any one candidate or may dis- tribute them among the five as he sees fit. (See §§ 53, 76.) § loi. Proxies. Any stockholder entitled to vote at a stockholders' meeting may usually give a proxy or — as it may other- wise and properly be termed — a power of attorney em- powering some other party to represent him at stock- holders' meetings and vote upon his stock in his stead. If this right of substitution is not given by the statute law, it should be provided for in the by-laws. It is not a common law right and does not exist unless expressly given by some competent authority. By means of proxies important meetings are often held with only a few persons present, the absentees being represented by proxies in the hands of those present to such an extent as to constitute a quorum and enable a legal meeting to be held. The person holding a proxy is frequently himself designated the "proxy" of the person he represents. In some states the life of proxies is regulated by statute, as in New York where a proxy must be ex- ecuted not more than eleven months before it is used, in New Jersey where three years is the legal limit and Il8 THE MODERN CORPORATION. in Maine, where a proxy must be executed within thirty •days of the date of the meeting. Proxies, unless the holder has himself some interest in the stock he represents, are revocable at any time, and this notwithstanding the fact that the terms of the particular proxy may state that it is irrevocable. The mere presence of the owner of stock at a meeting acts, if he so desires, as a revocation of proxies given by him for that meeting. A second proxy given while another proxy on the same stock is outstanding acts, when pre- sented to the secretary, as a revocation of the first proxy. A person holding a proxy, unless limited by the terms of the proxy itself, has every right of participa- tion in the meeting at which he acts that the stock- holder would himself possess if personally present. A proxy may be so drawn if desired as to convey a limited right, such as to vote only on some special sub- ject or in some particular wa)', or at some special meet- ing. A stockholder may if he wish give a proxy for a specified portion of his stock, reserving the right of representation on the balance to himself or conveying it to some one else by a second coexistent proxy. ( See Forms i6, 32, 33, 34.) § 102. Election of Directors. The annual election of directors is the most import- ant event in the corporate calendar, though in small corporations where there have been no material changes of stock during the year, the election is fre- quently omitted, the old board merely holding over for STOCKHOLDERS. II9 another term. If all the stockholders acquiesce there is no legal objection to this procedure. Owing to the importance of the subject, many states have passed special laws regulating the election of directors. In many states the election must be by bal- lot and must be conducted by inspectors of election ap- pointed for the purpose. The by-laws should provide for all details relating to elections. (See § 104; also Forms 13 and 15, Art. II, Sec. 5.) § 103. Officers of Meetings. In the smaller corporations the regular officers of the company usually act as the officers of stockholders' meetings. In the larger corporations the stockholders customarily have their own officers of meetings, who may or may not be the regular officers of the company. If the stockholders are to have their own officers of meetings, the by-laws will usually, though not neces- sarily, so state and provide for the election or appoint- ment of these officers. In the absence of any by-law provision for officers of meetings, any meeting of stock- holders would be called to order by some member pres- ent, and a president, or chairman, and a secretary, elected or appointed for the occasion. If the regular officers of the corporation are to serve at stockholders' meetings, this should be prescribed by the by-laws, as otherwise they would have no au- thority to so act. (For officers of directors' meetings see § no.) CHAPTER XII. DIRECTORS. § 104. Introductory. The board of directors is the most important feature of the corporate organization. Elected by the stock- holders, it has the entire management of the corporate affairs. In its turn the board elects the officers of the corporation, through whom it acts. It also employs such other agents and employees as may be necesssary for the proper conduct of the corporate business. The directors of a corporation are held to be its agents, and, in a measure, trustees for the stockholders. It is their duty to act with all proper care and diligence in looking after the affairs and property of the corpora- tion, and they are responsible for its proper manage- ment. Not infrequently the directors are styled "officers" of the company. This designation is not incorrect but tends to produce confusion and is therefore not em- ployed in the present volume. The directors are usually elected at the annual meet- ing of the stockholders to serve for the ensuing year. Should the annual meeting be omitted, or should the 120 DIRECTORS. 121 stockholders fail to elect a new board at the annual meeting, the directors then in office would continue to serve until the election of their successors and this whether such continuance of their term were specified in the by-laws or not. Until the election of their suc- cessors, these "hold over" directors have every power that they possessed before the expiration of their elec- tive term. § 105. Number and Authority. The number of directors composing the board is in many states fixed within cei'tain limits by statute. In most of the states there must be at least three directors. The maximum number is not usually designated. For all ordinary corporations a small board is most con- venient, and, as a rule, most effective. If the board is large the individual responsibility of the members is much diminished or lost, prompt effective action is practically impossible and at times it is even difficult to secure a quorum for the transaction of necessary busi- ness. The usual result of an unwieldy board is the delegation of the actual administration of the corporate affairs to an executive committee composed of from three to five members. (See § 117.) By this device the prompt and effective action of a small body is secured for the actual direct management, while the board in which rests the nominal control — ^and the actual final authority — may be as large in size and as irregular in meeting as the conditions dictate. A large board is not infrequently necessary or very desirable in order that .all interests may be represented, or that 122 THE MODERN CORPORATION. stockholders of special weight and influence may be included. The board elects the corporate officers, appoints such other agents as may be necessary and has entire charge of the property, interests, business and transac- tions of the company. Unless with the express sanc- tion of the stockholders its authority does not extend to radical action, such as the sale of the entire assets of the company, which would be a virtual winding up of the corporate business, but does cover all ordinary cor- porate transactions. In these matters the directors have the widest discretion and are practically indepen- dent of the stockholders, except in so far as these latter control by means of charter or by-laws provisions. To such provisions the directors are amenable. The directors can only act collectively and in a regular meeting or in a duly assembled special meeting. A single director unless authorized thereto by resolu- tion of the board, or specially empowered in some other way, has no standing of any kind in corporate matters above that of any other stockholder. § io6. Liabilities. Directors are held to be quasi trustees for the stock- holders. As such, they are liable for any wrong-doing ; also for any neglect that results in loss to the corpora- tion. For instance, they are liable if they issue stock as full paid which is not full paid, or pay dividends out of the capital of the company when there are no profits, or otherwise abuse their power, or grossly mismanage the affairs of the company. In short, they have under- DIRECTORS. 123 taken a trust, and they must conduct themselves in its administration as would careful business men in the management of their own private affairs. In addition to this general liability, special laws have been enacted in many states, making directors- Hable criminally as well as civilly for certain acts, such as declaring illegal dividends, making loans to stock- holders out of corporate funds, making false re- ports, . etc. As a trustee, a director must have no interest adverse to the interests of the company, and he should not in- volve himself personally in any contract or business in which the company is concerned unless the matter in hand is clearly to the advantage of the company. The courts scrutinize transactions of this kind closely and an objecting stockholder may have a contract between a director and the company set aside if he can show that undue influence has been used to secure such con- tract, or that it is not to the best interests of the com- pany. § 107. Qualifications. The usual statutory provisions require that directors shall be stockholders of the company, also, usually, that one member of the board shall be a resident of the state of incorporation. In New York and some other states the stockholding requirement may be waived by proper provision in the charter or by-laws. If direc- tors are required to be stockholders, any director dis- posing of his stock thereby vacates his office, and the position he occupied is vacant and may be filled by the 124 THE MODERN CORPORATlOlSr. board without any formality beyond the election of his successor. One or more shares of stock are often given to a party desired as a director in order to qualify him for the position. Such directors are termed "dummy" directors. (See §§ 64, 88.) In most, if not all of the states, married women may act as directors, as may, generally, any person capable of contracting. § 108. Vacancies. A board of directors may continue to act though there be vacancies, provided sufficient members remain and are present to make up a quorum. As a measure of safety, however, vacancies should be filled as they occur and authority to do this should be conferred on the board by the by-laws. The board does not possess this power unless it is specifically given. Directors can not be removed, either by the other directors, or by the stockholders, unless such power of removal is expressly given by the certificate of incor- poration, the by-laws, or the statutes of the state. Where directors may be removed for cause, sufficient charges must be preferred, due notice be given the accused person and the charges substantiated before his position may be declared vacant. § log. Classification. In the larger corporations to avoid the possibility of the sudden change of policy that might result from a sweeping change in the personel of the board, the di- rectors are frequently divided into classes, differing DIRECTORS. 125 only in the time of their election. The usual number of classes is three, and, after the first election, the di- rectors of one of these classes are elected each year and hold over for three years. Under this arrangement, after the first election only one-third the total number of directors is elected each year, and three years are re- quired to make a complete, change of the board. It is obvious that the plan completely prevents any sudden change in the composition of the board, unless by general consent and arrangement, and therefore insures stability in the management of the corporation. Such classification is not usual in the smaller corpora- tions and would not as a rule be of any advantage to them. § no. Regular Meetings. The times and places for regular meetings of the directors are fixed by the by-laws. Monthly meetings are generally prescribed, but the frequency of such meetings will be determined entirely by the require- ments of the particular corporation. In a small com- pany one regular meeting a year may suffice. Should action of the board prove necessary in the. interim, special meetings may be readily called, or held by con- sent, whenever the occasion arises. As a general rule directors must hold their meetings in the state of incor- poration and these meetings are usually held in the principal office of the company. They may be held elsewhere in the state if permitted by the by-laws, or without such permission, by unanimous consent of the members of the board. A meeting outside the state is 126 THE MODERN CORPORATION. not legal unless expressly permitted by the statutes of the state. Such statutes have been enacted in a few states. Directors can not give proxies to others to act for them at meetings of the board, but must be personally present if they wish to be represented. The officers of the company are also the officers of the board and act as such at all board meetings. An exception to this general statement must be made as to some of the larger corporations in which a special pre- siding officer termed the chairman of the board is not uncommon. § III. Special Meetings. The by-laws should clearly prescribe the method by which special meetings of the board are to be called. Commonly it is provided that the president or two or more of the directors may call such meetings. Calls for special meetings must specify the time, the place and the business to be transacted, these details must be repeated in the notice and no other business than that so specified may be transacted at that meeting. (See § 112.) If, however, all the directors meet or are present and coflsent, a special meeting may be held then and there, no call or ^lotice of any kind is required and in the absence of objection any business whatsoever may be transacted. Where the board is small and easily as- sembled such a "consent" meeting is convenient and entirely unobjectionable. All being present and con- senting, every formality is thereby waived and no dis- DIRECTORS. 