A " A =^^ 00 — ^= r- ^== 33 =^= 33 8 3 019 iNAL 4f C# ■ 9/ ' ;> y / /J w !,>:: i --^ vS A SUMMARY Law of Private Corporations BY LESLIE J. TOMPKINS, PROFESSOR OF LAW, NEW YORK UNIVERSITY. NEW YORK: BAKER, VOORHIS & COMPANY. 1004. ^ Copyright, 1904, -By BAKER, VOORHIS & COMPANY. T TGOOlf J. B. LVON COMPANY PRINTERS AND BINDERS ALBANY, N. Y. PREFACE. This work is intended to be a Summai'j of the Law of Private Corporations. To summarize a subject so prolific in decisions, and confine it within* the space desired, will admit of no extended discussion of the rules as they exist. The idea in mind has been to state in a systematic way the rules of law on the subject, and to state them in as few words as possible. In doing this, the language of the decisions, and in a few in- stances, the language of the text-writers, has been used, the writer finding it unnecessary, and in many cases impossible, to state the rule more concisely or accurately- Being a summary, only leading cases have been cited in most instances, and in others, such cases a& were necessary to support the point made. The excellent and important treatises on the subject by ]\Ir. Victor ]\Iorawetz, Judge Thompson, Mr. Cook, and Mr. Taylor, have been consulted and frequently cited. L. J. T. 'N'EW YOEK UxiVEESITY, January 15, 1904. 7564G9 CONTENTS CHAPTER I. THE HISTORY, DEFINITIONS, AND CLASSIFICATION OF CORPORATIONS. PAGE. History 1 General Divisions 4 Definitions 6 The Corporation v. Partnership 7 The Corporation v. Joint-Stock Companies 9 The Corporation v. Shareholder 10 CHAPTER II. THE CREATION AND CITIZENSHIP OF A CORPOR.\TION. Creation of Corporations 13 Acceptance of Charter 16 Citizenship 1" Corporations De Jure 20 Corporations De Facto 22 Corporations by Estoppel 27 CHAPTER III. THE CORPORATION AND THE STATE. In General 29 Interpretation of Charters 32 Power to Repeal, Alter, etc 33 The Police Power 37 Eminent Domain 40 Control over Foreign Corporations 42 Taxation 44 Dissolution 50 CHAPTER IV. THE POWERS OF \ CORPORATION. To Make Contracts 59 To Take, Hold and Transfer Real Property GO VI CONTENTS. PAGE. To Take by Devise 64 Ultra Vires Conveyances 65 To Alienate Property 66 To Lease Property 66 To Borrow :Money 67 To Mortgage its Property 67 To Issue Negotiable Paper 68 To Act as Trustee 69 To Enter into a Partnership" 70 To Acquire its Own Stock 72 To Acquire Stock in Other Corporations 73 To Make By-laws 74 CHAPTER V. GENERAL POWERS AND ULTRA VIRES. Powers in General 76 Ultra Vires Acts 78 CHAPTER VI. LIABILITY OF A CORPORATION FOR TORTS, CRIMES, ETC 89 CHAPTER VII. MEMBERSHIP — ITS RIGHTS, REMEDIES, AND LIABILITIES. Who May Become Shareholders 98 Capital Stock and Shares of Stock 99 Subscriptions for Stock 102 Subscriptions upon Conditions 107 Fraudulent Subscriptions 110 The Right to Rescind a Subscription 112 Assessments and Calls 114 Rights and Remedies of ^lembers 116 To a Certificate of Shares 117 To Transfer his Shares 117 To Vote 118 To Inspect Corporate Records 121 To Dividends 124 To Preference uj>on Increased Capital 131 To Interfere with Corporate Business 132 Liability of ^Members 137 Set-ofT bv Shareholders 148 CONTEXTS. VU CHAPTER VIII. MAKAGEMEIfT. PAGE. Corporate Meetings 150 The Power of the Majority 153 By-laws — Power to Make 157 Directors — Powers and Duties 160 Officers and Agents Other than Directors 173 CHAPTER IX. TRANSFER. Lien on Stock 182 Gifts of Stock 188 Transfer 189 CHAPTER X. creditors' rights and remedies. The Creditor and the Corporation 199 The Creditor and the Shareholder 210 CHAPTER XI. combinations. Consolidation 220 Reorganization 22.5 Pooling Agreements .' 229 Voting Trusts 230 Trust Combinations 232 CHAPTER XII. Promoters 237 TABLE OF CASES CITED. A. PAGE. A. A. Griffing Iron Co., Re The 180 Abbott V. Hapgood 246-248 Aberdeen R. Co. v. Blaikie 160 Ackerman v. Halsey 163 Adler v. Milwaukee, etc., Co 143 Adriance v. Roome 175 Aiken v. Colorado River, etc., Co 137 Albany, etc., Ry. Co. v. Fields Ill Alexander v. Cauldwell 175 Alexander v. Tolleston Club 65 Allen V. IMontgonierv, etc., Ry. Co 195 Allen V. Woonsocket Co 71 Am. Bible Soc. v. Marshall 65 American Loan, etc., Co. v. Minnesota, etc., Co 223 Am. Rj'. Frog Co. v. Haven 119-123 Auburn Bolt & Nut Co. v. Schultz 104 Andrews v. Ohio, etc.. Ry. Co Ill Anglo-California Bank v. Grangers' Bank 184 Appeal of Cornell 108 Argenti v. San Francisco 83, 86 Arnold v. Suffolk Bank 117. 183, 185 Arthur v. Griswold 176 Asbury, etc., Co. v. Riche 81, 84 Ashley's Case 112 Ashley v. Ryan 44 Ashley Wire Co. v. Illinois Steel Co 159, 174 Asiatic Banking Co., Re 73 Aspinwall v. Davies 17 Athol Music Hall Co. v. Gary 102 Atwood V. IMerrvweather 155, 240 Auburn Bolt & Nut Co. v. Schultz 104 Aultman's Appeal 145 B. Badger, etc., Co. v. Rose 104 Baines v. Babcock 218 Baird v. Bank 62 Ball Electric Light Co. v. Child 148 Baltimore. etc.^Rv. Co. v. Fifth Baptist Church 91 Bank v. Billings 33 Bank v. Dovetail, etc.. Co 209 Bank v. IMcDonald 27 Bank v. Poitiaux 65 Bank v. Potts 209 [ix] X TABLE or CASKS CITED. PAGE. J>;mk V. Wickorsliain T2 IJiiiik of Anicrica v. ^JcXcil 18G JSaiik of Atcliinson v. Duifoe 185 ]>ank of Attica v. Manufacturers' Bank 184 15ank of Auj^'usta v. Earle 18, 7G ]?ank of Cliarlotte v. National Bank 74 Bank of Chenango v. Brown 14 Bank of Col. v. Patterson's Adnir CO Bank of Holly Springs v. Pinson 184 Bank of Montreal v. Thayer 170 Bank of ^letropolis v. Jones 174 Bank of Republic v. Young 09 Bank of Saginaw v. Pierson 172, 173 Bank of U. S. v. Dandridge 70 Barnes v. Black, etc.. Coal Co 159 Barnes v. Trenton Gas Light Co 179 Barnes v. Trevor 14S Barrv v. Merchants' Ex. Co 60, 03, 07 Bartiett v. Drew 144 Batenian v. :Mid- Wales Ry. Co 08 Batli Gas Light Co. v. Claflfy 84, 86 Bates V. Telegraph Co Ill Bates V. X. Y. Ins. Co 1 S-i Bath Sav. Inst. v. Sagedahoe, etc.. Bank 183 Bausnian v. Kinnear 148 Beardsley v. Johnson 152, 100 jJeckley v. Schlay 21G Beer Co. v. Mass 37 Beers v. Bridgeport Spring Co 131 Beeknian v. Saratoga, etc., Rv. Co 41 Belfast, etc., Ry. Co. v. Belfast 124, 131 Bcnl)0\v V. Cook 151 Benedict v. Western Union, etc., Co 230 Bennett v. Holbeck 63 Bennington v. Gittings 189 Beveridge v. X. Y.- Elevated Ry. Co 162 Bigelow V. Gregory 16 Bingliamton Bridge Co. Case 33 Bird V. Daggett 86 Bird, etc., Co. v. Humes 103 Bishop v. Globe Co 184 Bissell V. :\rich. So. Rv. Co 09, 83, S6 Black V. D. o: H. Canal Co 223 Black River, etc.. Ry. Co. v. Barnard 25 Bliss V. Kcweah Canal, etc., Co 178 Bliss V. Malloson 228 Bloom V. Xational. etc., Co 106 Bonnlnian v. Lake Shore, etc., Ry. Co 128. 131. 105, 225 Bonrd of Excise v. Barrie 38 Bohnier v. HafTen 222 Bolm V. Brown 146 Bond V. Appleton 145 Boston Glass Co. v. Langdon 53, 209 Boston, etc., As.sn. v. Corv 191 TABLE OF CASES CITED. XI Boston, etc., Ey. Co. v. Gilmore 20G Boston Ry. Co. v. Salem Ry. Co 42 Bosworth Y. Allen 163 Bound V. S. C. Ry. Co ' 229 Bourdette v. Sieward 123 Bowditch V. New England, etc.. Ins. Co 179 Boynton v. Roe 209 Bradford, etc., Co. v. Briggs 18u Bradley v. Ballard 68 Bradley v. Reppell 2^ Branch v. Jessup 222 Brennan v. Tracy 07 Brent v. Bank of Washington 159, 182. 184, 185, 187 Brewster v. Hatch 24.3 Brewster v. Lathrop 128 Bridgeport, etc., Co. v. Tritsch 137 Briggs V. Cape Cod Co 24 Briggs V. Spanlding 163, 165 Brightman v. Bates 232 Brisbane v. D., L. & W. Ry. Co 195, 197 Bristol V. Chicago, etc., Ry. Co 18 Bristol, etc., Co. v. Probasco 219 Broadway Bank v. McElrath 196 Bronson v. La Crosse Ry. Co 135 Brooklyn, etc., Co. v. Brooklyn 55 Brown v. Furniture Co 209 Brown v. Hogg 62 Brown v. Pacific Mail Co 232 Brown v. Winnisimmet Co 59, 78 Bruffett V. Great Western Ry. Co 22G Brvan v. Carter 184 Buffalo Lubricating Oil Co. v. Standard Oil Co 92 Bullard v. National Eagle Bank 183 Burbank v. Dennis 238 Burke v. Smith 108, 139 Burrall v. Bushwick Ry. Co 100 Burrill y. Xahant Bank 162 Burrows y. Smith 105 Butler V. Watkins 92 Butler Univ. v. Scoonoyer 117 Butts V. Wood 170 Cabot, etc., Bridge Co. y. Chapin 107 Caldwell v. N. J. Steam, etc.. Co 95 California, etc.. Co. y. Callender 115 California v. Central Pac. Ry. Co 45, 40 Camden v. Stuart 143 Camden Safe, etc., Co. v. Ingham 70 Camden, etc., Ry. Co. v. Mays, etc., Ry. Co 86 Cameron v. Groyeland Imp. Co 137 Campbell v. Watson 163 Camp. Mfg. Co. y. Reamer 173 Cape May, etc., Nav. Co., Re 119 xii TABLE OF CASES CITED. PAOS. CiiriiKxly V. Powers ~i^> ~^^ Carroll v. Miillanphy, etc., Bank 18.3 Carver v. IJaiiitree Mfg. Co l-llj Cuse V. JJaiik 1!^7 Case V. Kellv 'i-- '^4, 85 Catlin V. Kagle Bank 207, 200 Catskill Bank v. Gray ^1 Cecil, etc.. Bank v. Watsontown Bank ISO, 187, 18S Central Land Co. v. Oberchain -41 Central Kv. Co. v. Collins '■'> Central Uv. Co. v. Kisch 110. Ill Central Rv. Co. v. Smith 8li Central Transportation Co. v. P. P. C. Co 82, 83, 84 Chabe v. Nicarajrua Canal, etc., Co 12.5 Chambers v. McKee 162 Chambers v. M. & M. Ry. Co 81 Chandler v. Bacon 239, 240 Chapman v. Bates 231 Chaj)in v. Lonfjworth 248 Charles Kiver Bridge Co. v. Warren Bridge Co 32 Charlick v. Flushing Ry. Co 123 Charlotte, etc.. Rv. Co. v. Gibbes 221 Clui'ver V. Rutlarid, etc., Ry. Co 210 Chesley v. Pierce 147 Chenev v. Gleason 240 Chicago City Ry. Co. v. Allerton 162 Chicago, etc., Ry. Co. v. Chicago Bank 206 Chicago, etc., Rv. Co. v. Derkes 83 Chicago, etc., "Ry. Co. v. Howard 228 Chicago, etc., Ry. Co. v. James ITS Chicago, etc., Ry. Co. v. Minn 39 Chicago, etc., Rv. Co. v. Moflitt 22.5 Chicago, etc., Ry. Co. v. Third Nat. Bank, etc 20S Chicago Ins. Co. v. Needles 3S Chicora Co. v. Crews 20 Child V. Boston, etc., Co 140 ( hild v. New York, etc., Rv. Co 228 Christcnsen v. Eno " 139, 215 Christian Union v. Yount 6o Chubb V. Upton 27 Church V. Pickett 23 Cincinnati, etc.. Co. v. TTofTmeister 123 Citizens, etc.. Co. v. Coriell 104 City, etc., v. Fry 49 Citizens, etc., Bank v. Kalamazoo, etc.. Bank 187 ( lapj) V. I'eterson 72 Clarke v. Richmond, etc., Co 120 (lark V. Thomas 116 ( learwater v. :Mcredith 222 ( leveland. etc.. Ry. Co. v. Closser 230 Cochran v. Arnold 24 Cochran v. \\'eichers 145 Cochrill V. Abeles 100 Cockrill V. Cooper 101 TABLE OF CASES CITED. Xlll PAGE. Coe V. Columbus, etc., Ry. Co 20'i Cohn V. Waters 208 Coit V. Gold, etc., Co 21'J Cole V. Millerton 20S Cole V. Millerton Iron Co 205 Coleman v. Columbia Oil Co 12S Coleman v. Eastern Co. Ry. Co 80 Coleman v. Howe 215, 21S Coleman v. New York, etc., Ry. Co 91 Coleman v. San R. T. R. Co <33 Coleman v. Second Ave. Ry. Co 16G ( 'oler V. Grainger 187 Colfax Hotel Co. v. Lyons 107 Colorado, etc., Co. v. Lenhart 172 Columbian Bank's Estate 72 Com. V. New Bedford Bridge Co 9(5 Com. V. Crompton 180 Com. V. Cullen 150 Com. V. Dalzell 119 Com. V. Proprietors, etc 97 Commonwealth v. Smith OS Commercial Bank v. Burch 72 Com. Bank v. Chatfield 163 Commercial Bank v. Pfeifl'er 27 Commercial Mutual, etc., Ins. Co. v. Union 174 Compton V. Wabash Ry. Co 225 Concord Rv. Co. v. Greelv 42 Cone V. Russell \ 232 Conger v. Chicago, etc., Ry. Co 179 Conklin v. Second Nat. Bank 183 Conro V. Gray 207 Conservators of River Tone v. Ash 7 Continental, etc.. Co v. Toledo, etc., Rv. Co 223 Cook V. Moody 209 Cook V. Sherman 133 Coppin V. Greenless Co 72 Corey v. Wadsworth 172 Cork, etc., Ry. Co., Re 82 Cortes Co. v. Tliannhauser 239 Covington v. Covington Bridge Co 35 Covington, etc., Co. v. Bowler 163 Covington, etc., Co. v. Sheperd 210 Coxe v. State 26 Crosby. Re 122, 123 Cumberland, etc., Canal Co. v. Portland 95 Cunningham v. Alabama Life Ins., etc.. Co 185 Currie v. School District No. 26 . . 167 Currier v. Continental, etc., Co 158 Currier v. Slate Co 72 Curtis V. Leavitt 68 Cushman v. Thaver Mfg. Co 118 Craig Co. v. Smith 152 Crandall v. Lincoln 72 Crease v. Babcock 141 xiv TABLE OF CASES CITED. PAGE. Credit Co. V. Howe, etc., Co l^i Crocker v. New I^ndon, etc., Ry. Co !.H Croinie v. Louisville, etc., Society 66 Crum V. Bliss 64 D. Dalton, etc.. Rv. Co. v. McDaniel 217 Danville, etc.. Rv- Co. v. Com 97 DartmoTitli College Case 6 Darst V. Gale . 83 Davis V. Gray -"j^ Davis V. :Memphis City Rv. Co 170 Davis V. Mills 172 Davis, etc., Wheel Co. "a'. Davis, etc.. Wagon Co 24G Day v. Opdensburgh Ry. Co 51 Dav V. Spiral, etc., Col 85 Dayton, etc., Co. v. Coy 245 Doadorick v. Wilson 163 Doansville Cemetery Co., Re 42 Delano v. Case 16S Dennis v. Joslin Co 150 Densmore Oil Co. v. Densmore 2.38 Denton v. MacXeil 244 Denver, etc.. Ry. Co. v. Harris 01 Dorring v. Hibernian, etc., Co 183 Des Moines, etc., Co. v. Des Moines Nat. Bank 181 Des Moines, etc., Co. v. West 210 De Varaigne v. Fox 42 De Witt V. City of San F 63 Do Witt V. Hastings 27 Dickerson's Appeal 189 Distilling, etc., Co. v. People 234 Doane v. Chicago, etc., Ry. Co 230 Dodge v. Woolsey ...'...". 47, 134, 1.55 Donnnllv v. Hearndon 22R Doolittle V. :\Iarsh 146 Dorris v. Sweeny 105 Doty V. Patterson 25 Dougherty v. Hunter 178 Douglas v. Trolnnd 216, 217 Downie v. Hoover 187 Downing v. Mi. Wash. Co 32 Driseoll V. West Bradley, etc., Co 182. 183, 184, 197 Dnilley v. Kentucky High School 15.5 DuniTiier v. Smedlev 215 Dunonml) V. New York, etc., Ry. Co 212 Dunkerson, 7>! re \ 183, 184, 188 Dunphy v. Travelers, etc., Assn 13r» Dupee v. Boston, etc., Co 72 Durfee y. Old Colony 154 E. East Anglian Ry. Co. y. East. Co.'s Ry 81 East Birmingham Land Co. v. Dennis 194 TABLE OF CASES CITED. XV PAGE. East Xorway, etc., Church v. Froislie 65 Eastern Ry. Co. v. Hawkes 81 Elkins V. Camden, etc.. Ry. Co 74 Ellerman v. Chicago, etc., Co 181 Elliott V. Siblev 187 Ellis V. Marshall 17 Ellsworth V. Dorwart 123 Elvton Land Co. v. Dowdell 156, 227 Emory v. Parrott 240, 24.3 Enfield Bridge Co. v. Railway Co 32 England v. Dearborn 177 Equitable Trust Co. v. Garis 70 Erdnian v. Bowman 132 Erie, etc., Rv. Co. v. Casey 35, 51 Erie, etc., Ry. Co. v. State 63 Essex, etc., Co. v. Collier 102 Estate of John C. McGraw 66 Estell V. Univ. of South 63 European, etc., R. Co. v. Poor 166 Evans v. Boston, etc., Co 68 Evansville, etc., Ry. Co. v. Dunn 107 Evansville, etc., Ry. Co. v. Posey 109 Evening Journal Assn. v. McDermott 91 Ewall V. Daggs 54 Ewing V. Robeson 27 Ewing V. Composite Brake Shoe Co 228 Ex-Mission Land, etc., Co. v. Flash 237, 242 Ex parte Firemen's Ins. Co 198 Ex parte Stringer 185 Eyster v. Centennial Board, etc 125 F. Falmouth Bank v. Cape Cod Co 210 Fanning v. Insurance Co 107 Farmers, etc., Co. v. Young 119 Farmers, etc., Co. v. Toledo, etc., Ry. Co 223 Farmers' L. & T. Co. v. Harmony, etc 70 Farmers' Nat. Bank v. Sutton, etc., Co 69, 86 Farmers, etc., Ins. Co. v. Chase 115 Farrington v. Tenn 48, 49 Fay v. Nobles 103, 177 Felton y. West Iron Mining Co 175 Ferguson v. State 123 Ferry \. Anderson 208 Fidelity, etc., Co. v. Niven 70 Fietsam v. Hay 209 Fifth Baptist Church v. Baltimore, etc., R. Co 16 Finnegan v. Naerenberg 23 First Nat. Bank, etc., v. Dovetail, etc., Co 172 First Nat. Bank v. Hartford, etc.. Ins, Co 182, 187 First Nat. Bank v. Lanier 183 First Nat. Bank v. National Exchange Bank 162 First Nat. Bank v. Peavey 212 First Nat. Bank v. Wood' 11 XVI TAUl.K Ol' CASKS CITED. PAOB. Fisher v. Essex Bank 192, 19U Fislicr V. CJnivcs Itio Fishor V. Scligman 141 Fitcli V. Lewiston, etc., Co 68 Fitz>,'('ral(l v. Weidonbcck 173 Flaj,rkT, etc., C'o. v. Flagler 244 Fliiin V. Hagiey 213 Flint V. Pierce 159 Fonl V. East Hampton Co 127 Ford V. Hill 209 Foss V. Harbottle 155, 238 Foster v. Borax Co 207 Foster v. Posson 218 Fourth Nat. Bank v. Francklyn 14!i Fowle V. Alexandria 92 Fox V. Allensville, etc., Co Ill Fr mcis v. New York, etc... Ry. Co 18!) Franklin Bank v. Commercial Bank 73 Franklin Bridge Co. v. Wood 14, 16 Franklin Co. v. Lewiston, etc., Bank 73 Freeman v. Machias, etc., Co IS Frost V. Coal Co 24 Ft. Madison Lumber Co. v. Batavian Bank 192 Ft. Wayne Co. v. Franklin Co 210 G. Galbraith v. Building Assn 197, 19S Galegher v. Jones 197 Galena, etc., Ry. Co. v. Ennor 109 Gallagher v. Brewing Co 12 Galveston, etc., Ry. Co. v. Gonzales 20 Gamble v. Queens Co. Water Co 167 Gardner v. Butler 100, 170 Gent V. Manufacturers' Co 246 German-American Seminary v. Keifer 107 German Union, etc., v. Sendmejer 197 Georgia, etc., Co. v. Mercantile, etc., Co CO Gettv V. Devlin 243 Gibbs V. Con. Gas Co 234 Gibbons v. Mahon 127 Gibbs' Estate, Re 23 GifTonl v. Livingston 6 GilTord v. Thompson 190 Gillespie v. Gaston 49 Gilkerson v. Third Ave. Ry. Co 189 Glenn v. Garth 137 Glass Co. V. Stoehr i>Q Goddard v. Grand Trunk Ry. Co 95 Goodspeed v. East Iladdam Bank 92 Goodwin V. Hardy 120, 127 Grand Trunk, etc.,' Ry. Co. v. Wellman 39 Grangers' Life, etc., Co. v. Kainper 101 Graham v. Boston, etc., Rv. Co 153 Graham v. Railroad Co. . .' 200, 201 TABLE OF CASES CITED. XVll PAGE. Granby Mining Co. v. Richards 22 Granger v. Bassett 128 Graves v. Brooks 216, 217 Gray v. Bank 132 Gray v. Oxnard 223 Great Wheal, etc., Co., Re 240 Great Western Tel. Co. v. Burnham 115 Greene v. Graves 25 Greene v. Nash 232 Green Bay, etc.. Ry. Co. v. Union, etc., Co 59 Green v. Hedenberg 74 Greenville Co. v. Planters' Co 223 Greenwood v. Freight Co 34, 37 Griffith v. Blackwater, etc., Co 5G Grimwader v. Mutual Society 165 Griswold v. Haven 92 Grommes v. Sullivan 68 Grymes v. Hone 189 Guarantee Co. v. East Rome ToAvn Co 129 Guckert v, Hacke 22 H. Haas v. Chicago, etc., Society 210 Hadden v. Linville 178 Hagar v. Cleveland 107 Hall v. Pine River Bank 186 Hall V. U. S. Ins. Co 186 Hall V. Vermont, etc., Ry. Co 170, 247 Hamilton Co. v. Mass 45 Handley v. Stutz 147, 215 Hardee v. Sunset Oil Co 17Q Hardware Co. v. Perry, etc., Mfg. Co 209 Harpold v. Stobart . ". 197 Harris v. Davis 229 Harris v. Thompson 42 Harris v. Miss., etc., Ry. Co 51 Harrison's Case 195 Harrington v. Connor 54 Harvey v. Linnville, etc., Co 231 Hatch" V. Dana 217, 218 Havemeyer v. Brooklyn Sugar Ref. Co 224 Hawkins v. Dutchess, etc., Co 91 Hawkins v. Railway Co 164 Hawley v. Upton .\ 1.39, 213 Hawthorne v. Calef 147 Hayden v. Davis 69 Hayne v. Dandeson 185 Hays V. Pittsburgh, etc., Ry. Co 115 Hay ward v. Davidson 61 Haywood v. Lincoln Lumber Co 1 iSVt Hazeltine v. Belfast, etc., Co 131 Heard v. Talbot 51 Heaston v. Cincinnati Ry. Co 28 ii Xviil TAllLK OF CASKS CITED. PAGE. 1 Iciknian's Estate, Re 24S I Uiniiiway v. llcniiiuvay 122 Ilirriiig V. N. Y., etc., Ry. Co 54 Jliflirins V. Lansingli 17G 1 1 if;f,'s V. Xortliern, etc., Co 18G I I ill V. Glasgow Ky. Co 35 Hill V. Nisbet 160 Hill V. Pioneer Lumber Co 171 Hill V. Rockingham Bank 197 llilles V. Parrish 152 Hodges V. Xew England Screw Co 15G Hodges V. Rutland, etc., Ry. Co 170 Hodges V. Screw Co 74 Hoflnian v. Reiehert 163 Hofrnian Steam Coal Co. v. Cumberland Coal, etc., Co 160 Holder V. La Fayette, etc., Co 170 Hollins V. Brierfield Coal & Iron Co 203, 208, 210 Home Ins. Co. v. New York 47 Holmes v. Holmes 74 Holmes V. Willard 164 Hood V. X. Y., etc., Ry. Co 76 IIoolc V. Great Western Ry. Co 130 Hopper V. Sage 129 Hoppin V. Buffum 119 Hospes V. Northwestern Mfg. Co 143 Hoy Lake Ry. Co., In re ISO Hoyt V. Thompson's Ex 162 Hubbersty v. Manchester, etc., Ry. Co 186 Hughes V. Vermont Copper, etc., Co 124, 198 Humbert v. Trinity Church 63 Humphrey v. McKissick 12 Hun V. Gary 163, 164 Htirlburt v. Britain 25 Hutchinson v. Green 162 Hutchins v. Smith 108 Hutton V. Thompson 244 I. Illinois Linen Co. v. Hough 170 Illinois, etc., Ry. Co. v. Read 91 InchbakI v. Western, etc., Co 55 Indcrwick v. Snell 180 lndianaj)olis, etc., Ry. Co. v. Jones 225 Ireland v. Globe, etc., Co 75 Iron Mt. Co. v. Mercantile Co 92 Isham V. Buckingham 195 J. Jackson v. Hartwell 64 Jackson v. Ludeling 1G3, 171, 228 Jackson v. Meek 140 Jackson v. Newark, etc., Co 138 TABLE OF CASES CITED. XIX PAGE. Jackson's Adm. v. Newark, etc., Co 130 Jackson v. Twenty-third St. Ry. Co 188 Jefferson Bank v. Townley 209 Jennings v. Bank of California 183, 187 Jennings v. Bank of Coloi'ado 193 Jermain v. Lake Shore, etc., Ry. Co 127 Johnson v. Laflin 188, 193, 195, 196 Joint Stock Co. v. Brown 16.5 Jones V. Aspen Hardware Co 26 Jones V. Barlow 172 Jones V. Guaranty Co 68 Jones V. Habersham 65, 70 Jones V. Kent 129 Jones V. Morrison 132, 170 Jones V. Terre Haute, etc., Ry. Co 196 K. Kanawha Coal Co. v. Kanawlia Co 53 Kean v. Johnson 156, 223, 224 Kearns v. Leaf 207 Keith V. Clark 11 Kelley v. Newburyport, etc., Horse Ry. Co 166 Kelner v. Baxter 246, 248 Kent V. Quicksilver Mining Co 158 Kernochan, Re 129 Ketcham v. Madison, etc., Co 223 Kilpatrick v. Penrose, etc., Co 170 King V. Bank of England 198 King V. Paterson, etc., Ry. Co 127 Knapp V. Publishers, etc 131 Knight V. Old Nat. Bank 184 Koch V. North Ave. Ry. Co 25 Kortright v. Buffalo, etc.. Bank 197 Kraft V. Freeman 178 Kreissell v. Distilling Co 231 L. Ladywell Mining Co. v. Brooks 242 Lagimas Co. v. Lugunas Syndicate 164 Laflin v. Powder Co 24 La Farge, etc., Ins. Co. v. Bell 179 Lake Ontario Ry. Co. v. Curtiss 137 Lake Shore., etc., Ry. Co. v. Prentice 95 Lauman v. Lebanon, etc., Ry. Co 156, 227 Lawrence v. Nelson 148, 219 Leavenworth Co. v. Chicago, etc., R. Co 166 Legendre v. New Orleans, etc., Co 122 Leggett v. Bank 182 Leggett V. Bank of Sing Sing 185 Lehman v. Knapp 87 Leroy v. Insurance Co 128 Leslie v. Lorillard 79, 135, 162 Lestapies v. Ingrahara 85 XX TAULl-: Ul" CASKS CITED. FAGB. Lewis V. Brainord 122, 123 Lewis V. W coclenfekl 248 Lippitt V. American Wood, etc., Co 190 Little Ivoctc, etc., Ky. Co. v. Perry 245 Liverpool Ins. Co. v. Mass 7 lx)ck V. Veniible 129 Locke V. Farmers' Loan & Tr. Co 189 Lockhart v. Van Alstvne 124, 120 Lockwood V. Mechanics'. Nat. Bank 182, 183, 184 London, etc.. Bank v. Brockleband 185 Long V. Georgia, etc., Ry. Co 85 Long V. I'enn Ins. Co 148 Lord Denman in Reg. v. Great No., etc., Ry. Co 96 Losee v. Bullerd 146 Lothrop V. Stedman 34, 207 Low V. Connecticut, etc., Ry. Co 247 Lowe V. E. & K. Ry. Co 105 Lowenthal v. Rubber, etc., Co 120 Lowry v. Inman 145 Loui.sville. etc., Ry. Co. v. Boeny 206 Ixtuisville, etc., Ry. Co. v. Com 97 Louisville, etc., Ry. Co. v. Flanagan 86 l^ouisville, etc.. Ry. Co. v. Kentucky 221 Lovegrove v. Hunt 87 Lucas V. Pitney 86 Lucas V. White, etc., Co 76 Lumsden's Case 99 Lydney etc.. Co.. v. Bird 241 Lynch v. Metropolitan Ry. Co 91 Lyon V. Am. Screw Co 123 M. M. & 0. Ry. Co. V. Yandal 105 Magee v. Badger 108 Mallett V. Simpson 66 Mallory v. Hanaur Oil Works 71, 85, 234 ^lanchester, etc., Co. v. Concord Co 223 Manhattan, etc., Co. v. Phalen 86 Mansfield, etc., Ry. Co. v. Brown 223 Marburv v. Land Co 74 ^larchand v. Loan, etc., Co 247 March v. Eastern Ry. Co 128, 196 Margage. etc., Co. v. Ziegler 172 Marine Bank v. Ogden 230 Market St. Ry. Co. v. Hellman 222 Marlin v. Niagara, etc., Co 69 Marsh v. jNfathias 23 ALirtin v. W. J. Johnston Co 123 ^larvin v. Anderson 205 Mason v. Finch 221 Massachusetts Iron Co. v. Hooper 182 Matson v. Alley 177 Matthews v. Associated Press '. 159 TABLE OF CASES CITED. XXI PAGE. Matthews v. Hoagland 189 Matter of B. W. & N. Ry. Co 55 Matter of the Estate of McGraw 3i Mayor, etc., v. New York, etc., Ferry Co 97 Maysville, etc., Co. v. Johnson 113 McArtliur v. Times Co 247 McCartee v. Orphans' Asylum G4 McClellan v. Detroit File 'Works 22(> McClellan v. Scott 92 McCIure v. People's Freight Ry. Co 107 McCullagh V. Maryland 14 McCutcheon v. Merz Co 73, 74, 85 McDermott v. Harrison 113 McFadden v. Los Angeles, etc 158 McKim V. Odom 97 McLaren v. Pennington 51 McLean v. Charles Wright, etc., Co 196 McMillan v. Maysville, etc., Ry. Co 107 McNaught V. Fis'her 104 McNeil V. Tenth Nat. Bank 119, 195, 19i> McReady v. Rumsey 184, 180 Mead v. Bimn Ill Mechanics' Bank v. Merchants' Bank 182, 18S Mechanics' Bank v. Seton , 185 Meeker v. Winthrope Iron Co '. 155 Melvin v. Lamar Ins. Co 139 Memphis Co. v. Ward 209 Merchants' Bank v. Shouse 182, 183, 185 Merchants' Bank v. State Bank 94, 175 Merrick v. Peru, etc., Co 212 Merz Co. v. Capsule Co 74 Methodist Church v. Town 107 Metropolitan, etc., Ry. Co. v. Manhattan, etc., Ry. Co. . 149, 162 Middlesex, etc., Ry. Co. v. Charlestown " 49 Middleton Bank v. Magill 147 Miller v. Barber 244 Miller v. Ewer 18, 152 Miller v. Illinois Cent. Ry. Co 179 Miller v. Wild Cat, etc., Co Ill Mills V. Northern Ry. Co 200 Mills V. Northern, etc., Ry. Co 125 Mitchell's Case 98 Mitchell V. Rubber, etc., Co 123 Milwaukee, etc., Ry. Co. v. Arms 94 Mobile Ry. Co. v. Midland Ry. Co 42 Mokelunine Hill, etc., Co. v. Woodbury 22 Montgomery v. Phillips 171, 208 Montgomery, etc., Ry. Co. v. Branch 206 Monument Nat. Bank v. Globe Works 69 Moore v. Bank of Commerce 187 Moore v. Fitchburg Ry. Co 91 Moore & Handley Co. v. Towers Co 11 Morgan v. Skiddy 176 Morris v. Cheney 187 TABLE OF CASES CITED. PAGE. Morris v. Staps 75 Morrison v. Gold, etc., Co 245 Morville v. A. T. Society 83 Morrill v. Little Falls Mfg. Co 153 Moses V. Tompkins 115 Moss V. Averill 02 Mnmma v. Potomac Ry. Co 28, 35, 51, oo, 206 Muii^on V. Syracuse, etc., R. Co 167 Mutual Fire Ins. Co. v. Farquhar 157 Mt. Holly Paper Co.'s Appeal 185, 187 Mt. Pleasant v. Beckwith 225 Mt. Sterling, etc., Ry. Co. v. Looney 178 N. Nashville, etc., Co. v. Nashville 49 Nas-^au Hank v. Jones Si National Park Bank v. German, etc., Co 69 National Bank v. Graham 01 National Bank v. Matthews GZ, 65 National Bank v. Watsonto%\Ti Bank 182 Nant-y-Glo, etc., Co. v. Graves 242 Nauney v. Morgan 189 N. Y., etc., Bridge Co. v. Smith 54 N. Y., etc., Canal Co. v. Fulton Bank 70 N. Y., etc., Co. V. Boston, etc., Co 42 N. Y., Lack. & W. Ry., In re 42 N. Y. Mutual Life Co. v. Willcox 83 N. Y; State, etc., Co. v. Helmer 84 N. J. A. R., etc., Co. v. Newark 62 Nesmith v. Washington Bank 186 Newcomb v. Reed 22 New Albany v. Burke 73 New Bedford Ry. Co. v. Old Colony Co 225 New England Trust Co. v. Abbott 193 New Orleans, etc., Co. v. Louisiana, etc., Co 42 New Sombrero, etc., Co. v. Erlanger 239 New York, etc., Ry. Co. v. Haring 86 New York, etc., Ry. Co. v. Ketchum 170, 247 New York, etc., Ry. Co. v. Schuyler 90, 195 New York v. Twenty-third St. Ry. Co 35 Nicoll v. N. Y. & E. Ry. Co '. 63 Nix v. Miller .' 169 Nockels V. Crosby 244 North, etc.. Assn' v. Childs 163 North Side Ry. Co. v. Worthington 230 No. Cent. Ry.* Co. v. Eslow 105 Nortliwest Transportation Co. v. Beatty 167 Northwestern, etc., Co. v. Cotton, etc., Co 171 Northwestern, etc., Co. v. Shaw 84 Norton v. National Bank 178 Norris v. Staps 157 Noves v. Marsh 232 TABLE OF CASES CITED. XXlll O. PAGE. Oakes v. Turquand 113 O'Brien v. Stamback 208 O'Bear, etc., Co. v. Volfer l'J9, 205 Ogden V. Murray 170 Ohio, etc., Ky. Co. v. State 231 Ohio, etc., Ry. Co. v. Wlieeler 19 Olcott V. Tioga Ry. Co 68 Old Colony, etc., Ry. Co. v. Evans 62 Oldham v. Mt. Sterling, etc., Co Ill, 113 Oliver v. Gilmore 230 Omo V. Bernart 114 Oregon Ry. Co. v. Oregonian Ry. Co 82 Orient Co. v. Daggs 18 Ormsby v. Vermont, etc., Co 152 Oroville, etc., Ry. Co. v. Supervisors 25 Osborn v. Bank of U. S 45 Otter V. Brevoort Petroleum Co 198 Overton v. Memphis, etc., Ry. Co 136 P. Packard v. Old Colony Ry. Co 53 Paddock v. Fletcher 244 Page V. Heineberg 02, 63 Paine v. Barnum 165 Paine v. Stewart 145 Parish v. Wheeler 85 Park V. Granite, etc.. Works 125 Parrott v. City of Lawrence 33 Passenger Ry. Co. v. Young 91 Patterson v. Lynde 218 Paul V. Virginia 42, 44 Pauly V. Coronado Beach Co 73 Pearsall v. Western Union Co 159 Peek v. Gurney 243 Pendergast v. Bank of Stockton . . ■ 184 Pennsylvania Co. v. Weddle 92 Penn. Transportation Co.'s Appeal 228 Penn. Ry. Co. v. St. Louis, etc., Ry. Co 82, 221 People V. Albany 96 People V. Albany, etc., Ry. Co 97 People V. Anderson, etc., Co 54 People V. Ballard 157, 227 People V. Batchelor 151 People V. Bowen 15 People V. Chicago Gas Co 234 People V. Coleman 10, 40 People V. Crockett 182, 184 People V. Ciunmings 151 People V. De Grauw 226 People V. Equitable Trust Co 45 People V. Globe, etc., Co 56 People V. La Rue 62 People V. Manhattan Co 53 Xxiv TAliLK (»1' CASES CITED. FAOB. i'eojilc V. Mauran *J3 IVojilc's Mutual ills'. Co. V. VVescott 115 IVcpli- V. N. V. C, etc., Ky. Co 53 IVople V. New York, etc., Ky. Co 10 I'.opli' V. North Uiver, etc 22i I'coiiU- V. North Hiver Sugar Kef. Co 222, 234 IVople V. 0"15rien 30 reojile V. Pullniau I'ahice Car Co 03 IVoplu V. Selfridge 10, 22 People V. Supervisors 125 IVople V. Tliroop 180 I'eople V. Township Board 107 lVoi)le V. Water Co 22 I'eoria, etc., Co. v. Coal, etc., Co 223 I'eny v. .Millaudon 165 Perriii v. Granger 140 IVrrv V. Tuscaloosa, etc., Co 17G I'eter v. Cnion Co 215 Pew V. Gloucester Bank 170 I'fohl V. Simpson 217 I'iielan v. Hazard 140 Phillips Acad. v. King 04, 70 Phillips V. Wickham 121 Phihul«'l|)hia, etc., Ry. Co. v. Conway 109 Piiiladelphia, etc., Ry. Co. v. Derby 92 Phila(leli)liia. etc., Ry. Co. v. Maryland 221 IMuenix \\"a rehousing Co. v. Badger 114 Phosphate, etc.. Co. v. Harmont 240 I'ick V. Kllinger 69 Pickering v. Stephenson 164 Pierce v. Com 120 Pierson v. liank of Washington 187 Pittsljurgh, etc., Ry. Co. v. Biggar 109 Pittsi.urgh, etc., Rv. Co. v. Clarke 182, 185, 186 Pittsburgh, etc., Ry. Co. v. Gazzam 107 Pittsburgh, etc., Ry. Co. v. Keokuk Bridge Co 82 Pittsburgh, etc., Co. v. Spooner 240 Pittsburgh, etc., Ry. Co. v. Stewart 108 Planters' Ins. Co. v. Selma Bank 185 Piatt V. I^iriningham, etc.. Co 185 IMaquciuincs. etc., Co. v. Buck 238-230 Plymouth, etc., Ry. Co. v. Colwell 206 Pneumatic Gas Co. v. Berry 107 Pollak Co. V. Muscogee Co 209 Pond V. l-'ramingham. etc.. Rj'. Co 200 Ponittle 145 Thayer v. Boston 95 Thebus v. Smiley 148 The Bank, etc., v. Niles 85 The Phosphate, etc., Co. v. Green 73 The State v. Morristown Fire Assn 100 Thoma.s v. Brown ville, etc., Ry. Co 166 Thomas' Admr. v. Lewis 188, 189 Thomas v. Dakin 7 Thomas v. Railway Co 59, 82 Thomas v. West Jersey Ry. Co 85, 230 Thompson v. Greely 163, 164 Thompson v. People 16 Thornton v. Marginal, etc., Ry. Co 200 TABLE OF CASES CITED. XXIX PAGE. Thornton v. Wabash Ry. Co 22i) Thrasher v. Pike County Ry. Co lO^:! Throop V. Hatch Lith. Co 171 Thrope v. Railway Co 38 Tift V. Quaker, etc.. Bank 245 Tisdale v. Harris 191 Titonic, etc., Co. v. Lang 107 Titus V. Cairo, etc., Ry. Co 177 Titus V. Railway Co H^*" Tod V. Kentucky Union Land Co 69 Tome V. Parkersburg, etc., Ry. Co 159 Tomlinson v. Bricklayers' Union 11 Tompkins Co. v. Catawba Mills 137 Tomkinson v. Southeastern Ry. Co 155 Tonawanda, etc., Ry. Co. v. New York, etc., Ry. Co 230 Toner v. Fulkerson 140 Townes v. Nichols 193 Townsend, Re 42 Trade, etc., Co. v. Vickers 137 Tradesman Pub. Co. v. Wheel Co 209 Treadwell v. Salisbury Co 150, 223 Tregear v. Etiwanda W^ater Co 100 Trenton Potteries Co. v. Oliphant 230 Trott V. Sarchett 107 Trust Co. V. Lee 70 Tucker v. Gilman 138 Tucker v. Ferguson 43 Turner v. Granger 113 Twin-Lick Oil Co. v. Marbury 163 U. U. S. Express Co. v. Ellyson 49 U. S. Rubber Co. v. American, etc., Co 209 United States v. Addyston, etc., Co 234 United States v. Trans-Missouri Freight Assn 230 Union Bank, etc., v. State 48 Union Bank, etc., v. Laird 197 Union Bank v. Laird 186 University v. People 18 Upton V. Hansborough ] O.S Upton V. Tribilcock Ill, 112, 113, 142, 213 V. Van Cott V. Van Brunt 215 Van Dyck v. McQuade 128 Van Sands v. Middlesex, etc.. Bank ISi, 183, 193 Vance v. Erie Ry. Co 92 Vance v. Insurance Co 103, 104 Vanderpoel v. Gorman 209 Vercontre v. Golden, etc., Co 157 Vidal V. Girard 64, 70 XXX TAULK OK CASES CITED. PAGE. Visalia. etc., Co. v. Sims 84 Vose V. Grant 109 VrtH'land v. N. J. Stone Co 107 W. Wabash, etc., Ry. Co. v. Ham 207 \\alk('r v. Joseph, etc., Co 1S9 Wallace v. Inliabitants, etc., in Townsend \~y,i Wallace v. Townsend lO-t Wallshire Iron Co., Re 55 Walsh V. Sexton 1H9 Walworth, etc.. Bank v. Farmers' Loan, etc., Co 178 Ward V. Griswoldville, etc., Co 143 Warner v. Penoyer 1G5 Warner v. Seymour 244 Warren v. Robinson 16.3 Washburn v. National, etc., Co 215 Water Co. v. darken 65 Weatherford, etc., v. Granger 247 Webster v. Upton 190 Webster v. Howe Machine Co 69 Wells V. Stout 14S West V. Camden 232 West River Bridge Co. v. Dix 40 West Wisconsin Ry. Co. v. Board of Supervisors 48 Western Union Ry. Co. v. Smith 225 Western, etc., Co. v. Cawsley 247 Wheeler v. Aiken, etc., Bank 165 Wheeler v. Miller 148 Wheeler v. Northwestern Co 129 Wliite v. Franklin Bank 84 White v. Howard 64 White Water, etc., Co. v. Vallette 59 Whitnev Arms Co. v. Barlow 83, SO Wliittefton Mills v. Upton 71, 221 Whitwell v. Warner 141, 213 Wigf,Mns, etc., Co. v. Chicago, etc., Ry. Co 230 Wilbur v. LjTide 106 Williams v. Boice 144 Williams v. Guile 188 Williams v. Hanna 147 Williams v. McKav 164, 165 Williams v. Montgomery 193. 231. 232 Williams v. Page 245 Williamson v. Smoot 11 Williams v. Tavlor 114 Williams v. Western Union Tel. Co 130 Winrham, etc., Co 16S Winget V. Quincy, etc., Co 26 Winters v. Hub, etc., Co 246 Witters v. Sowles 148 WoodruflF V. Erie Ry. Co 221 Wood V. Dummer '. 142, 144, 206 TABLE OF CASES CITED. XXXI PAGE. Worthen v. Griffith 205 Wright V. Bank of Metropolis 197 Wright V. Hughes (57 Wright V. Pipe Line Co 86 Wyetli Co. V. James Co 53 Y. Yale Gas Co. v. Wilcox 239 Yates V. Van De Bogert 63 Young V. Vough 182, 185 Z. Zabriskie v. Baldwin 33 Zabriskie v. Hackensack, etc., Ry. Co 155 A SUMMARY OF THE LAW OF PRIVATE CORPORATIONS. CHAPTEK I. § 1. History. — The origin of the idea of a corpora- tion is a mooted question. Sir Henry Maine insists that the idea of clans or organized bodies existed and were recognized before the individuaL Blackstone sajs the idea originated with the Romans, while Angell and Ames say it originated with the Greeks. Be that as it may, the generally accepted statement is that our present law of corporations is traceable in unbroken line to the Romans. Saviguy, who has writ- ten the best account of Roman corporations, says that villages and towns were the earliest forms of the cor- poration. Later the idea extended to the State and then to brotherhoods. The basis of all was community of interests. The first idea was for protection from the outside world. This being secured, protection from themselves, resulting in peace and order, made popular the municipal corporation idea, and the practical work- ings of this new idea being found satisfactory it gradu- ally extended to the formation of the brotherhoods. The associated artisans of Rome were followed by the bakers, the boatmen, and many others. It is interest- ing to note that in these business associations the con- sent of the State was necessary; that three members at least were necessary for formation, though not for existence, and that the rights and duties corresponded closely to those of an actual person. When Christianity [1] ii SUM^[AKY OF LAW OF PRIVATE COErORATIONS. was introchic'i'd, tho C'liurcli found nunicroiis ways to ap[)ly tilt' various (lootrincs now existent, and through tlio Church and its officials they were brought into Eng- land, where they were applied to the societies already existing, and thereafter strongly influenced the laws of that country. The earliest corporations in England were the peace- guilds, formed for mutual protection. Following these — and born of their experience — came the municipal corporation, followed in turn by the craft-guilds. Of these latter, many now in existence trace their origin to the earliest times. The first of them was the weavers, formed about 1300. This was followed in succession by the goldsmiths in 1327, the mercers in 1373, the haberdashers in 1407, the fishmongers in 1433, the vinters in 1437, and the merchant tailors in 146G. fn the sixteenth century new discoveries led to the incorpo- ration of companies for foreign adventures, the chief object being not so much the convenient prosecution of business, but for the purpose of public agency, to which was confined the due regulation of trade. " The gen- eral intent and end of all corporations is for better gov- ernment, either general or special. The corporations for general government are those of cities and towns, mayor and citizens, mayor and burgesses, mayor and commonalty. Special government is so called because it is remitted to the managers of particular things, as trade, charity, and the like, for government, whereof several corhpanies and corporations for trade were erected, and several hospitals and houses for charity." * The earliest of these companies were the African, the Russian, and the Turkey companies. In 1600 was formed the famous East India Company, followed later by the Royal African and the Hudson's Bay Company. At this time the advantages of corporate enterprise, 1. "The Law of Corporations, 1702," Anonymous. INTRODUCTION. i. e., the government of trade, together with aggregation of capital and distribution of profits, led to the later and larger corporations. In 1692 came the Greenland Com- pany, followed by the Bank of England in 1G94, the latter being an idea to raise money for governmental purposes. Now followed a jDeriod of wild speculation, in which over 200 companies were created, many with- out governmental license. In 1720 the government began to issue writs of scire facias to inquire into their rights to do business, and this not only put a stop to the creation of companies but brought on a collapse, which left only four com- panies in existence. So great was the distrust that the great economists of the day, notably Adam Smith, de- clared that corporations should exist only for the greater undertakings of a public kind, such as banking, insur- ance, canals, water companies, etc., for they required greater capital than could be commanded by private concerns. During the later part of the eighteenth cen- tury they began to increase, though their progress was slow, and so continued until the introduction of gas and railroads. Only one corporation was created in America prior to the Declaration of Independence. " The Philadelphia Society for Insuring Houses from Loss by Fire " was created in 1752 and chartered in 1768. In 1781 Con- gress chartered the " Bank of ISTorth America " (Phila- delphia), in 1784 the "Massachusetts Bank," in 1785 the " Charles River Bridge Company," and in 1786 the " Mutual Assurance Company of Philadelphia." The first New York corporation was chartered by Congress in 1786 — " The Associated Manufacturing Iron Com- pany of New York." With the development of the corporation through its various phases here outlined the law has kept stride. The first corporation laws were municipal in their char- 4 SUMMARY OF LAW OF PKIVATE CORPOKATIONS. acter. When business corporations came into existence — and there being no laws in force governing them — these municipal rules were used in so far as they were found applicable and new rules were added as the exi- gency of the time demanded. For this reason the law of private corporations is neither consistent or logical. Several features of the early Roman law exist, modified and increased by the later common law of England, which in turn has been modified and enlarged by the statutory law of our various States. It is a familiar statement therefore, that the Law of Private Corpora- tions consists of the early common law created for the government of municipal corporations, and modified and enlarged by statute both in England and America, to meet tlie requirements of our later development. Where statute does not apply the common law still obtains. While it is true that the law is largely statu- tory to-day there is no subject in the law where so great a conflict in the decisions are to be met with ; but while the law is unsettled on many points, there are more points on which it is settled, and thus is made practi- cable a general conception of the law relating to private corporations. § 2. General divisions. — Corporations are generally divided into two classes: (1) Aggregate — composed of a number of individuals; (2) sole — a single in- dividual. A familiar illustration of the latter is that of a bishop of a diocese. Corporations sole are rare in America. Corporations aggregate are divided into: (1) Public corporations, or such as are formed to promote public objects, as towns, counties, cities, states, etc.; (2) private corpo- rations, or corporations created by private individuals to promote and prosecute private enterprises. Private corporations are again divisible into: (1) Business or trading corporations; (2) ecclesiastical corporations, INTRODUCTION. 