127 pute as to the legality of such a meeting can arise later. The presence of all the directors at the meeting and their consent thereto should, however, be very clearly evidenced, either by proper entry in the minutes, or, better, by a written statement signed by all the di- rectors. When this method can not be followed, a call and waiver of notice, signed by all the directors, makes it possible to hold an immediate meeting without further notice. (See Form 29.) When neither of these methods is practicable, the formalities prescribed by the by-laws for the calling of special meetings should be closely followed. (See Form 30.) § 112. Notice of Meetings. The members of the board are supposed to know when and where its regular meetings are held, and, even though notice be required by the by-laws, failure of notice will not invalidate the proceedings of such a meeting. Notices should, however, always be sent out, both to insure the attendance of the members of the board at the meeting, and to remove any possibility of dispute or trouble as to its proceedings. Usually such notices specify the important matters that are to come before the meeting. With special meetings the case is quite different. Here due notice as to the time, place and purposes of the meeting is absolutely essential and if any director does not receive this full notice of a special meeting, he is not bound by the action of such meeting and may have its proceedings set aside if he chooses to take the 128 THE MODERN CORPORATION. necessary steps. Therefore the directions of the by^ laws should be followed to the letter both as to the call and notice of special meetings, and, whether required by the by-laws or otherwise, every notice should dis- tinctly specify the time and place of the meeting and the business to be considered thereat. (See Form 31.) As has been stated ( § 1 1 1 ) , notice of special meet- ings may be waived and the meeting held at any time and place and any business transacted thereat by agree- ment of all the directors. § 113. Quorum. A majority of the board is usually necessary to con- stitute a quorum. This means a majority of the whole board, not a majority of some reduced membership caused by resignations or removals. , A majority of the prescribed quorum decides the action of the board. Unless regulated by statute, the charter or by-laws may prescribe the number necessary to form a quorum. To allow less than a majority of the board to constitute a quorum is a measure of doubtful wisdom. § 114. Election of Officers. The board can only act through officers and agents, who are elected or appointed by the board. Usually the election of officers is held at the first board meeting in each year after the new directors for the coming year have been themselves elected. This is so arranged in order that the new directors may elect their own officers and thereby secure an official staff in harmony with their views and policy. The usual officers are a presi- DIRECTORS. 129 dent, vice-president, treasurer and secretary. Two offices may be held by the same person if the duties are not incompatible. The directors have the right to fill any official va- cancy occurring during the year. They have no right, however, to remove officers — except for cause — unless such power is expressly given them by the by-laws, the charter, or the laws of the state. In some few states broad rights of removal are given the directors by statute. In case of any failure to elect officers at the appointed time the old officers hold over until their successors are elected. Until superseded these old officers have the same power to perform the duties of their respec- tive offices that they enjoyed before the expiration of their term. If the board fail to elect officers at the ap- pointed time, directors may, if they see fit, hqld such election at the next regular board meeting, or at a special meeting called for the purpose. If they do not see fit to elect officers at all they can not be forced to do so unless the affairs of the corporation are obviously and materially suffering from such neglect. § 115. Compensation of Directors. In the larger corporations it is generally provided that a director attending any meeting of the board shall receive a certain fee for his attendance. The amount of this fee is fixed by the by-laws and usually ranges from five to ten dollars. If a director is absent from a meeting, his fee for that meeting is lost to him. Ex- cept for these fees a director does not as a rule receive 130 THE MODERN CORPORATION. any compensation unless he has performed some special service outside the ordinary duties of a director. If the directors are to receive payment for their ser- vices, that fact should be explicitly stated in the by- laws. In the absence of any such provision the services of the directors are supposed to be given without charge. § 116. Power to Pass By-Laws. Originally by-laws were passed by the stockholders alone, and one of the principal purposes of these by- laws was to define and limit the action of the directors and officers of the company. In the present day this has been modified in some of the states by statutes giv- ing the directors more or less power over the by-laws. In some other states such power may be given the directors by suitable charter and by-law provisions. • Under the New Jersey laws it is possible to give the directors absolute power to make and alter the by-laws, and in the great corporations, formed in that state for the purpose of combining industrial enterprises an^^ for other large undertakings, such authority is usually conferred upon them. In New York the directors may neither repeal nor alter by-laws adopted by the stock- holders, but are allowed to pass additional by-laws in harmony with those of the stockholders. The New York rule would seem to go as far in this direction as is safe for the ordinary corporation. (See § 37.) § 117. Executive Committee. In the larger corporations the board of directors is generally composed of a number of members. These DIRECTORS. 131 members are usually busy men living in different parts of the country and difficult to assemble. Many of them are on the board solely as representatives of special interests or because of wealth or influence and not from peculiar fitness for the conduct of the corporate business. Under such conditions the board is not an effective instrument for the management of the cor- poration. Its slow, formal and uncertain operation is then advantageously replaced by the prompt and effi- cient action of a small, selected executive committee. The membership of this committee is seldom less than three or more than five. Too large a committee would involve the very evils it was created to avoid. It must be composed of members of the board and this membership is supposed to be made up of those most competent to manage the corporate affairs. Usually for the interim between board meetings all the powers of the board are given to this committee. The executive committee appointed with such powers is the real managing body of the corporation. It is usually subject to the instructions of the board, but this latter body as a rule merely supervises the work of the committee, acting only in those matters which are referred to it by the committee or which are of unusual importance. The power of the committee is generally defined by the charter or by-law provisions under which it exists. When the board of directors is small, an executive committee is not only unnecessary, but may become an actual menace to the interests of the corporation. In such cases the committee is apt to improperly monopo- 132 THE MODERN CORPORATION. lize the management of the corporation, the board be- ing excluded from its rightful direction of the corpor- ate affairs. § 118. Finance Committee. In the larger corporations, in addition to an execu- tive committee, a finance committee is often provided to supervise and direct the financial affairs of the com- pany. For the interims between board meetings the scope, powers and authority of this committee in mat- ters relating to the finances of the company are, as a rule, the same as those of the board. A finance com- mittee is superfluous in the smaller corporations. The finance and executive committees are usually permanent, or standing committees. Still other stand- ing committees are found in some of the large corpora- tions. CHAPTER XIII. OFFICERS. § iig. Enumeration; Qualifications. The term "officer" is usually applied to those agents of the corporation who are elected or appointed by the board of directors as the direct executive representa- tives of the board and of the corporation. Technically the directors are themselves officers, but this applica- tion of the term is apt to cause confusion. The necessary officers of a corporation are the presi- dent, secretary and treasurer. In the smaller corpora- tions when the duties are compatible two of these of- fices are frequently held by one person. In the larger corporations the number of officers is increased by the addition of one or more vice-presidents, assistants for the secretary and treasurer, a managing director or general manager, an auditor and a counsel for the company. Sometimes also a chairman of the board and officials for the standing committees are added. • The officials named, are, for the most part, elective, and, with the occasional exception of the general man- ager and the assistant officers are supposed to report directly to the board or to the standing committees. 133 134 THE MODERN CORPORATION. All these are officers of the company while those lower in its service are ranked as agents and employees. The annual election of officers usually follows closely the election of directors, being held as soon thereafter as the newly elected board can be properly assembled. This is done in order that the new directors may choose officials acceptable to them and in harmony with their views. The president and vice-president, as presiding offi- cers of the board, should be chosen from its member- ship. The other officers need not be selected from the board though the treasurer is frequently chosen from among the directors and the other officials are so se- lected when convenient. The treasurer of the larger corporations is usually selected on account of his finan- cial standing or ability. A knowledge of the duties of the position would seem to be a necessary qualification for all corporate officials, though other considerations frequently prevail. § 120. Vacancies and Removals. The directors have power to fill any vacancies that may occur among the officials of the corporation, such interim appointments holding for the unexpired term. Officers can not be removed at the pleasure of the board unless the by-laws, charter or statute law gives the. di- rectors this power. The directors may, however, re- move an official for good cause without special authori- zation. When the removal of an officer for cause is contem- plated, charges should be made, the accused notified OFFICERS. 135 of these charges and full opportunity be allowed him for a hearing. Should the removal be made without such procedure, or with it, but on insufficient grounds, both the corporation and the directors personally might be liable in damages. § 121. Liabilities of Officers. Officers are liable generally for all damages result- ing from their negligence or active wrong-doing in connection with official duties. In addition the laws of most states impose upon them special liabilities for various acts and omissions, such as the failure or re- fusal to allow proper inspection of the stock books of the company, the making of false reports or certifica- tions, loaning corporate funds to stockholders, and other similar cases of neglect or malfeasance. § 122. Compensation of Officers. Usually officers of a corporation are paid for their services and if necessary may collect such payment from the corporation by process of law. If, however, they stand in any relation to the corporation — such as that of a director or stockholder — that would justify the inference that they were to serve without compen- sation and there is no by-law, resolution of the board, or other well-understood agreement for official sala- ries, they have, generally speaking, no claim to pay- ment for their services. Nor in the absence of provis- ion for compensation is it ordinarily allowable for the directors — unless with the consent of all the stock- holders — to vote a salary or payment to a director or 136 THE MODERN CORPORATION. stockholder for services as an officer after such services have been rendered. It is therefore advisable in all cases that the intention as to compensation of officers shall be clearly stated in the by-lavi^s, — either that officials shall serve without compensation, or with salaries specified in the by-laws or with such salaries as the board shall designate at the time of their election. Occasionally such liberal salaries are paid to the corporate officials as to amount practically to a division of the corporate profits among them. In close corpora- tions where all the stockholders are either officials or satisfactorily represented on the official staff this is at times a matter of agreement. Under such conditions the arrangement is legitimate and unobjectionable. Occasionally, however, the device is adopted in order to deprive the stockholders of profits which would otherwise and properly be received by them as divi- dends. Where any apprehension of such improper practices exists, the possibility should be prevented by by-law restrictions on salaries. (See §§56 and 80.) § 123. Duties of Officers. The duties of officers should be clearly stated in the by-laws, but, if not, might be prescribed by the board within the general limits set by custom. The usual duties performed by the respective officials of the cor- poration are about the same in all cases, varying some- what with the size of the corporation and the nature of its business. It is to be noted, however, that outside of a few OFFICERS. 137 statutory requirements, the duties of the various offi- cials are absolutely within the discretion of the stock- holders, and may be fixed by proper by-law provision in accordance with their wishes. Occasionally this power is exercised so as to materially change the usual relative status of the dififerent officials. In the present chapter the powers and duties assigned the various officials are those customary in the ordi- nary corporation of moderate size. § 124. The President. The president is the most important officer of the corporation. He presides over the n^eetings of the board, and, if authorized thereto by the by-laws, over the meetings of the stockholders. He can bind the cor- poration in most routine matters and usually affixes the corporate signature to all important instruments requiring such signature. He must, however, be spe- cially authorized by the board in order to bind the cor- poration in matters of unusual importance or outside the regular routine. The president should exercise a general supervision over all the corporate business, and, as necessary or required, make careful reports to the board and to the stockholders as tc5 the real condition of the company's business. The president is sometimes authorized to affix the corporate, seal and is frequently required in connection with the treasurer to sign or countersign the corporate checks. He is. also, sometimes given the same power to endorse negotiable paper and to endorse checks for I38 THE MODERN CORPORATION. deposit as is given the treasurer. He is also usually re- quired with the treasurer or secretary to sign the certi- ficates of stock. § 125. The Vice-President. Vice-presidents, designated and ranked as first, second, third and so on, are elected in accordance with the corporate needs. These in the order of precedence perform the duties of the president in the absence or disability of that official or in his refusal to serve. Also in the larger corporations active functions are usually provided for one or more of the vice-presidents. Frequently the number of vice-presidents is swelled merely to provide honorary positions for members of the board. In the smaller corporations, on the other hand, the position of vice-president is sometimes omitted entirely, its duties being assigned the treasurer, or the treasurer being elected as both vice-president and treasurer. A vice-president may take the place of the president only in the absence, disability or refusal of this latter to act. At other times a vice-president has no more power to act for the president, or as president, than would any other officer of the corporation, and should he so act it would be ineffective and his action would not be binding on the corporation. Also the absence, or disability of the president must be real and his re- fusal to act must be a distinct refusal to fulfill the gen- eral duties of his position, before the vice-presidents are competent to perform his duties. In event of any OFFICERS. 139 question as to the competence of a vice-president to act the board of directors should be the judge. § 126. The Secretary. The secretary's duties are to keep a record of the proceedings of the stockholders and directors, to send out notices of meetings, to issue stock certificates, keep the record of stock and stockholders, to notify officers of their election, to sign or countersign such corporate instruments as the board may direct, and to preserve and keep safely all such corporate instruments and records as do not pertain to the work of the treasurer, and are not otherwise assigned. The secretary usually has the custody of the seal and is required to attest it when it is affixed to any instru- ment requiring the formal corporate seal. (See § 141 and Form 48.) Also the secretary is frequently re- quired to sign certificates of stock with the president, though in some states, as New Jersey, he may not do so, the statutes requiring the signature of the president and treasurer. The secretary is frequently given active duties in connection with the business of the corporation, but these have no necessary relation to the duties of his official position. § 127. The Treasurer. The treasurer has charge of the funds and securities of the company. If these are of any considerable amount he should be required to give bond for the faithful performance of his duties and the due return of the cash and securities entrusted to him. 140 THE MODERN CORPORATION. Usually the treasurer is directed by resolution of the board, though sometimes by by-law provision, to de- posit the moneys of the company in the name of the company in some designated bank or other depositary; His checks are usually required to be countersigned by the president. He frequently has sole power to endorse negotiable paper and checks for collection or deposit. The treasurer either acts as bookkeeper, or the bookkeeping is done under his direction and he is sup- posed to maintain a general supervision of the financial interests of the company. Like the secretary> the treasurer may have other duties assigned him in the conduct of the corporate business that do not necessarily pertain to his office. § 128. General Manager. The general manager while an officer of the com- pany is not so in the same sense as is the president, secretary or treasurer. He is accounted an officer — in contradistinction to the employees — only because he is selected by and usually reports to the board. He has no concern with the corporate functions, having charge only of the ordinary business operations of the com- pany which he manages exactly as he might the afifairs of a firm or individual. At times he is directed to act under and report to the president. If the by-laws did not specifically provide for the election of a general manager, the board would still have authority to ap- point or employ such official and prescribe his duties and salary just as with any other employee of the com- pany. ' OFFICERS. 141 The powers, duties, compensation and term of office of the general manager are usually fixed by the by- laws, otherwise by the board of directors. Generally this officer enters into a contract of employment with the corporation and in such case the contract provisions control. § 129. Counsel and Auditor. In the larger corporations an attorney or firm of at- torneys to represent the corporation is retained as a regular and permanent feature of the management. Such counsel has no independent authority to act for the corporation, even in matters of litigation, save as expressly given, usually by action of the board. The principal duties of counsel are to confer with and advise the officers of the corporation, for their guid- ance and for the purpose of avoiding litigation, to pre- pare or revise all important contracts or other instru- ments of the company, and to represent the company when litigation does occur. An auditor is also usually appointed or elected in the larger corporations. The duty of this officer is to supervise the whole system of corporate accounts, busi- ness records, and the methods of securing and keeping these accounts and records. Such officer must of neces- sity, be an expert accountant. His authority and duties are usually prescribed by the by-laws, or otherwise would be fixed by the board. CHAPTER XIV. STOCK AND STOCK BOOKS. § 130. Acceptance of Subscriptions. Formerly before a corporation was organized it was customary to circulate lists and secure subscriptions to its stock. The plan is still occasionally pursued. Under the form of subscription list usually employed in such cases the subscriptions must be accepted by the corporation before they become binding on either side. The subscriber can not compel acceptance of his sub- scription, but on the other hand neither can the cor- poration prevent the subscriber from withdrawing his subscription if he sees fit. It is merely a proposition continuing until either accepted or withdrawn. 'As soon as accepted, however, it becomes a binding con- tract between the corporation and the subscriber, and the latter, by this acceptance, becomes a stockholder of the corporation. (See § 92.) If there are any out- standing stock subscriptions, they are usually accepted by the board at its first meeting. The subscriptions of the incorporators do not re- quire this formal acceptance by the corporation to be- come legally effective, the allowance of the charter by the state authorities acting as an acceptance of their 142 STOCK And s-rocit books. 143 subscriptions. The incorporators are therefore stock- holders upon the allowance of the charter and are thereby qualified to act in the organization meetings. After organization a corporation may offer for sub- scription unissued stock or treasury stock. For this purpose an individual subscription blank is most con- venient and is usually employed. (See Form 3.) Such subscriptions must also be accepted before they become binding and before the subscriber becomes a stock- holder of the corporation. § 131. Certificates of Stock. The persons shown by the books and records of a corporation to own its stock are termed "owners of record." The stock certificate is documentary evidence of such ownership of a specified number of shares of stock in the corporation issuing the certificate. When a stockholder sells his stock to a stranger, this latter is ,not an owner of record until he has had the proper transfers made on the books of the corporation. (See Forms 4, 5.) Each holder of stock for which the corporation has been paid in full, or for which it has been paid the agreed price, is entitled to receive a stock certificate signed by the president and the treasurer, or president and secretary, and sealed with the corporate seal. This certificate states that the party named is the owner of so many shares of the company's stock, full-paid and non-assessable. This certificate is not the stock, though colloquially so termed, any more than a deed is the land it transfers. It is merely evidence of the owner- 144 THE MODERN CORPORATION. ship of Stock, in such form as renders the transfer of the stock from hand to hand a simple matter. A stockholder whose stock has been paid for has a right to a certificate because he is already a stockholder. The certificate is merely a convenient evidence of the fact. It does not of itself constitute him a stockholder, or, except in the matter of convenience, afifect his ownership of his stock in any way. It might be lost or destroyed (See § 134), but the party in whose name the stock stands on the books of the company is still a stockholder and entitled to the rights of a stockholder in spite of this loss. If his rights are questioned he may refer to the stock book (See §§ 135, 149) and its records will control. Stock certificates are usually bound in a substantial volume, numbered from one up, and have a stub for each certificate upon which is kept a record of the facts relative to the issue of that certificate. This book of certificates is usually kept by the secretary. (See § 147- ) The owner of a stock certificate may assign it and thereby authorize the proper officials of the corporation to transfer the stock it represents. The ownership of record is not, however, changed until such transfer has been made upon the books of the corporation. If the owner wishes he may surrender a certificate and have it reissued in two or more certificates of the aggregate value of the surrendered certificate. These certificates may be in his own name, or in the name of others as he may direct. STOCK AND STOCK BOOKS. I45 § 132. Issuance of Certificates. When the corporation is organized the stock certifi- cates are in the hands of the secretary, ready to be issued to the rightful owners, or to the parties desig- nated by them. It may be that prehminary subscrip- tions have been taken and the stock is to be issued to these subscribers, or the company may have been or- ganized to take over property, and, under the condi- tions of exchange, all the stock of the company is to be issued in payment for this property, or subscriptions may be offered at the time. In any case the procedure as to the actual issuing of the certificates is much the same. Usually when stock is issued for property, the entire amount of this stock is included in the one first certi- ficate. If, as is generally the case, the stock is to be distributed among a number of persons, this original certificate is duly endorsed by the person in whose name it stands and' is then turned back to the secretary for reissue in such names and in certificates of such size as may be desired. Instead of this arrangement, the stock is sometimes issued directly to the parties in interest, or, in accord- ance with their instructions, in a number of certificates, the total of the shares represented by these certificates equalling the full amount of stock to be issued. There is no legal objection to this plan, though the first ar- rangement is somewhat simpler. If preliminary subscriptions have been taken, and payment has been made or is proffered, .or if subscrip- tions are offered at the time, the stock will be issued in 146 THE MODERN CORPORATION. accordance with the instructions of these subscribers. The officers of the corporation must be sure that their instructions come from parties duly authorized to give the instructions, but beyond this have no concern as to the names in which these certificates are made out, or as to the equitable ownership of the stock involved. When stock certificates are to be issued the secretary fills out the blank certificates in accordance with the conditions. These incomplete certificates are turned over to the president — and treasurer, if he be one of the signing officers — for signature. When signed, the secretary seals the certificates with the corporate seal, enters all the important data concerning each certificate upon the stub of that certificate, and they are ready for issue. If the recipient is at hand he is required to sign the receipt upon the stub of the certificate at the time delivery is made. If he is at a distance a receipt is usually mailed with' the certificate, and, when signed and returned, is pasted or otherwise attached to the stub of the certificate for which it stands. When transfer agents and registrars are employed the stock certificates pass through their hands before issue, and, usually, these agents take entire charge of the matter. § 133. Transfers of Stock. For convenience in transferring stock, each certi- ficate bears upon the reverse side a blank form of as- signment (See Form 5) which when properly filled out, or signed in blank and duly delivered, transfers the ownership of' the stock represented by that certi- ficate. If this form is filled out in its entirety, the STOCK AND STOCK BOOKS. • 1 47 ownership of the stock passes to the party named in the assignment. If, however, this form is signed in blank and the signature duly witnessed, the certificate may be passed from hand to hand or used as collateral, without further endorsement or formality, the equit- able ownership of the stock following the certificate. The ownership of record, however, including the right to vote and share in dividends, remains with the original holder until the transfer is made upon the books of the corporation. (See §§ 92, 136.) For this reason transfers should be made upon the books of the company without delay, unless it is designed to trans- fer the certificate to some one else very shortly, or unless the stock is by intention to be left in the name of the original owner. If the holder of a certificate endorsed in blank wishes to make himself a stockholder of record, he writes his name in the proper place in the blank form and also enters either the name of the secretary of the company, or his own name or the name of some other suitable person as attorney to make the transfer on the books of the company. ( See Forms 6, 7. ) This attorney, so designated, makes the transfer on the books of the company (See Form 61), surrenders the old certificate for cancellation, and the transferee thereupon becomes a stockholder of record, entitled to vote and to receive dividends. He is also entitled to a new stock certificate or certificates, which he usually receives forthwith. (See § 93.) The secretary upon receiving the sur- rendered certificate cancels it, attaches it to its stub, makes the proper entry on this stub and prepares the new certificate for issue. 