5 which, as such, are not known in America, though com- mon in England; and (3) charitable corporations; ■within the last classification may be embraced member- ship corporations, eleemosynary, religious, and social in- stitutions generally. A class of corporations exists which in fact lies be- tween the public and the private corporation. This in- stitution is known as the quasi-imblic or public service corporation. It is created by private individuals for private gain, with the object and purposes of promoting some public enterprise. Such institutions are railroads, canals, transportation lines, gas companies, turnpike companies, etc. These institutions are governed by the law affecting private business corporations, the only dis- tinction being that when a dispute arises between such a quasi-public corporation and the public, the law con- strues its rights and liabilities more strictly and ahvays more favorable to the public. Limited company. — This term is frequently used, and especially in England is the word limited placed after the name of the company. When used by a cor- poration it means that the liability of each shareholder is limited by the number of shares he has taken, so that he cannot be called upon to contribute beyond the amount of his shares. In England as well as in the United States the articles of association may provide that the liability of the shareholders, officers, and man- agers may be unlimited. The rule differs, however, for in England the word " limited " must be contained in the articles of incorporation, otherwise a full lia- bility corporation will be presumed, w^hile in the United States a limited liability company is presumed unless the articles of incorporation contain provisions to the contrary. j^o attempt will be made in these pages to treat of other than the private business corporation. It will em- C bLMMAKV OF LAW OF PRIVATE COKrOEATIONS. brace the general law applicable to stock corporations, business corporations, and quasi-public corporations. Some of the State statutes divide corporations in this way, and it may be of importance to make this inclusive statement, that the reader may properly appreciate the sco])e and character of the work. ^ ;3. Definition. — A corporation is a legal entity. " To frame a definition of any legal term which shall be both i:)ositively and negativ'ely accurate, is possible only to those who, having legislative authority, can adapt the law to their ow^n definition." ^ The wisdom of many text-writers and numerous decisions of courts both in England and the United States have furnished a mass of definitions of a corporation out of Avhich one may take his choice and not be far out of the way. All are more or less cumbersome, however. In framing a definition but one idea should be kept in mind — how shall we distinguish tlie institution from others of a similar nature and do it in the fewest words possible? A comparison of the many definitions used will show that all agree on at least two points — the corporation must be legal, i. e., exist by sanction of the government, and its members combined into an artificial unity or entity."^ The older writers seem to have agreed in de- fining a corporation by means of its faculties and pow- ers, asserting that five general powers must exist in order to have a corporation, to wit: (1) The power of succession, whereby the members elect or appoint their successors ; (2) the power to sue and be sued in the name of tlie corporation; (3) the right to purchase and hold real estate and personal property; (4) the right to enact by-laws for the government of the corporation in its 2. Lindley on Partnprship, p. 1. 3. Soo definitions of Blarkstone and Kent. Also 1 Kvd, 13; Aneoll & Amos (llth od.) . 1: Marshall. C. J., in Dartmouth Col- lepo Case, 4 Whont. 63fi; Toko, in Sutton Hospital Caso. 10 Repta. 28 ; Senator Hand, in GiflFord v. Livingston, 2 Denio. 295. I INTRODrCTIOISr. 7 dealings with its own members; and (5) the right to have a common seal. " Some of these are of trifling importance. The essence of a corporation is: (1) Per- petual succession under a special name and in an arti- ficial form ; ( 2 ) the power to take and grant property, contract obligations, sue and be sued by its corporate name as an individual; and (3) to receive and enjoy in common grants of privileges and immunities." ^ 'No particular form of words, in fact no express words are necessary to create a corporation.^ " If in- tent be evident, it is enough." ^ While this is true, there must be some way of ascertaining the faculties enjoyed by the corporation, and these being present, will deter- mine the nature of the institution irrespective of any name which may be conferred upon it or in use by it.^ These faculties may be more or less, as the grant of the government be specific or general, but in general may be gathered from an inquiry into three particulars : (1) Where is the title to the property? (2) Who acts? (3) Where does the liability rest — on the company or on the members individually ? If directly or by implica- tion it can 1)6 shown that the title to the property is vested in the company, as a company; that it is the company which acts, makes contracts, incurs liabilities, etc., and that the individuals who compose the company are not liable individually for its debts or obligations, then the institution is a corporation ; provided, always, that there be present the governmental sanction, either express or implied. § 4. The corporation vs. partnership. — ''A partnership is a voluniary contract between two or more persons for joining together their money, goods, labor, and skill, or any or all of them, in some lawful commerce or busi- 4. Thomas v. Dakin, 22 Wend. 9. 5. Conservators of River Tone v. Ash, 10 Barn. & Cress. 349. 6. Sutton Hospital Case, 10 Coke's Reports, 28. 7. Liverpool Ins. Co. v. Mass., 77 U. S. 566. 8 SUMMARY OF LAW OF PKIVATE CORPORATIONS. ness, imdor an iinclerstanding express or implied from the nature of the enterprise, that there shall be a com- munion of profits and loss between them." * Under the common law there were five fundamental differences between a corporation and a partnership: (1) A partnership is not an artificial person; (2) a chann:o of partners dissolved the firm ; (3) partners were individually liable for the debts of the firm; (4) each partner was the agent of the other in respect to the partnership business; and (5) a partnership required no special sanction for its existence. Not all of these differences exist to-day, though three of them remain true in their entirety. That a partner- ship is not an artificial person — in other words, an entity — has been disputed by many learned jurists and writers of modern days. A discussion of the ques- tion is not necessary here, for the reason that even if it be true, and this distinction between a partnership and a corporation be cast aside, the differences remaining are radical enough to answer all purposes. It is sub- mitted, however, that the weight of authority to-day is against the entity theory of a partnership. So, too, of the distinction that a partnership does not require a special sanction for its existence. Neither does a corporation, if the matter come to a question of hair splitting. Corporations to-day are usually created un- der general laws, and the statutes of most of the States contain partnership acts specifying how they may be created. " No legal institution exists save through the sanction or operation of the rules of law of which it is a manifestation." ^ Generally speaking, three differences exist to-day: First. No partner can retire from the partnership, ex- cept by mutual consent, without dissolving the partner- 8. Lindley on Partnership, p. 5. 9. Taylor on Corporations, p. 37. J I INTEODUCTION. 9 ship, while in a corporation the right of shareholders to transfer their holdings and rights ad libitum has always been recognized as a fundamental principle. Second. In a partnership each partner is the agent of each other and of the firm in respect to the partnership business, while in a corporation the only agents Avho can bind the corporation are those who are appointed by the directors, who in turn are so empowered by the shareholders. Third. Partners are " severally and individually " liable for all the debts of the firm, while the sharehold- ers have no liability for the debts of the corporation, save the liability of paying in full for the shares of stock for which they subscribe. This last rule has been qualified by two institutions of modern times, one of w^hich is rather uncommon, while the other is becoming a familiar and favorable in- stitution. The first is known as the " full liability cor- poration," provision for which is made by the statutes of several States.^*^ Under this statute shareholders may become liable as general partners, but it is necessary to incorporate the desire in the charter or articles, other- wise it will not be recognized. The second institution is the " limited partnership." Under statutes now exist- ing it is possible for a partnership to be formed where one or more of the members become general partners, with full and general liability, while the others have no liability beyond the amount of money contributed by them to the partnership assets.-*^ § 5. The corporation vs. joint-stock companies. — Xo distinction here exists save the one great distinction of liability. A joint-stock company is a corporation for all practical purposes, possessing the usual powers and faculties of a corporation, except that the shareholders 10. See Laws of N. Y. 1892, chap. 691, § 2. 11. See Laws of N. Y. 1897, chap. 420. 10 bUMMAKY OF LAW OF PKIVATE COE^OKATIO^'S. are severally and individually liable as partners for the debts of the concern. Save for this peculiar and radi- cal distinction the rules affecting corporations are gen- erally applicable to joint-stock companies. '' The words ' joint-stock company ' have never been used as descriptive of a corporation created by special act of the legislature, and authorized to issue certificates of stock to its shareholders. They describe a partner- ship made up of many persons under articles of asso- ciation, for the purpose of caiTying on a particular busi- ness, and having a capital stock divided into shares transferable at the pleasure of the holder." " The distinction between a corporation and an un- incorporated joint-stock association is that the creation of the corporation merges into the artificial body and drowns in it the individual rights and liabilities of the members, while the organization of a joint-stock com- pany leaves the individual rights and liabilities unim- paired and in full force. A joint-stock company is a partnership Avith some of the powers of a corporation." ^^ § 6. The corporation vs. the shareholder. — In stating that a corporation is considered as an entity, it has been taken for granted that it is so considered without regard to the members or shareholders who compose it. This is true at law as well as in the ordinary transactions of business, and has been so regarded from the earliest times. This is true as to a partnership from the stand- point of ordinary business, but the courts of law have not as yet recognized it. The corporation has been per- sonified, however, and regarded as a united body, the individuals composing it being regarded as component parts merely. " In most cases this is just as well as a convenient means of working out the rights of the real persons interested. However, it is essential to a clear understanding of many important branches of the law 12. Finch, J., in People v. Coleman, 133 N. Y. 274. INTEODUCTIOiS". 11 -of corporations to bear in mind distinctly that the exist- ence of a corporation independently of its shareholders is a fiction, and that the rights and duties of an incorpo- rated association are in reality the rights and duties of the persons who compose it, and not of an imaginary being." ^^ This distinction is usually recognized by answering the questions : Who contracts ? AVhere is the title to the property? Who owns the capital stock? ^Yho sues or is sued ? These questions are answered by the following several excerpts from leading cases : " The estate and rights of a corporation belong so completely to the body that none of the individuals who compose it have any right of o^^^lership in them, nor can dispose of any part of them." ^^ A shareholder owns no specific part of a thing. He has a share, but the title is owned by the corporation. '■'■ The money and property of a corporation belong to it and not to the individual members." ^^ ''A corpora- tion is a distinct entity, to be considered apart and sepa- rate from the individuals who compose it, and is not affected by the personal rights and obligations and trans- actions of its stockholders, and this whether said rights accrued or obligations were incurred before or subse- quent to incorporation." ^^ "A corporation and its shareholders are distinct legal entities. They are not responsible for the debts or the torts of the corporation. They cannot be parties in actions respecting corporate rights nor have they any title or direct interest in the property." ^"^ So, even if one man own all the shares of the corporation, the deed 13. Morawetz, chap. 1, § 1. 14. Williamson v. Smoot. 7 Mart^, (La.) 31. 15. Tomlinson v. Bricklayers' Union, 87 Ind. 308. 16. Moore & Handley Co. v. Towers Co., 87 Ala. 206; First Nat. Bank v. Wood, 86 "Hun, 491. 17. Keith v. Clark, 4 Lea (Tenn.), 718. 12 SUMMARY OF LAW OF PKIVATE CORPORATIONS. to the property must pass in the name of the corpora- tion.^^ " Shareholders are not joint-tenants, or in any other sense co-owners of the corporate property either before or after dissolution. The title rests in the legal entity called the corporation. A share of the capital stock merely gives the right to partake, according to the amount put into the fund, of the surplus profits of the corporation, and ultimately, on the dissolution of it, of so much of the fund thus created as remains unimpaired and is not liable for the debts of the corporation." ^" " It may be necessary at times to regard the indi- vidual shareholders as the real parties in interest, owing to the rights of creditors, and the obligations existing between a corporation and its shareholders by reason of their contract of membership ; but justice demands, as a rule, that a corporation be treated as a collective entity, without regard to its individual shareholders." ^^ It has often been stated that a corporation is to be compared to a trustee or cestui que trust. A corpora- tion docs not hold its property for its shareholders, but for its business, and within the limits of its powers has absolute disposal of it without regard to the shareholder. All that the shareholder can do is to keep the property or capital from being used otherwise than for the spe- cific purposes. 18. Humphrey v. McKissick, 140 U. S. 304. 19. Tlionipson on Corporations, § 1071. 20. Gallagher v. Brewing Co., 53 Minn. 214. CHAPTER II. (a) The Ckeatio:n" of a Corporation. (b) The Citizenship of a Corporation. (c) Corporations de Jure. (d) Corporations de Facto. (a) The Creation of a Corporation. § 7. General — The very essence of a corporation is that it should have incorporation under the authority of the laAV. Lord Coke, in the Sutton Hospital Case/ said this might be by four means : By common law, as the king himself ; by authority of Parliament ; by the king's charter, and by prescription. The right of the king to create corporations rests upon prescription.^ For many years in England corporations were created either by the Crown, or had existed and done business so long as corporations that the mind of man ran not to the contrary. The latter corporations were declared cor- porations existing by prescription. In later years, the power of the Crown to grant charters has been greatly abridged, and trading corporations in England are created either by a special or general act of Parliament. Whenever legislative power was invoked, it was done through a special act, and upon the introduction gen- erally of trading corporations this was the method of creation. From these methods sprang the idea of special sanction, which was originally one of the distinctions existing between a corporation and a partnership. To this special sanction we also owe the idea that to create a corporation is to create a law, and this can be done 1. 10 Coke's Reports, 28. 2. 1 Kyd, 44. [13] 1-1 SUMMARY OF LAW OF PRIVATE CORPORATIONS. only by the law-making body. In the United States this rule has been applied from the very inception, and obtains to-day in all of its rigor, save that special acts have been generally done away with by constitutional amendments, and the usual method is to create by means of general laws. § 8. Corporations in the United States — Under the United States Constitution no direct or express au- thority is found for the creation of corporations by Congress. But Congress may create corpora- tions as an incident to powers expressly granted to it. Given a constitutional object upon which Con- gress may lawfully act, and the means by which it is done are not inquired into. " Whether or not Congress can create a corporation depends upon the constitu- tionality of the object to be attained. If a corporation is a means of attaining that object, the courts cannot inquire into it." ^ In this way many corporations have been created by Congress, but always for the purpose of promoting some public object. National banks are the most common of the United States corporations, but some few railroads, post-road companies, dredging companies, and construc- tion companies exist by virtue of United States charters. § 9. Creation by State legislature. — The trading, stock, or business corporation generally is under control of the various States, and these have been and are created by the legislature. The right of the legislature to create is a definite right arising from the Constitution of the State, which Constitution defines the powers of the various branches of government. It may be taken away by the Constitution, but unless so taken away belongs to the legislature, and is incidental to the general law-making power of the State.^ It is 3. AloCuUagh v. Maryland, 4 Wheat. 316. 4. Franklin Bridge Co. v. Wood, 14 Ga. 80; Bank of Chenango V. Brown, 26 N. Y. 467. CKEATIOX OF A CORPORATION. 15 evident that given general authority to create corpora- tions, no restrictions are placed upon the legislature, and a special act or law applying to the particular cor- poration created was the original method of creation. This special act governed the creation, formation, and conduct of the cori^oration created, as well as the relationship existing between the corporation and the States, except that it could not contravene or nullify general laws already existing and applicable to corpora- tions generally. These special acts often gave particular corporations rights and immunities not possessed by others, and the abuse of this legislative authority has led, generally, to constitutional restrictions upon the legislatures. In a majority of the States of the Union to-day the legis- latures are prohibited from granting charters except in accordance with certain prescribed rules, and these rules generally prohibit the legislature from creating by spe- cial act, and provide for general laws applicable to the creation of all corporations. This may not prevent special acts for certain corpora- tions, however, unless the Constitution is express upon the subject. In ISTew York general corporation laws are in force, but the legislature has discretionary power to create certain classes of corporations by special act.^ A law may be general and yet confined to a particular and limited class of corporations ; as for instance, a gen- eral law governing elevated railroads in ISTew York would apply to only two companies in the State, though the same law would be applicable if more were created in other portions of the State than l^ew York city. § 10. Delegation of powers to create. — In England, Parliament, bound by no written constitution, may con- fer the power to grant corporate charters upon any per- son, but this is not so in the United States. A general 5. People V. Bowen, 21 N. Y. 517. IG SUMMARY OF LAW OK TKIVATE COKPOKATIONS. power to confer corporate charters cannot be delegated by the Icgishitiire to any other agency,^ the reason being that that authority to create must remain where located by the Constitution. But the legislature having en- acted that corporations may be created by complying with certain conditions, the duty of ascertaining whether the conditions have been complied with is a ministerial one and may be performed by any agency appointed by the legislature. In some cases this agency is a court, in others the secretary of state or other officer of the State. It is to be noted that the officer or court thus directed may not use his judgment to refuse applica- tions when the statutes have been complied with. The duty is both mandatory and directory,'^ for when the statutes come from the legislature, they are complete as laws, and do not depend for their force and efficiency upon the action or Avill of any other person. § 11. Creation under general laws. — Incorporation un- der general statutes must conform to the several require- ments of the statutes, which are really in the nature of conditions precedent to incorporation. A certificate which fails to comply with the essentials required will not be effective to bring the corporation into existence, nor will it be proof of its corporate existence.® This compliance with the statute need not be a literal one. If a substantial compliance, it is enough.^ Acceptance of Charter. § 12. A charter cannot be forced upon any body of persons who do not choose to accept it.^*^ The creation, of a corporation, though it come from the legislature, is 6. Franklin Bridge Co. v. Wood, 14 Ga. 80. 7. Idf>m. 8. People V. Selfridge, 52 Cal. 331; Fifth Baptist Church v. Baltimore, etc.. li. Co.. 4 Mackey (D. C), 43. 9. Thompson v. People, 23 Wend. 537 ; Bigelow v. Gregory, 73 111. 107. 10. Grant, p. 12. ACCEPTANCE OF CHARTER. 17 no corporation until the corporators ask for its creation or accept it when given, by doing acts to get it or acting in a manner to be judged as a corporation. An accept- ance must be shown either expressly or impliedly.^^ It cannot be accepted in part, for if this were so the cor- porators might accept benefits and reject obligations, thus being the creators themselves. ^^ Acceptance of a charter, to be binding, must be by the corporators in their constituent capacity. This is usually done at the first meeting of the stockholders after the charter has been received. It may be done impliedly by acting under the charter and pushing the corporation as a " going concern." When once accepted the corporation is then bound by all the laws in the general statutes and charter which may affect that class of corporations. Citizenship. § 13. The corporation as a citizen — " A corporation must be named of some place as will distinguish its situation from that of others." ^^ This was the ancient law in England, but it has been very gen- erally lost sight of, save perhaps, in the case of certain membership corporations.^* Being an arti- ficial person, a corporation has not the status of a natural person, and is naturally a citizen only of the State or place which created it. Time and again it has been held that a corporation is not a citizen within the Fourteenth Amendment of the United States Constitu- tion, which allows citizens of one State the same priv- ileges and immunities as are enjoyed by citizens of other States against legislation by the State into which the 11. Aspinwall v. Davies, 22 How. 364; Ellis v. Marshall, 2 Mass. 269; State v. Dawson, 16 Ind. 40. 12. Rex V. Westwood, 4 Barn. & Cress. 781. 13. Bacon's Abr., title Corporations, 2. 14. Grant, p. 54. 2 18 SUMMARY OF LAW OF PRIVATE CORPORATIONS. corporation goes or transacts business. ^'^ But a corpora- tion is a citizen to the extent that it cannot be deprived of the equal protection of the laws.^*^ § 14. Corporate residence — The residence of corpo- ration is within the place or State of its creation. It has no legal Cuxistence outside of that State. It exists only in contemplation of law and by force of law, and where the law ceases to operate it can have no existence — it must dwell in the place of its creation. ^^ " The residence of a corporation, if it can be said to have a residence, is necessarily where it exercises its corporate functions. It dwells in the place where its business is done. It is located where its franchises are exercised." ^^ To properly understand this last state- ment, it becomes necessary to understand what is meant by " corporate functions." That a corporation may do business in another State than that which created it is self-evident, unless restricted by its charter or the law. It is evident that by " corporate functions " is meant those corporate acts M'hich are necessary to the organiza- tion, the existence of and the final dissolution of the corporation. These, unless express permission be other- wise given, must be performed within the State.^'' This would include the acceptance of the charter, the election of directors, resolutions as to mortgaging the property, increasing or decreasing the capital stock, applying for larger powers, and proceedings for dissolution. All must be done at meetings of the stockholders held within the State of its creation. A further distinction must here be made between cor- porate acts and the acts of the agents of the corporation. " It seems well settled by the weight of authority that 15. Orient Co. v. Daggs. 172 U. S. 557. 16. Railway Co. v. Gibbs, 142 U. S. 386; Railway Co. v. Mackav, 127 U. S. 205. 17. Bank of Augusta v. Earle, 13 Pet. (38 U. S.) 519. 18. Bristol V. Chicago, etc., Ry. Co., 15 111. 436. 19. Miller v. Ewer, 27 Me. 509'; Freeman v. Machias, etc., Co., 38 id. 343; Smith v. Silver Mining Co., 64 Md. 85. CITIZENSHIP, 19 directors may hold meetings, have an office, make con- tracts, and transact a part, at least, of the general busi- ness of the corporation in another State, unless pro- hibited by local legislation. But the directors when so acting are not the corporate body, but its mere agents. ]^or do we think it makes any difference as to the opera- tion of this rule, that the named corporators, as in this case, are empowered by the charter to manage the affairs of the corporation, and to exercise all such rights as the charter grants, " as directors/' until others are elected. The two capacities of corporators and directors are dis- tinct, and they cannot do in the latter those acts which the law requires them to do in the former capacity." ^^ Statute or the charter itself may allow some of these " corporate functions " to be performed outside of the State, but imless express permission be so given, such acts are held to be void.^^ Some difficulty may arise under the consolidation statutes. For instance, a separate corporation may be formed for the same purpose, say a railroad company, in each of several States. By the consolidation statutes these several companies may consolidate under one man- agement, and one common capital stock, with the same individuals as owners, and to all appearances the com- pany be one entire and complete corporation. Suppose they take the name of one of the companies, which was organized under the laws of one of the several States. Does this make the combined company a corporation of this particular State, or is it a corporation of each of the States ? The weight of authority holds that a corpora- tion may not have two domiciles and cannot be the same legal being in two States, even though it be spoken of in the laws of the two States as one corporate body. It is a distinct corporation in each State.^^ 20. Smith v. Silver, etc., Co., 64 Md. 85. 21. Idem. 22. Ohio, etc., Ry. Co. v. Wheeler, 1 Black. (66 U. S.) 286; People V. New York, etc., Ry. Co., 129 N. Y. 474. 20 SUMMARY OF LAW OF PRIVATE CORPORATIONS. § 15. Citizenship in the United States courts. — From the United States jurisdictional standpoint a cor- poration is regarded as a citizen of the State in which it was created. So, too, the shareholders are regarded as citizens of the State in which the corporation was created, irrespective of their actual residence or citizen- ship. Further, the corporation is regarded as a citizen of that Federal district in which its principal office is located, and actions between a citizen and a corporation, the one a resident and the other having its principal office in the same district, will not lie unless the district embrace two or more States, and the citizen and cor- poration be citizens of the different States.^^ The juris- diction of the Federal courts is defined by the Constitu- tion, and where actions arise between citizens, thej must be residents of different States to avail themselves of these courts. To such an extent a corporation is a citi- zen, and, as has been said above, is entitled to the equal protection of the laws. Corporations de Jure. § 16. By this temi is meant corporations that are created by law, and in full and complete compliance with all of the provisions of the law. It has already been observed that when cor|iorations are created either by special act or under general laws, the rules prescribed in the laws must be substantially complied with, other- wise there will be a defect in the organization which may prove disastrous in the end. For this purpose the rules or conditions prescribed in the laws may be divided into conditions precedent, i. e., those rules which must be complied Avith to lawfully and completely incorporate, and conditions subsequent, or rules or conditions which 23. Shaw V. Quiney Mining Co., 145 U. S. 444; Galveston, etc., Ey. Co. V. Gonzales, 151 id. 496. COKPOBATIONS DE JUKE. 21 should be fulfilled after incorporation in order to com- plete. These conditions subsequent are divisible into conditions mandatory and conditions directory. By way of illustration, let us suppose the following : By a spe- cial act a railroad company is created under the follow- ing rules or conditions. (1) Articles of incorporation must be filed within one month from passage of act, and shall contain the names of all directors for the first year, and further show that ten per cent, of the capital stock subscribed for has been paid in to the company. (2) The company shall pay to the State treasurer one-eighth of one per cent, as incorporation tax upon the submis- sion of the articles of incorporation. (3) The articles must be subscribed by five or more persons, and acknowl- edged by each. (4) The call for the first meeting of the stockholders must be made by a majority of the sub- scribers of the articles. (5) The company is to com- mence operations within one year, and to have the road completed within five years. Here 1, 2, and 3 are conditions precedent, and no in- corporation can take place save by a substantial com- pliance with these conditions. It will be noted that upon the compliance with these conditions a charter is actually issued to the incorporators, and it is in their hands. The remainder of the acts must be done, but are subsequent to the receipt of the charter, which has already declared them to be a corporation. Four and five are then conditions subsequent. Four is a condition subsequent and directory, designed to secure to the mem- bers the rights conferred by law. If they waive that right, and attend a meeting called by one subscriber, no harm is done, and no serious result will follow. Five is a condition subsequent and mandatory from the stand- point of the State. No creditor or third party could take advantage of it, but the State may say, " You have not fulfilled the conditions prescribed," and annul the 22 SUMMAKY OF LAW OF PRIVATE CORPOKATIONS. charter. So far as the public is concerned, acceptance of a present grant, though it be subject to conditions sub- sequent, will be enough.^ *' There is a broad and obvious distinction between such acts as are declared to be necessary steps in the process of incorporation, and such as are required of the individuals seeking to become incorporated, but which are not made prerequisite to the assumption of corporate powers. In respect to the former, any mate- rial omission will be fatal to the existence of the cor- poration, and may be taken advantage of, collaterally, in any form in which the fact of incorporation can properly be called into question. In respect to the latter, the cor- poration is responsible only to the government, and in a direct proceeding to forfeit its charter." ^^ Corporations de Facto. § 17. Defined. — A corporation de jure is one which is invulnerable if assailed by the State.^^ From this it follows that there is a class of coroprations vulnerable if assailed by the State, and this class is called by the name. Corporations de Facto. It is easily possible to conceive a group of incorpo- rators who organize themselves as a corporation, transact business, and hold themselves out to the world as a corporation. If this have been done under color of law, i. e., an apparent attempt to perfect a cor- poration under the law, coupled with an intention to so incorporate, and the transaction of business as a corpora- tion, the failure to fulfill some substantial requirement will prevent it from being a corporation de jure, but it 24. See People v. Water Co., 97 Cal. 276; People v. Selfridore, 52 ifl. 331; Newcomb v. Reed, 12 Allen, 362; Guckert v. Hacke, 150 Pa. St.. 303. 25. MokehiTTine Hill, etc., Co. v. Woodbury, 14 Cal. 424. See also Oranhv ]\fininfr Co. v. Richards, 95 Mo. 111. 26. See 24 L. R. A. 259. I J COEPOEATIONS DE FACTO. . 23 will be declared a corporation in fact or de facto. The reason behind this is the general one of public policy. An extreme illustration might be a railroad company associating under a special act which required accept- ance within a specified or limited time. The acceptance was not made until some time after the time specified, where the privilege had been revoked by constitutional authority. Ignorant, perhaps, of this, the incorporators went ahead, issued stock and bonds, bought and graded the roadbed, bought rolling stock, and proceeded to carry on the road in good faith. It could not be a cor- poration de jure, for the omission was fatal, but public policy forced the idea that it was a corporation in fact, and as such might continue doing business, until assailed by the party whose laws had been disregarded, viz., the State.^^ To declare otherwise would mean severe hard- ship and loss to the community, to the shareholders, to the contractors, to the creditors and to the public, for it would be absurd on the part of the State to attempt to compel the placing of all parties in their original statu quo. So a corporation de facto is one, the formation of which was irregular, i. e., not in compliance with condi- tions precedent and mandatory. To make a corpora- tion de facto, three elements must be shown: (1) a law under which the cor^Doration might have been organized as a corporation de jure, if all conditions prescribed had been complied with; (2) an intention on the part of the incorporators to not only create a corporation, but to comply with the law; and (3) user on the part of the corporation, i e., the transaction of business and the holding ^^ of themselves out to the world as a corporation. 27. State v. Dawson, 16 Ind. 40. 28. Church v. Pickett, 19 N. Y. 482; Taylor on Corporations, p. 145 : Finnegan v. Naerenberg, 52 Minn. 239 ; Marsh v. Mathias, 19 Utah, 350 TEe Gibbs' Estate, 157 Pa. St. 59. 2-i SUMM^VKY OF LAW OF TKIVATE C0RP0RAT10^■S. The cases most frequently cited on this subject are those where some third part;^ — creditors — have dealt with the corporation as such, and, finding some irregu- larity in the incorporation, have sought to hold the in- dividual members as partners. But this has been met by the answer that the State is the only party whose laws have been violated, and is therefore the only party who can inquire into the matter. § 18. Who may raise the question and when — The State may, if it sees fit, waive a strict compliance with the terms of the statute or charter, and may elect whether it will insist upon a forfeiture, if there has been a breach of condition.^^ It it does not elect to forfeit, no party, creditor or otherwise, having dealt with the corporation as such, will be allowed to question the validity of the corporation. This position is based on the principle of estoppel, that when one has done an act, or made a statement, Avhich it would be a fraud on his part to controvert or impair, and such act or statement has so influenced any one that it has been acted upon, the party making it will be cut off from the power of retraction.^^ The courts therefore are bound to regard a com- pany incorporated according to all the required forms of law as a corporation so far as third persons are con- cerned until it is dissolved by a judicial proceeding in behalf of the government that created it; and until its franchises have been adjudged in proceedings at the instance of the State not to exist, it is a coi*poration de facto at least.^^ So contracts of a de facto corpora- tion, and the acts generally of the corporation acting itself or through its officers or agents, may be enforced 29. Briggs v. Cape Cod Co., 137 Mass. 71, and cases cited therein. 30. Richardson v. Baldwin, 1 Zabr. (X. J.) 397. 31. Laflin v. Powder Co.. 4G Md. 315; Frost v. Coal Co., 24 How. (65 U. S.) 278; Cochran v. Arnold, 58 Pa. St, 399. COKPOEATIONS DE FACTO. 25 by and against the corporation the same as if it were a corporation de jure.^^ Of course, it follows that if a third party cannot question the validity of a corporation with which he has contracted, much less can a shareholder question the regularity of it. And this not only on the ground of estoppel, but also because it would be a fraud upon his associates. In States where corporations are created by special act, and in States where the Constitution does not absolutely and expressly prohibit the creation by special act, there is nothing to prevent the legislature from passing an act validating the corporate acts and declar- ing the coi-poration to be de jure. This has been done many times.^^ But if the State be expressly pro- hibited such an act would, it seems, amount to the creation of a corporation by a special act, and there- fore unconstitutional.^* Several comparatively recent decisions have met a peculiar situation heretofore ex- isting. In Michigan a number of baniking associations were formed under a law which was afterward de- clared unconstitutional. In actions against the banks it was held that they were neither de facto corporations, nor could the members be sued as partners.^^ Tbey were not de facto, because it was held that there must be an attempt to organize under a valid law. The re- sult was that the members of these associations escaped liability in all directions, though the decisions have been justly criticised.^^ 32. Doty V. Patterson. 155 Ind. 60. and cases therein cited. 33. Shaw V. Norfolk Ry., etc., Co.. 5 Gray (Mass.). 162: Black River, etc., Rv. Co. v. Barnard. 31 Barb. (K Y.) 258; Koch v. North Ave. Ry. Co., 75 Md. 222. 34. Oroville, etc., Ry. Co. v. Supervisors. 37 Cal. 354; Potts v. Delaware, etc., Co.. 9 IST. J. Eq. 592. But see Koch v. North Ave. Ry. Co.. 75 Md. 222, supra. 35. Greene v. Graves. 1 Doug. 351 ; Hnrlburt v. Britain, 2 id. 191 ; State v. Howard, 1 Mich. 512. 36. 1 Thompson, § 506, 26 SUMMARY OF LAW OF PRIVATE COEPOEATIONS. The -weight of authority is in favor of the state- ment that a valid law must exist under which the coq>oration could have been organized, otherwise a corporation cannot exist even de facto. A de facto corporation can never be recognized in violation of positive law.^^ On the other hand it has been held in some cases that the assmnption and exercise of corporate powers under an unconstitutional statute creates a de facto corporation,^^ but it is believed that this statement is too broad, and the cases so holding are easily dis- tinguished from the general and almost unanimous weight of authority. " Where a corporation exists de facto, and in fact ex- ercises corporate powers, the question whether it ex- ercises such powers lawfully cannot be litigated in a collateral proceeding between private parties or be- tween a private party and a corporation; the question can only be litigated between the corporation and the State. The tenn ' collateral proceeding,' in the state- ment of this principle, is used to designate cases where the question of the existence of the corporation is in- cidental or collateral to the main object of the suit, and the oft-repeated reason of the rule is the incon- venience of trying the question of the right of an as- sumed corporation to exist, where the question arises as a mere incident to a private litigation, and where the State, which is chiefly interested in the question, is willing that it should exist." ^^ The question of corporate existence must be raised by the State itself. This may be done by quo warranto proceedings, by a writ of scire facias, or by the plea of 37. Jones v. Aspen Hardware Co., 21 Colo. 263; Georgia, etc., Rv. Co. V. Mercantile, etc.. Co.. 94 Ga. 306; Chicora Co. v. Crews, C'S. C. 243; Bradley v. Rcppoll, 133 Mo. 545. 38. Coxe V. State. 144 X. Y. 30G : Rmith v. Sheeley. 12 Wall. (83 U. S.) .358; Wingot v. Quincy. etc.. Co.. 128 111. 67. 39. 1 Thompson on Corporations. § 502, and cases cited. COKPOEATIONS BY ESTOPPEL. 27 nul tiel corporation; or an express act of the legisla- ture may forfeit the charter. If it he done by way of one of these writs, the court must decide. Until a competent judicial authority, in a direct proceeding by the State, or the legislature has expressly declared to the contrary, the corporation still exists as to third persons. The decisions affecting the question of de facto cor- porations throughout the United States are numerous and conflicting in their views and theories. It is be- lieved, however, that the weight of authority is in favor of the Dropositions advanced. CORPOEATIONS BY EsTOPPEL. § 19. It has already been stated that where third parties deal with a corporation as such they are estopped from denying the existence of the corpora- tion.