148 THE MODERN CORPORATION. When a transfer of stock is duly entered on the books of the company and a new certificate has been issued in the name of the party entitled thereto, such recognition by the company acts as a guarantee of title, and it is not necessary for a prospective pur- chaser to investigate further than to make sure that the certificate is genuine and is properly in the hands of the holder. § 134. Lost Certificates. A stockholder' Sl rights are not affected by the loss or destruction of his stock certificate. Nevertheless its absence may involve much inconvenience, more particu- larly if the stock is to be sold, and the stockholder usually wishes a duplicate issued. This is within the province of the directors, subject, however, to any by- law provision which may apply. Usually the by-laws provide that a bond must be required before a dupli- cate certificate is issued and this takes the matter out of the discretion of the board. In the absence of by-law provisions restraining them the directors may, if they deem such proceeding advis- able, order a new certificate issued in the place of any lost one. Inasmuch, however, as the corporation might be held responsible and lose the value of the stock if the lost certificate turned up in the hands of an inno- cent holder, the board usually will not order the issue of a duplicate certificate unless a proper bond of in- demnity is given the company. At times the board will not even do this, but will decline to act until ordered so to do by a court having jurisdiction. Such STOCK AND STOCK BOOKS. 1 49 an order relieves the directors of any responsibility in the matter and the duplicate certificate then issues as a matter of course. If the lost certificate has been actu- ally destroyed, as by fire, and the fact is proven beyond all doubt, the board might safely order the issue of a new certificate without requiring bond, if the by-laws permit. If a certificate is lost the secretary of the company should be notified promptly, as otherwise the stock certificate might be presented under circumstances which would justify him in making any desired trans- fer. After notification he would make such a transfer at his peril; § 135. Stock and Transfer Books. Corporations should, and, in many states, must keep a stock book or stock ledger showing who are stock- holders, their addresses, when they became stock- holders and how many shares they hold. (See Form 60.) In some states the stock book must be kept open at all times during business hours for the inspection of stockholders and judgment creditors of the corpora- tion. The stock book is the final authority as to who are the stockholders of the company entitled to vote and share in the dividends. Any statutory require- ments should be fully observed. A book of blank forms for the transfer of stock, known as the transfer book, is also usual. (See Form 61.) It is ordinarily the duty of the secretary to keep the stock books. If the stock is active much care is required to maintain the records free from error. CHAPTER XV. DIVIDENDS AND FINANCES. § 136. Dividends. The matter of declaring dividends rests in the dis- cretion of the board of directors. They decide when a dividend is to be declared and how much it shall be. Dividends may be legally declared only from surplus or net profits. If paid from the capital or obtained in any way that will impair the capital of the company they are illegal. The directors render themselves per- sonally liable for declaring such dividends and should the corporation become insolvent the amounts so paid to stockholders could be recovered from these stock- holders for the benefit of creditors. Dividends must be equal as between holders of the same class of stock. Particular stockholders may not be favored either in time or amount of payment. Divi- dends are paid only to stockholders of record. ( § § 92, 131.) If stock has been sold and the purchaser has neglected to have the transfer made on the books of the company, any dividends are paid to the former owner and the purchaser who is the equitable owner of the stock, must look to him for satisfaction. 150 DIVIDENDS AND FINANCES. I5I § 137. Working Capital. Usually when a corporation is organized some part of the capital stock is sold to provide working capital. Or when stock is issued for property, frequently a por- tion of this stock will be returned to the treasury as a donation, to be sold for this purpose. Or working capital may be included in the property turned over to the corporation. To provide for later necessities the by-laws some- times specify that a certain proportion of the profits shall be set aside for working capital before any divi- dends are paid, or shall be so set aside until a certain amount is so reserved. In the case of New Jersey cor- porations some such by-law is necessary if working capital and reserves are to be accumulated, as other- wise under the statutes all profits must be paid out as dividends. In other states as a general rule, without any specific authorization, the directors may reserve such amount as may in their discretion be deemed necessary for working capital and before or after do- ing so, may pay such dividends from profits as they think best. § 138. Debt. Certain restrictions upon the power of the board to incur debt are sometimes inserted in the by-laws. The usual form this takes is a requirement that no indebted- ness beyond a limited amount for current expenses may be incurred unless authorized by a two-thirds vote of the entire board, or, on occasion, an authorization from the stockholders will be required. (§§ 56, 80.) 152 THE MODERN CORPORATION. The assenting vote of a specified proportion of the stockholders should always be required before the board may mortgage the corporate property. In New York and some other states this is provided by statute. The usual method of corporate borrowing is by the issue of bonds secured by mortgage upon the real, and sometimes upon the personal property of the corpora- tion. § 139. Bank Deposits. The moneys of a corporation should be deposited in the name of the corporation in some bank or trust company designated by the board of directors. (See Form 52.) Such deposit should be in the name of the company and moneys deposited therein should be drawn out only by checks, signed by the treasurer ^ind countersigned by the president or by such other officers as may be properly authorized thereto. (See Form 54.) The by-laws Usually direct such disposition to be made, the board at its first meeting selecting the bank. CHAPTER XVI. SUNDRY DETAILS. § 140. Corporate Offices. A corporation is usually required to maintain a so- called "principal office" in the state in which it is in- corporated. It may have other offices either within or without the state and these offices may be and fre- quently are larger and more important than the desig- nated principal office, but this latter is still, from the legal standpoint, the principal office and the headquar- ters of the corporation. Certain of the corporate records are kept in the principal office and usually an agent must be kept in charge upon whom legal service, as against the corporation, may be made. The principal office is the usual and most suitable place in which to hold meetings of the stockholders, and in some states the statutes provide that such meet- ings must be held in this office. The directors have much more latitude than the stockholders as to their place, or places of meeting, but, in the absence of good reasons to the contrary, should also meet in the prin- cipal office. The by-laws usually provide that all regu- 153 154 THE MODERN CORPORATION. lar meetings both of stockholders and directors shall be held in the principal office. § 141. Corporate Seal. The corporate seal is either provided for in the by- laws and is therefore adopted with the by-laws or, otherwise, is adopted by direct resolution of the board of directors. No particular form of seal is required by the statute law, but it should bear the name of the com- pany, the state of incorporation and the year in which the incorporation was efifected. The corporate seal must be used in the execution of corporate deeds, mortgages and all other instruments of such nature as to require a seal when executed by an individual. It is also employed to authenticate the certificates of stock, transcripts of motions or resolu- tions, and such other corporate instruments as may be necessary or desirable. An ordinary corporate con- tract, or promissory note does not require the seal, nor is it usual to affix it to the corporate checks. Its use on such instruments does not affect them in any way. The secretary is usually the custodian of the seal and it is his duty to affix it to resolutions or other cor- porate documents when necessary, or when directed so to do by the board of directors, and, generally, when required in the course of his regular duties. (See Forms 48 and 57 for use of seal.) The board of directors may, in its discretion, au- thorize any officer of the company to affix the corpor- ate seal. SUNDRY DETAILS. 1 55 § 142. Execution of Contracts. Corporate contracts are authorized by resolution of the board of directors and it is the general rule that an officer of a corporation must be so authorized before he can legally contract for the corporation. In prac- tice, however, this rule is somewhat relaxed. The offi- cers may usually make binding contracts in minor mat- ters incident to their official duties. Also in more im- portant matters if the officers have been habitually per- mitted to contract for the corporation without specific authorization, such contracts unless unusual or obvi- ously in excess of the proper official powers, are bind- ing on the corporation. If, however, the officers have been allowed to so contract only in particular direc- tions their contracts while binding in these directions would not be in matters outside, unless these outside contracts were authorized by the board. For instance, if the corporation has habitually al- lowed its president without express authorization to make contracts for machinery and lumber and material used in the corporate operations, such contracts though not specifically authorized are binding on the corpora- tion. If, however, he should go further and contract to purchase real estate, or other property outside the usual routine,' such contracts, unsupported, would not be binding on the corporation. The board might re- pudiate any such contract absolutely, or ratify it either by express resolution or by accepting the benefit of the transaction. When an important contract is authorized by reso- lution of the board, the resolution usually empowers 156 THE MODERN CORPORATION. one or more of the corporate officials to execute the contract for the corporation. In such case, a certified transcript of the resolution, signed by the secretary and sealed with the corporate seal would be the proper evidence of the officials' authority in the matter, and, if the contract were one ofifered to the corporation, suf- ficient evidence of its acceptance by the corporation. (See Forms 52, 53.) The deed, mortgage or other instrument involved in any such contract should close with a testimonium (See Form ^'/) reciting the authorization under which the officials are acting, and should be signed by them with the corporate signature and be sealed with the corporate seal. § 143. Parliamentary Law. In all matters where the procedure is not specifically prescribed by the by-laws the corporate meetings are governed by the usual parliamentary law, which it is the duty of the president to enforce. Some particular manual of parliamentary law is frequently adopted to control in all cases not covered by the by-laws. Oc- casionally such particular manual is named by the by- laws with a provision that it shall control in the absence of higher authority. § 144. Treasurer's Books. Usually the treasurer's books are merely the books of account of the corporate business. If the treasurer is not himself book-keeper of the company, he is sup- SUNDRY DETAILS. 1 57 posed to supervise and be responsible for the corporate accounting. There is no system of book-keeping pecuHar to the corporation. Each company keeps its accounts in ac- cordance with its own methods and the general prin- ciples of book-keeping. In a large corporation con- ducting an extended business, the books will be num- erous, but this is because of the scope of the business, not on account of any peculiarities of corporate book- keeping. A capital stock account will be introduced. A dividend account will be necessary to record the dis- position of divided profits. A few other accounts peculiar to the corporate form will be necessary. A stockholders' ledger will be required. Outside of these, the books and the accounts they contain are much the same as they would be if the business were unincor- porated. (See §§ 91, 127.) § 145. Secretary's Books. The books kept by the secretary are as follows: — (i) the minute book, (2) the stock certificate book, (3) the transfer book and (4) the stock ledger. The minute book contains the records of the corpor- ate proceedings. (§ 146.) The stock certificate book contains any unissued certificates, attached to their stubs, the stubs of all cer- tificates that have been issued and usually any certi- ficates that have been surrendered for reissue. (§§ 60, 147.) The transfer book contains blank transfers to be 158 THE MODERN CORPORATION. filled and executed when stock of the corporation changes hands. (§§ 135, 148 and Form 61.) The stock ledger or stock book shows the name and residence of each stockholder with the number of shares owned by him. (See §§ 135, 149 and Form 60.) Large corporations frequently appoint a transfer agent to take charge of the stock certificate book, the stock ledger and the transfer book, thereby relieving the secretary of much labor and responsibility. § 146. Minute Book. It is a matter of the greatest importance that the proceedings of the meetings of stockholders and di- rectors, and, in the larger corporations, of the stand- ing committees as well, shall be recorded accurately and properly. This duty belongs to the secretary and the book or books in which his records of the corporate proceedings are entered is called the minute book. This book, if properly kept, is legal evidence of the pro- ceedings at the meetings it records. All entries in the minute book should be made by the secretary and the book should be retained in his custody. Any director has the right to inspect the minutes at any suitable time. A stockholder, as a general rule, does not have this right. The minute book is usually a blank book of the style termed "Record" by stationers. For the usual small corporation, a book containing one hundred pages is ample. A book SjA by 13 inches will be found con- venient. It should consist of a good quality of ledger paper and be substantially bound. Sundry details. 159 Minutes are not infrequently written with the type- writer on thin paper arid then pasted into the minute book. The loose leaf minute book, in which the pages may be written with the ordinary typewriter and then inserted, is also used to some extent. These arrange- ments are, however, open to objections, as substitu- tions and alterations are easy. The minutes of a com- pany, when matters of importance are considered, are better written with pen and ink, or with a book type- writer, and with the entries succeeding each other in such a manner that no later additions or insertions are possible. Kept in this manner and properly authenticated, the minute book is competent evidence in case of litigation, as to the proceedings at the com- pany's meetings; otherwise its testimony might be open to question. The first pages of the minute book should contain a copy of the charter or certificate of incorporation of the company. This may be the certified copy received from the Secretary of State, bound or pasted into the minute book; or, equally good, a careful and legible copy made by the secretary directly on the first pages. Following the charter should come the by-laws of the company, likewise carefully and legibly copied, and beginning at the top of the first page after the charter. The by-laws should be followed by a certificate signed by the secretary and stating that, as written, the fore- going by-laws are a true and correct copy of the by- laws adopted at the meeting of the stockholders of the company, held at such a time and place. (See Form 14.) l6o THE MODERN CORPORATION. Two or three pages next succeeding the by-laws should be left blank for the entry of any amendments. Then should follow the minutes of the first meeting of stockholders, then the proceedings of the first meet- ing of directors, and thereafter the minutes of stock- holders' and directors' meetings in due sequence as held. Each meeting should begin at the top of its proper page, and no blank pages should be left between the records of the different meetings. Usually the minutes of the board and of the stock- holders are kept in the same volume. In the larger corporations, however, a separate minute book is not unusual for the records of the directors and stock- holders. There is no objection to separate books if so desired, and, on occasion, they are necessary. When notification of some action taken at a meeting is necessary, as for instance the acceptance of a con- tract or proposition, a transcript of such part of th,e minutes as applies is made by the secretary and is evidenced by his signature and the seal of the com- pany. This is then delivered to the parties in intefest as formal and sufficient notice of the action taken. (See Form 52.) The minutes given in Chapter XXV are in conven- tional form. There is, however, no set form nor abso- lute rule as to how the minutes of a meeting shall be recorded, and any clear statement in good English is legally sufficient. Usually, however, the conventional arrangement will be found clearest and most concise, and should be followed. During the progress of a meeting many letters, re- SUNDRY DETAILS. l6l ports, contracts and other instruments are likely to be presented. In some cases the secretary is instructed to enter certain of these upon the minutes, but in other cases it rests in his discretion whether these documents be entered in full, in part, or be entirely omitted. Gen- erally it is sufficient if they be filed and preserved, and only such reference made to them in the minutes as will suffice to identify them, or explain their connec- tion with the action taken. If, however, the matters to which they relate are important, they might well be entered in full, or, as it is phrased, "spread upon the minutes." When this is done the minutes constitute a complete record in theinselves, which is sometimes a matter of much importance. The minutes should be written up in permanent form as soon after the meeting as possible, and while its events are fresh in the secretary's mind. If he is in doubt about any part of the proceedings, he may ask assistance from the president or members present at such meeting. He, however, must take the final re- sponsibility of making the authoritative record which he signs. The secretary should spare no pains to secure ac- curacy in the minutes, for they are the legal evidence of the action taken at the meetings recorded, and the authority for any action of the officers required there- by; and they will probably be referred to and acted upon before the formal approval of the stockholders, or directors, relieves the secretary from further respon- sibility. : ' : i ' The minutes of a meeting are signed by the secretary 1 62 THE MODERN CORPORATION. and by the presiding officer of that meeting. The minutes so evidenced should be read at the next suc- ceeding meeting of the body to which they pertain, and, if no objection is offered, should be approved. The stockholders could not approve the minutes of a board meeting nor could the board approve stockhold- ers' minutes. Neither would minutes of a meeting be approved at a subsequent special meeting of the same body unless such approval were one of the specified purposes of that special meeting. Any unapproved minutes of a body might be approved at a regular meeting of that body without special notification. The minutes of a stockholders' meeting will prob- ably not be passed upon until the following annual meeting, when they will be read, and, if no objections are offered, approved. If approved, no record need be made save the statement in the minutes of the last held meeting that the minutes of the previous meeting were read and approved. Sometimes, as a matter of con- venience, the secretary will endorse at the bottom of the minute's, after approval, "Read and approved at the Annual Meeting, January 24th, 1905," or what- ever the date may be. If objection is made to the form or substance of minutes as read, the president might, if the points objected to were obviously incorrect, order them cor- rected. Should the error be more serious, the correc- tion might be ordered by formal motion, or, in the absence of objection on the part of those present, might still be directed by the president or chairman. In such event, the minutes of the meeting then in session should SUNDRY DETAILS. 1 63 show exactly what correction was directed and in what minutes. In the corrected minutes the required changes should appear in red ink, and a marginal refer- ence should give the date of the meeting at which such correction was directed. A single red ink line might be drawn through any part ordered stricken out, and corrections may be interlined, but no erasure should be made in any case, as the corrected minutes should show both the error and the correction. This then shows the entire occurrence ; that the record was made in one way, and was, at a later date, ordered changed. The secretary has no discretion in this matter, but must correct his minutes in accordance with the in- structions of the meeting even though he may feel sure that his original entry was the true one. The meeting has full authority to say what shall be put in the minutes and what shall be excluded and the secre- tary can not gainsay that authority. It sometimes happens that a stockholder or mem- ber, opposing some proposed action, wishes his objec- tions or protest recorded in the minutes. If his ob- jections are pertinent and not too lengthy, this should visually be done ; but the presiding officer, not the secre- tary, would decide the matter, and the secretary should be guided by the president's directions. The objecting member will sometimes file his objections or protests in writing, and in such case the document should be received and filed, and the fact that it was received and filed would be noted in the minutes. Also at times it is necessary for a board member to file his dissent from or protest against some improper 164 THE MODERN CORPORATION. or objectionable board action, in order to avoid lia- bility for such action. In this case he has the right to demand the entry upon the minutes of his dissent or protest. The president will, however, decide whether such matters shall be entered or excluded, and the sec- retary should be governed by the president's decision. (See generally, Chapter XXV, Minutes.) § 147. Stock Certificate Book. Any stockholder whose stock is paid for in full, or who has paid therefor the full price demanded by the corporation, is entitled to a stock certificate, or certi- ficates, in evidence of his holdings. These certificates are usually printed, lithographed or engraved, attached to individual stubs, are numbered consecutively from one up to the total number and are bound together in a book which is designated the stock certificate book. When a new book becomes necessary the numbering is carried on beginning with the next number above the highest in the old book. A line of perforations between each certificate and its stub renders easy the detach- ment of the certificate when issued. Fifty to one hundred of these certificates are usually deemed sufficient for a corporation in which transfers are not likely to be numerous. For the larger corpora- tions or for those in which the stock is active, the certi- ficates are provided in books of five hundred to one thousand certificates and sometimes many volumes are required. If the corporation issues preferred stock, the certi- SUNDRY DETAILS. l6S ficates of this stock are usually bound separate from the common stock certificates, though in the smaller cor- porations to avoid expense and the multiplication of books both kinds of stock are sometimes bound in to- gether. The preferred stock certificates are also usually numbered independently of the common stock certi- ficates. The preferred stock certificates should always be marked in some way to clearly distinguish them from the common stock certificates and the preferences enjoyed by this stock and the conditions of its issue should, as a rule, appear upon the face of the certifi- cates. Usually the preferred certificates are distin- guished by having the word "Preferred" printed or tinted in on the face of the certificate, though there is no invariable rule as to the distinguishing marks. When certificates are surrendered for reissue or for other reasons, they are usually cancelled — either by punching or with a cancelling stamp — and the cancelled certificate is then pasted to the stub from which it was originally detached. The proper entries are then made on the stub and the certificate and its stub present a complete record of the issue and return of the certi- ficate in question. The certificate book is usually entrusted to the sec- retary and remains in his custody. § 148. Transfer Book. The transfer book is composed of a series of blank transfers. (See Form 61.) These transfers are in- tended to be filled out when stock is to be transferred, 1 66 THE MODERN CORPORATION. and, signed by the owner of the stock or his duly authorized attorney, become the secretary's authority for the issue of new certificates of stock in place of the old certificates surrendered. In some few states the transfer book is required by statute. By reference to the assignment on the back of a stock certificate (Form 6) it will, however, be seen that the transfer book merely duplicates the as- signment of the certificate, the power of attorney only being omitted. For this reason the transfer book is not always regarded as essential, and, where not re- quired by statute, it is frequently omitted by the smaller corporations. In such case the secretary depends upon the duly assigned stock certificate for his authoriza- tion to make desired transfers. The method from the legal standpoint is sufficient. It is customary among the larger corporations to appoint transfer agents who assume the entire super- vision of the issue and transfer of stock. These trans- fer agents are usually trust companies or other re- sponsible institutions and by their appointment both accuracy and responsibility are secured. § 149. Stock Ledger. The stock ledger or stock book contains the name and address of each stockholder of record, the number of shares received and the number, if any, transferred by him, the date of such receipts and transfers and the number of shares remaining at any time in his name. (See § 135 and Form 60.) When stock is received, the holder is credited in the SUNDRY DETAILS. 1 67 stock ledger with the number of shares so acquired, when he transfers part or all he is debited with the number of shares transferred. The balance, if any, will always be on the credit side and will show the number of' shares upon which the stockholder is en- titled to vote and draw dividends. The statutes usually require that a stock ledger be kept and that it be always open during business hours to the inspection of any stockholder of record or judg- ment creditor. In New York the statutes require a "stock book" to be kept. This stock book is merely a stock ledger with some additional data as to the stock and its owners. § 150. Amendment of Charter. Charter amendments are usually the result of a too hasty preparation of the charter, though sometimes necessitated by changed conditions. At all times they are troublesome and to some extent expensive. Any provisions may be brought into a charter amendment that might have been brought into the original charter and these amendments may be made at any time, even before the organization of the corporation is com- pleted. As soon as a charter amendment has been allowed by the state authorities, its provisions become to all legal intents part of the original charter and as per- manently binding on the corporation. The amendment and the original charter together then constitute the working charter of the corporation, the amendment taking precedence over and modifying the original charter in all points of diflference. 1 68 THE MODERN CORPORATION. The procedure for the amendment of a charter is prescribed by the statute law and varies in almost every state. In some few states the procedure varies with the nature of the amendment, as in New York where application must be made to designated courts if the name of the corporation is to be changed, while to change the number of directors application must be made to the state authorities. As a rule amendments of the charter require a due and formal assent of at- least two-thirds of the out- standing stock of the corporation as a preliminary step. Such authorized amendment is then usually filed in the same offices and with the same formalities as the original charter, becoming effective as soon as allowed and filed. PART IV.