^ The rule works both ways, and a corporation cannot, in an action against it, set up the fact of non- incorporation.*^ iSo, too, a shareholder is prevented from denying the existence of his corporation on the ground of estoppel.*^ These statements, unquestionably law, have caused a judicious and able writer on the subject to coin the expression " corporations by estoppel." '*^ It will be noted that the expression is of value only as between the cor|:)oration, its shareholders, and third parties, or the public. It can have no meaning as between the State and the corporation, the State having the right at all times to step in and question the legality of the corporation. 40. Commercial Bank v. PfeiflFer, 108 N. Y. 242; Chubb v. Upton, 95 U. S. 665; Bank v. McDonald, 130 Mass. 264. 41. Ewincr V. Robeson, 15 Ind. 26; Rush v. Steamboat Co., 84 N. C. 702 ; De Witt v. Hastings, 40 N. Y. Super. Ct. 463. 42. Slocum V. Pipe Co., 10 R. I. 112, 116. 43. See Thompson on Corporations (vol. 1), §§ 518-533. 28 SUMMAUY OF LAW OF PRIVATE COKPOKATIOXS. There are exceptions to the rules above stated, how- ever. Tho subject is limited to cases of de facto cor- porations, and it seems that if there be no law authoriz- ing the creation of the corporation,^ or the corpora- tion has expired by lapse of time, the exercise of cor- porate powers may be questioned collaterally.'*^ 44. Heaston v. Cincinnati Ry. Co., 16 Ind. 275; Thompson, § 523. 45. Mumma v. Potomac Co., 8 Pet. (33 U. S.) 281; Thompson, § 530. CHAPTER III The Corpokation and the State. § 20. The dominant principle underlying our govern- ment is that all men have a natural and inherent right to life, liberty, and property, and that any interference with this inherent right cannot be justified except as a means of securing the most effectual enjoyment of these rights to all. This principle has received the sanction of the law of our land, by being enacted into constitu- tional form, and appears in all of its phases in the United States Constitution, and thence incorporated in the various State Constitutions. So far as these affect corporations, they may be found in the United States Constitution, as follows : Sec. 10, art. I. " N"o State shall * * * pass any ■'^ * * law impairing the obligation of contracts." Fifth Amendment: — 'Ro person shall " be deprived of life, liberty, or property without due process of law; nor shall private property be taken for public use without just compensation." Fourteenth Amendment : — iN"© State shall " deprive any person of life, liberty, or property without due process of law, nor deny to any person within its juris- diction the equal protection of laws." The first question involved under the subject of this chapter is, What is the relationship created between the State and the corporation, by the granting of the fran- chise or charter, and the acceptance thereof by the cor- poration ? A franchise is defined by Bouvier as " a par- ticular privilege conferred by grant from government, and vested in individuals." ^ Granted by sovereign 1. 1 Bouvier (15th ed.), 687, citing 3 Kent, 458. [29] 30 SUMMARY OF L<\.W OF PRIVATE CORPORATIONS. power, it can be forfeited and taken away by the same power, unless the sovereign power be confined by a writ- ten constitution. It here becomes important to note a distinction between a grant of a corporate franchise and a grant of mere personal privileges to individuals. In our law, the former grant, extended to the incorporators and accepted by them, has been declared to be a contract which is protected by the Constitution, while the latter are not so protected, and may be withdrawn by the sov- ereign power, at will. The early decisions of the State courts did not take this ground, nor draw this distinc- tion, but declared that no such distinction existed. But the United States Court declared, in the famous Dart- mouth College Case, decided in 1819, that a franchise or charter was a contract within the protection of section 10, article I of the Constitution, and, as such, no State could pass laws impairing the obligations of such con- tracts. Modern text-writers and the best legal minds unite, to-day, in declaring this case to be wrong. In the decisions handed do\\Ti by Marshall, C. J., and Story, J., no exact terms of contract were pointed out, and it is apparent that a contract was assumed by them. It was impliedly held a contract on the ground that the agree- ment between the donors and the beneficiaries, of which the trustees are the legal guardian, might in some way be impaired. The essential elements of a contract are wanting. The franchise is merely a legal right, or priv- ilege, given without compensation. Of course, a fran- chise might be a contract, were consideration given for it, and the relationship thus expressly created. But it were as well to say that a treaty entered into between two countries is a contract, when all agree that it may be cut short by the same power that made it. But while the court was wrong in the decision, it is nevertheless true that the flecision has been binding law in this country from that day to this. " The doctrine thus settled is that THE COEPOEATION AND THE STATE. 31 whenever the sovereign power for the time being and within the legitimate sphere of action grants to a body of men the franchise of a corporation, or any other species of franchise, privilege, or license in the nature of property, and the grantees accept the grant, such fran- chise, privilege, or license is within the constitutional protection in such a sense that it cannot thereafter be repealed or revoked by any form of State action against the consent of the corporation." ^ The exact question to-day is of little importance to us because immediately upon the handing down of this decision, every State enacted legislation w^hich took the franchise out of the domain of contract, by declaring that all franchises gTanted thereafter should be subject to repeal or alteration. It is this, perhaps, Avhich has caused the peculiar doctrine to remain in tact to this day. But whether there be a contract between the State and the corporation or not, there is always the contract between the members of the corporation, which contract finds its foundation in the franchise issued by the State. The shareholders mutually agree to unite for the pur- poses indicated in the charter, each agreeing to con- tribute his proportionate share and thereby become en- titled to a share in the profits and management. This is a contract, and as such comes within the constitutional prohibition. States may not impair this contract, for to do so would be to take away property rights which are protected by the Constitution, in that it would be done without due process of law and without just compensa- tion. But this entire doctrine of contract is qualified in four ways, so far as trading or business corporations are concerned. (a) By the reservation of a right to repeal, alter or amend the franchise or charter. 2. 4 Thompson, § 5381. See also article 26 Am. Law Rev. 172. 32 SUMMARY OF LAW OF PRIVATE CORPORATIONS. (b) Bv repealing or altering prior to acceptance by the incorporators. (c) By the police power and (d) By eminent domain. Interpeetatiox of Charters. § 21. The charter of a corporation usually defines its rights, powers, and acts. In the interpretation of these charters, the general rule is that they should be construed neither strictly nor liberally, but according to the fair and natural import of it, with reference to the purposes and objects of the cori:)oration.^ But a distinction must here be made between the ordinary business or trading corporation and a quasi-public corporation. In the latter, duties are owing to the public, and the public is entitled to any and all benefits that are impliedly or constructively in its favor. In other words, if the dis- pute is one in which the contention, if secured, would be against common right, then the usual and general rule is to construe the charter strictly and in favor of the public, but not to the extent of impairing or defeating the objects of the corporation.^ In this particular no exclusive privilege, no sanction to smother competition, no divesting of rights to make public improvements will be implied on the part of a corporation. Unless such rights appear in express words, public policy forbids their implication. " The whole community are inter- ested in this inquiry, and they have a right to require that the power of promoting their comfort and of ad- vancing the public prosperity * * * shall not be construed to have been surrendered or diminished by the State unless it shall appear by plain words that it was intended to be done." ^ To this end a State may use 3. Enfield Bridge Co. v. Railway Co.. 17 Conn. 454. 4. Do^^^^in£r v. Mt. Wash. Co., 40 N. H. 230; Strowbridge Canal Co. V. \^Tnoelinr, 2 B. & A. 792. 5. Storv. ■!., in Charles River Bridge Co. v. Warren Bridge Co., 11 Pet. 420. INTEEPKETATION OF CHAETEK. 33 its power in the welfare of its citizens, pass such regu- lations and create new corporations ; may even divest vested rights, so long as it does not impair the obligation of contracts.® For legislative grants are not to be en- forced or enlarged beyond the fair meaning of the lang-uage used. "All rights which are asserted against the State must be clearly defined and not raised by in- ference or presumption ; and if the charter is silent about a power, that power does not exist. If, on a fair read- ing of the instrument, reasonable doubts arise as to the proper interpretation to be given it, those doubts are to be solved in favor of the State, and where it is suscep- tible of two meanings, the one restricting and the other extending the powers of the corporation, that construc- tion is to be adopted which works the least harm to the State. But if there is no ambiguity in the charter and the powers conferred are plainly marked, and their limits can be readily ascertained, then it is the duty of the court to sustain and uphold it, and to carry out the true meaning and intention of the parties to it." "^ The Power to Repeal, Alter, or Amend. § 22. The power to repeal, alter, or amend a charter on the part of the State was for the purpose of obviating the Dartmouth College rule, and is simply a reservation by the State for the benefit of the public, and can be exercised and taken advantage of only by the State.^ This reservation qualifies the grant of a charter, pre- vents it from becoming a contract in fact, though if it still be insisted that a charter is a contract, this reser- vation becomes part and parcel of it, the charter being accepted subject to it. 6. See Providence Bank v. Billings, 4 Pet. (29 U. S.) 514. 7. Davis, J., in Binghanipton Bridge Co. Case, 3 Wall. (70 U. S.) 51; Parrott v. City of Lawrence, 2 Dill. (U. S. C.) 332. 8. Zabriskie v. Baldwin, 18 N. J. Eq. 178. 3 3-i SUMMAKY OF LAW OF PRIVATE COKPOKATIONS. The answer to the question as to how this power may be exercised will depend upon the language of the reserving statute. If it appear to be " at the pleasure of the legislature," as it did originally in the Massa- chusetts statute, or states that the legislature may alter or revoke whenever, " in their opinion," it may be in- jurious, and others equally as strong, the power may be exercised summarily and without limitation or re- striction.^ But let the question be decided as it may, it stands to reason that a legislature cannot force an amendment or alteration upon a corporation' unless, the corporation sees fit to accept it. The corporation may decide to dissolve, and for this reason the amendment or alteration becomes operative only upon its acceptance. ^^ Subject to the peculiar phraseology of the statutes above stated, however, the general rule seems to be that the power of the legislature is limited. The power can- not be so exercised as to destroy rights which have be- come vested under the charter, except those rights are within the direct terms of the charter, nor can it be exercised unless some public interest demands it. § 23. Extent of the power. — " Personal and real property acquired by the corporation during its lawful existence, rights of contracts or choses in action so acquired, and which do not in their nature depend upon the general powers conferred by the charter, are not destroyed by such a repeal ; and the courts may, if the legislature does not provide some special remedy, en- force such rights by the means within their power. The rights of the shareholders of such a corporation to their interests in its property are not annihilated by such a repeal, and there must remain in the courts the power to protect those rights." " 9. Lothrop V. Stodman. 42 Conn. 583. 10. Sa?e V. Dillanl. 1."^ B. Mon. (Kv.) 340. 11. Grecmvood v. Freight Co., 105 U. S. 13. POWER TO EEPEAL AND ALTER. 35 " The principle * * * is that the legislature may change or modify the privileges and franchises which the State has gTanted to the corporation, and which con- cern the interests of the public ; but dealing with what it has bestowed, either by way of withdrawal or of alter- ation, the State may not go further, and so legislate as to disturb, affect, or impair rights either of the corporation or of its shareholders, previously acquired, while the corporate functions were being lawfully exercised. All rights thus acquired, of whatever character, are sur- rounded and protected by constitutional sanctions and guaranties higher and superior to the legislative power of amendment or repeal." ^^ The extent of this reserved power to repeal or alter may be stated as follows : Repeal may be had for mis- use or abuse ;^^ alterations and amendments may bo made when necessary to carry into effect or accomplish the purposes for which the charter was obtained.-^^ Such alterations and amendments may be within the scope of the subjects of taxation and the police power; they may be penal in their nature, or of any other nature affecting the rights, privileges, and immunities derived by its charter directly from the State. As affecting contracts, the rule is a general one that the legislature may not deprive the beneficiaries under the corporation of its property, or interfere with or annul its contracts with third persons, except so far as executory contracts are necessarily determined by the termination of the existence of the corporation.'^^ An interesting question here arises as to corporations vested with rights and privileges which are secondary in their nature, resting as they do upon the primary 12. Hill V. Glasgow Ry. Co., 41 Fed. 610. 13. Erie, etc., Ry. Co. v. Casey. 26 Pa. St. 287. 14. Covington v. Covinsrton Bridge Co.. 10 Bush fKy.). 60. 15. 4 Thompson. § 5414. citino: New York v. Twentv-third St. Rv. Co.. 113 N. Y. 311, etc.; Mumma v. Potomac Ry. Co., 8 Pet. (33 U. S.) 281. 3G SUMMARY OF LAW OF PRIVATE CORPORATIONS. right to be a corporation. An illustration of such a seo- ondary franchise may be found in a corporation char- tered with power to operate a railroad in the streets of a city. The original charter carries with it the right to existence as a corporation. The right to use the streets must come from the municipality, and may be termed a secondary franchise. Suppose the primary franchise to be extinguished either by repeal or limitation, does the secondary fran- chise still remain to the estate of the corporation ? In Greenwood v. Freight Company the court said: " Whatever poM^er is dependent solely upon the grant of the charter, and which could not be exercised by unin- corporated private persons under the general laws of the State, is abrogated by the repeal of the law which granted these special rights." And this is in accord with the general rules of interpretation which have obtained from a very early period, and has the virtue of the weight of authority behind it. Yet in New York it seems that such a grant is to bo construed to be in the nature of an estate in fee in real property, and this sec- ondary franchise received from a municipality to oper- ate a railroad in the streets of a city is declared to be a grant in perpetuity, even though the primary fran- chise was granted for a limited period only and was eventually taken away for gross abuse and corruption. ^^ In tlie light of precedent, the decision has no substan- tial foundation, and is not likely to become the law outside of tlie State of Xew York. " Personal and real property acquired by the corpora- tion during its lawful existence, rights of contract, or choses in action so acquired, and which do not in their nature depend upon the general powers conferred by the charter, are not destroyed by such a repeal ; and the courts may, if the legislature does not provide some 16. People V. O'Brien, 111 N. Y. 1. I THE POLICE POWER. 37 special remedy, enforce such rights by the means within their power." ^^ § 24. Repealing or altering prior to acceptance by the incorporators. — It is self evident that this may be done ; and under any principle, whether of contract or license or privilege; an offer may be withdra'^Ti or altered be- fore acceptance. iSo, too, a license or privilege ex- tended may be altered or repealed. The Police Powek. § 25. Definition and scope. — " There is a power abid- ing within the State to legislate so as to affect the cor- porate powers conferred by charter or statute, although such power may not be specially reserved, either in the charter, the Constitution, or the general law. This is the power to pass laws for the promotion of the general peace, health, and good order of the community, which laws are generally denominated police regulations J' ^^ " Many attempts have been made in this court and elsewhere to define the police power, but never with en- tire success. It is always easier to determine whether a particular case comes within the general scope of the power than to give an abstract definition of the power itself, which will be in all respects accurate. ISTo one denies, however, that it extends to all matters affecting the public health or the public morals. ■^^ " 'No legislature can bargain away the public health or the public morals. The people themselves cannot do it, much less their servants. The supervision of both of these subjects of governmental power is continuing in its nature, and they are to be dealt with as the special exigencies of the moment require. Government is organized with a view to their preservation and cannot 17. Greenwood v. Freifrht Co., supra. 18. 4 Thompson. § 5470. 19. Stone v. Miss., 101 U. S. 814, citing Beer Co. v. Mass., 97 U. S. 25. 38 SUMMARY OF I^VW OF PRIVATE CORrORATIONS. divest itself of the power to provide for them. For this purpose the largest legislative discretion is allowed, and the discretion cannot be parted with any more than the power itself." ^"^ The police poAver is then an inalienable part of gov- ernment itself, upon which depends " the security of public order, the life and health ©f the citizen, the com- fort of an existence in a thickly populated community, the enjoyment of private and social life, and the bene- ficial use of property." ^^ Its limitations are indefinable. " It extends to the protection of the lives, limbs, comfort, and quiet of all persons, and the protection of all property within the State." 22 Coi*porations stand upon the same plane with in- dividuals in respect to this power. Even though no reservation clause exist in statute or charter, the cor- poration must give way to this power. " Irrevocable grants of property and franchises may be made if they do not impair the supreme authority to make laws for the right government of the State; but no legislature can curtail the power of its success- ors to make such laws as they may deem proper in matters of police." ^ ■So every grant of corporate power implies " the con- dition that the corporation shall be subject to such reasonable regulations, in respect to the general con- duct of its affairs, as the legislature may from time to time prescribe, which do not materially interfere "U'ith or obstruct the substantial enjoyment of the privi- leges the State has granted, and serve only to secure the ends for whicli the corporation was created." ^^ 20. Stone v. iliss., supra. 21. Slauphtpr House Cases, 16 Wall. (83 U. S.) 36. 22. Thorpe v. Railway Co.. 27 Vt. 140. . 23. Board of Excise v'. Barrie. 34 N. Y. 6.=)7. 24. Chicago Ins. Co. v. Needles, 113 U. S. 574. THE POLICE POWEK. 39 § 26. Limitations upon. — .But there are limits to this power. Xumerous cases uphold the statement that the power, if exercised, must be reasonable and necessary. '' It seems to be universally agreed that there are two limitations upon the police power of the legisla- ture: (1) That the subject of its exercise must have some relation to the peace, the health, the good order, or the morals of the community; and (2) that it must be exercised, at least, apparently or presumptively, upon grounds which are reasonable and necessary." ^ It has been held that the power properly extends to the preservation of health, as in laws regarding foods, drinks, water supplies, fire limits, etc.; to moral- ity, as in gambling, lotteries, local option, etc.; to the employment of women and children; to the protection of labor as evidenced by the lien laws, hours for la- bor, wages paid by municipalities, etc.; to protection of property, both real and personal; to the regulation of insurance rates, reserves, etc. ; and in the matter of railroads, to regulations affecting the location and con- dition of stations, speed of the trains, grades, heat- ing, lighting, color blindness, and the fijdng of tolls and charges. It is in this last, the fixing of tolls and charges, that limitations have been found, beyond which the^ poKcs power cannot go. " This power to regulate is not a power to destroy, and limitation is not the equivalent of confiscation. Under pretense of regulating fares and freights, the State cannot require a railroad cor- poration to carry persons or property without reward; neither can it do that which in law amounts to a taking of private property for public use without compensa- tion or without due process of law." ^^ 25. 4 Thompson, § 5478, and cases cited. 26. Raih-oad Commission Cases, 116 U. S. 307. See also Chi- caffo, etc.. Ry. Co. v. Minn.. 134 id. 418; Grand Trunk, etc., Ry. Co. V. Wellman, 143 id. 339; Regan v. Farmers, etc., Co., 154 id. 362. 40 SUMMAKY OF LAW OF PRIVATE CORrORATIONS. Eminent Domain. § 27. Eminent domain is to be distinguished from the police power in that the former is but a function of or incident to government, wliile the latter is part and parcel of government itself. It is thus distin- guished because it can be delegated by the State, while the police poAver camiot be parted Avith. " Under every established government, the tenure of property is derived mediatel}- or immediately from the sovereign power of the political body, organized in such way as the community or State may have thought proper to ordain, * * * ^q^ [^ [^ undeniable that the in- vestment of property in the citizen by the government, whether made for a pecuniary consideration or founded on conditions of civil or political duty, is a contract between the State * ^^ * and the grantee; and both parties are bound in good faith to fulfill it. But into all contracts, whether made between States and individuals or between individuals only, there enter conditions which arise not out of the literal terms of the contract itself; they are superinduced by the pre- existing and higher authority of the laws of nature, of nations, or of the community to which the parties be- long; they are always presumed, and must be presumed, to be known and recognized by all, are binding upon all, and need never, therefore, be carried into express stipulation, for this could add nothing to their force. Ever)' contract is made in subordination to them, and must yield to their control, as conditions inherent and paramount * * *. Such a condition is the right of eminent domain." "^ This right does not therefore impair any grant or contract under the Constitution, and even as private property has to give way to it, so a franchise, or prop- 27. West River Bridfre Co. v. Dix, 6 How. (47 U. S.) 507. EMIi\"ENT DOMAIN. 41 erty acquired under a franchise right, is no more sacred, and must be held subject to it. "]^otwith- standing the grant to individuals, the eminent domain, the highest and most exact idea of property, remains in the government, or in the aggregate body of the people in their sovereign capacity; and they have the right to resume the possession of the property in the manner directed by the Constitution and laws of the State, whenever the public interest requires it. This right of resumption may be exercised, not only where the safety, but also where the interest, or even the ex- pediency of the State is concerned." ^^ A long line of decisions uphold the statement that the State may confer this right to take private property for a public use upon private corporations of a quasi- public nature. But these private corporations must have as their object some public service. The most familiar illustrations are those of railroad or canal, or highway building, but from the statements made un- der the heading " Interpretation of Charters " it may be readily seen that the right is not parted with by the State without express words. Two conditions as to the taking of private property under eminent domain are imposed by the Constitution. " Private property shall not be taken for a public use without just compensation." This has been inter- preted to mean that the right may not authorize the taking of private property except for a public use.^^ Secondly, this taking of property for a public use can be authorized only upon the payment of just compensation.^*^ The question of the necessity or expediency of the taking under this right is one which belongs exclusively 28. Chancellor Walworth in 3 Paige's Ch. 73. 29. Beokniaii v. Saratoga, etc., Ry. Co., 3 Paige's Ch. 45. 30. State v. Con. Coal Co., 46 Md. 1. 42 SUMMARY OF LAW OF PRIVATE CORPORATIONS. to the legislature.^^ But the question whether the use is a public one is one which belongs to the courts.^" It has been stated that in respect to this power the property of a coii:)oration is no more sacred than the property of an individual, and may be taken for pub- lic uses, even to the extent of the franchise, and ex- clusive privileges may thus be taken.^^ But one coqioration cannot acquire the right to con- denm the franchise and property of another doing the same business,^'* unless the property of such coi-poration bo not in use or unnecessary to the proper exercise of its franchise.^ CoxTROL Over Foreign Corporations. § 28. It has already been stated that a corporation is not a " person " or " citizen " wdthin the meaning of the Constitution granting to citizens of one State the same privileges and immunities enjoyed by citizens of other States.^*^ "ISTow a grant of a coi^Dorate existence is a grant of special privileges to the corporators, enabling them to act for certain designated purposes as a single in- dividual, and exempting them (unless otherwise specially provided) from individual liability. The cor- poration, being the mere creation of local law, can have no legal existence beyond the limits of the sovereignty where created. As said by this court in Bank of Au- gusta V. Earle, 'It must dwell in tlie place of its crea- 31. Talbot V. Hudson, 16 Grav (Mass.). 417; Harris v. Thompson. 9 Barb. (N. Y.) 350; Re ToA\Tisend, 39 N. Y. 171; De Varaigiie v. Fox, 2 Blatchf. (U. S. C.) 9.5. 32. Concord Rv. Co. v. Greely, 17 N. H. 47; Stockton, etc., Co. V. Stockton, '41 Cnl. 147: Re Deansrille Cemetery Co., 66 N. Y. 569; Boston Ry. Co. v. Salem Ry. Co., 2 Gray (Mass.). 1. 33. New Orleans, etc., Co. v. Louisiana, etc., Co., 115 U. S. 650, and cases cited. 34. Mobile Rv. Co. v. Midland Rv. Co., 87 Ala. 501. 35. N. Y., etc.. Co. v. Boston, etc., Co., 36 Conn. 196; Re N. Y., etc.. Rv. Co., 99 X. Y. 12. 36. Paul V. Virginia, 8 \Vall. (75 U. S.) 168. COXTKOL OVER FOKEIG^^ COEPOEATIONS. 43 tion, and cannot migrate to another sovereignty.' The recognition of its existence, even, by other States, and the enforcement of its contracts made therein depend purely upon the comity of these States, a comity whicli is never extended where the existence of the corpora- tion or the exercise of its powers are prejudicial to their interests or repugnant to their policy. * * * At the present day coi-porations are multiplied to an almost indefinite extent. There is scarcely a business pursued requiring the expenditure of large capital, or the union of large numbers, that is not carried on by corporations. It is not too much to say that the wealth and business of the country are to a great ex- tent controlled by them. And if, when composed of citizens of one State, their corporate powers and fran- chises could be exercised in other States without re- striction, it is easy to see that, with the advantages thus possessed, the most important business of those States would soon pass into their hands. The princi- pal business of every State would, in fact, be con- trolled by corjx)rations created by other States." '• It follows from these principles that a State, in granting a corporate privilege to its own citizens, or, what is equivalent thereto, in pennitting a foreign cor- poration to become one of its constituent elements of a consolidated corporation organized under its laws, may impose such conditions as it deems proper, and that the acceptance of the franchise in either case im- plies a submission to the conditions without which the franchise could not have been obtained. In Paul v. Virginia, supra, the court said : " Having no absolute right of recognition in other States, but depending for such recognition and the enforcement of its contracts upon their assent, it follows, as a matter of course, that such assent may be granted upon such terms and conditions as those States may think proper to impose. 44 SUMMARY OF LAW OF PEIVATE CORPORATIONS. They may exclude the foreign, corporation entirely; they may restrict its business to particular locaUties, or they may exact such security for the performance of its contracts with their citizens as in their judgment will best promote the public interest." " Taxation. § 29. Defined. — Taxes are defined to be burden? or charges imposed by the legislative power upon persons or property to raise money for public purposes. The power to tax rests upon necessity and is inherent in every sovereignty. The legislature of every free State will possess it under the general grant of legislative power, whether particularly specified in the Constitu- tion among the powers to be exercised by it or not," ^^ " AVhilo taxation is in general necessary for the sup- port of government, it is not part of the government itself. Government was not organized for the puq^ose of taxation, but taxation may be necessary for the pur- poses of government. As such, taxation becomes an incident to the exercise of the legitimate fimctions of government, but nothing more. Xo government de- pendent on taxation for support can bargain away its whole power of taxation, for that Avould be substan- tially abdication. All that has been determined thus far is, that for a consideration it may, in the exercise of a reasonable discretion, and for the public good, surrender a part of its powers in this particular." ^^ § 30. Corporate property subject to. — Franchises of corporations are property and as such are subject to taxation by the State quite as the property of an individual. 37. Wliitp. J., in Ashley v. Ryan, 153 U. S, 436, citing Paul V. Virpinia, and other leadinp cases. 38. Cnolevs Cnnst. Lim. (fith ed.) 587. 39. Stone v. Miss., 101 U. S. 814. TAXATION. 45 " Corporate franchises * * * are legal estates, and not mere naked powers granted to the coi-poration, but powers coupled with an interest, which vest in the corporation by virtue of their charter; and the rule is equally well settled that the privileges and fran- chises of a private corporation, * * * are as much the legitimate subjects of taxation as any other prop- erty of the citizens mthin the sovereign power of the State." *° But having once gained the right to tax franchises as property, the States found themselves in a predica- ment on account of the usual constitutional enactments requiring all taxes to be equal and uniform. Inas- much as the corporation paid the usual local taxes upon its real and personal property, the placing of an additional tax upon its franchise as property, it was contended, amounted to double taxation. The question then directly arose. Is the tax to be regarded as one upon the franchise, or upon the property? The question has been uniformly decided that it is a tax upon franchises and not on property, as the Constitu- tions of those States prohibiting unequal taxation of property does not prohibit the laying of indirect taxes upon pri\aleges, or, in other words, franchises.^^ There are limitations to the power of the State to tax franchises, however. It has been held, for in- stance, that a State cannot tax franchises granted by the United States,^^ nor can it tax the business of cor- porations engaged in interstate commerce,^^ nor can it tax upon that portion of the capital stoak employed in business outside of the State.^^ 40. Hamilton Co. v. Mass., G Wnll. (73 U. S.) 632. 41. Hamilton Co. v. Mass.. 6 Wall. (73 U. S.) 632; Society, etc. V. Coite, id. 594: Provident Inst. v. Mass., id. 611; Osborn V. Bank of U. S., 9 Wheat. 738. 42. California v. Central Pac. Rv. Co., 127 U. S. 1. 43. Tel. Co. V. Texas, 105 U. S. 460. 44. People v. Equitable Trust Co., 96 N. Y. 388. See also 15 Wall. (82 U. S.) 300. 4G SUMMARY OF I>AW OF PRIVATE CORPOKATIOXS. § 31. Methods of. — Subject to these limitations the laying of taxes upon franchises seems to be dis- cretionary with the legislature. These .taxes take different forms in different States, and include such methods as taxing gross earnings, dividends, capi- tal stock, or net earnings. In j^ew Jersey the general franchise tax is a graded one on capital stock, while special coqDorations pay a tax on gross receipts, etc. In i^ew York the franchise tax is based on dividends, and if no dividends are paid, then upon the capital stock employed within the State. In Illinois, Indiana, and Massachusetts the franchise tax is based on the excess of the market value of their capital over the real value of the tangible property. All of these methods have received the sanction of the highest courts, and have been declared not to be in conflict with any constitutional provisions relating to imequal taxation. Speaking of the discretion of a legislature in laying this tax, Bradley, J., in a case cited above, said: "It has no limitation but the discretion of the taxing power. The value of the franchise is not measured like that of property, but may be ten thousand or ten hundred thousand dollars as the legislature may choose. Or, without any valuation of the franchise at all, the tax may be arbitrarily laid." ^^ Some peculiar doctrines relative to the taxation of franchises exist in New York. It has been the gen- eral custom to assess the franchise of corporations in connection with their capital stock as personal prop- erty, but a case handed do\\Ti in 1891 declared that franchises of coi'porations were not taxable, for the reason that they are regarded as property.^^ But fran- chise has been defined and limited to the right or privi- 45. California v. Central Pac. Ry. Co., 127 U. S. 1. 46. People, etc. v. Coleman, 126 N. Y. 433. TAXATIOSr. 47 lege of being a corporation, i. e., of doing business in a corporate capacit}^ and not the privilege, when incorporated, which the company may exercise.*^ This last has been denominated a " special franchise " and as such has been made the subject of a " special fran- chise tax," wliich w^as laid in 1S99 in that State. It relates only to a certain class of franchises which are within the term quasi-public corporations, and is an attempt to secure to the State some compensation for the privileges granted by the State to these quasi- public corporations. The act does not give the right to assess a corporation for the privilege of exercising its right as such, or for its good will, or the choice or conduct of its business. Tliis special franchise ap- proximates closely to a secondary franchise, which, like the original franchise, has not heretofore been taxable in j^ew York. The methods of valuation of this special franchise have not, as yet, received the sanction of the courts, and hence any statement of them seems unwarranted. § 32. State may exempt. — . It has been stated that the power to tax is a mere incident to government, and as such may be parted with by the State. So, in the absence of constitutional restraint, it is now set- tled that the legislature of a State may exempt the property of corporations from taxation, or definitely fix the rate of taxation, and this for a limited period or in perpetuity.'*^ The reason for this is found in the public policy of encouraging corporate enterprises. It is further settled law that Avhen a State has made any express stipulations respecting the rate of taxation, whether a compromise or a commutation, such a stipu- 47. Home Ins. Co. v. N. Y., 134 U. S. 594, affg. 92 N. Y. 328. 48. Dodge v. Woolsey, 18 How. (59 U. S.) 331. 4S SUMMAEY OF LAW OF PIUVATE COKPOEATIONS. lation is construed as a contract and ^\^thin the consti- tutional prohibition.^^ Such grants aro strictly construed, however, and must appear expressly, as they cannot be raised by implication. "Where the State has exempted certain property of coi-porations from taxation, and the ex- emption is a mere gratuity on the part of the State, such exemption is not a contract, but is subject to modification and repeal in like manner as other legislation.^*^ If the exemption have been made at a time when no reservation clause existed, it then is regarded as a con- tract, and cannot be repealed or altered. ^^ § 33. Taxation of shares of stock — Two theories seem to exist as to the taxation of shares of stock. The one, that a State has power over all property, fixed or movable, which has an actual existence within the State, and the other, that movable property follows the owner. The question has arisen directly many times, whether a State has the right to lay a tax upon the shares of stock of a corporation of its creation, even though those shares be in the hands of parties who reside outside the State. " Individual shareholders, if taxed on their shares, are to be taxed where they respectively reside, though they may he and sometimes are taxed at the place where the corporate business is carried on." ^^ " The shares of stock represent the property of the corporation — that in which the capital stock is invested. The owner is not the omier to a dividend, but he is 49. State v. Georgia Ry. Co., 54 Ga. 423; Union Bank, etc. v. State, 9 Yerg. (Tenn.) 490; Farrington v. Tenn., 95 U. S. 679. 50. Tucker v. Ferguson. 22 Wall. (SO U. S.) 527; West Wis- consin Rv. Co. V. Board of Supervisors. 93 U. S. 595. 51. University v. People, 99 U. S. 309. 52. C'oolcy on Taxation, p. 274. TAXATION. 49 owner of a proportionate share of the property, and therefore the law which created the shares may sepa- rate them from the person of their o^\^ler for the pur- pose of taxation, and give them a situs of their own." ^^ " The coi-porate home is in this State. Tlie corpo- ration is subject to the exclusive legislation of the State, and its members are subject to the legal enactment of the legislature affecting the corporation. If the share- holders are not relieved from other legislation af- fecting the corporation or its members, why should they be relieved from taxation ? " ^^ These arguments are in favor of the theory that the State may lay a tax upon the shares of stock of a cor- poration created by it. '^o one doubts that if the cor- poration be created with such a clause in its charter, the shareholders, being with notice, take the shares subject to all the conditions. But one may well doubt the advisability and correctness, though not the con- stitutionality,^ of such a statute laying the tax after the corporation has been created and the shares dis- tributed, for the reason that it is the worst kind of double taxation,^^ and in direct opposition to the long- established rule that personal property follows the owner, and is taxable in the place where he resides.