— CORPORATE FORMS. CHAPTER XVII. SUBSCRIPTION LISTS. Form I. Subscription List. Usual Form. Subscription List. THE VERASCOPE CAMERA COMPANY. To be Incorporated under the Laws of New York. Capital Stock $25,000. Shares $100 each. We, the undersigned, hereby severally subscribe for and agree to take, at its par value, the number of shares of the Capital Stock of The Verascope Camera Company set opposite our re- spective names, and agree to pay therefor in cash on demand of the Treasurer as soon as said Company is organized. Troy, New York, May 20, 1905. NAMES. ADDRESSES. SHARES. AMOUNT. David B. Ewbank . . . Henry Brown Troy, New York . . . Syracuse, New York IS 10. $1,500 00 1,000 00 This is the simplest form possible, but will be found sufficient for small corporations where the purposes 169 170 THE MODERN CORPORATION. and conditions of subscription are well understood. All the essential features of the proposed company- should be incorporated in the subscription list and no material change should be made later, otherwise the subscribers may be released. Subscribers must be per- sons competent to contract. In event of litigation the courts construe subscription lists liberally and in ac- cordance with their intent. (See §§ 40, 130.) It should be remembered that subscriptions under such a list are — until the organization of the corpora- tion — mere promises without consideration and there- fore revokable by the subscriber. To avoid this ele- ment of uncertainty subscription lists are sometimes drawn with a trustee acting for the proposed corpora- tion, so that subscriptions thereunder are binding from the time they are made. The following form is of this nature. Form 2. Subscription List. Trustee's. Subscription List. HARVEY LANE BRASS COMPANY. To be Incorporated under the Laws of New York for the Manu- facture of Brass and Metal Ware. Capital Stock, $200,000. Shares, $100 each. We, the undersigned, hereby severally subscribe at par for the number of shares of the capital stock of the Harvey Lane Brass Company set opposite our respective signatures, and hereby promise and agree to pay therefor as follows : Five per cent, of subscription on demand to Henry M. Shannon, as Trustee for the said Company, such payment, or so much thereof as may be necessary, to be used for the preliminary and SUBSCRIPTION LISTS. I7I incorporating expenses of said Company; 30% of subscription to the Treasurer of the Company ten days after the incorporation thereof, and the remainder of subscription at such times and in such instalments as may be prescribed by the Board of Directors. New York, January 16, 1905. NAMES. ADDRESSES. SHARES. AMOUNT. Willoughby Knight . 32 Nassau St., N. Y.. 25 $2,500 00 Form 3. Subscription Blank. | Individual. THE NEW ALBANY RUBBER COMPANY. 60 Liberty St., New York. To be Incorporated under the Laws of New Jersey. Capital Stock $500,000. Shares $100 each. I hereby subscribe for shares of the Capital Stock of The New Albany Rubber Company at the par value thereof, and agree to pay 50% of such subscription on demand of the Treas- urer so soon as said Company is incorporated; the remainder to be paid at such times and in such amounts, not exceeding 10% of said subscription in any one month, as may be prescribed by the Board of Directors. Unless one-half the capital stock of said Company is reliably subscribed by the 30th day of June, 1905, and the Company incorporated within thirty days thereafter, this subscription shall be void and of no effect. Dated at. The above form would usually be mailed, accompa- nied by such statement, prospectuses and explanations 172 THE MODERN CORPORATION. as might be necessary. Any material misstatement of fact in the subscription blank or the accompanying papers would render the subscription void at the option of the subscriber. A modification of this form is fre- quently employed when stock is to be sold after incor- poration. CHAPTER XVIII. STOCK CERTIFICATES. Most of the stock certificate forms in common use contain all the essential requirements, differing only in the manner of expression, arrangement of mat- ter, etc. The cost of stock certificates varies widely with their character. The legality of a certificate is not affected in any way by the style in which it is prepared. A certificate written with pen and ink is as legally effective as the finest engraved certificate. From a business standpoint, however, certificates should be neat and tasteful and of reasonably good quality. The stock exchanges usually require a certain prescribed excellence of finish in the certif- icates of stock which are listed with them. Usually the officers to sign stock certificates are designated by the by-laws of the corporation, though in some states, as New Jersey, the signing officials are designated by the statutes. The words "full paid and non-assessable" should not appear upon certificates unless the stock which they represent has really been paid for in full, in cash or in property. (See §§ 60, 131.) ^73 174 THE MODERN CORPORATION. Form 4. Stock Certificate with Stub. J3 >H ^ < fc s fs u n\ i-r 'ni ■u g J3 S u <4H ^ -< tn ^ H o S g d o Sou ^ u S The first of these is the simple corporate endorse- ment. The second is the form usually employed when the instrument is deposited for collection or credit. This latter endorsement is generally affixed in its en- tirety with a rubber stamp. Form 50. Acknowledgment of Corporate Instru- ment. State of New York, ") County of New York. On this I2th day of May, in the year 1905, before me came Henry WilHs Crampton, to me known, who being by me duly sworn, did depose and say that he resided in the City of New York; that he was the president of the Crampton Shipbuilding Company, the corporation described in and which executed the above instrument; that he knew the seal of said corporation; that the said seal affixed to the said instrument was such cor- porate seal and that it was affixed by order of the Board of SIGNATURES AND CERTIFICATIONS. 255 Directors of the said corporation, and that he signed the cor- porate name thereto by like order, as president of said cor- poration. Henry Willis Crampton. Sworn to before me this I2th day of May, 1905. Henry Silliman, Notary Public for (Notarial Seal.) New York County. A corporation does not acknowledge signatures, or the execution of instrutnents, in its own name, but only through its officers. Each state has its own form for such acknowledgment. The foregoing follows the New York requirements. Form 51. Treasurer's Affidavit. State of New York,") County of New York, f On this isth day of May, 1905, personally appeared before me, a Notary Public in and for the County of New York, William H. Holt, Treasurer of the Merriman Wrecking Company, who, be- ing duly sworn, did depose and say that he has full charge and control of the books and accounts of the said Company; that the above and foregoing statement is taken from said books and accounts; that it is a true and accurate transcript therefrom, and that, to the best of his knowledge and belief, it is a just and correct presentation of the financial condition of said Company on this date. William H. Holt. Sworn to before me this iSth day of May, 1905. Henry Silliman, Notary Public for (Notarial Seal.) New York County. 256 THE MODERN CORPORATION. Form 52. Certified Resolution for Bank. CERTIFIED RESOLUTION. "Resolved : That the Treasurer .be and hereby is author- ized and instructed to open an account for the Company with the Fourth National Bank of New York City and to deposit therein all of the funds of the Company com- ing into his custody; such account to be in the name of the company, and funds deposited therein to be with- drawn only by check signed by the Treasurer and counter- signed by the President." I hereby certify that the foregoing i? a true and accurate transcript of a resolution duly passed /t a regular meeting of the Board of Directors of the Mallibone Manufacturing Com- pany held in the office of said Company in New York City at II A. M., on the loth day of February, 1905, as shown by the minutes of said meeting; and that Charles Mallibone is the duly elected President of said Company and Henry Cornell is the duly elected Treasurer of said Company. In Testimony Whereof, I have hereunto affixed my official signature and the corporate seal of said Company, this loth day of February, 1905. CORPORATE ) Henry Cornell, f CORPORATE I \ SEAL j Secretary. The above is a good general form employed in open- ing the corporate bank account. In many cases the banks have their own forms for this purpose and if so these special forms will, of course, be used. In some cases banks require also a certified transcript of any by-laws relating to the custody of funds and the duties of officers in relation thereto. The additional clause certifying to the identity of the president and treasurer in the above certification is SIGNATURES AND CERTIFICATIONS. 257 in the present instance necessary information for the bank. It is not necessarily part of a certification and would not ordinarily be included. Form 53. Certified Extract from By-Laws. FARADAY ELECTRICAL COMPANY. Extract from By-Laws. Article VL — Business, "i. The President shall have full power and authority to sign with the corporate signature any and all contracts or other in- struments that may be necessary for the transaction of the regular business of this Company." I, Herbert Cromwell, Secretary of the Faraday Electrical Company of New York, do hereby certify that the above is a true and correct copy of Section i, Article VI, of the duly adopted by-laws of this Company, and in testimony thereof I have hereunto affixed my official signature and the seal of the Company in the City of New York on this Sth day of July, 1905. Herbert Cromwell, (Corporate Seal.) Secretary. If the transactions requiring the foregoing certified extract were with strangers, the name of the president would probably be brought into the certification as in Form 53. CHAPTER XXVIII. SUNDRY CORPORATE FORMS. Form 54. Corporate Check. o o >> ■ ■a o rt 1-. t- V CQ > C o 6 No. 1338. New York, February 20, 1905. SEABOARD NATIONAL BANK. 18 Broadway. Pay to the order of Arthur Colville $500.00 Five Hundred Dollars. Marchmont Realty Corporation. Willis Alcott, By Stephen Calvert, President. Treasurer. Checks are made out in a variety of forms, the above form being perhaps the most common. Fre- quently the name of the company will appear in the place occupied by the bank's name in the foregoing check form, the name and address of the bank then appearing in the left lower corner as in the ordinary draft form. The arrangement has merits from an ad- vertising standpoint. If a check has the name of the company plainly appearing upon it, the simple official signatures of the officers authorized to sign, as given in Form 47 (a), are sufficient and are much used. 258 SUNDRY CORPORATE FORMS. 259 Form 55. Corporate Note. Signature by Presi- dent. $1,000.00 New York, January 16, 1905. Sixty days after date the Ogden Wrecking Company promises to pay to the order of Henry Adams the sum of One Thousand Dollars. Ogden Wrecking Company, By Henry Ogden, President. The foregoing gives the proper form of signature for a corporate note. If the foregoing note were merely signed with the president's official signature, — "Henry Ogden, President of the Ogden Wrecking Company " the person so signing might make himself personally liable and might also invalidate the note as against the corporation. Form 56. Corporate Note. Signature by Treas- urer. $1,500.00 Newark, New Jersey, June i, 1905. Three months after date the Harwood Manufacturing Company promises to pay to the order of Howard McCormick the sum of Fifteen Hundred Dollars, with interest from date until paid, at the rate of S per cent, per annum. Value Received. The Harwood Manufacturing Company, By James H. Halsey, Payable at the Treasurer. Seaboard National Bank of New York City. 260 THE MODERN CORPORATION. A corporate note does not require to be sealed. It may be signed by any officer or officers properly auth- orized thereto. For notes given in the regular routine of business, this authority would usually be conferred upon the proper officials by the by-laws or by custom. For large amounts, or for special transactions outside the usual routine, this authorization would be given by resolution or motion of the board of directors. Form 57. Corporate Contract. This Agreement made and entered into this 23rd day of Janu- ary, 190S, by and between the Corwin-Blythe Manufacturing Company, a corporation duly organized and existing under the laws of the State of New York, party of the first part, and Henry J. Wilkins, of the City and State of New York, party of the second part: Witnesseth : That in consideration of the, etc. (Here would be inserted the consideration, specifications and terms.) In Witness Whereof, the said Corwin-Blythe Manufacturing Company, party of the first part, has caused its corporate seal to be hereunto affixed and its corporate signature to be subscribed hereunto by its President and Secretary, and the said Henry J. Wilkins, party of the second part, has hereunto affixed his signature and seal, all being done in the City and State of New York on the day and year first above written. Corwin-Blythe Manufacturing Company, By Wilson M. Brown, r CORPORATE I President. \ SEAL j Harvey B. Small, Secretary. In presence of Henry J. Wilkins, (L.S.) Manly F. Clark. Albert Parsons. SUNDRY CORPORATE FORMS. 26 1 When the secretary joins in the company signature as in the foregoing form, he need not attest the seal. If, however, he does not join in the company signature, the corporate seal should be attested by his signature and the formal corporate signature affixed to the fore- going testimonium would then appear as in Form 48. Where the contract or other instrument is to be acknowledged for record in some particular state, the form of acknowledgment used in that particular state should be employed, or, in the case of real estate, the form used in the state in which the real estate is situated. (See Form 44 for resolution authorizing this contract.) Form 58. Resignation of Director. To the Board of Directors of the Manhansett Milling Company. Gentlemen : I hereby tender my resignation as a member of your body and ask acceptance of the same at your earliest convenience. Very respectfully, James McNair. Jersey City, N. J., March loth, 1905. A director or other officer of a corporation may resign at any time. A resignation of the foregoing form does not take effect until accepted by the board. If it were desired to make it immediately effective, the wording might be, "I hereby resign my membership in your body, such resignation to take immediate effect." The resignation would then sever the relations of the 262 THE MODERN CORPORATION. signing director with the board upon its delivery to the secretary of the company. Form 59. Resignation of President. To the Board of Directors of the Eldridge T3T>ewriter Company. Gentlemen : I hereby resign my position as President of your Company and as a member of its Board of Directors. Very respectfully, Vernon M. Donnelly. New York City, March i, 1905. This resignation is peremptory and takes effect im- mediately upon delivery. A somewhat less peremptory form would be, "I hereby tender my resignation and ask your immediate acceptance of the same." Under this wording the resignation would not be effective tin- til accepted. The stock ledger on opposite page combines in com- pact form all the requisites of the stock ledger with all the statutory requirements of most of the states as to the stock book. The leaves of this book are indexed to secure the necessary alphabetical arrangement, and the name and residence of the stockholder appear at the head of the account as in the ordinary ledger. On the right hand side of the account the party is credited with the stock he purchases or otherwise acquires, and on the left hand side is debited with any stock disposed of. The SUNDRY CORPORATE FORMS. 263 Form 60. Stock Ledger. 'A O U 15 W > < w 'A J" W Q O m \-^ hJ p S, .2 g, a A H , l\U « H ff S H P s < S 5 '3 f^ 2 « ■ a°S E C c S g. »«S . fi Sg i! 1 t a •• ag to H hn m2! ? r 1 a g°' ci s« sS B > i » tn rt t< "5 m % 5 ^ « to 1-4 Ih m ^ ^^1" 264 THE MODERN CORPORATION. difference between the two sides shows at any time the amount of stock standing to his credit. On the debit or sales side of the account, the first column gives the date of the transaction, the second the name of the party to whom the stock is transferred, the third the number of the surrendered certificate, the fourth the number of the certificate reissued to the transferrer, in case but a portion of the stock repre- sented by the surrendered certificate is sold, and the fifth column the number of shares disposed of. On the credit side, the first column gives the date of purchase, the second the name of the party assign- ing the purchased stock, the third the character of the stock, whether full-paid or but part-paid, and if but part-paid the amount paid to the company thereon, the fourth column the numbers of the certificates issued to the party, and the last the number of shares acquired. (See § § 13s, 149.) Form 61. Transfer Book. Ledger Folio 25. Transfer No. 725. THE HASWELL PAPER PULP COMPANY. For value received, I hereby sell, assign and transfer to Harvey Woodville, of Brooklyn, New York, Fifteen (15) Shares of the Capital Stock of the above-mentioned Company now stand- ing in my name on the Company books and represented by sur- rendered Certificates, Nos. 32 and 153. Witness my hand and seal this 12th day of April, 1905, at Jersey City, New Jersey. Edward Serrell^ [l. s.] By Holmes B. Desbrow, New Certificates Nos. 325, 326. Attorney. Issued to Harvey Woodville. Ledger Folio 75. SUNDRY CORPORATE FORMS. ' 265 The secretary or transfer agent usually acts as attor- ney for the person selling the stock, and fills out and signs the transfer as shown above. The data relat- ing to the issue of the new certificate is no part of the transfer proper, being merely a memorandum for the convenience of the secretary when making the entry of the transfer in his stock book. (See § § 135, 148.) The transfer book is usually closed to transfers from ten to twenty days before the annual meeting, as may be prescribed by the by-laws. During this period no transfers of stock will be entered on any of the books of the corporation. Form 62. Treasurer's Bond. TREASURER'S BOND. Know All Men by These Presents, That we, Henry Brown- ing, of Brooklyn, New York, as principal, and Ellis Wardwell and Ralph S. Wharton, both of New York City, as sureties, are held and firmly bound unto the Armor Plate Steel Company, a cor- poration duly organized under the laws of the State of New York, its successors and assigns, in the sum of Ten Thousand Dollars ($10,000), to the payment of which to the said corporation, its successors or assigns, we do by these presents, jointly and severally, firmly bind ourselves, our heirs, executors and admin- istrators. Signed and sealed this nineteenth day of January, 1905. The condition of the above obligation is that : Whereas, The said Henry Browning has been elected Treas- urer of the said Armor Plate Steel Company, for the term of one year from the i8th day of January, 1905, and, whereas, the said Henry Browning may hereafter be re-elected, or may con- tinue to act as such officer for a longer period than one year. 266 THE MODERN CORPORATION. Now Therefore, If the said Henry Browning shall hereafter in all respects fully and faithfully perform and discharge the duties of said ofifice so long as he shall occupy the same or con- tinue therein, and shall, when properly so required, fully and faithfully account to the said corporation, its successors or as- signs, for all moneys, goods and properties whatsoever, for or with which the said Henry Browning may be in any wise ac- countable or chargeable to the said corporation, its successors or assigns, and if, in event of his death, resignation or removal from office, all books, papers, vouchers, money and other prop- erty of whatever kind in his custody belonging to the said cor- poration shall be forthwith restored to the said corporation, then this obligation shall be void; otherwise to remain in full force and virtue. Henry Browning. [l. s.] Ellis Wardwell. [l. s.] Ralph S. Wharton. [l. s,] Signed, sealed and delivered 1 in the presence of J Howard McComb. Sarah J. Meredith. Form 63. Committee Report. To the Board of Directors of the EUenville Woolen Mills Co. Gentlemen : Your Committee appointed to investigate the cost of the pro- posed betterments of the Company's equipment and general plant begs leave to report as follows : First. Your Committee finds that the present ma- chinery and apparatus used in the mills of the Com- pany is in thoroughly good condition, but that since its introduction better methods requiring apparatus of special design have been introduced and that the difference is so radical that but little, if any, of the present installation can be utilized in the proposed general betterments of the plant. SUNDRY CORPORATE FORMS. 267 Second. The cost of the proposed betterments will ma- terially exceed the estimates of the stockholders' re- port submitted at a preceding meeting of the Board, aggregating not less than $60,000. 'This larger cost is occasioned by the radical nature of the improve- ments required and by the necessity of considerable alterations and additions to the present buildings in order to accommodate the apparatus that must be installed if the best results are to be secured. Third. Your Committee has gone a step beyond the pre- cise ends for which it was appointed, in an investi- gation of the better methods referred to, and as a result of such investigation would report that the output of the Ellenville Mills is higher in cost and lower in quality than the output of similar mills better equipped, and this in the face of natural fa-- cilities that give the Ellenville Mills material ad- vantages over these competitors. In conclusion your Committee would strongly recommend the speedy introduction of the better equipment contemplated, not only as a matter of policy, but of necessity, as a continuance of the present conditions is likely to seriously and permanently in- jure the reputation and the prosperity of the Ellenville Mills. On the other hand the installation of the proposed improved equipment will not only maintain the business of the Company on the same satisfactory basis as heretofore, but will unquestion- ably result in materially increased profits. Respectfully submitted, William S. Symington, Herbert Wilson. Ellenville, New York, February 2, 1905. (See Form 39.) GENERAL INDEX. [References are to pages.] [For Titles of Forms, see Table of Contents.] Acceptance of Subscriptions, io8, 109, 142, 143, 170. Acknowledgment, Corporate, 255, 261. Forms, 254, 255. of Charter, 67, 68. Forms, 179-185. Adjourned Meetings, 79, 85. Adjournment, 78, 79, 85, 116. Adoption of By-Laws, 46, 50-53, 71, 74, 75, 78. Advantages of Corporate Form, 21-29. Affidavit, Treasurer's, Form, 255. Agent, Transfer, 146, 158, 166. Agreements. (See Contracts.) Amendment of By-Laws, 52-54, iii. of Charter, 22, no, 167, 168. of Minutes, 162-164, 245. Annual Franchise Taxes, 186, 187. Annual Meeting of Stockholders. (See Meetings.) Application for Charter. (See Certificate of Incorporation.) Approval of Minutes, 161-164. Articles of Association. (See Certificate of Incorporation.) 269 270 GENERAL INDEX. [References are to pages.] Assets, Sale of Entire, 122, 250, 251. Form, 250. Assignment of Stock for Property, 76-78, 82, 104-106, 145. Forms, 206-212. of Stock, 144, 146, 147, 166, 176, 177- Form, 176, 177. in Blank, 146, 147, 177. Form, 176. Attestation of Seal, 253, 261. Auditor, 141. Authority of Directors. (See Powers of Directors.) B. Bank Deposits, 82-84, IS2, 256. Board of Directors. (See Directors.) Bond, loi, 152. of Indemnity, 148. of Treasurer, 84, 218, 219. Form, 26s, 266. Books, Changing, 107. Inspection of, 88, no, 158. Minute book, 70, 157-164. Forms, 213-219, 232-244. of Account, 107, 156, 157. of Corporation, 70, 107, 144, 157-167, 262-265. Secretary's books, 70, 144, 149, 157-167, 232-244, 262-265. Stock book. (See Stock Ledger.) Stock certificate book, 70, 144, 157, 164, 165. Forms, 174-176. Stock ledger, 70, 149, 158, 166, 167, 262-264. Form, 263. Transfer book, 70, 149, 157, 158, 165, 166, 264, 265. Form, 264. Treasurer's books, 107, 156, 157. Business Corporations, 17. Business, Order of, 189-191, 197, 200. GENERAL INDEX. 27 1 [References are to pages.] By-Laws, so-SS, 78, 188-205. Forms, 188-205. Adoption of, 46, 50-53, 71, 74, 75, 78. Amendment of, 52-54, in. , Certification of, 159, 193. Form, 193. Certified extract from, 257. Form, 257. Enforcement of, 54, 55. Non-observance of, 54, 55. Power to make, 46, 51, 130. Record of, 52, 75, 159. C. Cancellation of Stock Certificates, 147, 165. Called Meetings. (See Special Meetings.) Calls, 113, 114, 126, 220-226. Forms, 222, 223, 225, 239. Calls and Waivers, 72, 80, 113, 114, 127, 208, 209, 221. Forms, 207, 209, 221, 222, 224. Capital, 33-35. Capitalization, 30, 33-35, 60, 61, 98-101. Capital Stock. (See Stock.) Certificate of Incorporation, 22, 28, 42-49, 178-185. Forms, 179-185. Amendment of, 22, no, 167, 168. Application for, 22, 42, 57-59, 68, 69. Certified Copy, 68, 69, 159. Execution of, 58, 67, 68, 180-183, 185. Fees, 69, 185, 186. Filing, 68, 69. Parties to, 58, 59. 64, 72, 73, 102, 108. 2y2 GENERAL INDEX. [References are to pages.] Certificate of Incorporation. — Continued. Powers, 23, 43-49, SS. 60, 62, 6S, 66. Recording, 68, 6g, 74, 159. Special Provisions, 47, 48, 64-66. Certificate of Secretary, 159. Forms, IQ3, 256, 257. Certificate of Stock, 16, 27, 30-33, 37, 143-149, 164, 165, 173-177- Forms, 174-T76. Adoption of, 84. Assignment of, 144, 146, 147, 176, 177. Forms, 176, 177. Book, 70, 144, 157, 164, i6s, 173-177. Cancellation of, 147, 165. Common Stock, 164, 165. Form, 174. Full Paid, 32, 143, 173. Issue of, 32, 36, 99, 14s, 146. Lost, 32, 33, 144, 148, 149. Preferred Stock, 164, 165. Forms, 175, 176. Signatures, 32, 146, 173. Stub, 144, 146, 164, 165. Form, 174. Style, 173. Transfer of, 27, 146-149, 166, 264, 265. Forms, 176, 177, 264. Transfer Agent, 146, 158, 166. Certification of By-Laws, 159, 193. Form, 193. Certified Minutes, 160, 251. Certified Resolution, 83, 84, 156, 250, 251, 256. Form, 256. Certified Transcript from By-Laws, 257. Form, 257. Changing Books, 107. Charter. (See Certificate of Incorporation.) GENERAL INDEX. 273 [References are to pages.] Charter Powers. (See Powers.) Checks. (See Corporate Checks.) Classification of Corporations, 14-19. of Directors, gi, 92, 124, 125. of Stock, 64, 91, 92. Close Corporations, 106, 107. Closing Transfer Book, 188, 194, 265. Committees, Standing, 63, 121, 130-132. Common Stock, 38. Form, 174. Company, Joint Stock, 19, 20. Compensation of Directors, 129, 130, 135. Consent Meetings, 126-128. Contracts, 45, loi, 123, 155, is6, 249, 261. Form, 260. Execution of, 155, 156, 260, 261. Signatures to, 156, 253, 260, 261. Corporate Acknowledgment, 255, 261. Forms, 254, 255. Advantages, 21-29. Books, 70, 107, 144, 157-167, 262-265. Checks, 258. Form, 258. Contracts. (See Contracts.) Endorsement, 254. Forms, 254. Entity, 13, 14, 24-26. Management, 108-168. Forms, 220-267. Mechanism, 28, 29, 108-168. Name, 59, 60, 98, 99. Notes, 259, 260. Forms, 259. Organization, 56-107. Forms, 169-219. Permanence, 26, 27, 46, 62. Powers, 23, 43-49, 55, 60, 62, 65, 66. 274 GENERAL INDEX. [References are to pages.] Corporate. — Continued. Purposes, 23, 47, 60. Seal, 44, 70, 154, 156, 260, 261. Attestation of, 253, 261. Form, 253. Signatures, 252, 253. (See Signatures.) Forms, 253, 260. System, 13-55. Corporation, The, 13-20. Corporations, Business, 17. Classification of, 14-19. Close, 106, 107. Dissolution of, 26, 31, 46, 47, 62. Distinctive Features, 21. Domestic, 62. Duration of, 26, 27, 62. Financial, 18, 19. Foreign, 62. Formation of, 17, 22, 28, 42, 43, 57-59, 68, 69, 97-104. How Controlled, 50, 51, 71. Limited Liability, 23, 24. Limited Powers, 23. Nature, 13, 14, 24-26. Officers of, 120, 128, 129, 133-141. •« Offices of, 61, 62, 153, 154. Organization of, 28, 51, 56-70, 71-79, 80-85, 87, 97-107, 206-212. Private, 14, 15. Public, 14, 15. Public Service, 17, 18. Purposes, 23, 47, 60. Quasi-Public, 15. Stock, 16, 21-29. Without Stock, 15, 16. Correction of Minutes, 161-164, 245. Cost of Incorporation, 69. Equipment, 70. GENERAL INDEX. 275 [References are to pages.] Counsel, 141. (See By-Laws, 203.) Cumulative Dividends, 38-40. Voting, 64, 65, 88-90, 117. D. Debt, 66, (>y, 94, 151, 152. Decrease of Capital Stock, 22. Deposits, Bank, 82-84, 152, 256. Directors, 103, 104, 120-132. Authority. (See Powers.) By-Laws, Power to Make, 51, 130. Classification, 91, 92, 124, 125. Compensation, 129, 130, 136. Dummy, ^(i, 102, 103, 124. Duties, 120, 121. Election, 45, 63, 71, 72, 75, "jd, 93, 118-121, 215. Executive Committee, 63, 121, 130-132. Failure to Elect, 120, 121. Finance Committee, 132. For First Year, 63. Liabilities, 49, 122, 123, 150, 164. Meetings, 80-85, 125-129, 221, 226. (See Meetings.) Method of Action, 122. Number of, dz, 121, 122. Powers of, 23, 28, 29, 45, 46, 48-53^ 66, 67, 78, 87, 88, 120-122, 129, 130, 150-152, 158. Proxies, 81, 126. Qualifications, 63, 75, 76, 102, 103, 123, 124. Quorum, 128. Removal, 124. Resignation, 261. Form, 261. Vacancies, 124. Dissolution of Corporation, 26, 31, 46, 47, 62. Dividends, 38-40, 147, 150. Form, 249. 