^^ The tax laws of one State are entirely independent of any other, and a State may tax any property it finds within its borders, whether real or personal, and this, even though the same property have paid a tax in an- other State.^^ The " capital stock " of a corporation is the basis 53. Tappan v. Merchants' Bank, 19 Wall. (87 U. S.) 490. 54. St. Albans v. Car Co.. 57 Vt. 68. 55. Nashville, etc.. Co. v. Nashville, 8 Lea (Tenn.) 406; Far- rinprton v. Tenn., 95 U. S. 679. 56. Gillespie v. Gaston. 67 Tex. 599; Republic, etc., Co. v. Pollak, 75 111. 292; Middlesex, etc., Ev- Co. v. Charlestown, 8 Allen (Mass.), 330; U. S. Express Co. v' Ellvson, 28 Iowa, 370. 57. Idem. 58. City, etc. v. Fry, 63 Cal. 470. 4 50 SUMMAKY OF LAW OF PRIVATE COKPORATIOXS. of the corporate business, belongs to the coq^oration and to no one else. Shares of stock are exclusively the property of the stockholders. This distinction is well recognized, and a tax laid on the capital stock is not a tax upon the shares of stock and vice versa. Some difficulty arose at first, over the fact that shares of stock were nothing more than choses in ac- tion, but they have been very generally designated property for the purposes of taxation, even when not so named in the statutes. That coi^Dorations pay a fair share of taxes will be readily recognized in the following illustration. A, an. individual, o^^tis $100,000 of real property. He pays one tax thereon and only one. The B Company has a capital stock of $100,000 invested in real and personal property. The company pays a franchise tax based on its capital stock, it also pays the usual local tax on its property, and the shares of stock in the hands of the shareholder are subject also to a tax, as on personal property. It seems, too, that a State may compel a tax upon these same shares from the company. Dissolution. § 34. According to the older text-writers^^ there are four ways of dissolution: (1) By act of legislature. (2) Death of all its members. (3) Forfeiture of the charter. (4) Surrender of the charter. The second has no value in stock corporations, for the reason that upon the death of all the members their personal representatives would immediately take their places as stockholders, and the corporation still remain a going concern. 59. 2 Kyd, 447; 1 Blackstone Com. 485; 2 Kent (1st ed.), 245. DISSOLUTION. 51 § 35, By act of the legislature — A charter may be repealed for misuser and nonuser, or for any other good and sufficient reason, provided there be reserved to the State the power to repeal.'^'^ If this be not the case then the Dartmouth College imle obtains in all its force, and no action can be taken by the legislature. The legislature is the judge of the reasonableness of the act, and the courts have uniformly sustained their right so to do.^^ § 36. Forfeiture of charter — Courts are generally re- luctant to enforce forfeiture of charters on the gen- eral ground of public policy, and this is especially true in the case of quasi-public corporations. But forfeit- ure may be had by the courts for misuser or nonuser, as these matters affect the rights and interests of the public.^^ " The public must have an interest in the act done or omitted to be done. If it is confined ex- clusively to the corporation, and in nowise affects the community, it should not be considered as of those con- ditions upon which the grant is made." ^^ This question cannot be raised, however, except in a direct proceeding by the State, the reason being that it is the State's laws which are violated. To allow the question to be raised by the public directly or in collateral proceedings is to run counter to the principle of public policy and confuse rights.^"* But the State may make, and usually does make, provision whereby the public may proceed through the attorney-general or other officer, upon good cause being shown. The certificate granted to a corporation by the sec- 60. McLaren v. Pennington, 1 Paige (N. Y.), 102. See als,> Repeal, Alteration, etc., ante, p. 33. 61. Erie, etc., Ry. Co. v. Casey, 26 Pa. St. 287. 62. Terret v. Taylor. 9 Cranch (13 U. S.), 43; Mumma v. Potomac Co., 8 Pet. (33 U. S.) 281. 63. Harris v. Miss., etc., Ry. Co., 51 Miss. 602; State v. K R. Sugar, etc., Co., 121 N. Y. 58*2. 64. Heard v. Talbot. 7 Gray (Mass.), 113; Day v- Ogdens- burgh Rv. Co.. 107 X. Y. 129. 52 SUMMAliV or I.AW OF PRIVATE CORPORATIONS. retary of state, as provided by statute, is conclusive evi- dence of its rights to be a corporation. The right to lilo an information in the nature of quo warranto, or to institute any form of proceeding to arrest the al- leged usurj^ation of the franchise of a corporation, does not belong to the indi\4dual citizen, but resides in the State, and in the absence of statute, in the discretion of the attorney-general.^ § ,37. Grounds of — As to the grounds of forfeiture, so long as the act done or omitted be of interest to the public, any violation of conditions named in the charter, or of those named in the governing statute under which the corporation was formed, or those substantial condi- tions named in the governing statutes under which the corj)oration acts operate per se as such a misuser as will warrant judicial forfeiture.^^ Such violations may be the nonperfonnance of conditions subsequent annexed to the grant or charter; misuser generally, wdien it contravenes the charter or general laws; nonuser or the abandonment of its franchise; failure to make reports as required by statute and joining a "trust" to stifle competition, have all been declared by the courts as warranting an action to forfeit. Statute may, and usually does, prescribe specific penalties for violation? of the prescribed statutory requirements or for mal- feasance or misfeasance by its officers and directors, but it is doubtful if such penalizing statutes \vi\\ con- stitute ground for forfeiture, they being more in the nature of remedies to the creditors and stockholders than punishment to the coqwration.*'^ As a general rule the statute of limitations will not run against the State, nor can laches be imputed to it. In England, Lord Mansfield stated that '' no length of usurpation shall affect the crown," but in the United 65. Rice v. Xational Bank, etc., 126 Mass. 300. 66. State v. Pawtuxct Co., 8 R. I. 182. 67. See on this subject 5 Thompson, § 6641. DISSOLUTION. 53 States the rule seems to be that where private rights have been acquired on the faith of corporate existence, and a vacation of the franchise would lead to injustice and confusion, that legislative waiver of a forfeiture, by acts of recognition, will cure defects in the corpo- ration.^^ The State may waive a forfeiture by express legislation.^^ § 38. Surrender of the charter. — The State cannot force a charter on a group of individuals, nor can it force a body of shareholders to continue a corporation as a " going concern " if they do not desire so to con- tinue, conditions being such that the business cannot be conducted except at a loss. This would be against pub- lic policy, it being the duty of the State to conserve rather than destroy property. This statement is true only of ordinary business or trading corporations. In the case of quasi-public corporations, the duty owing to the State and public generally is such as will give the State the right to compel the corporation to perform its duties and powers under penalty of forfeiture.'*' The corporation having decided to abandon its pow- ers and franchise may surrender them to the State. But as in the creation of a corporation acceptance of the privilege or franchise by the incorporators is necessary, so in a surrender of the same the consent of the State is necessary, otherwise the corporation remains in exist- ence,'^^ and this though it be insolvent,'^^ have assigned its property,'^^ have failed to elect officers,^'* or have abandoned its franchise and powers entirely. 68. State v. Turnpike Co.. 15 N. H. 162; Kanawha Coal Co. V. Kanawha Co., 7 Blatchf. (U. S. C.) 391. 69. Davis v. Gray, 1(5 Wall. (83 U. S.) 203; People v. Man- hattan Co., 9 Wend. (N. Y.) 351. 70. People v. ?sL Y. C, etc., Ry. Co.. 28 Hun (X. Y.), 543. 71. Boston Glass Co. v. Langdon, 24 Pick. (Mass.) 49. 72. 2 Kent (1st ed.), 249. 73. Wyeth Co. v. James Co., 15 Utah. 110. 74. Packard v. Old Colony Ry. Co., 108 Mass. 92. 54 SUMMARY OF LAW OF TKIVATE CORrORATIONS. In States where statutes provide for voluntary dis- solution, as in Xew York and Massachusetts, the statute must be complied with, which being shown, a judgment will issue.'** § 3t). Expiration of charter. — Even as a contract, the terms of which have been fulfilled, becomes extinct, so a corporation having reached the limit of the period pre- scribed in its charter for its corporate life becomes ex- tinct, and this without any direct action on the part of the State or corj^oration.'^ In other words, an ipso facto dissolution takes place. When such a dissolution taikes place, no powers created by the charter or governing statute can thereafter be exercised, unless the statute continue them for the purpose of winding up its affairs. It has already been shown that neither insolvency nor assignment for benefit of creditors, nor failure to elect officers will effect an ipso facto dissolution. Nor will the centering of all the stock of a corporation in one man work an ipso facto dissolution, for it is still the property of the corporation.^' Neither will a sale of all its property destroy the corporation.'* In some instances charters have been granted which embrace terms of forfeiture upon failure to comply with conditions named. Whether the forfeiture will be self- executory or not will depend upon the language em- ployed by the legislature. The words " under forfeiture of the privileges of said act in future " "^ were declared to be by no means self-executing. The words " or this act and all rights and privileges granted hereby shall be null and void " were given the meaning " voidable," '^ 75. Herring v. N. Y., etc., Ry. Co., 10.5 N. Y. 340. 76. People v. Anderson, etc., Co., 76 Cal. 190; Sturges v. Van- (lerbilt, 73 N. Y. 384. 77. Harrington A'. Connor. .51 Nebr. 214. 78. Reichwald v. Com. Hotel Co., lOfi 111. 439. 79. State v. Turnpike Co., 15 N. H. 162. 80. \. Y., etc.. Bridge Co. v. Smith, 148 N. Y. 540, citing Ewell V. Daggs, 108 U. S. 143. DISSOLUTION. 55 while " its corporate existence and powers shall cease " *^ and " this act and all its powers, rights and franchises herein and hereby granted shall be deemed forfeited and terminated " *~ were deemed self -executing. § 40. Effect of dissolution — Under the common law the effect of dissolution is to put an end to its existence for all purposes and destroy all its faculties. Thereafter it can neither make contracts nor take them, nor can it sue or be sued ; all debts to or from it are extinguished, and all actions by or against it abate.^^ The harshness of this rule has been offset by equity and statute, so that a better rule for these modern days is that while con- tracts cannot be made or taken by the corporation its property remains in the hands of its trustees and cred- itors, and the stockholders have their rights protected. Actions remain but the remedy is changed. A court of equity will take the property and use it as a trust fund for the benefit of the creditors and stockholders, through receivers or trustees, wdiile in most of the States statutes are in force not only continuing the corporation as such for a period of time to wind up its affairs, but abro- gating the common-law rule and providing for the sur- vival of the debts and the continuation of actions. The obligations of contracts survive, except such as are in- capable of specific performance, and the creditor may en- force his claims against the property of the corjDoration which has not passed into the hands of bona fide pur- chasers.^'* Executory contracts cannot be carried out, of course, but modern English rules have granted com- pensation therefor by way of damages for the breach of the contract,^^ but no cases bearing directly upon this 81. Matter of B. W. & N. Rt. Co.. 72 N. Y. 245. 82. Brooklyn, etc.. Co. v. Brooklj-n, 78 N". Y. 524. 83. 5 Thompson, § 6718, and ca?es cited. 84. Mumma v. Potomac Co., 8 Pet. (33 U. S.) 281. 85. Inchbald v. \Yestern. etc.. Co., 17 C. B. (N. S.) 133; Re Wallshire Iron Co., L. R., 3 Ch. 443. 56 SUMMAKY OF LAW OF PIUVATE CORPORATIONS. point seem to have been decided in the United States. Statutory provisions exist, however, applicable to this subject. There are decisions to the effect that when forced into dissolution executory contracts become nugatory, for an implied condition of their execution is the de jure posi- tion of the corporation.^^ On the other hand, when the corporation is voluntarily dissolved, executory contracts remain in force, for a corporation cannot, by its o\\ti act, relieve itself of contracts. Equity will step in and hold its assets liable for breaches thereof.^^ 86. Griffith v. Blackwater, etc., Co., 46 W. Va. 56; People v. Globe, etc., Co., 91 N. Y. 174. 87. Glass Co. v. Stoehr, 54 Ohio St. 157 ; Schluder v. Dielman, 44 La. Ann. 462. CHAPTER IV. POWEES OF A COEPOKATIOIT. § 41. In general — The common-law idea of a corpo- ration and its powers are concisely stated by Coke as follows : " Now it is to be seen what things are of the essence of a corporation. 1. Lawful authority of incorporation * * * . The 2nd, * * * are persons to be incorpo- rated * * *. 3. A name by which they are incorpo- rated. 4. Of place, for without a place no incorporation can be made. 5. By words sufficient in law, but not restrained to any certain, legal, and prescript form of words." " When a corporation is duly created all other inci- dents are tacitly annexed. And for direct authority in this point in 22 E 4, Grants, 30, it is held by Brean, chief justice, and Choke that corporation is sufficient without the words to implead or be impleaded, etc., and there- fore divers clauses subsequent in the charters are not of necessity, but only declaratory, and might well have been left out, as 1. By the same to have authority, ability, and capacity to purchase, but no clause is added that they may alien, etc., and it need not, for it is in- cident. 2. To sue and be sued, implead and be im- pleaded. 3. To have a seal, and that is also declaratory, for when they are incorporated, they may make or use what seal they will. 4. To restrain them from aliening or devising but in certain form; that is an ordinance testifying the King's desire, but it is but a precept and does not bind in law. 5. That survivors shall be a cor- poration, that is a good clause to oust doubts and questions which might arise, the number being certain. [57] 58 SUMMAKY OF LAW OF I'KIVATE COEPOKATIONS. * * *. 8. To make ordinances ; that is requisite for the good order and government of the poor, etc., but not to the essence of the incorporation. * * *. 10. The license to purchase in mortmain is necessary * * * " 1 Blackstone, writing 150 years later, says that the " rights, capacities, and incapacities which are neces- sarily and inseparably incident to every corporation * * * are : ( 1 ) To have perpetual succession * * *. (2) To sue and be sued, implead or be impleaded, grant or receive by its corporate name, and do all other acts as natural persons may. (3) To purchase lands and hold them for the benefit of themselves and their suc- cessors, which two are consequential to the former. (4) To have a conunon seal * * *. (5) To make by-laws or private statutes for the better government of the cor- poration * * *." Such are the powers imjDlied to every corporation ex- isting under the common law, even to this day. To these may be added such powers as are granted expressly by the charter or enabling statutes, and in addition there are incidental powers necessary to exercise the powers expressly conferred. But corporations created under legislative statute are not created by the common law, though corporations created by special act, with purposes of creation only named, took impliedly these incidental or implied powers of the common law. The general laws, under which corporations are created to-day, however, usually name tlicse common-law powers as belonging to every corporation,^ to which are added such powers as are expressly named in the articles of incorporation. " We take the general doctrine to be in this country, though there may be exceptional cases and some authorities to 1. Coke on Litt., p. 250a. 2. See for instance Laws of N. Y. 1892, chap. 687; Laws of N. J. 1896, chap. 185. POWERS CONTRACTS. 59 the contrary, that the powers of corporations organized under legislative statutes are such and such only as those statutes confer. Conceding the rule applicable to all statutes, that what is fairly implied is as much granted as what is expressed, it remains that the charter of a corporation is the measure of its powers, and that the enumeration of these powers implies the exclusion of all others." ^ " The charter of a corporation, read in connection with the general laws applicable to it, is the measure of its powers, and a contract manifestly beyond those pow- ers will not sustain an action against the corporation. But whatever under the charter and general laws, reason- ably construed, may fairly be regarded as incidental to the objects for which the corporation is created, is not to be taken as prohibited." ^ In the construction of the statutes and charters it has already been stated that where there is no dispute in which the public is directly interested, a fair con- struction is to be made and not a strict one, while if the dispute be one between the public and the corpora- tion, the construction is to be strict and in favor of the public.^ This method of constniction admits of the in- cidental rights necessary to properly and profitably carry out the express provisions of the charter.^ To Make Contracts. § 42. The power to make contracts is an implied power based on partnership. In carrying on its legiti- mate business a corporation may enter into any con- tract which is reasonably adapted to further the pur- poses for which it was incorporated.^ 3. Thomas v. Railway Co., 101 U. S. 71. 4. Green Bay, etc., Ry. Co. y. Union, etc., Co., 107 U. S. 98. 5. Chap. 3. p. 32. 6. BrowTi V. Winnisimmet Co., 11 Allen (Mass.), 326. 7. White Water, etc., Co. v. Vallette, 21 Hoav. 414. 60 SUMMAKY OF LAW OF PKIVATE CORPORATIONS. Originally, a coqjoration, lacking the power to ex- press itself as an individual, could do nothing except by deed and seal. But the rule was relaxed, at first, for convenience sake, to allow a corjjoration to do or- dinary matters ^\dtllOut deed and seal. This rule became further relaxed, and at length it became established that while they could not act directly, except under deed, they might, by mere vote, appoint an agent whose acts and contracts would be binding on the corporation. It was but a step from this iiile to the general rule now established, that whenever a corporation is actu- ally within the scope of its legitimate purjDoses, all parol contracts made by its agents within the scope of their authority are express promises of the corporation, and all duties imposed upon them by law, and all bene^ fits conferred at their request, raise implied promises for the enforcement of which an action will lie. And so, given the corporate ability to contract in some form, in the given circumstances, the kind of contract the corporation can make is immaterial.^ It can make con- tracts just as an indi\adual can. A seal is no longer necessary, except in sucli contracts and deeds as require the seal of an individual. To Take, Hold, and Transfer Real and Personal Property, § 43. The power of a corporation to take and hold personal property is unlimited, unless restricted by its charter or the general laws. The statutes of mortmain do not apply to personal property.^ The power to transfer or alienate is an incident of the power to pur- chase, and in the case of personal property is unlimited, save when to do so would be to either commit a fraud 8. Bank of Col. v. Patterson's Admr., 7 Cranch (11 U. S.), 299, and cases therein cited. 9. 1 Kyd, 104; Barry v. Merchants' Ex. Co., 1 Sandf. Ch. 280. POWEES PEftSOXAL EIGHTS. 61 upon the creditors or the shareholders. This phase of the subject will receive a more complete statement in another chapter. ^*^ " Corporations when considered with reference to their powers to take and hold real estate may be classi- fied as follows: " First, those whose charter or law of creation for- bids that they should acquire and hold real estate. In which case a corporation cannot take or hold real es- tate; and a deed or devise to it passes no title. " Secondly, those whose charter or law of creation is silent on the subject. In sucli case, as a general rule, there is no power to acquire and hold such property. But if the objects for which the coi'poration was formed cannot be accomplished without acquiring and holding the title to real estate, the power to do so is implied. '' Thirdly, those corporations whose charter, etc., au- thorizes them in some cases, or for som^e purposes, to take and hold the title to real estate. In these cases, as the cori>oration may for some purposes acquire and hold title, it cannot be questioned by any party, except the State, whether the real estate has been acquired for the authorized purposes or not. " Fourthly, those whose charter, etc., confer a gen- eral power to acquire and hold real estate, such corpora- tions may take and hold real estate as freely and as fully as natural persons." ^^ The common-law rule that corporations have an im- plied right to purchase such real estate as w^as necessary for the purposes of its business arose at a time when business or trading companies were little kno"UTi.^^ The corporations of that day were either municipal, eccle- 10. See chap. V, p. 76. 11. Haj^vard v. Davidson, 41 Ind. 212. 12. 1 Kyd, 69; Angell & Ames, § 149. 62 SUMMARY OF LAW OF TEIVATE CORPORATIONS. siastical, or cliaritable in tlicir nature, and the first were naturally limited. The ecclesiastical and charitable corporations, however, invested their money in lands, for. indeed, there was little else, at that time, which would bring in an income. So much of the land was being accumulated by these cor|3orations that the stat- utes of mortmain were passed in which not only eccle- siastical, but lay corporations as well, were forbidden to purchase lands. These statutes were never enacted in the United States, however, save in the State of Pennsylvania,^^ and a long line of decisions support the statement that corporations have ample power to pur- chase and hold such real estate as is necessary and rea- sonable, in order to carry out the purposes of its incorporation;^'* and this implied power obtains in all cases where the charter or enabling statutes are silent. Save in those cases where the charter confers gen- eral powers to purchase, a corporation cannot lawfully purchase real estate for any object inconsistent with the purposes for which it was created.^^ Tliis rule does not prevent the acquisition of lands by way of debts. Banks and other moneyed corpora- tions frequently loan money on mortgages, and if, to save loss to the company, they find it necessary to take the property, such taking is usually permitted,^^ though statute may not permit a holding for an indefinite period. The question of the amount and value of the prop- 13. See 3 Binney, 625. 14. People V. La Rue, 67 Cal. 526; Brown v. Hogg, 14 111. 218; Old Colony, etc., Ry. Co. v. Evans, 6 Gray (Mass.), 25; Moss V. Averill, 10 N. Y. 449 ; Reynolds v. Commissioners, .5 Ohio, 205; Page v. Heineberg, 40 Vt. 81. 15. Case v. Kelly, 13.3 U. S. 21; St. Peter's, etc., Cong. v. Ger- main. 104 111. 440; Sutton v. Cole, 3 Pick. (Mass.) 232; N. J. A. R., etc., Co. V. Xewark, 25 N. J. L. 315; Rensselaer Ry. Co. v. Davis, 43 N. Y. 137. 16. Silver Lake Bank v. Xorth, 4 Johns. Ch. (N. Y.) 370; National Bank v. Matthews, 98 U. S. 621 ; Baird v. Bank, 11 Serg. & R. 411. POWEES PEOPERTY EIGHTS. 63 erty which a corporation may hold, unless expressly limited, has received a very liberal interpretation. It seems that the phrase " it may lawfully acquire and hold any amount of property, whatever its value, for ihe purposes of its creation," ^"^ is the proper expression of a corporation's power in this respect. Under this rule, if the company sees a future need of the prop- erty, or wishes to erect and o\\ti an office biiilding,^^ or wants to erect dwellings for cmployees,^^ it may do so. Given power to purchase real estate and the pur- chases made within the rule above stated, the title which a corporation takes is that of an estate in fee, unless, of course, it be qualified by the parties them- selves or the corporation.^^ And this is true, even though the corporate life be limited to a number of years.^^ The power of a corporation to take by adverse pos- session is also established.^^' A corporation may also hold as tenant in common,^^ though it cannot hold in joint tenancy,^"* nor can it take a beneficial interest in land, when it cannot hold land in its own name.^ The power to take and hold property in trust will be implied, although the authority to assume such be not conferred by express words, whenever the trust 17. Barry v. Merchants' Exchange Co., 1 Sandf. Ch. (N. Y.) 280. 18. People V. Pullman Palace Car Co., 175 111. 125. 19. Steinway v. Steinway, 17 Misc. (N. Y.) 43. 20. Pa?e V. Hineberg, 40 Vt. 81; Erie, etc., Ry. Co. v. State, 31 N. J. L. 531; People v. Mauran, 5 Denio (K Y.), 389. 21. Nicoll V. N. Y. & E. Ry. Co., 12 Barb. 460; Yates v. Van De Bogert, 56 N. Y. 526. 22. Rehoboth v. Carpenter, 23 Pick. (Mass.) 131; Humbert V. Trinity Church. 24 Wend. (N. Y.) 587. 23. Estell V. Univ. cf South, 12 Lea (Tenn.), 476; De Witt v. City of San F.. 2 Cal. 289. 24. Telfair v. Howe, 3 Rich. Eq. (S. C.) 235; Bennett v. Hol- beck, 2 Saunders, 319. 25. Coleman v. San R. T. R. Co., 49 Cal. 517. 6-i SUMMARY OF LAW OF PKIVATE COEPOKATIONS. is in furtherance of the general objects of the corpo- ration,"" though this rule will not apply if the purpose be foreign to its institution."^ § 44. The power to take by devise. — By the English statutes of mortmain, already noticed, the power of a corporation to take real estate by devdse was re- strained. In the United States the rule differs, in that the general rule is that in the absence of express statu- tory restraint the common-law rule applies, and cor- porations may take by devise, subject to the qualification that tlie property devised must be used for the pur- poses for which the corporation was instituted, on the ground that the word " purchase " includes the ac- quisition of land by devise.^^ Some of the States, nota- bly Xew York, have enacted in their statutes of wills that corporations may not take by devise. Under such statutes, devises of property within the State, to either domestic or foreign corporations, would be void, the statute limiting the individual in the disposition of his property. A devise of property situated outside the State by a citizen of another State to a New York cor- poration, when only the statute of wills contained the restraining clause, was held good.^^ The question seems to depend upon whether the charter forbids the tak- ing or the restraint is found in the statute of wills. If the former be the case the charter is the measure of the powers of the corporation, and will follow the coii^oration wherever it go; but if the statute of wills forbid tlicre seems to be no reason why the corpo- 26. Vidal v. Girard, 2 How. (43 U. S.) 121; Phillips Acad. V. King, 12 Mass. 546. 27. Jackson v. Hartwell, 8 Johns. (X. Y.) 422; Case v. Kelly, 133 U. S. 21. 28. Matter of the Estate of McGraw, 111 N. Y. 66; Rat- cliff e's Case, 1 Strange, 267; McCartee v. Orphan Asylum, 9 Cow. (N. Y.) 437. 29. Crum v. Bliss, 47 Conn. 592; White v. Howard, 38 Conn. 342. But see White v. Howard, 46 N. Y. 144. I POV\^ERS PROPERTY RIGHTS. 65 ration may not take property located outside the State, devised by a testator, whose domicile was in a State where the statute did not apply. ^° § 45. Ultra vires conveyances. — The question of hold- ing becomes important only in the matter of ultra vires takings by the corporation, for if the takings be within the sphere of corporate necessity or reasonableness, the corporation may hold even as an individual may hold. In the case of an individual citizen there is no distinction to be made between his power to take and hold against the State itself. But it has been stated, and is undoubtedly the rule, that an alien may take under our laws, and hold as against every- body except the State. A corporation taking ultra vires is in a similar position. To allow third par- ties to question the holdings of a corporation would be to throw estates into the utmost confusion and lead to infinite inconveniences. The matter is one between the government and the corporation and is no concern of third parties.^^ The general rule may thus follow: where a corporation, by the law of its creation, is authorized, in some cases, or for some pur- poses, or to a limited extent, to take and hold real es- tate, and real estate has been acquired in excess of the capacity of the corporation to take and hold, such taking and holding cannot be made a question by any party, except the State.^^ This rule seems established with striking unanimity, let alone the weight of authority, and applies not alone to corporations de jure, but also to corporations de facto}^ 30. Am. Bible Soc. v. Marshall, 15 Ohio St. 537; Christian Union v. Yount, 101 U. S. 352. 31. Water Co. v. darken, 14 Cal. 543. 32. Ibid.; National Bank v. Matthews, 08 U. S. 621; Jones v. Habersham, 107 id. 174; Alexander v. Tolleston Club, 110 111. 65; Russell v. Texas, etc., Ry. Co., 68 Tex. 646; Bank v. Poitiaux, 3 Rand. (Va.) 136. 33. East Norway, etc., Church v. Froislie, 35 N. W. 260. 66 SUMMAEY OF LAW OF PBIVATE CORPOEATIONS. Where the corporation has been prohibited by its charter from acquiring real estate, the weight of au- thority is in favor of declaring a deed thereof to be absolutely void.^"* It is believed, however, that if the coi-poration be in actual possession of the property that the general rule will obtain, and no party save the State will be allowed to object. The general rule above stated obtains in Xew York, except in the case of a corporation receiving property by will or devise. In that case it seems that a third party may question and even defeat the title to the property in the hands of the corporation.^^ § 46. The power to alienate — As stated above, the power to alienate property is an incident to the power to purchase, the jus disponendi being an incident to ownership. But the power to sell or assign must be limited to transactions made under authority and in good faith, otherwise both creditors and stockholders may claim fraud, and in proper cases set aside the transactions in a court of equity. § 47. The power to lease — " Subject to the principle that a corporation having public duties to perform can- not disable itself from performing those duties -with- out consent of the State, a corporation, authorized by its charter to hold real property, may lease it to be used for a business which the corporation itself could not lawfully carry on. ' The right to hold such prop- erty includes the right to lease it so as to make it pro- duce income. It would be too strict a construction of the statute to decide that a corporation which may lease real estate for profit can lease it only to be used in those kinds of wdiich it is authorized by its charter to carry on.' Even where such a lease is ultra vires, pro- 34. St. Peter's, etc., Church v. Germain, 104 111. 440; Cromie V. Louisville, etc., Society, 3 Bush (Ky.), 365. See contra, Mal- lett V. Simpson, 94 N. C. 37. 35. Estate of John C. McGraw, HI N. Y. 66. POWERS TO BOEEOW MONEY. 67 vided that it is not so in the sense of being malum in se, it will be enforced in so far as it has been executed on one side, on the principle * * * (of estoppel), so that where the lessee has taken possession, the corporation may recover rent earned under the lease. The directors of a corporation which has been unsuccessfully carrying on the business for which it was organized may, with the consent of the majority of the stockholders, validly lease the plant of the corporation for ten years with the privilege of purchase, to another corporation carry- ing on the same business, even though a minority of the shareholders object thereto." ^® The Powee to Boreow Money. § 48. This power is implied to a corporation from the power to make contracts and carry on its business. These powers imply the right to incur indebtedness and it follows naturally that a corporation may choose such means as are convenient and expedient to liquidate the indebtedness so created, so long as those means be within the scope of the corporate objects. The power to borrow money is one of these means.^^ This power is unlimited at common law,^ though many States limit the amount of indebtedness to be contracted by a corporation. The Powee to Moetgage Its Property. § 49. Unless the legislature has forbidden a corpo- ration to mortgage its property by an express provision in its charter, or by placing it under such a duty to the public that a foreclosure of the mortgage would prevent its fulfilling these duties, its right to mortgage may al- 36. 7 Thompson, § 8365, and cases cited. But see article 14 Harvard Law Rev. 332. 37. Barry v. Merchants' Exchg. Co., 1 Sandf. Ch. 280; Wright V. Hughes, 119 Tnd. 324. 38. Barry v. Merchants' Exchg. Co., 1 Sandf. Ch. 280. 68 SUMMAKY OF LAW OF PIMVATE COKPOKATIONS. ways be implied where it has authority to borrow or in- cur indebtedness, and to alien the subject-matter of the mortgage/'^ and the mortgage may include the franchise, except in the case of public or quasi-public corpora- tions, where the consent of the State is necessary, on the ground that an engagement of this kind might oper- ate to prevent the corporation from performing these public duties/" The Pow^er to Issue, Accept, or Indorse Negotiable Paper. § 50. In England, corporations have not the power to issue bills and notes, unless the business is such that it cannot be carried on without such issue; and the di- rectors have no power to draw, accept, or indorse them in the name and on behalf of the company. Xor can the power to do so be implied from the right to incur debts, nor is it coextensive with the power to engage in busi- ness or to borrow money.'*^ In the United States, however, the rule is different, and the authorities are practically unanimous in support of the rule that every private corporation, unless re- strained by the provisions of its charter, has the power, while acting within the legitimate purposes of its in- corporation, to make promissory notes, to draw and ac- cept bills of exchange, and to assume the obligations of an indorser. This jDOwer is based upon and is coexten- sive with the power to make contracts and incur debts.*^ But a corporation has no power to bind itself by be- 39. Jonps V. Guaranty Co., 101 U. S. 022; Fitch v. Lewiston, etc.. Co.. 80 :\rc. 34; Curti.s v. Loavitt. 15 N. Y. 9. 40. Commonwealth v. Smith, 10 Allen, 448; Evans v. Boston, etc.. Co., 157 Mass. 37. 41. Bateman v. Mid- Wales Ry. Co., L. R., 1 C. P. 499, and cases cited. 42. Orommes v. Sullivan. 81 Fed. 45; Olcott v. Tiojra Rv. Co., 27 N. Y. 540; Lucas v. Pitney, 27 N. J. L. 221; Bradley v. Ballard, 55 111. 413. POWEKS NEGOTIABLE PAPER. 69 coming an acceptor, maker, or indorser of accommo- dation paper for the benefit of other persons or corpo- rations, and this on the ground that to do so would be to risk the property of its stockholders in channels for- eign to the express purposes of the incorporation.^^ The implied power to issue, accept, and indorse nego- tiable paper carries with it the presumption that the corporation has acted Avithin its powers in so doing. Accordingly, an innocent purchaser for value of corpo- rate paper, even though it be issued, accepted, or in- dorsed for accommodation, or be ultra vires the corpora- tion, will be protected, and may recover upon such instruments.'*'* Where the power to issue, accept, and indorse nego- tiable paper is expressly denied the corporation by statute or charter, accommodation paper so executed will be void, even in the hands of a hona fide purchaser for value.'*'' "Where the corporation is thus expressly prevented from issuing, accepting, and indorsing, paper coming to the corporation in the usual transactions of business may be indorsed by the corporation for the purpose of transfer, but no liability will attach thereto.*^ Power to Act as Trustee. § 51. It was formerly held that a corporation could not hold lands to the use of another. The reasons as- signed for this rule were that neither trust or confidence 43. Tod V. Kentuckv Union Land Co., 57 Fed. 47; ■\^^ebster v. Howe Machine Co.. 54 Conn. 394; Pick v. Ellinger. 66 111. App. 570; National Park Bank v. German, etc., Co.. 116 N. Y. 281. fiemblc. contra, ^larlin v. Niagara, etc., Co., 122 N. Y. 165. 44. Farmers' Nat. Bank v. Sutton, etc., Co., 52 Fed. 101 ; Monu- ment Nat. Bank v. Globe Works, 101 Mass. 57: Bissell v. ;Mich. So. Ry. Co., 22 N. Y^ 289; Bank of Republic v. Young, 41 N. J. Eq. 531. 45. Root V. Godard, 3 McLean (U. S. C.) 102; Hayden v. Davis, id. 276. 46. N. Y. Neg. Inst. Law, § 41. 70 SUMMAKV OF LAW OF PHIVATE COKPOKATIONS. could be imposed in a corporation aggregate, as the courts could not compel a corporation to execute a trust, the corporation having no conscience, nor could it take an oath, and lastly it could not be imprisoned for a re- fusal to obey the decree of the court. But this doctrine has long since been abandoned, and it is now settled beyond dispute that public, quasi-pub- lic, and even business corporations have the power to hold real or personal property in trust for any purpose that is not foreign to the purposes of its creation, and that courts of equity will enforce the trusts.^^ Excep- tions arise, however, and where a corporation is ex- pressly prohibited from taking land by devise or other- wise, it cannot act as a trustee.'*^ For the ancient reason that a corporation could not act as trustee, the power to act as executor, adminis- trator, guardian, etc., was denied to the corporation. To-day a corporation, if authorized by its charter, and not prohibited by statute, may act in any of these capac- ities, to which may be added the power to act as com- mittee of an insane person or habitual drunkard, and The Power to Enter into a Partnership. § 52. The obvious and important distinctions between a corporation and a partnership of agency and liability are the reasons for the general rule that corporations cannot consolidate their funds with each other^*^ or with 47. Jones v. Habersham, 107 U. S. 174; Farmers' L. & T. Co. V. Harmony, etc., Co., 41 N. Y. 619; affp. s. c, 51 Barb. 33; Vidal V. Girard, 2 How. (43 U. S.) 187; Phillips Acad. v. King, 12 Mass. 246. 48. Trust Co. v. Lee, 73 111. 142. 49. Camden Safe, etc.. Co. v. Ingham, 40 X. J. Eq. 3 ; Fidelity, etc.. Co. V. Niven, 5 Houst. (Del.) 410; Equitable Trust Co. v. Garis. 100 Pa. St. 544; Roane Iron Co. v. Wisconsin Trust Co., 99 Wis. 273. 50. N. Y., etc., Canal Co. v. Fulton Bank, 7 Wend. 412. POWERS TO FORM PAETNEKSHIP. 71 an individuaP^ so as to form a partnership, unless, of course, the legislature has enabled them to do so. It seems, however, that if the partnership be one to be terminated at will, the corporation to bear the entire burden as to liability and the purposes to be within the corporate powers, it will be upheld by the courts.^^ But a corporation may not enter into a " trust " whereby a committee or a central company operate the property for the common benefit so as to stifle competition.^^ A distinction must be made between a partnership and a joint contract, as where two carrying companies enter into a contract or joint traffic agreement for the transportation of goods. " It is clear on principle and authority that both defendants were competent to enter into contract to carry this oil from Panama to l^ew York. As each was competent to contract alone, it cannot be doubted that they were competent to make a joint contract to do it. They could even become part- ners in the transportation business * * * and so far as we have discovered, the power of corporations thus to become joint carriers has never been denied, but has frequently been recognized." ^'^ The right of a corporation or an individual to recover upon obligations made to them, while acting in the capacity of partners, will depend much upon the juris- diction. The weight of authority is probably in favor of allowing a recovery, irrespective of their rights and duties between themselves or of the power of the cor- poration to enter into a partnership, and this on the ground of estoppel.^^ 51. Whitterton Mills v. Upton, 10 Gray (Mass.), 582. 52. Allen v. Woonsocket Co., 11 R. I. 288. See also Catskill Bank v. Gray, 14 Barb. (N. Y.) 471. 