276 GENERAL INDEX. [References are to pages.] Domestic Corporations, 62. Dummy Directors and Incorporators, 59, 76, 102, 103, 124. Duration of Corporation, 26, 46, 62. Duties of Auditor, 141. Counsel, 141. Directors, 120, 121. General Manager, 140, 141. Officers, 136-141. President, 137, 138, 191, 201. Secretary, 139, 146, 154, 158-164, 191, 201, 202. Treasurer, 139, 140, 156, 157, 191, 202, 203. E. Election, Inspectors of, 75, 119. of Directors, 45, 63, 71, 72, 75, 76, 93, 118-121, 215. of Officers, 45, 81, 82, 128, 129, 133, 134. Endorsement, Corporate, 254. Forms, 254. Enforcement of By-Laws, 54, 55. Exchange of Stock for Property, 76-78, 82, 104-106, 145, 206-212, 215. Forms, 206-212. Execution of Charter, 58, 67, 68, 180-183, 185. of Contract, 155, 156, 260, 261. Executive Committee, 63, 121, 130-132. Expenses of Incorporation, 69, 70, 185, 186. F. Face Value. (See Par Value.) Failure to Elect Directors, 120, 121. Officers, 129. to Send Notice of Meeting, 115, 127. Fees and Taxation, 69, 185-187. Tables, 185-187. Filing Charter, 68, 69. GENERAL INDEX. 2/7 [References are to pages.] Finance; Bank Deposits, 82-84. Committee, 132. Debt, 66, 67, 94, 151, 152. Dividends, 38-40, 147, 150. Reserve Fund, 151. Surplus, 151. Financial Corporations, 18, 19. First Meeting of Directors, 80-85, 206-212. Adjournment, 85. Calling Meeting, 80. Form, 209. Election of Officers, 81, 82. Exchange of Stock for Property, 82, 104-106, 14s, 210, 211. Forms, 209-212. Financial Provisions, 82-84. Minutes, 218. Forms, 216-219. Opening Meeting, 80, 81. Other Business, 84, 85. of Stockholders, 71-79, 206-212. Adjournment, 78, 79. Adoption of By-Lav>rs, 71, 74, 75. Calling Meeting, 72, 208. Form, 207. Conduct of Meeting, 73. Election of Directors, 75, 76. Exchange of Stock for Property, 76-78, 104-106, 145, 210. Forms, 209-211. Minutes, 73, 74, 77, 213, 215. Forms, 213-215. Opening Meeting, 73, 74. Preliminary, 71-73. Reception of Charter, 74. Foreign Corporations, 62. 278 GENERAL INDEX. [References are to pages.] Formation of Corporation, 17, 22, 28, 42, 43, S7-S9, 68, 69, 97-104. Franchise Taxes, 186, 187. Full Paid Stock, 36, 37, m, 112. Forms, 174-176. General Manager, 140, 141. (See By-Laws, 203.) Guaranteed Stock, 39. Illegal Purposes, 60. Incorporating a Partnership, 97-107. Board of Directors, 102-104. Business under New Form, 106, 107. Capitalization, 98-101. Name, 98, 99. Organization, 102-104. Selection of State, 97. Special Adjustments, 100, loi. Transfer of Business, 104-106. Usual Arrangements, 99. Incorporation, 56-70. Advantages of, 21-29. Certificate of. (See Certificate of Incorpora- tion.) Cost of, 69, 185, 186. Domestic, 62. Foreign, 62. State of, 97. Incorporators, 58, S9, 64, 72, 73, 102, 108. Dummy, 59. Increase of Capital Stock, 22. Indebtedness, Limitations on, 66, 67, 94, 151, 152. GENERAL INDEX. 279 [References are to pages.] Indemnity Bond, 148. Inspection of Books, 88, no, 158. Inspectors of Election, 75, 119. Issuance of Stock for Property. (See Exchange of Stock for Property.) Issue of Stock, 36, 99, 105, 145, 146. Issued Stock, 32, 35, 36. Irregular Procedure, S4, SS, m, iSS- J. Joint Stock Companies, 19, 20. L. • Law, Parliamentary, 156. Ledger, Stock, 70, 149, 158, 166, 167, 262-264. Form, 263. Liabilities of Directors, 49, 122, 123, 150, 164. of Officers, 49, 135. of Stockholders, 23, 24, 36, 37, in, 112. Limitations on Salaries and Debt, 66, 67, 94, 151, 152. List, Subscription, 56, 57, 142, 169-172. Forms, 169-171. Location of Corporation, 61, 62, 153, IS4- Lost Certificates, 32, 33, 144, 148, 149. M. Management of Corporation, 108-168. Forms, 220-267. Manager, General, 140, 141. Mechanism, Corporate, 28, 29, 108-168. Meetings, Adjourned, 79, 85. Adjournment, 78, 79, 85, 116. 28o GENERAL INDEX. [References are to pages.] Meetings. — Continued. Calls, 113, 114, 126, 220-226. Forms, 222, 223, 225, 239. Calls and Waivers, ^2, 80, 113, 114, 127, 208, 224. Forms, 207, 209, 221, 222, 224. Consent, 126-128. Directors' First, 80-85, 206-212. Forms, 209-212. Adjourned, 85. Regular, 125, 126, 128, 129. Forms, 226, 236-238. Special, 80, 126-128. Forms, 224-226. Failure of Notice, 115, 127. Minutes of. (See Minutes.) Notice of, 113-11S, 127, 128, 220-226. Forms, 220, 221, 223, 226, 239, 240. Officers of, 119, 126. Opening, 73, 74, 80, 81. Order of Business, 189-191, 197, 200. Proxies, 72, 73, 81, 117, 118, 126, 227-231. Forms, 206, 207, 228-230. Publication of Notice, 115, 220, 221, 235. Form, 221. » Quorum, 115, 116, 128. Record of, 158-164, 213-219, 232-244. (See Minutes.) Stockholders' Adjourned, 79. Form, 241, 242. Annual, 112-119, 220, 221. Forms, 220, 221. First, 71-79, 206-212. Forms, 206, 207. Special, 72, 113-115, 206-212, 221-224. Forms, 207, 221-223. Voting at, 33, 64, 65, 81, 88-90, 116, 117. Minority, Protection of. (See Protection of.) Rights of, 86, 87. GENERAL INDEX. 281 [References are to pages.] Minute Book, 70, 157-164. Arrangement, iS9, 160, 218. How Kept, 159. Style, is8. Status, 158, 159. Minutes, 74, ^^, 80, 82, 159-164, 213-219, 232-244, 246-251. Amendment of, 162-164, 245. Approval of, 161-164. Book of, 70, 157-164. (See Minute Book.) Certified, 160, 251. Correction of, 161-164, 245. Directors' First, ^^, 80, 82, 215. Forms, 216-219. Regular, Forms, 236-238. Special, Forms, 242-244. Entry of, 159-161, 218, 232, 246-251. . Reading, 73, 162. Signatures to, 161, 162, 233. Stockholders' Adjourned, 79. Forms, 241, 242. Annual, 235, 236. Forms, 233-235. First, ^^, 74, ^^, 213, 215. Forms, 213-215. Special, Forms, 238-241. Transcript of, 160. Motions, 245-251. Forms, 246, 247. N. Name, Corporate, 59, 60, 98, 99. Nature of Corporation, 13, 14, 24-26. 282 GENERAL INDEX. [References are to pages.] New Jersey Charter, Form, 181-183. New York Charter, Form, 179-181. Non-Stock Corporations, 15, 16. Non-Voting Stock, 90, 91, 99, 100. Notes, Corporate, 259, 260. Forms, 259. Notices, Failure to Send, 115, 127. of Directors' Meetings, 127, 128, 225. Forms, 226. of Stockholders' Meetings, 113-115, 220, 221, 223, 224. Forms, 220, 221, 223, 239, 240. Number of Directors, 63, 121, 122. Office, Principal, 61, 62, 153, 154. Officers, 45, 120, 128, 129, 133-141. (See By-Laws for -Detailed Duties.) Auditor, 141. Counsel, 141. De Facto, 129. Duties, 136-141. Election of, 45, 81, 82, 128, 129, 133, 134. Failure to Elect, 129. General Manager, 140, 141. Liabilities of, 49, 135. Necessary, 133. of Meetings, 119, 126. Powers, 29, 137-141. ISS- President. (See President.) Qualifications, 134. Removal, 124, 129, 134, 135. Resignation, 261, 262. Salaries, 81, 82, loi, 135, 136. Secretary. (See Secretary.) GENERAL INDEX. 283 [References are to pages.] Officers.— Continued. Signatures, 252-257. Treasurer. (See Treasurer.) Vacancies, 129, 134. Vice-President, 138, 139. ■ Opening Meeting, 73, 74, 80, 81. Order of Business, 189-191, 197, 200. Organization of Corporation, 28, 51, 56-70, 71-79, 80-85, 87, 97-107, 206-212. Forms, 169-219. Expenses of, 69, 70, 185, 186. First Meetings, 28, 71-79, 80-85, 206-212. Owners of Record, 102, 109, 116, 143, 144, 147, 150. P. Paid Up Stock. (See Full Paid Stock.) Parliamentary Law, 156. Parties to Charter, 58, 59, 64, 72, 73, 102, 108. Partnership, ig, 22, 25, 26, 44, 97-107. Partnership Association, 19. Partnership, Incorporation of, 97-107. (See Incorporating a Partnership.) Par Value of Stock, 31, 32, 61. Issue for less than, 36, 37, iii. Payment for Stock in Property. (See Exchange of Stock for Property.) Powers, Charter, 23, 43-49, 55, 60, 62, 65, 66. Illegal, 60. Special, 47, 48, 64-66. To Appoint Directors, Officers and Agents, 45. To Buy, Sell and Hold Property, 45. To Dissolve Itself, 46, 47. To Do All Things Necessary, 47. To Make By-Laws, 46. 284 GENERAL INDEX. [References are to pages.] Powers, Charter. — Continued. To Sue and Be Sued, 44. To Use a Seal, 44. Powers of Directors, 23, 28, 29, 45, 46, 48-53, 66, 67, 78, 87, 88, 120-122, 129, 130, 150-152, 158. of Officers, 29, 137-141, I55- of Stockholders, 28, 29, 45, 46, 50-53, iio. III. Preferred Stock, 33, 38-40, 100. Certificates of, 164, 165. Forms, 175, 176. Cumulative, 38, 39. Dividends, 38-40. Participating, 39, 100. Redemption, 39, 40, loi. Rights of Holders of, 38-40, no. Voting Rights, 33. President, 137, 138. (See By-Laws, 191, 201.) Call, for Special Meeting, 225. Forms, '225, 226, 239. Duties, 137, 138, 191, 201. Powers, 137. Qualifications, 134. Resignation, 262. Form, 262. Signature, 252-255. Forms, 252, 253, 259, 260. Vice, 138, 139. Principal Office, 61, 62, 153, 154. Private Corporations, 14, 15. Promissory Notes, 259, 260. Forms, 259. Property for Stock. (See Exchange of Stock for Property.) Sale of Entire, 122, 250, 251. Form, 250. Protection of Minority, 86-96. Classification of Stock, 91, 92, 124, 125. GENERAL INDEX. 285 [References are to pages.] Protection of Minority. — Continued. Cumulative Voting, 64, 65, 88-90, 117. Limitations on Expenditures, 66, 67, 94, 151, 152. Non-Voting Stock, 90, 91, 99, 100. Representation on Board, 87, 88. Restrictions on Amendments, 94, 95. Restrictions on Voting Power, 96. Voting Trusts, 92-94. Protest in Minutes, 163, 164. Proxies, 72, 73, 81, 117, 118, 126, 227-231. Forms, 206, 207, 228-230. Blank, 227, 228. Powers Conveyed, 227. Revocation of, 118, 230, 231. Signature, 227. Publication of Notice, iiS, 220, 221, 235. Form, 221. Public Corporations, 14, 15. Public Service Corporations, 17, 18. Purposes, Charter. (See Certificate of Incorporation.) Illegal, 60. • Q. Qualifications of Directors,, 63, 75. 76, 102, 103, 123, 124. of Incorporators, 58, 59. of Officers, 134. Quasi-Public Corporations, 15. Quorum at Directors' Meetings, 128. at Stockholders' Meetings, 115, 116. R. Ratification of Unauthorized Action, 155. Reading of Minutes, T2i, 162. Record, Owner of, 102, 109, 116, 143, 144, 147, 15°. 286 GENERAL INDEX. [References are to pages.] Recording By-Laws, 52, 75, 159. Certificate of Incorporation, 68, 69, 74, 159. Minutes, 158-164, 218, 232-244, 246-251. Motions and Resolutions, 246-248. Regular Meetings, 125, 126, 128, 129. (See Meetings.) Removal of Directors, 124. of Officers, 124, 129, 134, 135. Reports, Disposition of, 160, 161. Forms, 266, 267. Resignations, 261, 262. Forms, 261, 262. Resolutions, 77, 78, 82, 236, 245-251. (See also Motions.) Forms, 211, 212, 235, 241, 242, 248-250, 256. Certified, 83, 84, 156, 250, 251; 256. Form, 256. Restrictions on Amendments, 94, 95. Restrictions on Salaries and Debt, 66, 67, 94, 151, 152. on Voting Power, 33, 94-96. Revocation of Proxy, 118, 230, 231. Rights of Minority, 86, 87. Rights of Stockholders, 32, 54, 86, 109, no, 142-144, 147, 148, 163. S. Salaries, Limitations on, 66, 67, 94. of Directors. (See Compensation of Directors.) of Officers, 81, 82, loi, 135, 136. Seal, 44, 70, 154, 156, 260, 261. Attestation of, 253, 261. Form, 253. Secretary, 139, 146, 154, 158-164. (See By-Laws, 191, 201, 202.) Books of, 70, 144, 149, 157-167, 232-244, 262-265. Certificate of, 159, 256, 257. Forms, 193, 256, 257. Duties, 139, 146, 154, 158-164, 191, 201, 202. Affixing Seal, 146, 154. GENERAL INDEX. 287 [References are to pages.] Secretary, Duties. — Continued. Attestation of Seal, 253, 261. Closing Transfer Book, 188, 194, 265. Correction of Minutes, 162-164. Custodian, 44, 139, 154, 158, 165. Issue of Stock, 145, 146, 149. Notice of Meetings, 114, 115, 220-226, 239, 240. Proxies, 227, 228. Reading Minutes, 162. Recording Minutes, 158-164, 218, 232-244, 246-251. Transfer of Stock, 146-149, 166. Signature, 252-257, 261. Forms, 253, 256, 257, 260. Shares. (See Stock.) Signatures, Corporate and Official, 252-257, 260, 261. Forms, 252, 260. to Contracts, 156, 261. Forms, 253, 260. to Notes, 259, 260. Forms, 259. to Stock Certificates, 32, 146, 173. Forms, 174, 176. South Dakota Charter, Form, 183-185. Special Meetings, 72, 80, 113-115, 126-128, 206-212, 221-226. (See Meetings.) Special Provisions in Charter, 47, 48, 64-66. Classification of Stock, 64, 91, 92. Corporate Stockholding, 65, 66. Cumulative Voting, 64, 65, 88-90, 117. Limitations on Salaries and Debt, 66, 67, 94, 151, 152. Standing Committees, 63, 121, 130-132. 2de GENERAL INDEX. " [References are to pages.] Stock, i6, 30-41, 60, 61, 99, 142-149. Assignment of, 144, 146, 147, 166, 176, 177. Forms, 176, 177. In Blank, 146, 147. Form, 177. Book. (See Stock Ledger.) Certificates of, 16, 27, 30-33, ZT, 143-149, 164, 165, 173-177- Forms, 174-176. Classification of, 64, 91, 92. Common, 38. Decrease of, 22. Full Paid, 36, 37, III, 112. Guaranteed, 39. Increase of, 22. Issuance for Property. (See Exchange of Stock for Property.) Issue of, 36, 99, los, 14s, 146. Issued and Outstanding, 32, 35, 36. Ledger, 70, 149, 158, 166, 167, 262-264. Form, 263. Minimum Amount, 61. Non-Voting, 90, 91, 99, 100. Par Value, 31, 32, 61. Preferred, 33, 38-40, ico. Shares of, 27, 30-35, 61. Subscription to, 36, 56, 57, 64, 108, 109, 142, 143. Forms, 169-171. System, 15, 16, 27-29. Transfer of, 27, 146-149, 166, 264, 265. Forms, 176, 177, 264. Treasury, 36, 40, 41, 151. Unissued, 35, 36, 41. Watered, 37. Stock Books, 70, 144-149, 158, 262-265. Stock Certificate Book, 70, 144, 157, 164, 165, 173-177. Forms, 174-176. GENERAL INDEX. 289 [References are to pages.] Stock Certificates. (See Certificate of Stock.) Stock Corporations, 16, 21-29. Stockholders, 16, 30-33, 36, 108-119. Liabilities of, 23, 24, 36, 37, iii, 112. Meetings of. (See Meetings.) of Record, 102, 109, 116, 143, 144, 147, 150. Powers, 28, 29, 45, 46, 50-53, no, in. Rights, 32, 54, 86, 109, no, 142-144, 147, 148, 158, 163. Subscriptions, 36, $6, 57, 64, 108, 109, 142, 143, 169-171. Forms, 169-171. Acceptance of, 108, 109, 142, 143, 170. T. Taxation, 69, 186, 187. Testimonium Clause, 156, 253. Form, 253. Transcript, Certified, from By-Laws, 257. Minutes, 160, 251. Transfer Agent, 146, 158, 166. Transfer Book, 70, 149, 157, 158, 165, 166, 264, 265. Forms, 264. Closing, 188, 194, 265. Transfer of Stock, 27, 146-149, 166, 264, 265. Forms, 176, 177, 264. Treasurer, 139, 140. (See By-Laws, 191, 202, 203.) Affidavit, 255. Bond of, 84, 218, 219. Form, 265, 266. Books, 107, 156, 157. Duties, 139, 140, 156, 157, ipi, 202, 203. Endorsement of, 254. Signature, 258. Form, 258. Treasury Stock, 36, 40, 41, 151. Trusts, Voting, 92-94. 290 GENERAL INDEX. [References are to pages.] U. Ultra Vires, 23, 48, 49. Unissued Stock, 35, ■^d, 41. Vacancies, Directors', 124. Officers', 129, 134. Vice-President, 138, 139. (See By-Laws, 191, 201.) Voting, IS, 16, 33, 64, 6s, 81, 88-90, 116, 117. Cumulative, 64, 65, 88-90, 117. Preferred Stock, 33. Proxies, 72, Ti, 81, 117, 118, 227-231. Forms, 206, 207, 228-230. Restrictions on, 33, 94-96. Trusts, 92-94. W. Waiver of Notice, 72, 80, 113, 114, 127, 208, 209, 221. Forms, 207, 209, 221, 222, 224. Watered Stock, 37. Working Capital, 151.