53. State v. X. R. Sugar Ref. Co., 121 K Y. 582. 54. Swift V. Pac. Mail SS. Co.. 106 N. Y. 206, and cases cited. But see contra. Mallory v. Hanaur Oil Works, 86 Tenn. 598. 55. See Ultra Vires Contracts, post, chap. V. 72 summary of law of private corporations. Power to Acquire and Hold its Own Stock. § 53. The English doctrine as to this power is settled and rigid. A corporation cannot acquire and hold its OA\Ti stock, unless expressly authorized to do so by its charter, for the reason that it would be a fraud upon the part of the corporation and would tend to a breach of duty on the part of the directors.^^ In the United States two views exist, the one (a) con- ceding that the power exists on the ground that there is nothing in the nature of a corporation that renders it incapable of holding or dealing in its own stock, unless prohibited by charter or statute." (b) On the other hand, the weight of authority seems to be in favor of the English rule on several grounds: (1) fraud upon creditors, in that it practically amounts to a reduction of capital stock; (2) violation of contract with the stockholders who do not consent ; and ( 3 ) a violation of the charter,^® The power will be denied in any juris- diction, if the rights of creditors are involved, injured, or prejudiced, and thie even though there have been good faith in making the purchase.^^ In the absence of express statutory prohibition corpo- rations may acquire and hold their own stock when it is acquired (1) by gift or bequest;^" (2) when taken in payment of debts, the transaction being reasonably neces- sary to prevent loss, as for instance, the stock having been taken as collateral for a pre-existing debt f^ and 56. Green's Briee's Ultra Vires (2d ed.) , p. 94. 57. Dupee v. Boston, etc., Co., 114 Mass. 37; Clapp v. Peter- son, 104 111. 26. 58. Coppin V. Greenless Co., 38 Ohio St. 275; Sutherland v. Olcott. 9") N. Y. 03; Currier v. Slate Co., 5G N. H. 262; Bank v. Wickersham. 09 Cal. 655. 59. Crandall v. Lincoln. 52 Conn. 73; Commercial Bank v. Burch, 141 111. 519; Columbian Bank's Estate, 147 Pa. St. 422. 60. Rivanna Nav. Co. v. Dawsons, 3 Gratt. (Va.) 19. 61. See cases already cited. POWEES TO HOLD STOCK. 73 (3) when taken as a compromise, on a dispute between the corporation and the stockholder.*^^ When a corporation has competently purchased shares of its own stock, it may hold them unextinguished, and reissue them, but while holding them it cannot exercise the privileges which pertain to an ordinary stockholder, and especially it cannot vote on them, for to do this would be to usurp, partially at any rate, the power of the stockholders, and to take an advantage over them which is in violation of their contract.^^ Power to Acquire axd Hold Stock iisr Another Corporation. § 54. This power, in absence of statutory permis- sion, will depend very much upon the nature of the corporation, its purposes, and the purposes for which the stock is acquired. In England the earlier authorities held that the power was lacking, unless expressly given. This rule has been changed, and corporations may now purchase and hold stock in another corporation unless expressly pro- hibited.*'^ In the United States, however, the opposite rule pre- vails, save in two States (Mar^dand and Iowa), and this on the ground that to allow it would be to allow a corpo- ration to engage in a business foreign to its created pur- poses.^^ This is especially true where the corporations have different purposes,^^ and are subject to laws of a different character.''^ Indeed, if allowed at all, it must 63. The Phosphate, etc., Co. v. Green, L. R.. 7 C. P. 43 ; New Albany v. Burke, 11 Wall. (78 U. S.) 96. 63. See Taylor (4th ed.), § 13G, and cases cited. 64. Re Asiatic Bankinfr Co.. L. R., 4 Ch. App. 2.52. 65. Franklin Co. v. Lewiston. etc.. Bank. 68 Me. 43: Franklin Bank v. Commercial Bank, 36 Ohio St. 3.55; Central Ry. Co. v. Collins, 40 Ga. 582. 66. Panlv v. Coronado Beach Co., 56 Fed. 428. 67. McCiitcheon v. Merz Co., 37 U. S. App. 586. 74 SUMMAKY OF LAW OF PEIVATE COBPOEATIONS. be in cases wlicre the purposes are the same and the same laws regulate.^ It cannot be allowed for the purpose of controlling or lessening or defeating competition, on the grounds of public policy.^^ The power will be implied, if not expressly given, under certain conditions and circumstances, however, and in general these would be when the investment is reasonable and within the purposes and rights of the corporation. The power to consolidate with another corporation ]'^ the duty of a corporation to keep its funds invested to produce income ;^^ the taking of stock by way of a compromise, when the transaction is hona fidef^ the taking of stock as collateral for a debt previously existing, in order to prevent loss ;^^ and the right of a purely private corporation to sell its property and wind up its business, and in doing so to sell its stock to any purchaser, individual or corporation,'^^ are all implied unless expressly granted, and are within the general rule above expressed. There is nothing to prevent a stockholder of one cor- poration subscribing or purchasing stock in another cor- poration, as the stockholder stands in no fiduciary re- lationship either to the other shareholders or the cor- poration/^ Power to Make By-Laws. § 55. " ITow I am of opinion that though power to make laws is given by special clause in all corporations, yet it is needless, for I hold it to be included by law in 68. Merz Co. v. Capsule Co., 67 Fed. 414. 69. Elkins v. Camden, etc., Ry. Co.. 36 N. J. Eq. 5. 70. Marbury v. Land Co., 62 Fed. 335. 71. Hodges V. Screw Co., 1 R. I, 312. 72. Bank of Charlotte v. National Bank, 92 U. S. 122. 73. Talmage v. Pell, 7 N. Y. 328. 74. Holmes v. Holmes, 127 N. Y. 252. But compare Me- Cutchern v. Merz Co., 71 Fed. 787. 75. Green v. Hedenberg, 159 111. 489. POWERS TO MAKE BY-LAWS. Y5 the very act of incorporating, as is also the power to sue, to purchase, and the like. For, as reason is given to the natural body for the governing of it, so the body corpo- rate must have laws as a political reason to govern it, but those laws must ever be subject to the general laws of the realm as subordinate to it. And therefore, though there be no proviso for that purpose, the law supplies it." '^ 76. Morris v. Staps, Hobart's Rep., p. 21o. See also Ireland V. Globe, etc., Co., 19 R. I. 180. CHAPTER V. General Powers and Ultra Vires. § 56. In general. — Having stated tlie powers usually implied to every corporation, as well as those usually denied, it remains to say a few words about the general powers of a corporation. It has been stated many times that corporations possess such common-law powers as are implied to every corporation, when such powers are not granted in the general statutes, and such further powers as are expressly stated in the charter or articles of incorporation together with such other powers as are incidental to the proper carrying out of the powers ex- pressly granted or implied. " An incidental power is one that is directly and im- mediately appropriate to the execution of the specific power granted, and not one that has a slight or remote relation to it." ^ The expression " consistent " is some- times used in the place of " incidental." " Consistent means standing together, or in agreement with." ^ "A corporation can make no contracts, and do no acts, either within or without the State which created it, except such as are authorized by its charter." ^ But these contracts and acts may be made and done in the same manner as the contracts and acts of an individual may be made and done, and further, promises and en- gagements may be implied from the corporate acts as if it were an individual.* In other words, a corporation may, within its expressed powers, act as a natural person may act in carrying out those powers. And so, if in 1. Hood V. X. Y.. etc., Ey. Co., 22 Conn. 1. 2. Lucas V. White, etc., Co., 70 Iowa. 541. 3. ■Rank of Augusta v. Earle. 1.3 Pot. (39 U. S.) .'510. 4. Bank of U. S. v. Dandridcrp. 12 Wheat. (2G U. S.) 64. ["G] COEPOEATE POWEES AND ULTEA VIEES. 77 carrying out the purposes for which it was expressly created, it becomes necessary to act in a mamier not ex- pressly provided for by statute, it may do so, provided, of course, the act be not expressly prohibited. " The doctrine is not that an express power conferred upon a corporation to accomplish certain objects carries with it, by implication, all the poiver which might pos- sibly, under given circumstances, be called into exercise to effectuate those objects. The meaning rather is, that it carries with it, by implication, a grant of the right to use all such powers as a natural person might properly and lawfully use to accomplish the same results under similar circumstances * * * subject to these and similar limitations (the prohibitions of the Constitutions and the general principles of the common law), the gen- eral rule therefore is, that if the means employed are reasonably adapted to the ends for which the corpora- tion was created, they come within its implied or inci- dental powers, though they may not be specifically desig- nated by the act of incorporation." ^ The question of what is or is not " incidental " or " consistent " with the proper exercise of express cor- porate powers will depend upon the circumstances of the particular case in hand, and cannot therefore be stated in definite form. In construing the powers of coi-porations, the courts are inclined to interpret them fairly and with the idea in mind to protect the private rights of the corporation, its shareholders, the creditors, and the public generally. " We know of no rule or principle by which an act creating a corporation for certain specific objects or to carry on a particular trade or business is to be strictly construed as prohibitory of all other dealings or trans- actions not coming within the exact scope of those desig- nated. Undoubtedly the main business of a corporation 5. 4 Thompson, § 5641, and cases cited. 78 SUMMARY OF LAW OF PRIVATE CORPOEATIONS. is to be confined to that class of operations which properly appertain to the general purposes for which its charter was granted. But it may also enter into con- tracts and engage in transactions which are incidental or auxiliary to its main business, or which may become necessary, expedient, or profitable in the care and man- agement of the property which it is authorized to hold under the act by which it was created." ° a * * *^ Corporations have none of the elements of sovereignty, * * * they cannot go beyond the powers granted them, and * * * they must exer- cise such granted powers in a reasonable manner. * * * the court must judge in each case whether the exercise of the power be reasonable." "^ § 57. Presumption as to corporate acts. — The maxim of right acting is responsible for the statement fre- quently made that the acts of a corporation are pre- sumed to be within their powers until the contrary is shown, and this presumption seems to find favor in many reported cases both in England and America. It has been severely criticised, however, as vague and inap- plicable, except in connection with the facts upon which it depends.* It finds its fullest application in connection with the power of a corporation to take and hold real property,^ and its least application in the other general powers of a corporation. Ultra Vires Acts.^** § 58. The subject of conveyances both intra vires and ultra vires has already been treated, and the rules hereafter stated are applicable to corporate acts, ex- 6. Brown v. Winnisimmet Co., 11 Allen, 326. 7. St. Louis V. Weber, 44 Mo. 547. 8. See Morawetz (2d ed.), § 324; 4 Thompson, § 5G44, 9. Ante, p. 60. 10. See excellent article by ^Mr. Thompson in 28 Am. Law Rev. 376, and criticism of same by Mr. Pepper in 9 Harvard Law Rev. 255. CORPOKATE POWERS AND ULTRA VIRES. 79 elusive of the power to take, hold, and convey real property. In dealing with the subject of ultra vires, it first be- comes necessary to distinguish between a mere want of capacity on the part of the corporation and an ex- press prohibition against its acts. The former may be viewed in the light of the incapacity of a married woman to act under the common law, while the latter is unquestionably illegal. § 59. Meaning. — "The contracts (or acts) of cor- porations are said to be ultra vires when they involve some adventure or undertaking not within the scope of their charter, which is their rule of corporate action. In the granting of charters, the legislature is pre- sumed to have had in view the public interest; and public policy is (as the interest of the stockholders ought to be) concerned in the restriction of corporations within chartered limits, and a departure therefrom is only deemed excusable when it cannot result in pre- judice to the public or to the stockholders. As artifi- cial creations they have no powers or faculties, except those with which they were endowed when created; and when, as is frequently the case, they act in excess of their powers, the question will be : Is the act prohibited as prejudicial to some public interest, or is it an act not unlawful in that sense, but prejudicial to the stock- holders ?" " § 60. Origin. — The doctrine of ultra vires is a heri- tage of the older law of England affecting municipal and public corporations. The encroachment of some of these corporations into the domain and authority of higher powers led to very stringent rules being laid down whereby corporations were held strictly to the powers granted, and again and again was the rule re- iterated that corporations possess no powers except such 11. Leslie v. Lorillard. 110 K Y. 51f 80 SUMMARY OF LAW OF PRIVATE CORPORATIOISrS. as are expressly granted or are necessarily implied to carry into effect the powers expressly granted. Con- tracts made beyond their powers were void ah initio — they could not be ratjfied or renewed, nor could per- formance give validity to them. "When private busi- ness or trading corporations came into prominence, these rules were imported into the law relating to them, and the result has been that from the beginning to the present time the rules have been undergoing a process of modification, the end of which has not yet been reached. Indeed, the subject has been productive of more dispute than any one subject in the law of cor- porations, and the cases upon the subject are without end in numbers. An attempt to state definitely the rules affecting the subject is almost futile, for the reasons stated, yet out of the " mass of cases we have on the subject," the following may answer for a day, § 61. The English rule. — In England the general rule as to the powers of private business or trading corporations is that they have either expressly or by implication all capacities or powers, which being reason- ably incidental to their enterprise or operations, are not forbidden them either expressly by their charters or by necessary inference therefrom. " How far those powers, which are necessarily or properly to be exercised for the purposes intended by the act, extend may very often be a subject of great difficulty. We cannot always ascertain what they are. * * *. I believe they have the power to do all such things as are necessary and proper for the purpose of carrying out the intention of the act of Parliament, and they have no power of doing any thing beyond it." ^^ " * * * If the company is a corporation only for a limited purpose, and a contract like that imder dis- cussion is not Mnthin their authority, the assent of aU 12. Coleman v. Eastern Co. Ry. Co., 10 Beav. 1. CORPOKATE POWERS AXD ULTRA VIRES. 81 the shareholders to such a contract, though it make them all personally liable to perform such contract, would not bind them in their corporate capacity, or render liable their corporate funds." ^^ From these statements it may be gathered that con- tracts ultra vires are incapable of performance, either by or against the corporation, and further that the plea of ultra vires will defeat a recovery even on a contract which has been either partly or fully performed on one side. The reasons for these rules are found in the in- terest which the public and the State have in the proper administration of the powers conferred by the act of incorporation, and the right of the shareholder to ex- pect that the conditions upon which the act vvas ob- tained will be performed. It has been stated that the now leading case in Eng- land has modified the rules stated above and declared in effect that where a corporation is created for a par- ticular purpose, the act creating it impliedly prohibits it from exercising any powers not necessary or proper to carry out that purpose. ^^ It is submitted that the application of this latter rule would result in neither greater or less incidental powers being allowed than were allowed by virtue of the former rules. The difference between " reasonably incidental to their en- terprise or operations " and " necessary or proper to carry out that purpose " cannot be dignified into a dis- tinction even. While no recovery may be had on contracts ultra vires at law, the English courts allow recovery on the ground of subrogation, and show a tendency to allow it 13. East Anglian Ry. Co. v. East. Co.'s Ry., 11 C. B. 775. In support of these eases see Chambers v. M. & M. Ry. Co., 5 B. & S. 588; Eastern Ry. Co. v. Hawkes, 5 H. L. C. 381; Taylor V. C. & M. Ry., L. R., 2 Ex. 3.56. 14. Asbury Co. v. Riche, L. R., 9 Ex. 224. See Mr. Thompson's article above cited. 6 82 SUMMARY OF LAW OF PEIVATE COEPORATIONS. ou implied or quasi-contract, on the ground that a cor- poration must account for benefits received. ^^ § 62. The United States rules. — There are two op- posing judicial conceptions of public policy. The United States Supreme Court, and the courts of Mas- sachusetts, Alabama, and a few others have declared themselves in favor of maintaining the existing restric- tions upon the coi-porate power to contract, and they have very generally refused to enforce unauthorized or prohibited contracts, even in favor of the party who has fully performed. In other words, a corporation has such powers, and such powers only as are conferred upon it by its charter. These powers may be conferred upon a corporation expressly and impliedly, — impliedly because they are incidental to corporate existence, and again because they are necessary to exercise the powers expressly conferred.^*" The reasons given for their ad- herence to these rules are: (1) the interest of the public demands that the corporation shall not transcend its powers; (2) the interest of the shareholders demands that the capital shall not be subjected to the risk of enterprises not contemplated by the charter, and there- fore not authorized by the stockholders in subscribing for the stock; (3) the obligation or duty of every one entering into a contract with a corporation to take notice of the legal limits of its powers.^^ This rule obtains in all its rigor whether contracts are executory, or executed in part. In. other words, no liability will be allowed on the contract, but where one side has been unjustly enriched, the courts will allow 15. Ke Cork, etc., Ry. Co., L. R., 4 Ch. App. 748. 16. Thomas v. Railway Co., 101 U. S. 71; Penn. Ry. Co. v. St. L., etc., Ry. Co., 118 id. 290; Oregon Ry. Co. v. Oregonian Ry. Co., 130 id. 1 ; Pittsburg, etc., Ry. Co. v. Keokuk Bridge Co., 131 id. 371; Central Transportation Co. v. P. P. C. Co., 139 id. 24. 17. Pittsburg, etc., Ry. Co. v. Keokuk Bridge Co., 131 U. S. 371. CORPORATE POWERS AND ULTRA VIRES. 83 a disaffirmance of the contract and a recovery on quasi- contract.'^ § 63. The opposing and general rule in the United States. — On the other hand, the courts of Pennsylvania, New York, Indiana, Illinois, Minnesota, and many others have refused to allow a party who has benefited to take advantage of the defect of power when an action is brought to enforce a contract. ^^ They endeavor to work this out on the ground of estoppel, but this is only a bridge, for no one is estopped from pleading law. In dealing with the reasons given by the United States court, it may be said that so far as the public is concerned they have no interest until the corpora- tion does something in conflict with the public right and injurious to the public interests. The State may step in, but if it does not assert its rights it will be held to have waived them. As to the interests of the stock- holders the same rule applies, viz., that it is time enough to interfere when they ask it ; while the doctrine of notice is utterly impracticable under our general statutes.^" This latter rule is now over^vhelmingly supported by the weight of authority in the United States. Indeed, the English rule, followed as it is by the United States court, is rapidly disintegrating and in time will prob- ably give way to the rule which secures some justice at least to the parties interested. In the opinion of em- inent authorities on the subject, the doctrine of ultra vires so far as it relates to private corporations should be done away with, and the later cases on the subject show that it has all but disappeared from the majority 18. Morville v. A. T. Society, 123 Mass. 129; Cent. Trans. Co. V. P. P. C. Co., 139 U. S. 24. 19. Darst v. Gale, 83 111. 136; Whitney Arms Co. v. Barlow, 63 N. Y. 62; Argenti v. San Francisco. 16 Cal. 2.56: N. Y. Mutual Life Co. V. Willcox. 8 Biss. (U. S. C.) 203; Chicago, etc.. By. Co. V. Derkes. 103 Ind. 520; Bissell v. Mich. So. Rv. Co., 22 N. Y. 258. 20. Bissell v. Mich. So. By. Co., 22 N. Y. 258. 84: SUMMARY OF LAW OF PRIVATE COKPOEATIONS. of jurisdictions. Given a contract which is ultra vires and at the same time illegal, immoral, opposed to sound public policy, or prohibited by statute on grounds con- nected with, the public good and no court will enforce or aid in enforcing it, or so much of it as remains un- executed. Aside from this, the doctrine as it obtains in England and as followed in the United States courts is productive of injustice, and should be done away with. It only remains to state the rules more definitely and as it applies to particular instances. § G4. Acts per se illegal. — There is no difference of opinion in any courts, either English or American, as to such acts. They cannot be enforced, nor can they be ratified, and there is a continuing duty on the part of either party to withdraw from such a contract, and courts of law and equity will aid in restoring to the other party what he has lost upon it.^^ So, too, when statute expressly prohibits.^^ The courts, however, pro- ceed upon the theory that ultima vires contracts are neither malum in se, nor malum prohibitum, but merely beyond the powers conferred by law. § 65. Contracts wholly or in part executory. — Ultra vires contracts which are wholly executory are consid- ered void and cannot bo enforced in any jurisdiction, for the courts will not lend their assistance to enforce an illegal or void contract. Hence the jolea of ultra vires is available to either side.^^ Wliere contracts are executory in part, a part having 21. Providence Tool Co. v. Norris. 2 Wall. (69 U. S.) 45 ; Visalia, etc., Co. V. Sims, 104 Cal. 326; Pratt v. Short. 70 N. Y. 437; White V. Franklin Bank. 22 Pick. (Mass.) 181; Bath Gas Light Co. V. ClaflTv, 151 X. Y. 24. 22. N. Y. State, etc., Co. v. Hclmer, 77 N. Y. 64; Root v. Godard, 3 McLean, 102. 23. Asbury, etc., Co. v. Riche, L. R., 7 H. L. 653; Central Trans. Co. v. Pullman's, etc., Co., 139 U. S. 24; Nassau Bank V. Jones, 95 X. Y. 115; Northwestern, etc., Co. v. Shaw, 37 Wis. 655. CORPOKATE POWERS AND ULTRA VIRES. 85 been executed, the partial performance will not aid either party as a basis of an action to compel perform- ance of the remainder, or to recover damages for the failure to perform. This is true of all contracts, whether for the sale of lands, leases, or contracts generally.^ ^ QG. Contracts fully executed on both sides. — When a contract has been entered into between parties, and one or both is a corporation, and the contract is ultra vires the coi*poration, neither party can avail them- selves of the defense, if the contract has been fully executed by both sides.^^ " The executed dealings of corporations must be allowed to stand for and against both the parties, when the plainest rules of good faith so require." ^^ This rule is based on the maxim that where both parties are in fault, neither party is in a position to defend. § 67. Contracts executed on either side. — The Eng- lish courts, and those United States jurisdictions wliich follow them, refuse to enforce performance by the party in default. The majority of jurisdictions follow the iiile that where the contract has been fully ex- ecuted on one side, and the party so executing is suing to recover the agreed consideration, the other party will be estopped from setting up the defense of ultra viirs. This rule is based on the principle that neither party will be allowed to receive the fruits or benefits of a contract and then, when sued for performance, while keeping the fruits or benefits, set up the defense, and thus work injustice to the party executing. In 24. Case v. Kellev; 133 U. S. 1 ; The Bank, etc. v. Niles, Wal- ker's Ch. (Mich.) 99: Thomas v. \Yest Jersey Ry. Co.. 101 U. S. 71; Mallorv v. Hanover Oil Works, 80 Tenn. 598: Day v. Spiral, etc., Co., 57 Mich. 146; McCutcheon v. Merz Capsule Co., 37 U. S. App. 586. 25. Long V. Georgia, etc., Ry. Co., 91 Ala. 519: Day v. Spiral, etc., Co., 57 Mich. 146: Lestapies v. Ingraham, 5 Pa. St. 71. 26. Parish v. Wheeler, 22 X. Y. 494. 86 SUMMAEY OF LAW OF PRIVATE CORPORATIONS. considering tliis question, the statements already made as to cases where public interest would be involved must be eliminated; but aside from such instances the rule is a very general one and obtains whether the con- tract have been executed by the party contracting with the corporation, or by the corporation itself.^^ § 68. The rule as to commercial paper. — The general power to make and indorse commercial paper is among the implied powers of a corporation, and the innocent purcljaser for value of commercial paper, signed or in- dorsed by a coi^ioration, has a right to presume that the payjer was made or indorsed in the usual course of busi- ness, and is binding on the corporation, and he can therefore recover upon a bill or note made or indorsed by a corporation, even though such making or in- dorsing be ultra vires}^ But commercial paper exe- cuted by a corporation in ^^olation of an express statutory prohibition is void, even in the hands of an innocent party.^ § 69. Ultra vires torts. — The general rule in all juris- dictions is that corporations are liable in actions for damages for tortious acts committed in the prosecution of an ultra vires contract or business.^*^ The reason for this distinction between ultra vires torts and ultra vires contracts is found in the statement that the jiarty upon whom the ultra vires tort is committed does not voluntarily consent to it, and the law will not hold him 27. Camden, etc., Rv. Co. v. Mays, etc., Ry. Co.. 48 X. J. L. 530; Arjienti v. San Francisco, 16 Cal. 2.55; Louisville, etc., Ry. Co. V. Flanagan, 11.3 Ind. 488; Manhattan, etc., Co. v. Phalen, 128 Pa. St. 110; Whitney Arms Co. v. Barlow, 63 N. Y. 02; Wright V. Pipe Line Co., 101 Pa. St. 204; Bath Gas Light Co. V. Claffv, 151 N. Y. 24. 28. Farmers' Nat. Bank v. Sutton Mfg. Co.. 52 Fed. 191; Bird V Daggett. n7 IMass. 4n4; Lucas v. Pitncv, 27 N. J. L. 221. 29. Root V. Godard, 3 McLean (U. S. C), 102. 30. Central Rv. Co. v. Smith, 76 Ala. 572; Bisscll v. Michigan So. Rv. Co., 22 N. Y. 289; New York, etc., Ry. Co. v. Haring, 47 N.J. L. 137. COEPOEATE POWEES AND ULTEA VIEES. 87, blamable for not anticipating it and intercepting it. In the former case corporations are always held liable, ■while in tlie latter they are not always held for a breach of contract. § 70. Shareholder's right to prevent ultra vires acts In the United States courts and in those jurisdictions which agree with them, the shareholders have a stand- ing in equity to set aside ultra vires acts done by the corporation or its managing directors and officers, pro- vided all legal means of redress have been exhausted.^^ But this right will not be conceded in the majority of jurisdictions, when the acts complained of have been either partially or wholly executed on one or both sides, unless some public interest be involved. Share- holders may prevent the commitment of executory ultra vires contracts, however, as they may prevent any act which amounts to a breach of duty on the part of the corporation, the directors or officers.^^ § 71. Shareholder's liability for ultra vires acts of the corporation. — In the absence of statute, a shareholder is not personally liable for the ultra vires acts of the corporation.^" § 72. Who may plead ultra vires. — From the preced- ing statements it may be gathered that in those juris- dictions where the defense is allowed, any party may plead ultra vires and prevent a recovery, whether it be the public, the shareholder, or one of the parties to the transaction. In jurisdictions where the doctrine of estoppel obtains, the plea is not allowed, save in cases involving public interests, when ultra vires may be set up by the State. The statement of a learned writer to the effect that there seems to be a new and somewhat 31. Railroad Co. v. Ellerman, 105 U. S. 166. 32. See post, p. 132. 33. Second Xat. Bank v. Hall. 3.5 Ohio St. l.iS: Searight v. Payne, 2 Tenn. Ch. 175. See for statutory liability, Lovegrove V. Hunt, 58 Me. 9; Lehman v. Knapp, 48 La. Ann/ 1148. bb SUMMARY OF LAW OF I'RIVATE COEPORATIOKS. growing doctrine that the question cannot be raised by either party to the litigation, nor in collateral pro- ceedings, but only in direct proceedings by the State is true, perhaps, as far as ultra vires conveyances are concerned, and is true in those jurisdictions where es- toppel obtains ; but the statement is not borne out by the cases cited on ultra vires acts outside of taking, holding, and conveying real property.^ 34. See 5 Thompson, §§ 6034-35. CHAPTER VI. Liability of a Corporation for Torts, Crimes, etc. § 73. A discussion of the various views which obtain in the different jurisdictions, as well as a discussion of the subjects of torts, and agency, as they affect corpora- tions, is deemed superfluous, as these subjects are not properly within the scope of the work as outlined. Indeed, the principles enunciated hereafter do not rest upon any principle peculiar to the law of corpora- tions, and when it has once been decided that a corpora- tion in the matter of torts is to be treated as an indi- vidual under similar circumstances, it will be readily seen that these general principles of torts and agency obtain with equal force against individual and corpora- tion, without distinction. § 74. Civil liability for torts. — " It was formerly sup- posed that a corporation aggregate could not commit an actionable tort, and that no action sounding in tort would lie against such a corporation. This conclusion rested upon the idea that a corporation is an artificial being, created by the sovereign, and endowed by the sovereign with power to do certain things, and none other. * * * The judges were accustomed to reason that a corporation can act only in the mode pointed out in its charter ^ * * * and that when those wdio have its management or control, or who act for it in a given particular, step beyond the authoriza- tion of the charter in doing an act, it is not the act of the corporation, but is their own individual act. * * * As corporations multiplied, it was seen that intolerable wrongs would be done, if men could, by clothing themselves with the immunities of corporate [89] 90 SUMMAKY OF LAW OF PRIVATE COEPOKATIONS. organization, commit wrongs without being answerable for them, for which they would be answerable if they had committed them in their natural capacities. The courts therefore while not denying or repudiating this fiction, and in the full face of its logical results, have been obliged to find their way out of the difficulty as best they could; and the result is, that it is now well settled, within certain limits, both as to private and municipal corporations, that whenever the agent of a corporation, proceeding within the general scope of its powers and of the powers delegated by it to him, commits a wrong, the corporation must pay damages to the person injured, just as a natural person would be compelled to do under like circumstances." ^ "A corporation is liable to the same extent and under the same circumstances as a natural person for the con- sequences of its wrongful acts, and will be held to re- spond in a civil action at the suit of an injured party for every grade and description of forcible, malicious, or negligent tort or wrong which it commits, however foreign to its nature or beyond its granied powers the wrongful transaction or act may be." ^ " Every tort committed by a corporation necessarily involves an unauthorized exercise of corporate power ; but that is no reason why the company should not be held liable for the consequences. If an association is guilty of a wrong, it seems very clear that the fact that the association committed the wrong in a manner pro- hibited by law should not deprive the injured party of relief. Accordingly, it is settled that a corporation can- not set up as a defense in an action for the wrongful in- vasion of another's rights, that authority M-as not con- ferred by the charter to do the act complained of, in a corporate capacity. Mr. Justice Swayne said : " Cor- 1. 5 Thompson, § 6275. 2. New York, etc., Ry. Co. v. Schuyler, 34 N. Y. 30. LIABILITY FOR TOKTS, ETC. 91 porations are liable for every wrong they commit, and in such cases the doctrine of ultra vires has no application. They are liable for the acts of their servants, while such servants are engaged in the business of their principal, in the same manner and to the same extent that indi- viduals are liable under like circumstances. An action may bo maintained against a corporation for its mali- cious or negligent tort, however foreigTi they may be to the object of its creation or beyond its granted powers. It may be sued for assault and battery, for fraud and deceit, for false imprisonment, for malicious prosecu- tion, for nuisance, and for libel. In certain cases it may be indicted for misfeasance or nonfeasance touching duties imposed upon it in which the public are inter- ested. Its offenses may be such as will forfeit its ex- istence." ^ In accordance with these principles, it is now settled that a corporation may be held liable for damages for maintaining a nuisance ;^ for committing a trespass,^ and this rule extends to trespasses upon the person,^ and in the common-law actions of trespass, trover, trespass on the case ex delicto, etc.''^ A corporation may also be held responsible for an as- sault and battery,^ for a libel published by the corpora- tion," for false imprisonment,^'^ for malicious prosecu- 3. Morawetz on Corporations, § 726, citing National Bank v. Graham, 100 U. S. 699. 4. Baltimore, etc., Ry. Co. v. Fifth Baptist Church, 137 U. S. 568. 5. Illinois, etc., Ry. Co. v. Read, 37 111. 484; Moore v. Fitch- burg Ry. Co., 4 Gray, 46.5. 6. Denver, etc., Ry. Co. v. Harris, 122 U. S. 597. 7. Hawkins v. Dutchess, etc., Co., 2 Wend. 452 ; Crocker v. New London, etc., Ry. Co., 24 Conn. 249. 8. Coleman v. New York, etc., Ry. Co., 106 Mass. 160; Pas- senger Ry. Co. V. Young, 21 Ohio St. 518. 9. Samuels v. Evening Mail Co., 75 N. Y. 604; revg. 9 Hun (N. Y.), 288; Evening Journal Assn. v. McDermott, 44 N. J. L. 430. 10. IMoore v. Fitchburg, etc., Ry. Co., 4 Gray, 465; Lynch v. Metropolitan Ry. Co., 24 Hun (N. Y.), 506. 92 SUMMARY OF LAW OF PRIVATE CORPORATIONS. tion," for conspiracy/^ for maliciously prosecuting civil actions/^ for the frauds of its agents," and for negli- gence in the performance of duties either imposed by law^^ or voluntarily assumed.^*^ § 75. Slander. — " May a corporation be held liable in an action for slander? The rule of liability as enun- ciated in N. Y. & N. H. R. R. Co. v. Schuyler {supra) certainly seems broad enough to include such actions. Yet it is stated in Eichner v. Bowery Bank, 24 App. Div. 63, that a corporation cannot be made liable in an action to recover damages for slander, apparently be- cause ' The corporation itself could not talk.' " 'A corporation can act only by or through its officers or agents, and as there can be no agency to slander, it follows that a corporation cannot be guilty of slander. It has not the capacity for committing that wrong. If an officer or an agent of a corporation is gviilty of slander he is personally liable, and no liability results to the cor- poration.' Townshend on Slander and Libel, § 265. " 'A corporation will not, it is submitted, be liable for any slander uttered by an officer, even though he be acting honestly for the benefit of the company and within the scope of his duties, unless it can be proved that the corporation expressly ordered and directed that officer to say those very words, for a slander is a volun- tary tortious act of the speaker.' Odgers on Libel and Slander, p. 368. 11. Vance v. Erie Ry. Co., 32 K J. L. 334; Pennsylvania Co. V. Weddle, 100 Ind. 18; Reed v. Home Savings Bank, 130 ]Mass. 443. 12. Buffalo Lubricating Oil Co. v. Standard Oil Co., 106 X. Y. 669. 13. Goodspeed v. East Haddam Bank, 22 Conn. 530; Iron Mt. Co. V. Mercantile Co., 4 Mo. App. 505. 14. Griswold V. Haven, 25 N. Y. 595; McClellan v. Scott, 24 Wis. 81 ; Butler v. Watkins, 13 Wall. 450. 15. Fowle V. Alexandria. 3 Cranch, 70. 16. Philadelphia, etc., Ry. Co. v. Derby, 14 How. 4fiS. For subject of negligence see statements in extenso, 5 Thompson, chap. 140. LIABILITY FOR TOKTS^ ETC. 93 " Such conclusion savors of retrogression both in mode of reasoning and in manner of consideration, and rests too literally upon the idea that a corj)oration is an in- tangible, ideal person. It is inconsistent "with the rule laid down in N. Y. & N. H. B. R. Co. v. Schuyler, 34 iN". Y. 30, 49, and also with the decisions in analogous cases. If a corporation cannot talk, neither can it write or strike, yet our courts have held corporations liable in actions of libel, assault and battery, malicious prose- cution, and conspiracy. " If a corporation can be held liable in an action for malicious prosecution, no good reason appears why it should be exempt from liability in an action for slander, because the nature of the wrong is not unlike malicious prosecution. The real offense in each case consists of damage to reputation, and is effected by the same means, viz., speech. In each case the plaintiff claims injury to character by reason of improper charges or accusa- tion, the one being defamation in court, and the other, in pais, and recovery for the one bars recovery for the other. 'In an action for malicious prosecution, the plaintiff is entitled to recover damages not only for his unlawful arrest and imprisonment, and for the expenses of his defense, but for the injury to his fame and char- acter by reason of the false accusation. The latter in- deed is, in many cases, the gravamen of the action. An accusation of crime, made under the forms of law, or on the pretense of bringing a guilty man to justice, is made in the most imposing and impressive manner, and may inflict a deeper injury upon the reputation of the party accused, than the same words uttered under any other circumstances. The luost appropriate remedy for the calumny in such cases is by the action for malicious prosecution. The injured party cannot be entitled to two recoveries for the same cause, and a recovery in that form must therefore be a bar to a subsequent 94 SUMMARY OF LAW OF FRIVATE CORPORATIONS. action of slander, for the same identical accusation.' Sheldon v. Carpenter, 4 IST. Y. 578, 570." ^^ § 76. When a corporation is liable for a tort committed by an agent. — A corporation cannot do anything of it- self. It must and always does act through its officers or agents, and its responsibility should he determined not by what the artificial body can or cannot itself do, but by what it has done through its agents, " acting or pretending to act about the business for which the or- ganization was formed, and for which they were ap- pointed agents." ^^ It is a general rule of the law of agency that when- ever a man employs an agent or servant to act for him in a given particular, and the agent or servant, when so acting, commits an actionable wrong against a third person, the principal or master must answer in dam- ages for that wrong, and this is true irrespective of the negligence of the principal or master in employing the agent, or in giving him instructions as to his employ- ment and duties. Whatever the ground may be, the law identifies the principal with the agent, and holds the former liable in damages for the wrongs of the latter. It has been stated that a corporation stands, in this respect, as in others, on the same footing as an in- dividual. The cases are numerous and uniformly in favor of this proposition.** But in order to render the principal liable the act of the agent must have been done within the general scope of the agency or employment, for the principal is not lial)lo for an act performed by the agent when he " steps outside of the scope of his employment to accomplish some purpose of his own." ^^ 17. Erwin'p Summarv of Torts, p. 26. 18. .5 Thompson. § 0275. 19. Merchants' Bank v. State Bank, 10 Wall. (78 U. S.) 604; Milwaukee, etc., By. Co. v. Arms, 91 U. S. 489. 20. 5 Thompson, § G277, and cases cited. LIABILITY FOK TOKTS^ ETC. 95 § 77. Ratification of acts of agent. — A corporation may ratify a wrongful act j)erformed or committed by its agent or employee, and if it does, will be held liable for such acts, on the general principle of ratification or adoption. There seems to be an exception as to ratification of torts, however, for the principle of estoppel has no application here, and unless the superior agents rati- fying the act constituting the tort have authority, as between themselves and the corporation, to bind the corporation by their ratification, it cannot be held.^^ § 78. Damag-es recoverable. — The common law allows an individual to recover full compensation for an injury suffered by him, and corporations are not to be distin- guished in this respect. The general rule is that in the case of corporations the measure of damages is the same as in actions against individual masters or prin- cipals. This general principle is productive of some difference of opinion, however, when it reaches to the liability of a corporation for exemplary damages. Ex- emplary damages can only be reasoned out on the ground of " public policy, expediency, and public safety " — " a reason which puts an end to all argiunent." Repeated adjudications have settled the general rule in the United States that exemplary damages may be given against a corporation in any cases where such damages might be awarded against an individual.^^ The difference of opinion spoken of is not as to the granting of exemplary damages, but as to the circumstances under which such damages will be awarded against corporations.^ 21. Cumberland, etc., Canal Co. v. Portland. 62 Me. 508. Conf. Goddard v. Grand Trunk Ry. Co., 57 Me. 202; Thaver v. Boston, 19 Pick. 511: Ross v. Madison, 1 Ind. 281. 22. Lake Shore, etc.. Ry. Co. v. Prentice, 147 U. S. 101; Springer, etc., Co. v. Smith, 16 Lea (Tenn.), 498; Caldwell v. N. J. Steam, etc., Co., 47 N. Y. 282; Singer Mfg. Co. v. Hold- fodt. 80 111. 455. 23. 5 Thompson, § 6384^. 9G SUMMAliV OF LAW OF PKIVATE COEPOEATIOlSrS. § 79. Criminal liability for torts, acts, etc The fiction which identifies principal and agent or master and servant in their liability for civil damages arising out of torts has no application in such acts as involve malice or intention on the part of the offender. That corporations are subject to the criminal process of in- dictment for nonfeasance and misfeasance there is now no doubt.^* It was originally urged that it was un- necessary to hold the corporations for acts of mal- feasance when their officers might be prosecuted. " Of this there can be no doubt. But the public knows nothing of the former, and the latter, if they can be identified, are commonly persons of the lowest rank, wholly incompetent to make any reparation for the in- jury. There can be no effectual means for deterring from an oppressive exercise of power for the purposes of gain, except the remedy by indictment against those who truly commit it — • that is, the corporation acting by its majority, and there is no principle which places them beyond the reach of the law for such proceedings." ^"^ " It is true that there are crimes (perjury, for ex- ample), of which a corporation cannot, in the nature of things, be guilty. There are other crimes, as treason and murd(jr, for which the punishment imposed by law cannot be inflicted upon a corporation, ^ot can they be liable for any crime of which a corrupt intent or malus animus is an essential ingredient. But the crea- tion of a mere nuisance involves no such element. It is totally immaterial whether the person erecting the nuisance does it ignorantly or by design, with a good in- tent or an evil intent; and there is no reason why for such an offense a corporation should not be indicted." ^^ 24. Com. V. New Bedford Bridge Co., 2 Gray (Mass.), 339; State V. Portland, 74 Me. 268; People v. Albany, 11 Wend. (N. Y.) 539. 25. Lord Denman in Reg. v. Great No., etc., Ry. Co., 9 Ad. & El. N. S. 325. 26. State v. Morris, etc., Ry. Co., 23 N. J. L. 360. LIABILITY FOE TOKTS, ETC. 97 So it has been held that a corporation, is liable to indict- ment for criminal libel,^ for keeping a disorderly house,^^ for obstracting na^dgation,^^ for obstructing a highway, ^^ for committing a public nuisance,^^ for Sab- bath-breaking,^^ for failure to perform their public duties,^^ for failing to keep their works in repair,^^ for "usury, ^^ or for doing any act which is made indictable without regard to the intention of the offender.^^ § 80. Liability for contempt of court. — From what has already been said on the punishment of corporations for criminal acts, it must follow that there is no diffi- culty in the way of jjunishirg it for those contempts which consist of disobedience of the judgments, decrees, or orders of a court of justice. If this were not so, jus- tice would be defeated.^^ A corporation may be com- pelled to obey the orders of the Court of Chancery by a distringas and sequestration of its property,^^ and may be fined for violating an injunction of the court.^ 27. State v. Atchison, 3 Lea (Tenn.), 729. 28. State v. Passaic, etc., Society, 54 N. J. L. 260. 29. Com. V. Proprietors, etc.. 2 Gray (Mass.), 339. 30. State v. Vermont Cent. Ry. Co., 27 Vt. 103. 31. Reg. V. Great No., etc., Rv. Co., supra. 32. State v, Baltimore, etc., Ry. Co., 15 W. Va. 362. 33. Louisville, etc., Rv. Co. v. "Com., 13 Bush (Ky.), 388. 34. Danville, etc., Rv." Co. v. Com., 73 Pa. St. 29. 35. State v. First Xat. Bank, 2 S. Dak. 568. 36. Regina v. Bradford, etc., Co., 6 B. & S. 631; State v. Murfreesboro, 11 Humphr. (Tenn.) 217; Brennan v. Tracy, 2 Mo. App. 540. 37. People v. Albany, etc., Ry. Co., 12 Abb. Pr. 171; Rochester, etc., Rv. Co. V. New York, etc.. Rv. Co., 48 Hun (N Y.), 90. 38. iVTcKim v. Odom, 3 Bland's Ch. (Md.) 420; Reed v. North- western Ry. Co., 32 Pa. St. 257. 39. Mayor, etc. v. New York, etc., Ferry Co., 64 N. Y. 622. CHAPTER VII. MEMBERSHIP — ITS RIGHTS, REMEDIES, AND LIABILITIES. (a) CAPITAL STOCK AND SUBSCRIPTIONS THEREFOR. (1) Who May Become Shareholders. § 81. The relationship between a corporation and its shareholders is purely contractual.^ In the organi- zation of a coi^ioration, no one may become a subscriber to the shares of stock who is incapable of making a contract. Such relationship, however, is governed by the law in force in the particular State in which the corporation is created. In New York, for instance, three or more natural persons are required to create a corporation. This precludes a partnership, — a cor- poration or other association, and of course excludes natural persons incapable of contracting.^ § 82. Infants. — Unless statutes have been inter- preted so as to preclude an infant becoming an original subscriber, there is nothing in the common law to pre- vent such a contract, though the relation is subject to the general rules of infants' contracts, and there is no doubt that an infant may become a shareholder by transfer, subject to the same rules. Few cases exist in this country on the subject, but in England the rules seem established as follows: if an infant elects to hold his shares, he must not only pay the assessments and calls thereon, for he cannot accept the benefits and repudiate the burdens.^ It seems, too, that if he be- 1. 1 Morawetz, p. 43. 2. White on Corporations (5th ed.), p. 6. 3. Mitchell's Case, L. R., 9 Eq. C. 363. [98] WHO MAY BECOME SHAKEHOLDEKS. 99 comes a shareholder by transfer, the directors have the power to reject hnn as such, but unless they do so, his contract is good, being voidable only."^ § 83. Married women, — Where the conunon-law dis- ability of a married woman exists, she cannot become a subscriber, nor can she become a shareholder by trans- fer. Many of the States have removed this disability, however, and in such States she is free to contract as a single individual may. In case of this disability, the usual common-law rules as to the husband's right to reduce to his possession, and his liability thereon ob- tains. § 84. Corporations. — One corporation may not be- come a subscriber to, nor obtain by transfer, shares of stock in another corporation, nor may a corporation purchase its own shares, unless authorized to do so by statute.^ § 85. Trustees. — Disability to subscribe personally does not mean or imply disability to own, and there is nothing to prevent a trustee, as such, from subscrib- ing for and holding shares for his cestui. The trustee in such case becomes the legal owner of the shares, and is answerable as such, subject to the trust existing be- tween him and his cestui. (2) Capital Stock axd Shares of Stock. § 86. Capital stock defined. — " The phrase 'capital stock,' IS employed in acts of incorporation, is never, that I am aware, used to indicate the value of the prop- erty of the company. It is very generally, if not uni- versally, used to designate the amount of capital to be contributed by the stockholders for the purposes of the corporation. The amount thus contributed constitutes the ' capital stock ' of the company. The value of the 4. Lnmsden's Case, L. R., 4 Ch. App. 31. 5. See this subject, ante, p. 72. 100 SLMMAIJY OF LAW OF TKIVATE CORPOKATIONS. stock may be greatly increased by surplus profits or be diuiinislied by losses but the amount of the capital stock remains the same. " The funds of the company may fluctuate. Its capital stock remains invariable, save by legislative enactment. This distinction between the value of the property of incorporated companies, and their capital stock is per- fectly familiar." "^ § 87. Share of stock defined. — "A share of the capital stock is the right to partake, according to the amount put into the fund, of the surplus profits of the corpora- tion ; and ultimately on the dissolution of it, of so much of the fund thus created, as remains unimpaired, and is not liable for debts of the corporation. * * * But such a right, that is, such a share, cannot be issued and delivered by a corporation, continuing in legal existence, and carrying on the business for which it was formed. A demand that it deliver a share of the corporate fund, is to ask of jt something which it has not the power to do ; and which it will not be compelled to do, by judg- ment * * *. It cannot take from the capital stock the corporate fund, a part or parts thereof equal in number to the shares or rights therein, * * *. "What the corporation can do, is to issue and deliver the writ- ten evidence, of the existence of such shares, and of the ownership of them; a paper usually called a stock certificate." '^ " Shares are merely contract rights."^ These rights are evidenced by certificates, which are chattels, or choses in action, and declared to be personal property, and this whether the property of the corporation be real or personal,^ for as remarked above they give their owner no rights over the property itself, but merely the 6. The state v. Morristown Fire Assn., 23 N. J. L. 195. 7. Burrall v. Bushwick Ry. Co., 75 N. Y. 211. 8. 1 Morawetz, § 200. 9. Tregear v. Etiwanda Water Co., 76 Cal. 537. THE CONTRACT OF MEMBEESHIP. 101 right to share in the profits, and to a proportionate share upon dissolution. § 88. The contract of membership. — " The relation of stockholders to the corporation whose stock they hold is that of contract; and the rights and duties of both parties grow out of contract, implied in a sub- scription for stock, construed by the provisions of the charter or articles of incorporation." ^^ " Every element which is essential, in the nature of things, to the existence of a contract, must of course be present in the contract of membership in a corpora- tion. There must be contracting parties, and these parties must by their mutual agreements create obliga- tions among themselves. Without these elements no true contract is possible. But it is not necessary to bring the contract of membership in a corporation within any technical classification of common-law con- tracts ; nor does the validity of this contract depend upon a compliance with any form or condition prece- dent which the common law requires as a prerequisite to the legal recognition and enforceability of a con- tract, such as the rule requiring a consideration. The proper form of entering into the contract of member- ship, and its legal force and effect, depend entirely upon the statute under which it is created." ^^ " A subscription to the stock of a corporation is a contract, and like other contracts must be supported by a consideration. The consideration upon Avhich sucli a subscription rests is the right secured by it of mem- bership in the corporation, and the interests accruing from such membership; and when these are not secured, and cannot legally result from the subscription, it is wanting in consideration, as are notes or other obliga- tions given for its payment." ^^ 10. Supply Ditch Co. v. Elliott, 10 Colo. 327. 11. 1 Morawetz, § 44. 12. Grangers' Life, etc., Co. v. Kamper, 7.3 Ala. 32.5. 102 summary of law of private corporations. (3) Subscriptions for Stock. § 89. Subscriptions may be generally divided into subscriptions before incorj)oration and subscriptions after incorporation. " Tlie contract which exists among the members of a cori:)oration, and which constitutes them a coq>orato association, is the contract of membership. This con- tract gives the contracting parties the status of share- holders; it invests them with the continuing rights of sharcliolders, together with the corresponding liabili- ties." '^ § 90. Agreements to form a corporation. — Where a number of persons mutually agree to become share- holders in a corporation about to be formed, the agree- ment may be said to be an offer to the corporation when the same is formed, and this offer may be accepted by sueli corporation through its regular agents.^* There is no contractual relationship existing between the sub- scribers, even when the agreement is worded " we * * * agree to and with each other," for such an agreement is not a contract. ^^ It follows from the general principle of contracts that an offer may be withdrawn before acceptance, al- though to amount to a withdrawal it should be com- municated to the proper party. Considerable discussion pro and con on this subject has been indulged in by eminent writers, and their views are in some instances upheld by a few cases, but it is submitted that tlie principle stated obtain without qualification on this precise state of facts. ^^ ^ 91. Agreements and actual subscription distin- guished. — Agreements to subscribe and actual subscrip- 13. 1 Morawetz, § 46. 14. Starritt v. Rockland, etc., Ins. Co., 65 Mc. 374; Essex, etc., Co. V. Collier, 8 ]\Ias?. 292. 15. Athol IMusip Hall Co. v. Carv, 116 Mass. 473. 16. Seo 1 Morawetz, §§ 50, 51; 1 Thompson, §§ 1136-95, and cases cited therein. i SUBSCEIPTIONS FOK SHAKES. 103 tion for shares must be distingmslied. The former will be governed by the principles just stated. In the latter case the situation ^^^ll depend much upon the question of statute, which generally provides for preliminary subscriptions. " The statutory subscription itself (actual subscription to the articles of incorporation) constitutes the subscriber a shareholder, and the lia- bility to pay the amount of the shares is merely an incident to the contract of membership; it is like the liability of a partner to contribute his share of capital as fixed by the partnership articles. The contract of the shareholders of an incorporated association is in reality, though not in form, a mutual contract, like that among the members of an unincorporated associa- tion, and the existence of the association is in each case but a result of this contract. Where the stock sub- scriptions are made before incorj^oration, the contract of membership is consummated at the moment at which all conditions precedent prescribed by law have been complied with. At this moment the subscribers assume the status of shareholders." ^^ By entering into an agreement to take shares in a corporation to be formed, persons do not become partners, nor are they liable as principals for each other's acts as agents.^^ The same eminent authority states that this is also true even at common law: "The subscribers are bound by their subscriptions from the time they are made. The con- tract of the subscribers is not a contract with the cor- poration, but a contract between themselves. It has been held that a mutual contract to become sharehold- ers in a cor|:)oration to be formed thereafter is binding, even at common law." ^^ Agreeing that statutory sub- scriptions depend for their validity upon the statutes 17. 1 Morawetz, § 56, and cases cited. 18. Shiblev v. Anjile, 37 N. Y. 620; Fav v. Nobles, 7 Cush. (Mass.) 188: Thrasher v. Pike County Ey.'Co., 25 III. 393. 19. 1 Morawetz, § 59. 104 SUMMARY OF LAW OF PRIVATE COEPORATIONS. imder which tho corporation is created, and that the rule just stated obtains very generally, it is submitted that a subscription to the articles of incor|3oration or any other form of paper under the common law is not, on principle, a contract, nor is it binding to the extent that one may not withdraw before incorporation takes place; for the relation between subscribers is not con- tractual, and there being no party in existence to accept, the subscription is but an offer subject to withdrawal by the offerer. The criticism that justice might bo subverted, or the door opened to fraud, is met by the statement that this is no more true in the case of a corporation than in agreements between individuals, and the law has not, as yet, found it necessary to change the established principles because of lack of power to properly cope with these two subjects. The true rule, based on principle, is that in the absence of statute to the contrary, a subscription to the articles of incorporation, or an actual subscription made in any other form before incorporation may be withdra"\\Ti at any time prior to the filing of the articles or actual incorporation.^" So, any event which would be tantamount to a with- drawal of an offer at common law will act as a "^vitli- drawal, as the insanity or death of the offerer.^^ § 92. Subscriptions made to a promoter before incor- poration. — If the subscription be made to a jM-omoter, and the subscription amount to an agreement with him, whereby he can be held as principal, then there is no doubt but that the agreement is a binding contract and the novation of the contract, whereby the corporation, after formation, takes his place offers no difficulty. Promoters do not as a rule, bind themselves and if the 20. Auburn Bolt & Xut Co. v. Schultz. 143 Pa. St. 2.50; MeNaupht v. Fisher. 90 Fed. 108; Badsrer. etc.. Co. y. Rose, 95 Wis. 14.'i: Starrett v. Insurance Co., O.t 'Mo. 374. 21. Wallace v. Townsend, 43 Ohio St. 537. II I SUBSCKIPTIONS FOE SHARES. 105 subscription-book or papers recite that the subscriber is not to hold the promoter, or the circumstances sur- rounding the transaction are such as to lead to such a conclusion, the promoter is not bound, and the rules stated above will obtain.^^ § 93. Subscriptions after incorporation. — After in- corporation, a contract of membership in a corporation will be created and valid, if the requirements of the statute and the charter or articles of incorporation have been substantially complied with. In the absence of express provisions in statute or charter, the matter is in the control of the corporation, and may be regulated through by-laws.^^ Here both parties are in esse, and the formation of the contract will take the usual prin- ciples of contract to make it complete. In other words, mutual assent, and acceptance.^^ A sale of shares, or transfer by one shareholder to another, must be dis- tinguished from subscriptions, even after incorporation. The former mil be treated under the subject of Trans- fer.-^ § 94. The powers of agents receiving subscriptions — Agents, whether appointed under provisions of the statute or charter or by the corporation itself, are limited strictly to the duties they are required to per- form, and no other agents can bind the company or the other subscribers, though an irregular subscription may be ratified by the proper agents or the corporation and thus become binding.^^ Agents cannot release a subscription when once made,^^ nor can they accept subscriptions upon special terms,^^ nor in any way vary 22. See subject Promoters, post. chap. XII. 23. State v. Sibley, 25 Minn. 387. 24. Dorris y. Sweeny, 60 N. Y. 463; No. Cent. Ry. Co. v. Eslow, 40 Mich. 222. 25. See post, chap. IX. 26. M. & O. Ry. Co. v. Yandal, 5 Sneed. 294. 27. Lowe V. E. & K. Rv. Co., 1 Head (Tenn.), 659. 28. Burrows v. Smith, *10 N. Y. 550. 106 SUMMARY .OF LAW" OF PRIVATE CORPORATIONS. the design of the law that all subscriptions must be . j^ ^ terms. § 95. Formalities and modes of subscription If the statutes or the articles of incorporation prescribe cer- tain fonnalities to be observed, these formalities must be substantially complied with, otherwise there will be no binding contract. " Every subscription by implica- tion refers to and incori:)orates the terms of the charter or general law under wdiicli the corporation is to be formed; and every subscriber agrees to become as- sociated with the others only upon condition that the fonnalities prescribed by the charter shall be observed in making the mutual contract." ^^ And this state- ment is true wdiether before or after incorporation, though if made before incoi-poration, the formalities are to be found in the statutes or general laws. Illus- trations of such formalities may be — requiring sub- scriptions to be made upon* the articles of incorpora- tion, or after incorporation upon the stock-books; the payment of a deposit upon subscription either before or after incorporation or at any time the subscription is made. Irregularities along these lines wall " not necessarily prevent a person from becoming a share- holder de facto wdth all the rights and liabilities of a shareholder * * *. It is an established rule of general application, that a person who has been recog- nized as a shareholder, and has acted as a shareholder, will be liable as a shareholder both to the company and its creditors." ^^ Eliminating statutory or charter formalities, and no particular form of subscription is necessary, so long as intention to become a shareholder is indicated, and the number of shares he wall take and the amount he is to pay can be fixed. 29. Shiirtz V. Schoolcraft, etc., Ry. Co., 9 Mich. 269. 30. 1 Morawetz, § 67. 31. 1 Morawetz, § 73. SUBSCKIPTIONS FOE SHAKES. 107 The weight of authority is in favor of the rule that subscriptions for shares are contracts in writing, and cannot be proved by parol evidence until the ab- sence of the original has been accounted for;^^ nor can the terms of the contract be varied by parol evidence.^^' (4) Subscriptions upon Conditions. § 96. Subscriptions for shares in a corporation may be made subject to express conditions, and this both be- fore and after incorporation. It will depend much upon the conditions expressed, whether the subscriptions are binding or not. § 97, Conditions precedent. — Subscriptions made con- ditional upon the performance of conditions precedent will not be binding until the performance of the con- dition. Such subscription, whether before or after in- corporation, amounts to nothing more than an offer to become a subscriber after performance of the conditions, and will not ripen into a contract except upon per- formance.^^ Such conditions may be: that all or a cer- tain portion of the capital stock be subscribed ;^^ that a road shall be located along a certain route.^^ The sub- scriber is entitled to notice of performance, though the performance of the act may be notice in and of itself, or a general notice to all stockholders will be good.^^ 32. Pittsburgh, etc., Ey. Co. v. Gazzam, 32 Pa. St. 340; Fan- ning V. Insurance Co., 37" Ohio St. 330; Vreeland v. N. J. Stone Co., 29 N. J. Eq. 188. Conf. Colfax Hotel Co. v. Lvon, 69 Iowa, 683. 33. McClure v. People's Freight Rv. Co., 90 Pa. St. 269; Ridgefield, etc., Ry. Co. v. Brush, 43 Conn. 86; Methodist Church V. TowTi, 49 Vt. 29. Conf. Sodus Bay, etc., Ry. Co. v. Hamlin, 24 Hun, 390. 34. Santa Cruz Ry. Co. v. Schwartz, 53 Cal. 106; Trott v. Sarchett. 10 Ohio St. 242. 35. Titonic. etc., Co. v. Lang, 63 Me. 480; Cabot, etc.. Bridge Co. V. Chapin, 6 Cush. 50; Hagar v. Cleveland, 36 Md. 476. 36. McMillan v, Mavsville, etc., Rv. Co., 15 B, Mon. 218; Evansville. etc., Rv. Co.' v, Dunn, 17 Ind. 603. 37. 2 Thompson, § 1333. 108 SUMMARY OF LAW OF PlilVATE CORPORATIONS. § 98. Waiver of condition, etc. — The subscriber may waive conditions i)rccodent by any act that will amount to an estoppel, as by acting as a shareholder,^** or the payment of calls upon the subscription prior to per- formance of the conditions. ^^ § 99. Subscriptions upon special terms. — Subscrip- tions of this kind cannot be called conditional subscrip- tions, but they are absolute subscriptions to which are attached, it may be said, conditions subsequent, the failure of which M'ould subject the corporation to an action for damages. Such a subscription made before incorporation or after is treated as an offer subject to acceptance by the corporation upon the terms stated, and when accepted makes the subscribers shareholders immediately.^^ As before stated, agents appointed to receive sub- scriptions before incorporation have no power to make special terms, but are authorized to receive subscriptions only upon the terms expressly or impliedly set forth in the charter and general laAvs.*^ There is no doubt but that a subscriber may make his subscription subject to special terms, but it is at most only an offer. The managing agents have a limited authority to accept, after incorporation, subscriptions made subject to special terms, subject always to the intervening rights of the other shareholders. Shareholders have a right to expect that the burdens of the corporation shall be equally distributed, as also the profits of the concern, and when the special terms vary in any substantial de- gree the burdens or rights, the other shareholders may 38. Hutchins v. Smith. 4G Barb. (N. Y.) 235. 39. Appeal of Cornell, 114 Pa. St. 1.5.3. 40. Pittsburjrh. etc.. Ry. Co. v. Stewart, 41 Pa. St. 54; Magee V. Uad^^er, .30 Barb. (N. Y.) 240. 41. See The Powers of Agents, pp. 10.5, 111. 42. Burke v. Smith, 16 Wall. (83 U. S.) 390; Upton v. Hans- borough. 3 Biss. (U. S. C.) 423. SUBSCRIPTIONS FOR SHAKES. 109 complain/^ unless, of course, they have estopped them- selves by laches or acquiescence under circumstances which might mislead creditors. § 100. Secret agreements. — The above statement is es- pecially true of secret agreements between a subscriber and the agents of a corj)oration, as it is also true of oral agreements. Such secret or oral agreements are void, and the subscription is enforceable as if no such agree- ments or understandings had existed.^^ " The law offers to the subscriber membership and stock, as the consideration for his subscription, and it offers no more. If he could secure more, it would be a wrong to the other subscribers, not less than if the stipu- lation were that he should have a certificate for two shares of stock on payment of one. The rights of all subscribers are necessarily equal; nor can there be any such thing as conditional membership: either the de- fendant in error became a corporator on the issuing of the letters patent, by virtue of his subscription, * * * or the subscription amounted to nothing. * * * It is the condition of the subscription which is the illegal part, it is that which is repugnant to the nature of a subscription, and Avhich is in conflict with the policy of the law, and therefore the defendant cannot assert it." ^^ Secret agreements made with the agents of a corpora- tion after incorporation, the corporation being a party to the agreement, could not be enforced by the corpora- tion, regardless of the agTeements, but if neither laches or estoppel can be imputed to the shareholders, they could enforce the subscription regardless of the special 43. Galena, etc., Ry. Co. v. Ennor, 116 III. 55; Evansville, etc., Ry. Co. v. Posey, 12 Ind. 363; Philadelphia, etc., Ry. Co. v. Conway, 177 Pa. St. 364. 44. Pittsburgh, etc., Ry. Co. v. Biggar, 34 Pa. St. 455. 110 SUMMARY OF LAW OF PRIVATE CORPORATIONS. terms or secret agreements,^^ and such subscriptions v.-ill usually be enforced for the benefit of creditors, where the corporation becomes insolvent/® (5) Fraudulent Subscriptions. § 101. This subject embraces the acts of promoters in securing subscriptions to a corporation about to be formed, and is more properly treated under the subject of promoters and their contracts.^' Some attention must here be given to the subject as it affects subscriptions. " It is a general rule of law, that, if a person is induced to enter into a contract by false representations, fraudulently made by the other contracting party or his agent, the contract is voidable at the option of the inno- cent party. This rule applies with full force both to contracts of membership and to contracts to purchase, or to take shares in a corporation at a future time. It may be stated as a general rule, that if a subscription for shares was obtained by fraudulent representations, it may be annulled by the subscriber at any time before equities have intervened. Lord Romilly said, in con- sidering the right of a person to be relieved of shares which he had taken upon the faith of a fraudulent prospectus issued by the company: ' Contracts of this description between an individual and a company, so far as misrepresentation or suppression of the truth is concerned, are to be treated like contracts between any two individuals. If one man makes a false statement which misleads another, the way in which that is to be treated affords the example for the way in which a contract is to be treated where a company makes a false statement which misleads an individual.' " ^^ The courts 45. See the subjects. Rights of Shareholders, post, p. 116. 46. See Rijihts of Creditors, post, p. 199. 47. See post, chap. XTI. 48. 1 Morawetz, § 94, citing Central Ey. Co. v. Kisch, L. R., 2 H. L. 99. SUBSCKIPTIOXS FOE SHAEES. Ill take into consideration the peculiar characteristics of such an agreement, and it has been generally held that representations which concern matters of public law, which every one is bound to notice,^^ as well as repre- sentations concerning the legal effect of a subscription, about which the subscriber ought to inform himself,^" will not even render the subscription voidable. So, too, subscriptions by an agent, which contain promises as to future acts of the corporation, cannot be avoided, amounting as they do to matters of opinion only.^^ In order to avoid an agreement of this kind, the misrepresentations must be such that the subscriber was imposed upon after using the caution of an ordi- nary business man,^^ and the representations such as to be a material inducement to the subscriber to become such.^^ § 102. Agent's authority, etc. — On the general rule of agency a principal is bound by an agent only when the representations are made within the scope of his au- thority. But difficulty arises here, in that the promoter may have no principal, the corporation not yet exist- ing, or he may be acting for the corporation after incorporation. In the former case they have no au- thority to bind the company, and it seems that whether m.ade in good faith or through fraud the subscriber will be held.^* In the latter case, i. e., after incoi-po- ration, fraudulent representations will usually avoid the subscription.^^ 49. Upton V. Tribilcock, 91 U. S. 45. 50. Albany, etc., Rv. Co. v. Fields, 10 Ind. 187. 51. Fox V. Allensville, etc., Co., 46 Ind. 31; Miller v. Wild Cat, etc., Co.. 57 Ind. 241. 52. Central Ey. Co. v. Kisch, supra; Mead v. Bunn, 32 N. Y. 275. 53. Pulsford v. Richards, 17 Beav. 96; Andrews v. Ohio, etc., Ey. Co.. 14 Ind. 109. 54. Oldham v. Mt. Sterling, etc., Co., 103 Ky. 529; St. John, etc., Co. V. Munger. 106 Mich. 90. 55. Bates v. Telegraph Co., 134 111. 530; Salem, etc., Co. v. Ropes, 9 Pick. 187. 112 SUMMARY OF LAW OF TKIVATE COKPOEATIOXS. Diligence is required on the part of the subscriber in avoiding the subscription, lest others be misled by the fact of his remaining a subscriber.^** The position of the courts upon this subject of fraudulent subscriptions is unsettled and confusing in that the iiilcs generally obtaining as to fraud seem to have been disresrarded.^^ (G) The Right to Rescind a Subscriptiox. § 103. English rule. — " \Yith respect to the time within which a person who has been induced by fraud to take shares in a corporation must claim a rescission of his contract in order to be entitled to it, the ques- tion is to be considered in two aspects: 1. Where it affects the rights of other shareholder's merely, the com- pany being solvent or a " going concern." 2. Where it affects the rights of creditors, the company having stopped payment, or winding-up proceedings having commenced. The authorities appear to justify the following statements: 1. The claim for rescission, in order to have any standing in court, must he made in the shortest possible time after discovery of the fraud, or after the person seeking the rescission might, by a fair exercise of his opportunities of knowledge, have discovered it. 2. It will not be entertained, in any event, in the English and Canadian courts of equity, after winding-up proceedings have been commenced. 3. Keither will it be entertained after the company has stopped payment and the directors have called an extraordinary general meeting of the shareholders for the purpose of passing a resolution to wind up the company. 4. It seems also clear, upon principle, that 56. Ashley's Case, L. R., 9 Eq. 2G3 ; Upton v. Tribilcock, 91 U. S. 45. 57. See article, 36 Am. Law Rev. 855. SUBSCRIPTIONS FOE SHAKES. 113 it will not be entertained after the company lias stopped pa^Tiient hj reason of insolvency. * * *." ^^ § 104. The rule in the United States. — Xo such defi- nite rules can be declared as obtaining in the United States. In Xew York the rule seems to be that a sub- scription obtained by fraudulent representations may be annulled, if the subscriber acts promptly, and before the rights of creditors or subsequent shareholders have accrued.^^ On the other hand, there are not wanting decisions which hold directly to the contrary, and de- cided later than this case and with no reference to it.^° The same degree of diligence as required by the English rule obtains in the United States,^^ and no re- scission will be allowed after bankruptcy^^ or insolv- ency.^^ The rules stated under " Subscriptions Secured through Fraud," etc., show the circumstances which must obtain in order to give the subscriber a right to rescind, to which should be added the rule that gener- ally obtains; a material divergence from the corporate scheme as contemplated and revealed to the subscriber, will release him from his contract, and he may recover back any moneys paid by him pursuant to the terms.*''* In the absence of fraud, rescission of membership cannot, as a general rule, be made for the reason that it would amount to a decrease of capital stock. There are exceptions, as where, by statute, the managing agents have the power, or where the corporation, by statute, may deal in its O'^ti shares, or where it comes into possession thereof through debts previously con- tracted, and, in order to avoid loss, takes such shares. 58. 2 Thompson, § 1439, citing Oakes v. Turquand, L. R., 2 H. L. 325, and other cases. 59. ISIcDermott v. Harrison, 9 N. Y. Supp. 184. 60. Oldham v. Jit. Sterling, etc., Co., supra; St. Johns, etc., Co. V. Hunger, supra. 61. Upton V. Tribilcock, 91 U. S. 45. . 62. Idem. 63. Turner v. Grangers, etc., Co., 45 Ga. 649. 64. Mays-s-ille. etc., Co. v. Johnson, 109 Cal. 192. 8 114 summary of law of private corporations. Assessments and Calls. § 105. The contract of membership is based upon the terms and conditions stated in the charter or articles of incorporation, and such other instruments as may be authorized by statute before incorporation, and through by-laws and resolutions after incoi-poration. The shareholder, upon subscribing, agrees to associate himself with the other subscribers upon the terms and conditions stated, and becomes liable to pay his pro- portionate amount of the capital stock agreed upon, the liability being based upon this contract. Tlie method or manner by which the capital stock is brought together is by " assessment " or '' call," the two words often being used interchangeably. Properly speaking, the term " call " is applied to the collection of unpaid subscriptions, while the term " assessment " is given to sums required over the fully paid or par value of the shares.^^ § 106. When necessary — If the terms of the subscrip- tion state expressly when the amounts are to be paid, no call is necessary, and it is the duty of the subscriber to pay the amounts as they fall due, otherwise a cause of action arises in favor of the corporation.*^ It is usual, however, to leave all or a portion of the subscription subject to the call of the directors, and under such circumstances, a valid call by the directors or stockholders is a condition precedent to any liability on the part of the subscriber, and notice must be given to the subscriber.*^ § 107. Who may make. — It goes without saying that a call must be made by the proper authority. Gener- ally, and in the absence of express provisions to the contrary, the directors of the corporation may make, 65. Omo V. Bernart, 108 Mich. 43. 66. Phoenix Warehousing Co. v. Badger, 67 N. Y. 294. 67. Williams v. Taylor, 120 N. Y. 244. I ASSESSMENTS AND CALLS. 115 but if the charter or by-laws prescribe who shall make, the power cannot be exercised by others.^'^ This power cannot be delegated by the board of directors,^^ though it seems the shareholders may delegate it to the board of directors/*^ legally constituted as suchJ^ As stated, no calls can be made until all the condi- tions contained in the subscription or other articles have been complied with,^^ though assessments for pre- liminary expenses, where the articles expressly pro\dded for an assessment of this kind, may be properly laid even before the corporation has the authority to make calls for the general objects of the actJ^ § 108. Manner of making calls. — Xo particular form is necessary unless the method or manner be expressly provided for. * * * " There should be some act or resolution which evinces or shows a clear official in- tent to render due and payable a part or all of the un- paid subscription." '^'^ If the charter or by-laws or stat- utes prescribe the manner of making calls, the provi- sions must be carried out,^^ though mere irregularities or informalities will not invalidate, if the provisions are substantially met.^® § 109. Calls must be equal. — Justice requires that the calls must bo equal and made on all alike,^'^ and made by the proper authority, acting legally, and must clearly fix the time and mode of payment in order that they be capable of enforcement."^^ § 110. Assessments. — The general rule is that when 68. People's Mutual Ins. Co. v. Wescott. 14 Gray (Mass.), 440. 69. Farmers, etc., Ins. Co. v. Chase, 56 N. H. 341. 70. Rives v. Montgomery, etc., Co., 30 Ala. 92. 71. Moses V. Tompkins, 84 Ala. 613. 72. Salem Mill, etc., Co. v. Ropes, 6 Pick. (Mass.) 23. 73. Idem. 74. California, etc., Co. v. Callender. 04 Cal. 120. 75. People's Mutual Ins. Co. v. Wescott. 14 Gray, 440. 76. Hays v. Pittsburgh, etc., Ry. Co., 38 Pa. St. 81. 77. Great Western Tel. Co. v. Burnham. 79 Wis. 47. 78. Rutland, etc., Ry. Co. v. Thrall, 35 Vt. 536. IIG SUMMAKY OF LAW OF PKIVATE COKPOKATIOXS. the liability of the shareholder to contribute the amount of capital agreed upon at the time he makes his subscription has been exhausted, no further lia- bility exists, and further calls or assessments cannot be made, unless provided by the charter in express termSj^^ or by statute.**^ The latter provision is usu- ally taken advantage of only after insolvency, and for the purpose of protecting creditors. § 111. Calls upon increased capital. — If the capital stock of a corporation already a " going concern " be increased, a subscriber to new shares will be liable to pay the calls without regard to the amount of the new shares taken,^^ which is a qualification to the general rule that calls cannot usually be made until all the capital stock has been subscribed.^^ The reason for the former rule is that the subscriber becomes a shareholder im.mediately, and in a going concern. (b) Rights A^'D Remedies of Members. § 112. The rights of members are properly divisible into individual rights and collective rights. The former are of such a nature as may be enforced by each shareholder separately against the corporation, the latter can only be enforced by the shareholder acting for himself and all other shareholders, or through the corporate organization, and are classed by a learned writer as " rights in the corporate concern." ^^ These rights may be classified as follows: Individual rights: To a certificate of shares. To transfer his shares. 79. State v. Morristown Fire Ass. Co., 3 Zabr. (23 N. J. L.) 195. 80. Santa Cruz Rv. Co. v. Spreckles, 65 Cal. 193; Price's Appeal, 106 Pa. St. 421. 81. Clarke v. Thomas. 34 Ohio St. 46. 82. Stoneham. etc., Rv. Co. v. Gould, 2 Gray (Mass.), 277. 83. 1 Morawetz, § 235. EIGHTS OF MEMBEESHIP. 117 To vote at the shareholders' meeting. To inspect the books of the company. To dividends after same is declared. Collective rights: To interfere mth corporate management. § 113. The right to a certificate of shares " Where one has subscribed for shares in a corporation and has paid for them, but the corporation has nevertheless re- fused to deliver to him his share certificate, there is judicial authority for the conclusion that he cannot elect to treat the contract as rescinded and maintain an action against the cor^Doration to recover the money thus paid to it, as so much money had and received to his use. But in such a state of facts an action in assumpsit Avill lie upon the implied promise of the corporation to issue the certificate, and the measure of damages is the value of the shares, or its highest price in the market, at any time after the demand and refusal.^'* This decision seems to proceed upon plain grounds. By subscribing for shares and paying for them the subscriber becomes a shareholder; and while a share certificate is not nec- essary to make him a shareholder, that being only the paper e\adence of his title,®^ yet, where the corporation refuses to issue this certificate to him, its refusal may be treated as tantamount to a conversion of his shares, and his right of action, though called an action in as- sumpsit, is really an action for damages for the conver- sion of personal property." ^^ § 114. The right to transfer his shares. — This particu- lar subject will be treated in a separate chapter under the title of "Transfer." ®^ In passing, it is enough to note that shares of stock being property, the owner thereof has as much right to dispose of them as he has 84. Arnold v. Suffolk Bank. 27 Barb. (N. Y.) 424. 85. Butler Univ. v. Scoonover, 114 Ind. 381. 86. 4 Thompson. § 4458. 87. See post, chap. IX, p. 182. 118 sum:maky of law of i'iiivate coepokations. of any other property belonging to him, unless by charter, statute, or by-law the shareholder is prevented, this being part and parcel of his contract. One learned writer distinguishes between the common-law right to dispose of an interest in a partnership and this right to dispose of shares of stock, which he says is due to statute.^^ Another places it on the ground of the jus disponendi incident to ownership of property.^^ What- ever be the reason the power to sell is possessed in the completest sense, subject to the above limitation and subject further to the rights of creditors. And this right is protected by a court of equity which, in general, will compel a transfer upon the books of the corporation of the shares of stock, so as to invest the owner of the equitable title with the legal title also; in other words, issue to him a certificate of the shares. " The jurisdiction which courts of equity exercise over individuals extends equally to acts done or omitted to be done by private or municipal corporations; and the power to compel a transfer of specific property is a salutary one, and should be exercised where such relief alone will work a complete and ample remedy." ^'^ § 115. The right to vote. — The right to vote is a common-law right. Originally, as in a municipal or public corporation, members had but one vote, and this is still true in membership corporations. Custom and later statutes generally gave to each share a vote, and the rule in private stock corporations is a very general one that each shareholder is entitled to one vote for each share of stock owned by him. This rule was founded on the inequality attaching to the early rule, Avhereby a member owning one share had as much voice in the management as he who owned a majority of the stock. 88. 1 Morawetz, §§ 163, 4. 89. 2 Thompson, § 2,300. 90. Cushman v. Thayer Mfg. Co., 76 N. Y. 365. EIGHTS OF MEMBEESHIP. ll'D Shareholders cannot be deprived of the right to vote unless the statute or charter provide to the contrary, or unless he has surrendered his rights by a voluntary agreement, as a by-law. Of course, if the statute or charter deny the privilege, the shareholder takes subject to all conditions. If he acquiesce in passing a by-lav/ to that effect, not only is he bound, but his transferee, who takes his rights and title. § 116. Who are entitled to vote. — Generally speak- ing, only shareholders of record are entitled to vote. If there be a dispute as to the shareholder's right to vote, the transfer-books of the coi-poration will be prima facie evidence of his right,^^ and if the right be shown, equity will compel the acceptance of his note, usually by mandamus. In case of transfer, the vendor has the right to vote until the transferee has perfected his title by having the same recorded on the stock-book.^^ When stock is pledged, the pledgee generally has the right to vote if the stock is registered in his name, but not other- wise,^^ unless statute be to the contrary. Trustees, being the stockholders of record, have the right to vote the shares held in trust, unless the cestui que trust takes steps to prevent by having the shares registered in his name.^ So it seems that executors or administrators have the same right, even though the shares be registered in the name of the decedent.^'' A corporation cannot vote its own stock, which may have come to it by purchase or through debts, or which may be unissued.^^ To allow this would be in the nature of a fraud on the shareholders, giving to the coi'poration an undue advantage in holding the balance of power. 91. Com. V. Dalzell, 152 Pa. St. 217. 92. ]\IcXeil V. Tenth Nat. Bank, 4(3 X. Y. 325. 93. Hoppin v. Buffum, 9 R. I. 513. 94. Farmers, etc., Co. v. Younor, 6 U. S. App. 469. 95. Re Cape May, etc., Nav. Co., 51 N. J. L. 78. 96. Am. Ry. Frog Co. v. Haven, 101 Mass. 398. 120 SUMMARY OF LAW OF TEIVATE CORPOSATIOIS'S. Where the statute of a State gives a corporation the right to hold shares in another corporation, such shares may be voted,^^ unless there be circumstances such as the corporation being only a shareholder and having no beneficial interest, or public poUcy or fraud to pre- clude it.^« § 117. Cumulative voting. — The original rule as to voting gave one vote to each shareholder, regardless of his holdings. Custom and statute has changed this, thereby making a shareholder's power in proportion to his holding, and giving one vote for each share. This directly reversed the former situation and gave to the majority a power over the minority which practically precluded them from representation upon the board of directors, or from having any voice in the manage- ment of the corporation. To obviate this, cumulative voting was adopted, which gives to the minority share- holders the power to have representation upon the board of directors, by cumulating their votes on one candidate. For instance, suppose there are three directors to be elected. The majority have 700 votes, the minority 300. It is evident that the majority can cast TOO for each of their three candidates. The minor- ity may multiply their entire number of votes by the number of directors to be chosen (300 x 3) and cast the entire 900 votes for one candidate, thus assuring his election over one of the majority's candidates. This method of voting does not belong to stockhold- ers as matter of right, and if not contained in the char- ter or statute, cannot be enforced, unless the corpora- tion adopts it in its by-laws — where all consent.^* Pennsylvania has adopted this method as a constitu- tional provision.^ 97. Ropors v. Nashville, etc.. Rv. Co., 91 Fed. 299. 98. Clarke v. Richmond, etc., Co.. 62 Fed. 328. 99. Stale v. Stncklej', 4.5 Ohio St. 304; Pierce v. Com., 104 Pa. St. 1.50; Lowenthal v. Rubber, etc., Co., .52 N. J. Eq. 440. 1. See Pierce v. Com., 104 Pa. St. 150, supra. RIGHTS OF MEMBEESHIP. 121 § 118. Proxy voting. — Voting by proxy was un- known to the coimnon law. The members of a corpora- tion must vote personally, nor can they delegate this right to others, unless the right to do so be conferred by statute or charter. By-laws of the corporation ^ may provide for it, and this by-law may be adopted by a majority only. '^ A stockholder, who desires to exercise his right to vote on his stock by proxy, is undoubtedly bound to furnish his agent with such written evidence of the latter's right to act for him as will reasonably assure the inspectors that the agent is acting by the authority of his principal. But the power of attorney need not be in any prescribed form, nor be executed with any peculiar formality. It is sufficient that it appear on its face to confer the requisite authority, and that it be free from all reasonable grounds of suspicion of its genuineness and authenticity; and the court, in review- ing the proceedings at an election, must be satisfied that the inspectors had reasonable grounds for reject- ing the proxy." ^ On the general principles of agency, a proxy may be revoked at any time, unless coupled with an interest. § 119. The right to inspect the corporate books. — The right to examine the corporate books and records under the common law is a right which existed from the very beginning and came from the law of partnership. " According to the decided weight of authority, a stock- holder has the right at common law to inspect the books of his corporation at a proper time and place, and for a proper purpose, and that, if this right is refused by the officers in charge, a writ of mandamus may issue in the sound discretion of the court, with suitable safe- guards to protect the interests of all. It should not be 2. Phillips V. Wickham. 1 Paitre Ch. (N. Y.) 590. 3. In re St. Lawrence Co., 44 N. J. L. 529. 122 SUMMAEY OF LAW OF PRIVATE CORPOEATIONS. issued to aid tlie blackmailer, nor withheld simply be- cause the interest of the stockholder is small; but the court should proceed cautiously and discreetly, accord- ing to the facts of the particular case. To the extent, however, that an absolute right is conferred by statute, nothing is left to the discretion of the court; but the writ should issue as a matter of course, although even then, doubtless, due precautions may be taiken as to time and place, so as to prevent interruption of busi- ness or other serious inconvenience." ^ Statutes, in many of the States, have guaranteed this right, in some cases declaratory of the common-law right, in others extending it and in some abridging it in hours, time, and place. § 120. Books to which the right is applicable — It seems that all the books of the company are the sub- ject of inspection, unless the statute state specifically what they shall be. In the absence of statute the mat- ter lies in the discretion of the court, but the party asking the privilege must have some interest at stake which renders the inspection necessary;^ and must state, usually, the particular books desired. The motive is not a subject of judicial investigation, as a lawful reason or purpose will be presumed in? the absence of proof to the contrary.*^ Idle curiosity is not a good reason, however, nor must the purpose be reprehensible.'^ As a general rule, an inspection* for purposes hostile to the coi-poration will not be allowed, unless the right to inspect is unqualified as at common law.^ If the inspection bo desired to ascertain whether the corporate affairs are properly managed, it will usually 4. In re Steimvay, 159 N. Y. 250. 5. Legendre v. New Orleans, etc.. Co., 45 La. Ann. 669. '6. Lewis V. Brainerd, 5."? Vt. 510. 7. Ke Crosbv. 28 Misc. (N. Y.) .300. 8. HeminwaV v. Heminway, 58 Conn. 443; State v. Epstein, 46 N. J. L. 479. EIGHTS OF MEMBERSHIP. 123 be granted, but the reasons given must not be mere vague belief that there is mismanagement,^ or a mere desire to ascertain the vahie of the stock.^*^ § 121. Who may inspect. — Directors have an un- qualified right/^ as has a stockholder. The fact that the applicant holds a certificate of stock is generally sufficient. ^^ The party applying may have the assist- ance of experts and attorneys or the examination may^ be conducted by his agents,^^ 'and the right to examine carries ^\ith it, as incidental, the right to make such memoranda and copy as may be necessary.^* § 122. Insolvent corporations. — Stockholders have the right to inspect the books of an insolvent corpora- tion in the hands of a receiver, but the order of a court of equity must be obtained before this can be done.^^ § 123. The shareholder's remedy. — An action for dam- ages will lie against the officers of the corporation for refusing the rights of inspection.^^ Such relief is in- adequate, however, as there would be great difficulty in properly measuring the damages. The shareholder asiks for the exercise of a right, and mandamus is not only the preferable remedy, but the usual mode of enforc- ing the right, ^^ A court of equity will interfere, pro- vided there be no legal remedy given under statute, 9. Re Steinway. 159 N. Y. 250; Mitchell v. Rubber, etc., Co. oration must increase its stock, so that the general rule is that where a corporation bas the right to increase its capital stock, it may make a 36. Hopper v. Sage, 112 N". Y. .530; Wheeler v. Northwestern Co.. 39 Fed. 347. 37. Guarantee Co. v. East Rome Town Co.. 96 Ga. 511. 38. Lock V. Venables, 27 Beav. 598; Re Kernochan, 104 N. Y. CIS. 39. Jones v. Kent, 80 N. Y. 585. 9 130 SrMMAlIY OF LAW OF PRIVATE CORPOKATIONS. Stock dividciul, if it has aceiimiilated a surplus in prop- erty or money equal in value to the par value of the stock so issued/" " There is no jmblic policy which, in all cases, con- demns such dividends. Shares having been legall}^ brought into existence may be distributed among the stockholders of a company. By such distribution no harm is done to any person, provided the dividend is not a mere inflation of the stock of the company, with no corresponding values to answer to the stock distributed. It may be that a distribution of stock gratuitously to the stockholders of a company based upon no values, a mere inflation, or, to use a phrase much in vogue, a watering of stock, would be condemned by the law. But when a stock has been lawfully created, and is held by a corporation, which it has a right to issue for value, then a stock dividend may be made, provided that the stock always represents property." ^^ Wlien a stock dividend is declared, and minority shareholders object, they must be provided for, and have the right to refuse to take the increased capital stock in lieu of cash.^^ It is usual to provided for such cases at the time the dividend is declared. § 130, Right of the shareholder to compel. — The granting of a dividend is a matter of internal manage- ment, resting in the sound discretion of the directors or stockholders, and uncontrolled by the courts.^^ While it is a general rule that the directors or majority stock- holders of a corporation are the sole judges as to the propriety of declaring dividends and the courts will not interfere with a proper exercise of their discretion, yet, when tlie right to a dividend is clear, and there are 40. Williams v. Western Union Tel. Co., 93 N. Y. 162. 41. Williams v. Western Union Tel. Co., 93 N. Y. 162. 42. Idem; Hoole v. Great Western Ry. Co., L. R., 3 Ch. App. 262. 43. Williams v. Western Union Tel. Co., 93 N. Y. 162; Jack- son's Adm. V. Newark, etc., Co., 31 N. J. L. 277. stockpiolder's prefekence. 131 funds from wliicli it can properly be made, a court of equity will interfere to compel the company to declare it/* A very strong case must be made to require a court of equity to interfere mth the discretion of the directors; their action cannot be controlled at the in- stance of a stockholder unless it is shown to be a willful abuse of their discretion, or the result of bad faith, or a willful neglect or breach of a known duty/"" This power will be more readily granted where the direct- ors neglect or refuse to pay a dividend to the preferred stocl-liolders, Avhen the finances of the corporation justify it, and the stockholders are equitably entitled to it.--'' § 131. Stockholder's preference — on increase of stock. — " Where capital stock is increased by a corporation for the pui']30se of increasing its capital by a sale of the stock, the latter belongs to the coi-poration, until disposed of. But where the object is not to increase the capital, but the additional shares are created on account of the existing capital or property of the cor- poration, the entire stock, as then increased, represents no more capital than the original shares had done, and the new shares are not owned by the corporation, but as soon as created, become the individual property of the owners of the old shares, in proportion to their holdings." ^^ This right of the shareholder to his preference in the distribution of the new stock is based on the law of partnership, — ^when stockholders 'assume the bur- dens they are entitled to such benefits as may accrue. The coi-jDoration has no right to deprive the sharehold- ers of this right, and this is true even if the stock 44. Belfast, etc., Co. v. Belfast, 77 Me. 445 ; Boardman v. Lake Shore, etc., Ry. Co., 84 N. Y. 157; Beers v. Bridffeoort Spring Co.. 42 Conn. 17. 45. Smith v. Prattville Mfg. Co., 29 Ala. 503. 46. Hazeltine v. Belfast, etc., Co., 79 Me. 411. 47. Knapp v. Publishers, etc., 127 Mo. 53. 132 SUMMAKY OF LAW OF PRIVATE CORPORATIONS. bo increased for sale. The power to iiicrease is a power which is really a tiiist for the subsisting- shareholders in proportion to the original stock held by them, and each of the shareholders has the right to subscribe for and take the new stock in proportion to his original holdings.^^ This right may bo enforced against the corporation to obtain the shares, or if otherwise disposed of, dam- ages may be recovered. Such damages will be the dif- ference between the highest manked price the stock afterward reached, and the par value together vnth interest thereon, if the same can be computed.'*'' And this is true even though the corporation became in- solvent wliilo the action was pcnding.'^^ § 132. Stockholder's right to interfere with corporate business. — The rights heretofore discussed are the in- dividual rights of the shareholder as distinguished from his collective rights, or in other words, his right as a shareholder to interfere with the corporate business in order to protect his ovm. as well as the interests of his fellow shareholders. This right is really a three- fold right, yet rests entirely upon the one basis of equitable relief. It is self-evident that the majority must rule, in order that anything shall be done to make a corporation prosperous, yet there are limitations to this rule, and the stockholder, in behalf of himself and his fellows, may restrain (a) breaches of trust on the part of the officers or majority; (h) the commission of ultra vires acts on the part of the corporation ; and (c) bring and defend suits in the name of the corpora- tion, where the directors or majority refuse to act. § 133. limitations upon the power of the majority. — " The holders of a majority of the stock of a corjiora- 48. Erdman v. Bovvman, .58 111. 444; Gray v. Bank, 3 Mass. 3G3; Jones v. Morrison. 31 Minn. 140. 49. Erdman v. Bowman ; Gray v. Bank, supra. 50. Reading Trust Co. v. Reading Iron Works, 137 Pa. St. 282. I shareholder's bights in equity. 133 tion may legally control the company's business, pre- scribe its general policy, make themselves its agents, and take reasonable compensation for their services. But, in thus assuming the control, they also take upon themselves the correlative duty of diligence and good faith. They cannot lawfully manipulate the company's business in their own interests to the injury of other stockholders. They cannot by their votes in a stock- holders' meeting lawfully authorize its officers to lease its property to themselves, or to another corporation foiTued for the purpose and exclusively owned by them, unless such lease is made in good faith and is supported by an adequate consideration; and, in a suit properly i^rosecuted to set aside such a contract, the burden of proof, showing fairness and adequacy, is upon the party or parties claiming thereunder. All doubts will be solved in favor of the corporation for whom such stockholders assumed to act." ^^ § 13-i. Equity will aid the shareholder. — There has been a conflict of judicial authority as to how far and to what extent equity will aid. " Still, it has been found necessary for prevention of injuries for which common-law courts were inadequate to entertain in equity such a jurisdiction in the progressive develop- ment of the powers and effects of private corporations upon all the business and interests of society. It is now no longer doubted, either in England or the United States, that courts of equity in both have a jurisdiction over corporations, at the instance of one or more of their members, to apply preventive reme- dies by injunction to restrain those who administer them from doing acts which would amount to a violation of charters, or to prevent any misapplication of tlieii* capitals or profits which might result in lessening the dividends of stockholders or the value of their shares, 51. J. C. Harper in note to Cook v. Sherman. 20 Fed. 175. 134 SUMMAKY OF LAW OF PRIVATE CORPOKATIOXS. as either may be protected by the franchise of a cor- poration, if the acts intended to be done create what is in the hiw denominated a breach of tnist. And the jurisdiction extends to inquire into and to enjoin, as the case may require that to be done, any proceedings by individuals, in whatever character they may profess to act, if the subject of complaint is an imputed viola- tion of a corporate franchise or the denial of a right growing out of it, for which there is not an adequate remedy at law * * *." ^^ § 135. When the shareholder may invoke the aid of equity. — " It is obvious from the rule that the circum- stances of each case must detennine the jurisdiction of a court of equity to give the relief sought; that the pleadings must be relied upon to collect what they are, to ascertain in what character and to what end a share- holder invokes the interposition of a court of equity on account of the mismanagement of a board of direct- ors; whether such acts are out of or beyond the limits of the act of incoi-j^oration, either of commission con- trary thereto or of negligence in not doing what it may be their chartered duty to do." ^^ In Hawes v. Oakland, the Supreme Court of the United States held that, in order to entitle a stock- holder to sue in behalf of the corporation, there nmst bo shown: " (1) Some action or threatened action of the directors or trustees which is beyond the arthority conferred by the charter or the law under which the company was organized; or (2), Such a fraudulent transaction, completed or threatened by them, either among themselves or with some other party, or Avith shareholders, as will result in serious injuiy to the com- pany or the other shareholders; or (3), That the direct- ors, or a majority of them, are acting for their OAvn 52. Dodfre v. Woolsey, 18 How. (59 U. S.) 331. 53. Idem. 4 shareholder's rights in equity. 135 interests in a manner destructive of the company, or the rights of the other shareholders; or (4), That the majority of the shareholders are oppressively and il- legally pursuing, in the name of the company, a course in violation of the rights of the other shareholders which can only be restrained by a court of equity; or (5), It must also be made to appear that- the complain- ant made an earnest effort to obtain redress at the hands of the directors and shareholders of the corporation, and that the ownership was vested in him at the time of the transactions of which he complains, or was there- after transferred to him by operation of law." ^'^ " In actions by stockholders, which assail the acts of their directors or tnistees, courts will not interfere un- less the powers have been illegally or unconscientiously executed, or unless it be made to appear that the acts were fraudulent or collusive and destructive of the rights of the stockholders. Mere errors of judgment are not sufficient as grounds for equity interference; for the powers of those intrusted with corporate man- agement are largely discretionary.^^ In restraining ultra vires acts the same court said: " We do not question the right of stockholders to com- plain of any diversion of the capital and assets to pur- poses not authorized by the charter, and to arrest by suit an unauthorized course of dealing which results in such diversion. The powers of a court of equity may be put in motion at the instance of a single share- holder, if he can show that the corjDoration is employ- ing its statutory powers for the accomplishment of pui'poses not within the scope of its institution." The aid of a court of equity may not therefore be invoked until all legal remedies have been exhausted, 54. 104 U. S. 450. 55. Leslie v. Lorillard, 110 N. Y. 519. See also Bronson v. La Crosse Ry. Co., 2 Wall. (69 U. S.) 283. 13G SUMMARY OF LAW OF PRIVATE CORPORATIONS. and until it has been shown that the proper demand has been made by the shareholder to the corporation to protect itself and its shareholders, and a refusal made.^** An exception will be made to this rule, how- ever, in cases where the officers or directors of the corporation are themselves guilty of the wrong com- plained of, in which case equity will proceed to act without requiring the demand to be made.^^ The coqjoration is an indispensable party defendant in such cases. The reason for this is " that all other possible future suits by the corporation are thereby pre- vented, the rights of the coi'iJoration are duly ascer- tained, and the remedy made effectual against the corporation as well as others." °^ § loC. Stockholder's right to ask for the appointment of a receiver. — " It is not the province of a court of equity to take possession of the property, and conduct the business of corporations or individuals, except where the exercise of such extraordinary jurisdiction is indis- pensably necessary to save or protect some clear right of a suitor, which would otherwise be lost or greatly en- dangered, and which cannot be saved or protected by any other action or mode of proceeding." "^ The instances are not many where a court of equity will appoint a receiver at the instance of a stockholder, more decisions existing where the courts have refused the aid asked than where it has been granted. The mere fact that stockholders apprehend exposure in the future, or that the corporation is not prosperous, or that there is a difference of opinion as to the policy to be pursued in running the business, or that there is a sus- picioTi tlint the officers are not honest and may misappro- 56. Taylor v. Holmos, 127 U. S. 489; Dunphy v. Travelers, etc., Assn., 140 Mass. 4nr>. 57. ]\rora\vot7:. § 380: Rqnair v. Lookout. Mt. Co., 42 Fed. 729. 58. Cook on Stockholders (1st ed.). § 002. 59. Overton v. Memphis, etc., Ry. Co.. 10 Fed. 86G. il LIABILITY OF MEMBERS. 137 priate funds or usurp powers, or that the majority are acting without regard to the interests of the minority — none of these are grounds for a receivership. But a receiver will be appointed where there are such internal dissensions in the governing body of the cor- poration that it is impossible to carry on the business of the company to the advantage of all parties interested.'''^ So, too, a receiver will be appointed where it is clear that mismanagement and misappropriation on the part of the corporate officers will continue unless the court interferes.^^ (c) Liability of Members. § 137. The liability of a member or shareholder in a corporation is embraced uuder one or more of the following: (a) Liability to the corporation. (&) To the other shareholders, (c) To creditors. The latter liability may be subdivided into (1) In law; (2) in equity; (3) the liability to creditors under statute. § 138. Liability to the corporation. — This subject has already been treated under the title of "Assessments and Calls." ®^ The liability rests on the ordinary lia- bility of contract, and if conditional, the conditions must be complied with before the contract can be en- forced.'''^ It is important to remember that no one can be made a shareholder without his consent, either express or implied.^'* The liability, briefly stated, is to take and pay for the proportion of stock subscribed for, and the corporation may enforce the payment of the amounts due up to the par value of the stock, unless 60. Trade, etc.. Co. v. Vickers. L. R., 16 Eq. 303: Tompkins Co. V. Catawba Mills, 82 Fed. 780; Sternberg v. Wolff, .50 N. J. Eq. .555. 61. Stevens v. South Ogden, etc., Co., 14 T'tah, 232; Cameron V. Groveland Imp. Co.. 20 Wash. 169; Aiken v. Colorado River, etc.. Co.. 72 Fed. 591 ; Bridgeport, etc.. Co. v. Tritseh, 110 Ala. 274. 62. See p. 114. 63. Lake Ontario Rv. Co. v. Curtiss, 80 N. Y. 219. 64. Glenn v. Garth. "133 N. Y. 18. 138 SUMMAKY OF LAW OF PRIVATE CORPORATIONS there be an express agreement to the contrary, and the corporation a "• going concern." It is a well-recognized rule, and borne out by weight of authority, that if a stockholder sell his stock before the full amount due thereon is paid, the liability to pay the same is transferred to the transferee, the corpora- tion by canceling the old certificate and issuing a new one in its place having waived all claims on the original certificate.*'"' § 139. The liability to other shareholders ■ Share- holders, as a rule, owe no duty to other shareholders, as they stand in no fiduciary relationship, one to the other. Their liability to other shareholders rests upon the mutual rights and obligations with respect to the contribution of the capital. As a general rule this liability is one enforceable by the corporation, though in certain and extreme cases one shareholder, acting for himself and the others, may compel default- ing shareholders to contribute an amount proportionate to the stock subscribed for. Every share of stock in a corporation is equal in all respects to every other share, unless otherwise provided in the charter. To discriminate between shareholders is to relieve one at the expense of another. Sound policy and justice requires that where one enjoys the privileges of membership, he must also bear its burdens, and for the reason that the profits of the corporation must be divided evenly among the shareholders in pro- portion to their holdings,®^ so every shareholder must contribute a proportionate amount of the capital. Accordingly, every shareholder has a right to insist that every other shareholder shall be held to a strict performance of Ids obligations; and as we have seen, no 65. Tucker v. Oilman, 121 N. Y. 189. For further discussion of this subject, see Creditor's Rights and Remedies, chap. X, p. 199. 66. Jackson v. Newark, etc., Co., 31 N. J. L. 277. I LIABILITY OF MEMBERS. 139 shareholder can rescind or cancel his contract without the consent of the corporation and the members who compose it. This liability to the other shareholders arises in cases where one shareholder comes in on a more favorable basis than the others, as in the matter of secret agTeements between the shareholder and the cor- poration, and the further case where one shareholder has not paid the amounts due upon his stock, while the others have. Where a subscriber allows his name to be placed on the books as a stockholder, he is estopped from denying that he intended to become a shareholder, and any secret agreements between the agents of the corporation and the subscriber can be enforced unconditionally, for the reason that such an agreement would be a fraud on the other shareholders.^^ While the corporation itself could not enforce, being a party to the agreement,^^ it is unquestionably true that the shareholders themselves, being imaware of this secret agreement, have the right to enforce the subscription as an unconditional one, acting themselves or through a receiver. But share- holders must not sleep on their rights.®^ Agents of the corporation, soliciting subscriptions, have no right to enter into agreements with subscribers on special terms, whereby the subscriber shall come in and contribute less than the other members, or receive a preference in the distribution of profits. Such a sub- scription is either void or it must be enforced without regard to the special agreement.^^ § 140. Forfeiture of shares — A corporation has, at common law, no lien on the shares of its members to secure the payment of calls, hence the only remedy is 67. Melvin v. Lamar Ins. Co.. 80 111. 446: Hawley v. Upton, 102 U. S. 314. 68. Christensen v. Eno, 106 N. Y. 97. 69. Melvin v. Lamar Ins. Co.. 80 111. 446. 70. Idem. See also Burke v. Smith, 16 Wall. (8.3 U. S.) 390. 140 SUMMARY OF LAW OF TRIVATE COKPOKATIONS. an action at law in the name of the corporation to com- pel the payment. i!^o authority on the part of the cor- poration exists whereby it can forfeit the shares of the delinquent member, unless there be an express grant of authority, either in the charter or in the general laws under which the corporation was organized."^ If this power exists, it must bo exercised fairly and without discrimination either to the other shareholders or the delinquent shareholder. It cannot be exercised in such a way as to allow the shareholder to escape liability to creditors, for this would amount to a fraud upon the continuing shareholders.'" § 141. "Paid-up" shares. — A person who innocently purchases such shares, the corporation having issued them treating them as such, and stating in the certificate that they are " paid-up," will not be charged with a liability for the falseness of the corporation's position. Having used the ordinary caution of a business man, he is not required to suspect fraud and institute in- quiries, when there is no ground for such suspicion.'" Of course if he takes with notice, he will be chargeable. It is self-evident that if shares having once been fully paid are transferred back to the corporation, they may be sold by the corporation at their actual or market value, without incurring any liability eithor to share- holders or creditors. Liability to Creditors. § 142. At common law. — It is a general rule of law that shareholders are not liable to creditors for the debts or torts of the corporation, unless made so by statute or Constitution, or unless they agree, upon becoming share- holders, to assume a larger liability.'^'* In all cases, 71. Porrin v. Granf3;er, 30 Vt. .595. 72. Stanhope's Case. L. R., 1 Ch. App. 101. 73. Phelan v. Hazard. 5 Dill. (U. S. C.) 45. 74. Jackson v. Meek, 87 Tenn. G9; Toner v. Fulkerson, 125 Tnd. 224. LIABILITY OF MEMBEKS. 141 however, the shareholder is liable to pay to the corpora- tion -whatever remains unpaid upon his shares at their par value for the benefit of the creditors of the corpora- tion, and this may be enforced in one of several ways, and if not at law equity will enforce it. Exceptions to this rule will be found in favor of a bona fide purchaser, M'ho, in good faith, has bought shares of a corporation, believing them to be paid up, and the corporation has issued them as paid up f^ and the same is true of a pledgee of the corporation who holds shares as collateral security for money advanced to the corjDorationJ^ The pledgee of a shareholder, being an equitable holder only, will not be held liable on the shares unless he has reduced the shares to his pos- session by transfer on the books."^ Shareholders are not liable for the tiUra vires acts of the corporation, and cannot be held for them. But it has been held that they are liable as partners in cases where the corporation was illegally formed, or where the corporation was pro- hibited either by law or public policy ,''^^ the reason given being that individuals cannot use an incorporation as a cloak to cover transactions of this nature. They are, of course, liable for their o\vn frauds as shareholders.'*^ § 143. In equity. — From the above statement it is evident that the only recourse of creditors at law is to reach the tangible assets of the corporation by execu- tion. If the assets have been put beyond execution by secret agreements, fraudulent transfers, or conceal- ments, then equity may be invoked and its aid will be extended to the creditors as against the corporation, and in certain instances against the shareholders. It is a general rule, however, that equity will aid only after all legal remedies have been exhausted, and in seeking the 75. See Thompson on Stockholders, § 135. 76. Fisher v. Seligman, 7 Mo. App. 383. 77. Crease v. Babcock, 10 Mete. (Mass.) 525. 78. See 3 Thompson, §§ 2940. 2941. and cases cited. 79. Whitwell v. Warner. 20 Vt. 425. 142 SUMMAKY OF LAW OF PRIVATE CORPORATIONS. aid of a court of equity the creditors generally have to aver that they have proceeded at law, and that an execu- tion has been returned unsatisfied. Shareholders can be reached in equity only under two conditions: (1) Where the capital has been sub- scribed for, but not paid in; (2) where the capital has been paid in and improperly divided among the share- holders or otherwise diverted from their proper func- tion of paying corporate debts. § 144. The trust fund theory. — It is a favorite doc- trine, invented by Justice Story, of the United States Supreme Court ,^° that the property of a corporation is a trust fund for the payment of the debts of the cor- poration in preference to the stockholders. For many years this theory obtained in the majority of jurisdic- tions in the United States, but of late years has been qualified, and in one or two jurisdictions seems to have been lost sight of altogether. A leading case in the United States Supreme Court held that a subscriber to the shares of a corporation could be compelled to pay, if necessary to liquidate its debts, the entire par value of his shares, no matter what agreement he may have made with the corporation in respect to the amount to be paid therefor at the time of his subscription.*^ This rule received some qualification in a much later case of the same court : " It is the settled doctrine of this court that the trust arising in favor of creditors by subscrip- tions to the stock of a corporation cannot be defeated by any simulated payment of such subscription, nor by any device short of an actual payment in good faith. And while any settlement or satisfaction of such sub- scription may be good as between the corporation and the stockholders, it is unavailing as against the claim of creditors. JSTothing that was said in the recent eases of aark V. Bever, 139 U. S. 9G; Fogg v. Blair, id. 118; 80. See Wood v. Dummer. 3 Mason (U. S. C.),308. 81. Upton V. Tribilcock, 91 U. S. 45. LIABILITY OF MEMBERS. 143 or Ilandley v. Stutz, id. 417, was intended to overi-ule or qualify in any way the wholesome principle adopted by this court in the earlier cases, especially as applied to the original subscribers to stock. The later cases were only intended to draw a line beyond which the court was unwilling to go in affixing a liability upon those who had purchased the stock of a corporation, or had taken it in good faith in satisfaction of their de- mands." ^^ This means, in the language of Mr. Thomp- son, " that except in cases where creditors have been deceived and misled by the corporation pretending to have a capital which it has not, a creditor can en- force no right as against a shareholder gTeater than the corporation itself could enforce against him." ^^ The entire theory has been impugTied by a State court which would allow a corporation, in contem- plation of insolvency to prefer particular creditors. ^^ § 145. Relief when stock is not paid in " The rights of creditors being superior, and partaiking somewhat of the character of a lien, equity will regard and work them out by the same means the cor|Doration itself should have done."^'* This aid will be extended only where the creditors are unable to obtain satisfaction by legal methods, un- der which circumstances, if any of the stockholders are indebted to the corporation on account of their sub- scriptions to the capital stock, and the board of direct- ors fail or refuse to raise the money to pay the debts by enforcing the delinquent shareholders to make pay- ment, equity will either compel the directors to per- form this duty or perform it by its own proper officers.^'^ 82. Camden v. Stuart. 144 U. S. 104. 83. 3 Thompson, § 2953. 84. Hospes v. Northwestern Mfg. Co.. 48 Minn. 174. 85. Adler v. Milwaukee, etc., Co., 13 Wis. 63. 86. Idem; Ward v. Griswoldville, etc., Co., IG Conn. 597. See also Slee v. Bloom, 19 Johns. Ch. 456. 144 SUMMAUY OF LAW OF FlUVATE COKPOKATIO^^S. § 14(;. Relief when stock is improperly withdrawn or divided. — Wlicre dividends have been properly paid from profits, the company being solvent at the time, its subsequent insolvency will not make the shareholders liable to creditors for the dividends so received.**^ But a division of assets at a time when the corpora- tion was insolvent, or contemplating insolvency, would plainly be -an injury to the creditors, and it may not only^ be restrained, but if paid to shareholders, may be recovered back.^^ So the shareholders of an insolvent bank are not entitled to receive or divide among themselves any of its assets until its debts and liabilities are fully dis- charged.^^ An action may be maintained by the receiver of an insolvent corjjoration against its share- holders to recover sums received by them as dividends where the corporation was insolvent.^*' § 14:7. Statutory liability. — Much discussion has been indulged in with reference to this liability and its re- semblance to the liability of partners and guarantors. That it resembles cither one or the other is of little moment. It is created by and depends upon statute, and if a fair construction of the particular statute seems to approach to the liability of either one or the other in particular instances, it by no means follows that the general liability of a partner or guarantor is created. § 148. Parties to the action. — " The individual lia- bility of stockholders in a corporation is always a creature of statute. It does not exist at common law. The first thing to be determined in all such cases is therefore what liability has been created. There will always be difficulty in attempting to reconcile cases 87. Reid v. Eatonton Mfg. Co.. 40 Ga. 98. 88. Bartlett v. Drew, .57 N. Y. 587. 89. Wood V. Dummer, 3 Mason (U. S. C.),308. 90. Williams v. Boice, 38 N. J. Eq. 3G4. I LIABILITY OF MEMBEKS. 145 of this class in which the general question of remedy has arisen, unless special attention is given to the pre- cise language of the statute under consideration. The remedy must always be such as is appropriate to the liability to be enforced. The statute which creates the liability may declare the purpose of its creation and provide directly or indirectly a remedy for its en- forcement. If the object is to provide a fund out of which all creditors are to be paid, share and share alike, it needs no argument to show that one creditor should not be pennitted to appropriate to himself, without regard to the rights of others, that which is to make up the fund." ^^ From this it may be gathered that the distinction as to whether one creditor may sue or all must join in the action will depend upon the language of the stat- ute. If the shareholders are made severally and in- dividually liable to the creditors directly, one creditor may sue a single shareholder, and at law. If the stat- ute directly or impliedly provides for a proportionate liability by all stockholders, by which a fund is cre- ated out of which all creditors are to be paid alike, then the liability must be enforced by all the creditors, or by one for the benefit of all, and all shareholders should be made defendants. § 140. The liability a contractual one — The liability imposed by statute is, in most cases, an absolute obli- gation to pay and is generally held to be contractual.^^ As such it has been held to survive and may be en- forced against the personal representatives of the de- ceased shareholder.^^ If, however, the liability be a contingent one, accruing only upon the nonperformance of certain prescribed duties, it will be penal in its 91. Terry v. Little, 101 U. S. 216. 92. Lowry y. Inman, 46 N. Y. 119; Paine v. Stewart. 30 Conn. 516; Bond v. Appleton, 8 Mass. 472; Aultman's Appeal, 98 Pa. St. 505. 93. Cochran v. Weichers, 119 N. Y. 399. 10 14G SUMMARY OF LAW OF PRIVATE CORPORATIONS. nature and does not sun'ive. Such a liability would be one making the directors liable for failure to file the annual rejjort. § 150. "Debts" under the statutes. — The general view is that the word " debt " is confined solely to de- mands founded upon contract, and is not to be extended to include claims arising from torts. There are sev- eral jurisdictions which hold to the contrary, however, and insist that the words include any just demand against the corporation and will include a claim for damages sounding in tort.^^ § 151. Mode of enforcing the liability. — The manner of enforcing the liability against the shareholders will depend to a certain extent upon the statute. Statutes usually provide that the creditor must exhaust all reme- dies at law and against the corporation, secure a judg- ment and have the same returned unsatisfied before he may go against the shareholder. If he is not able to secure a judgment he cannot proceed against the shareholder at all.^^ Where the statute does not re- quire a judgment against the corporation, the necessity for it will depend upon the peculiar liability wdiich at- taches by virtue of the statute. If the statute makes the shareholder primarily liable no judgment against the corporation is necessary; but if the liability is sec- ondary only, legal remedies against the corporation must first be exhausted before the creditor may proceed against the shareholder. In other words, judgment must first be obtained against the corporation and exe- cution thereon returned unsatisfied. § 152. What shareholders are liable. — Three distinct views exist as to what shareholders are liable. (1) Only 94. Child V. Boston, etc., Co., 137 Mass. 516; Bohn v. Brown, 33 Mich. 257; Doolittle v. Marsh, 11 Nebr. 243; Cook on Stock- holders, § 220. Contra, Losee v. Bullerd, 79 N. Y. 404; Carver v. Baintree Mfg. Co., 2 Story (U. S. C), 432; Rider v. Fritchey, 49 Ohio St. 285. 95. Fourth Nat. Bank v. Francklyn, 120 U. S. 747. LIABILITY OF MEMBERS. 147 those shareholders are liable who were such when the debt was contracted, and while transfer will release them from debts subsequently incurred, it will not have that effect upon those incurred during membership ;^^ (2) that only those shareholders are liable w^ho were such at the time of the commencement of the action ;^^ (3) all shareholders who were such either at the time the debt was contracted or who became such prior to the commencement of the action. ^^ A review of the earlier cases will show the subject to be in some con- fusion, all three views having obtained at different times in the same jurisdiction. This is accounted for, however, by the changes through which the statutes have gone and allowance must also be made for the variation in the form and language of the statute im- posing the liability. As to who is or is not a share- holder, the rules already stated will govern.^^ § 153. Effect of a repeal of the statute. — A repeal or abrogation of an existing statutory or constitutional provision imposing a contractual liability upon the shareholders of a corporation to its creditors is, as against the creditors whose claims accrued while such provision was in force, invalid as an attempted impair- ment of contract.-^ When a shareholder in a corpora- tion who has assented to an increase of stock and its gratuitous distribution among the shareholders, re- ceives such stock as full paid, an obligation arises to pay for it in full when called upon to do so by creditors whose debts are subsequent to the increase. This rule has no effect if the debts were contracted prior to the 96. Williams v. Hanna. 40 Ind. 535; Chesley v. Pierce, 32 N. H. 388. 97. Middleton Bank v. Magill. 5 Conn. 28. 98. Root V. Sinnock, 120 111. 350. 99. See ante, p. 98. 1. Hawthorne v. Calef, 69 U. S. 10. 2. Handley v. Stutz, 139 U. S. 417. 148 8ummaky of law of pkivate corpokations. Set-Off by Siiakeholders. § 154. Against unpaid subscriptions. — A stockholder who is also a creditor of the corporation has no right to set-off as against his unpaid subscription, after the corporation has become insolvent, and a suit in equity has been brought to wind up its affairs and distribute its assets. The unpaid stocik is held to be a trust fund for the purpose of paying the debts of the corporation, and as such it must be distributed among the creditors pro rata. The debt due a stockholder is entitled to no preference over other debts, and he cannot require its payment by way of set-off, to the exclusion or post- ponement of other claims. The reason usually assigned for this rule is that the debts owing by the stockholders to the cori:)oration after insolvency and that owing from the corporation to him are not in the same right, the former being a debt owing to a trust fund." ^ § 155. Under statutory liability. — Two views exist here — the one holding that where the statute creating the liability is personal and several, and action may be brought by any creditor against any shareholder, the shareholder may set off debts due him from the com- pany.* On the other hand, if the statute creating the liability contemplates that it shall be a fund for the payment of creditors ratably, then the right to set-off is denied, and the shareholder must pay his proportion and look to the funds thus created for the satisfaction of his debt.* 3. Bausman v. Kinnear, 79 Fed. 172; Scoville v. Thayer, 105 U. S. 143; Lawrence v. Nelson, 21 N. Y. 158; Long v. Ponn. Ins. Co., 6 Pa. St. 421. 4. Wells V. Stout, 38 Fed. 807; Wheeler v. Millar. 90 N. Y. 353; Pondville Co. v. Clark, 25 Conn. 97. 5. Witters v. Sowles. 32 Fed. 130; Ball Electric Light Co. v. Child, 68 Conn. 522; Thebus v. Smiley, 110 111. 310; Barnes v. Trevor, 45 App. Div. (N. Y.) 314. CHAPTER VIII. Management. § 156. In general. — One of the important distinctions between a corporation and a partnership is that in the latter each partner is the agent of the partnership and of each other with power to bind either or both within the scope of the partnership business, while in the former, no one shareholder has any such power. The management of the corporation belongs to the share- holders collectively, and from them, as a constituted body, must come the authority to manage and direct its affairs. This is usually done by the election of directors and other officers and agents, who represent and act for the corporation, and these directors, officers and agents are not only responsible to, but subject to the control of, the shareholders. The delegation of authority to a board of directors is usually regarded as a delegation of general authority to exercise all the corporate powers which relate to the ordinary business of the corporation, but by no means vests all the author- ity in them, for extraordinary and unusual powers still remain in the shareholders, and must be exercised by them.^ Statute or charter, or both, may provide for and define the scheme of management and outline the au- thority and duties of the managing agents, in which case they cannot be interfered with or controlled by thy shareholders. In the absence of these limitations, the shareholders control, and the usual method of proced- ure is for the shareholders to elect a board of directors whose duties and powers may bo outlined, defined and 1. Metropolitan, etc.. Rv. Co. v. Manhattan, etc.. Rv. Co., 11 Daly (N. Y.). 373. [149] 150 SUMMAKY OF LAW OF TiUVATE CORPORATIONS. limited through by-laws adopted by the shareholders. In the absence of by-laws or statutory limitation, it is a general rule that wlien once the authority has been delegated to a board of directors, the directors may do all that the shareholders could do. Generally, the above statement will apply, viz., that directors have ** the authority to exercise all the coi-porate powers which relate to the ordinary business of the corpora- tion," while the extraordinary or unusual powers must be exercised by the shareholders. Such unusual powers may include the conveying, leasing and mortgaging of the property; incre-asing or diminishing the capital stocik; authorizing amendments or alterations to the charter; the adoption of by-laws and the surrender of the charter or the dissolution of the corporation; though, as already stated, one or all of these extraor- dinary powers may be given to the directors by statute or charter. '' A corporation is not a copartnership where mem- bers can make an agreement between themselves in- formally, but it must act as a corporate body; and as corporations are now so numerous in all l)ranohes of business we deem it highly important to require regu- larity and certainty in their proceedings, so far as mutual rights of stockholders arc reqiured." " From this statement it may be concluded that the powers of the shareholders must be exerted collectively, and at a meeting called and conducted according to law. In- dividual acts of shareholders, even though expressed in writing, will not suffice,^ unless the statutes provide for such action. §157. Corporate meeting's.- — Provision is usually made in statute, charter or by-laws for the calling of corporate meetings, and these provisions are man- 2. Dennis v. .Toslin Co.. 10 P.. T. 666. 3. Com. V. Tnllon. 13 Pa. St. 133. COEPORATE MEETINGS. 151 datorj in their nature^ and must be complied with,* though it seems that irregularities in calling, or failure to comply with express provisions will not render the meeting illegal, provided all sharehold- ers be present, or subsequently ratify the actions taken.^ In the absence of such express provisions the meeting must be called by some person or persons hav- ing competent authority. The directors have this authority when it is deemed advisable, and it has been held that the officer or general agent intrusted with the management of the coq^oration may call, but sub- ordinate officers or agents have no such authority.^ When charter or by-laws provide that a meeting may be called upon the application of a certain number of shareholders, and the officers refuse to make such call, they may be compelled by mandamus.^ § 158. Notice. — The object of a meeting of share- holders is to enable all to consult and deliberate, and for this reason all shareholders are entitled to be pres- ent and have a hearing. To bring this about every shareholder is entitled to a notice of the meeting, other- wise the transactions of the meeting are not binding as corporate acts.^ The notice must contain the exact time and place of the meeting, and, in case of a special meeting, must state the nature of the business to be transacted. If a special meeting, only such business may be transacted as stated in the notice and call; if a general meeting, all business incident to the general corporate interests may be transacted. Usually, the charter or by-laws state the time and place of meetings, and in such a case shareholders, be- ing deemed familiar with both, are not entitled to any 4. StevPTis V. Eden, etc., Societv. 12 Vt. 688. 5. Benhow v. Conk. 115 X. C. 324. 6. Rtebbins v. Merritt. 10 Cuish. (Mass.) 27. 7. People V. Ciimminsrs. 72 IST. Y. 43.3. 8. People V. Batchelor, 22 N. Y. 128. 152 SUMMARY OF LAW OF PRIVATE CORPORATIONS. Other notice as a matter of right. Notice may be waived, under conditions stated above, under irregu- larity as to calls. § 159. Time. — In the absence of express provi- sions as to the time of calling a shareholders' meet- ing, there is no definite rule, save that it must be ap- pointed at such a time as to let the shareholders have reasonable notice of the meeting. The fact that the by-laws state the number of yearly meetings of the shareholders does not preclude meetings at other times, due notice having been given.^ § 160. Place. — A cor])oration has no legal existence outside of the limits of tlio State in which it was cre- ated, and it is a general rule that no corporate meeting can be held outside of that State. This general rule has been qualified by the courts at times,- and perhaps a better rule would be that transac- tions affecting the corporate existence of the corpora- tion, and which are the direct acts of the corporation, must be done within the limits of the State of its crea- tion. ^° Such transactions might be the first meeting, the election of directors, increasing or decreasing capi- tal stock, transferring or mortgaging property, passing of by-laws and winding-up. There is nothing to pre- vent a directors' meeting from being held outside of the State, as the acts of the agents of the corporation nuist be distinguished from those acts of the corporation. Where a corporation created by one State has be- come a corporation of one or more other States, un- der provisions in statutes of the various States, one corporate meeting in any one of the States will be deemed sufficient, and the transactions of that one meeting declared effective generally. In other words, 9. Boaidslev v. Johnson. 121 K Y. 224. 10. ^filler V. Ewer. 27 Mo. oOO : Craig Co. v. Smith, 10.3 Mass. 2(12: Hilles v. Parrish. 14 N. J. Eq. .380; Ormsby v. Vermont, etc.. Co., .50 N. Y. 623. POWER OF THE MAJORITY. 153 it is not reasonable to ask that the corporation hold a separate meeting in each State in order to make the transactions valid within that State.^^ Several of the States now expressly provide in their general laws that meetings may be held outside of the State. The conduct of the meetings is usually regulated through by-laws. In their absence there is no pre- scribed method to be followed, the presumption being that the meeting. was regularly called and properly conducted, in the absence of proof to the contrary.^^ Unless otherwise prescribed a majority of sharehold- ers present will constitute a quorum, and may transact business.^^ This is not true of a Ijoard of directors, however, as a majority of them must be present to make up a quorum. The method of voting and the right of a shareholder to vote has already been spoken of in a previous chapter.^'* § 161. The power of the majority.-^ " We suppose it may be stated as an indisputable proposition, that every person who becomes a member of a corporation ag- gregate by purchasing and holding shares agrees by necessary implication that he will be bound by all acts and proceedings, within the scope of the powers and authority conferred by the charter, which shall be adopted or sanctioned by a vote of the majority of the corporation, duly taken and ascertained according to law. This is the unavoidable result of the funda- mental principle that the majority of the stockholders can regulate and control the lawful exercise of the powers conferred on a corporation by its charter. A 11. Graham v. Boston, etc.. Rv. Co.. 118 U. S. 161. 12. Wallace v. Inhabitants, etc.. in Townsend. 109 Mass. 263. 13. Morrill v. Little Falls IMfg. Co.. 5.3 Minn. 371; Re Rapid Transit Ferry Co., 15 App. Div. (N. Y.) 531. 14. See Voting, etc.. chap. VII, p. 118. 15-i SUMMAKY OF LAW OF PKIVATE COEPORATIONS. holder of shares in an incorporated body, so far as his individual rights and interests may be involved ^n the doings of the corporation, acting within the legiti- mate sphere of its corporate power, has no other legal control over them than that which he can exercise by his single vote in the meetings of the company. To this extent he has parted with his personal i-ight or privilege to regulate the disposition of that portion of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of a majority of his fellow coi-porators. The jus dis- ponendi is vested in them so long as they keep within the line of the general purpose and object for which the corporation was established, although their action may be against the will of a minority, however large. It cannot therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed or impaired by any act or proceeding of the former which is authorized by a majority, and which comes within the terms of the original statute creating and establishing their fran- chise, and conferring on them capacity to exercise con- trol over the rights and property of their members. On the contrary, the fair and reasonable implication resulting from the legal relation of the stockholder and the coi-poration is, that the majority may do any act either coming within the scope of the corporate authority, or which is consistent with the terms and conditions of the original charter, without and even against the consent of an individual member." ^"^ " Each and every stockholder contracts that the will of the majority shall govern in all matters coming within the limits of the act of incorporation ; and in all cases involving no breach of trust, but only error or mistake of judinnont upon the part of the directors 15. Durfco V. OM Colony, etc., By. Co.. 5 Allen (Mass.), 230. POWER OF MAJORITY. 155 who represent the company, individual stockholders have no right to appeal to the courts to dictate the line of policy to be pursued by the corporation." ^^ It follows from these decisions, which have been unanimously uj)held, that there are limits beyond which a majority cannot go. The majority has no greater power than the corporation itself, and any^ attem^Dt on their part to go beyond that power will give a dissenting shareholder the right to seek equitable relief by injunction and to further set the transaction aside.^^ !N^or can they manipulate the company's business in their o^vn interests to the injury of other shareholders. " The owners of a majority of the capi- tal stock of a corporation may legally control the com- pany's business, prescribe its general policy, make themselves its agents, and take reasonable compensa- tion for their services. But, in assuming the control, they also take upon themselves the correlative duty of diligence and good faith. They cannot lawfully ma- nipulate the company's business in their own interests to the injury of other corporators." ^^ The constitutional protection to contracts applies here, in that a majority cannot force a minority into an enterprise which differs from that originally stated in the charter, even thougii a statute passed subse- quently to the incorporation allows the corporation to undertake the enterprise. ^° § 162. Power of majority to alienate the property. — " We entertain no doubt of the right of a corporation, established solely for trading and manufacturing pur- 16. DiuUev V. Kentucky High School. 9 Bush (Ky.), 576; Foss V. Harbottle^ 2 Hare, 461. 17. Tomkinson v. Poutheastern Rv. Co.. L. R.. .35 Ch. Div. 675: Dodge v. Woolsev. 18 How. (59 U. S.) 331. 18. :Mpeker v. Winthrop Iron Co., 17 Fed. 48; Atwood v. Merry- weather. L. R., 5 Eq. 464, n. 19. Stevens v. Rutland, etc.. Ry. Co.. 29 Vt. 545; Zabriskie v. Hackensack, etc.. Ry. Co., 18 N. J. Eq. 178. 156 SUMMARY OF LAW OF PRIVATE CORPORATIONS, poses, by a veto of a majority of their stockholders, to wind up their affairs and close their business, if in the exercise of a sound discretion they deem it expe- dient so to do. * * * Public policy does not re- quire them to go on at a loss. On the contrary, it would seem very clearly for the public welfare, as well as for the interests of the stockholders, that they should cease to transact business as soon as, in the ex- ercise of a sound judgment, it is found that it cannot be prudently continued. If this be not so we do not see that any limit could be put to the business of a trading corporation, short of the entire loss or destimc- tion of the corporate property. The stockholders could be compelled to carry it on until it came to actual insolvency. Such a doctrine is without any support in reason or authority." "^ Under such conditions the manner of closing up the business is immaterial, so long as it be done in good faith. The majority may dispose of the property to another corporation and take stock in this latter, to be distributed among the shareholders of the former, if all shareholders consent.^^ A dissenting shareholder must be provided for, however, and if he refuses to accept such stock, he may enjoin the sale until such time as his rights are secured." On the other hand, if the circumstances do not re- quire a winding-up of the corporate enterprise, the majority cannot, against a dissenting minority, dis- pose of the corporate property, and every shareholder has the right to insist that the business shall be con- tinued in accordance with the charter. ^^ It is further 20. Treadwell v. Salisbury Mfor. Co.. 7 Gray, 303: Hodges v. New Entrland Screw Co.. 1 E. T. 312. 21. Treadwell v. Salisbury Mfg. Co.. 7 Gray. 393. 22. Lanman v. Lebanon Valley Ry. Co., 30 Pa. St. 42. 23. Kean v. Johnson, 9 N. J. Eq. 401: Elyton Land Co. v. Dowdell, 113 Ala. 177. II BY-LAWS. 157 implied that this power of the majority would not at- tach to a public-service corporation, unless the consent of the State be obtained. An attempt on the part of a majority to transfer the property of a going concern, merely for the purpose of turning the corporation into a foreign one, for the purpose of avoiding the requirements of the parent State may be frustrated by any dissenting shareholder, for this amounts, in fact, to a dissolution.^'* By-la WxS; Power to Make. § 163. The power to make by-laws has already been spoken of. "As reason is given to the natural body for the governing of it, so the coi-porate body must have laws, as a politic reason to govern it." ^"^ By-laws are rules adopted by the majority of shareholders for the guidance and management of the internal affairs of the corporation, and so long as they do not contra- vene the " law of the realm " or conflict with the char- ter or articles of incorj)oration, they are binding upon each and every shareholder. To be valid they must be adopted at a meeting regularly called and conducted according to law, and charter as well as statutory pro- visions must be complied with in adopting them.^^ Charter or statute may vest the power to make thein in the directors or other body, but unless this is so done, the power to enact is in a majority vote of the shareholders. The power to repeal, alter, or amend the by-laws remains to and ^vith the same body that originally enacted them, subject always to the iTile that vested interests cannot be taken away. " The power to make 24. People v. Ballard, 134 X. Y. 269; Tavlor v. Earle, 3 Hun (N. Y.), 1. 25. Norris v. Staps, Hobart's Rep., p. 211a. 26. Mutual Fire Tns. Co. v. Farquhar, 86 Md. 668; Vercontre V. Golden, etc., Co., 116 Cal. 410. 158 SUMMARY OF LAW OF I'laVATK CORPORATIONS. bj^-laws is to mate such as are not inconsistent \\'ith the constitution and the law; and the power to alter has the same limit, so that no alteration could be made which would infringe a right already given and secured by the contract of the corporation. * * * xhe alteration of a by-law is but the making of another upon the same matter. If the first must be reasonable and in accord with the principles of law, so must that which alters it. If, then, the power is resen'^ed to alter, amend, or repeal, and that reservation enters into a contract, the power reserved is to pass reasonable by-laws, agreeable to law. But a by-law that will dis- turb a vested right is not such." ^^ Circumstances may arise which may impliedly repeal a by-law, as in the case of a subsequent statute, or a subsequent by-law which may be inconsistent with the former. So too repeated usage to the contrary would render the by- law useless and impliedly repeal it, for it has been waived, and cannot be set up as against third parties, or even the shareholders,^* § 164. The rights of members under. — As already im- plied, if the by-laws were enacted in accordance with the law and the charter, they are binding upon all the shareholders, whether they consent to them or not, so long as they do not impair his rights under his con- tract of membership. Some method of procedure and of transacting business must be adopted, and the share- holder impliedly agrees to be governed by the will of the majority within the limits of the chartered rights. Under such circumstances, the shareholder is bound to take notice of the by-laws, and is so chargeable.^^ So too, if a shareholder become such after the adop- tion of the by-laws, he impliedly consents to them, 27. Kent v. Quicksilver Mining Co., 78 N. Y. 159. 28. Susquehanna, etc.. Co. v. Elkins, 124 Pa. St. 484; Currier V. Continental, etc., Co., 53 N. H. 538. 29. McFadden v. Tx)s Angeles, etc.. 74 Cal. 571. BY-LAWS. 159 and they become part and parcel of his contract ^vith the corporation.^^ But it seems that the shareholder is to be treated as a stranger in such transactions with the corporation as do not concern his position as shareholder. In other words, if he deal with the corporation in business transactions, he is not chargeable with notice of the by-laws.^^ § 165. The rights of third parties under. — By-laws which merely regulate the management of the corpo- ration and duties of the officers do not affect the rights of third parties dealing with it.^^ So too they are not bound by by-laws which are unauthorized and of which they have no actual notice.^^ But if the charter of the corporation expressly authorize certain by-laws, third parties are chargeable with notice thereof, and they enter into the contracts and are binding both for and against the corporation,^"* unless the party ex- pressly exclude the by-law in his contract. The most frequent illustrations of the rights of third parties are found in cases where by-laws impose limitations upon the apparent duties of the officers and agents of the corporation, with respect to the making of contracts. If the third party has actual notice of such by-law he will be bound thereby, but not other- wise;^ and corporations holding out an agent or officer as having apparent authority and accepting the fruits of such contracts cannot set up a violation of the by- laws as a defense. 30. Matthews v. Associated Press, 136 N. Y. 333. 31. Pearsall v. Western Union Co., 124 N. Y. 256. 32. Ashley Wire Co. v. Illinois Steel Co., 164 111. 149. 33. Idem. 34. Brent v. Bank of Washington, 10 Pet. 596; Flint v. Pierce, 99 Mass. 68. 35. Smith v. Smith, 62 111. 493; Tome v. Parkersburpr. etc., Ry. Co.. 30 Md. 36: Barnes v. Black, eto.. Coal Co., 101 Tenn. S54; Pearsall v. Western Union, 124 N. Y. 256. 160 KL-MMARY OF LAW OF I'KINATE COia'OKATlO^fS. DiRECTOKS. § 1G6. Qualifications. — " In the absence of a statute reqiiiriug it, the discretion of the stockholders in elect- ing directors is not limited to persons holding stock." '^'^ The fact that a person is an -alien, a bankrupt, a non- resident, or an officer does not disqualify him in the absence of statutory enactments to the contrary, or of by-laws prohibiting. The by-laws, as well as stat- ute, may provide otherwise, however, and fix the quali- fications of directors. Most of the States provide statutory requirements in this particular, the most familiar one of which is that the director shall be a shareholder. Directors are elected by the shareholders on a majority vote of those present. Statutes usually pro- vide a maximum and minimum number of directors to be chosen, and the charter or articles of incorpora- tion usually provides for the exact number within the statutory provision, though the ntmiber first stated in the articles may be increased or diminished by the cor- poration following statutory provisions to that effect. § 1G7. Power of directors. — "All powers directly conferred by statute, or impliedly granted, of neces- sity must be exercised by the directors who are con- stituted by the law as the agency for the doing of corporate acts. The expression of the corporate will and the performance of cor]>orate functions in the management of a corporation may originate with its directors, where the law or tlio by-laws have not ex- pressly restricted their authority and made their action to rest for its validity upon the concurrence of the stockholders by previous action or subsequent ratifica- tion. "Within the chartered authority they have the 36. State v. McDaniel, 22 Ohio St. at p. 3G7 ; see also Beards ley V. Johnson, 121 N. Y. 224; Re St. Lawrence, etc., Co., 44 N. J. L. at p. .541. DIEECTOES. 161 fullest power to regulate the concerns of a corporation according to their best judgment, and contracts which the corporation could legitimately make come within the scope of the ordinary powers of corporate man- agement. * * * Xhe duties of directors are of the most responsible kind, and it is in the purview of the law that they should be held to a strict accounta- bility for their acts to the stockholders, toward whom they occupy the relation of trustees, with all which that term implies of powder and responsibility. In the management of the affairs of the corporation they are dependent solely upon their own knowledge of its busi- ness, and their own judgment as to what its interests require. * * * They must exercise all the powers of a corjDoration, subject to the general law and to the by-laws of the company, and, where they act in good faith and without fraud or collusion, their action is conclusive upon the corporation. As agents of the corporation, we find the extent of their powers by an examination of the laws under which it was created and exists. * * * < The board of directors of a coi-poration do not stand in the same relation to the corporate body which a private agent holds toward his principal. In the strict relation of principal and agent, all the authority of the latter is derived by delegation from the fonner. * * * B^^it in cor- porate bodies the powers of the board of directors are, in a very important sense, original and undelegated. The stockholders do not confer, nor can they revoke those powers. They are derivative only in the sense of being received from the State in the act of incor- poration. The directors convened as a board are the primary possessors of all the powers which the char- ter confines. ***/*** "What business a corporation can do mthin its chartered limits and in or about that business, by a statutory authority, its 11 162 SUMMARY OF LAW OF PRIVATE CORPORATIONS. directors hold a delegated power from the legislature to do for it." ^' An attempt to enlarge upon this statement would be productive only of specific powers held by the directors. The general and specific powers of a cor- poration have already been outlined, and the general statement that wiiliin the limits of its chartered "powers the diltectors can do all that the corporation can do, unless specially restricted by statute, charter, or by- law holds good.^^ It must be noted that this statement is qualified and limited to acts within the chartered powers. There are acts which the corporation as a body of sharehold- ers may do which the directors cannot do. Their authority does not extend to changes in the general character or purposes of the corporation, nor can they dissolve the corporation, unless authorized to do so."^ Directors cannot, under this general clause, accept amendments to the charter, nor may they apply to the legislature for such amendments; they cannot increase or decrease the capital stock, nor can they consolidate with another corporation. They cannot change the by-laws in any way, nor can they sell out, directly or indirectly, the business and property of a going con- cern in such a way as to virtually end its existence. All of these acts are corporate acts, and, as we have already seen, must be performed by the shareholders acting as a legally constituted body. 37. Beveridpe v. N. Y. Elevated Rv. Co.. 112 N. Y. 1, citing Leslie v. Lorillard, 110 id. 536; Hoyt v. Thompson's Ex., 19 id. 216. 38. See Burrill v. Naliant Bank, 2 Mete. (Mass.) 163; Hutch- inson V. Green, 91 Mo. 367; First Nat. Bank v. National Exchange Bank, 92 U. S. 122; Chambers v. McKee. 185 Pa. St. 105. 39. Chicago City Ry. Co. v. Allerton, 18 Wall. 233; Metro- politan Elevated Ry. Co. v. Manhattan Elevated Ry. Co., 11 Daly, 373. DIRECTORS. 163 § 168. Directors and the corporation.^'^ — A director of a corporation occupies the relation of trustee to the corporation in regard to its property and its property interests. " That a director of a joint-stock corpora- tion occupies one of those fiduciary relations "where his dealings with the subject-matter of his trust or agency, and with the beneficiary or party whose inter- est is confided to his care, is viewed with jealousy by the courts, and may be set aside on slight grounds, is a doctrine founded on the soundest morality, and which has received the clearest recognition in this court and in others." ^^ § 169. Liability of directors to the corporation. — Directors are boimd to possess ordinary skill and ca- pacity, and to exercise reasonable care and diligence, in the exercise of the powers conferred upon them, having reference to the character of the corporation and the kind of business conducted by it.^^ Whether the standard of reasonable care and dili- gence is that which an ordinarily prudent man will exercise in his own affairs,*^ or that which he will ex- ercise about the business of a corporation of which he is a director, is left somewhat in doubt by the authorities, but the latter view seems the more just and reasonable.^^ When directors act in excess of their powers, the 40. See on this subject excellent summary to note to Bosworth V. Allen, 55 L. R. A. 751 which has been freelv used. 41. Twin-Lick Oil Co. v. Marbury. 91 U. S! 587. See also Bird, etc., Co. V. Humes, 157 Pa. St. 278: Covington, etc., Co. v. Bowler, 72 Kv. 468; Hoffman v. Reichert, 147 111. 274; Jackson V. Ludeling, 88 U. S. 616. 42. Thompson v. Greelv. 107 Mo. 577; Scott v. De Peyster, 1 Edw. Ch. 512; Hun v. Carv, 82 N. Y. 65; Campbell v. Watson, 62 X. J. Eq. 396; Vance v. Insurance Co.. 4 Lea, .385. 43. Com. Bank v. Chatfiekl. 121 Mich. 641; Ackerman v. Hal- scv. 38 N. J. Eq. 501; Warren v. Robinson, 19 Utah, 289. 44. Swentzel v. Penn. Bank. 147 Pa. St. 140; Campbell v. Wat- F^on, 62 N. J. Eq. 396: Briirgs v. Spaulding, 141 U. S. 132; North, etc., Assn. v. Childs, 82 Wis. 460. IG-i SUilMAIlY OF LAW OF PKIVATE CORPOKATIOIN'S. standard of reasonable caro and diligence, if applicable at all, is only to be applied for the purpose of deter- mining whether they were culpable in not knowing that thej were exceeding their authority. If they knowingly exceeded their authority, their liability for resulting losses is established without reference to the question whether or not what they did might be jus- tified on the principle of reasonable care/"" This state- ment, however, is subject to the qualification that tliere may have been such assent or acquies'cence by the per- sons interested as estops them to complain/" Directors, however, are not in every case bound to judge correctly of their powers under penalty of being subjected to liability for losses if they make a mis- take. If, in the exercise of good faith, they make a mistake as to a point upon which the charter or by- laws is not clear, taking the advice of counsel if they feel doubtful, they may be exonerated.'*^ Directors are liable, if at all, for losses due to an error of judgment, with reference to matters within their authority, only when the error was so gross that a person of ordinary capacity, exercising reasonable care, would not have fallen into it. In applying this test, the transaction must be viewed from the standpoint of the time when the directors exercised their judgment -with reference to it, and not from the standpoint of the present.^^ Directors are bound to use reasonable care to choose honest and capable men as executive officers and em- 45. Cockrill v. Cooper, 80 Fed. 7: Thompson v. rxreelr. 107 Mo. 577; Hawkins v. Railway Co., 2 Webb & Meigs' Digest (Tenn.), p. 963. 46. Holmes v. Willarrl. 12.5 N. Y. 75; Citizens, etc., Co. v. Coriell. 34 N. J. Eq. 383. 47. Pickering v. Stephenson, L. R., 14 Eq. 322; Williams v. McKay, 46 N. J. Eq. 25; Vance v. Phoenix Ins. Co., 4 Lea (Tenn.) , 385. 48. Lagunas Co. v. Lajrunns Rvndicato. 2 Ch. (ISnO) 392; Sper- ing's Appeal, 71 Pa. St. 11; Hun v. Cary, 82 N. Y. 65. I DIEECTOES. 1G5 ployees; but having exercised such care, they are not insurers of the fidelity or cai:)acity of such persons, and in order to render tliem liable for the fraud or mis- conduct of the latter, they must themselves have been guilty of some dereliction of duty, the perfomiance of which would iiave prevented the losses.*^ Unless a director is himself guilty of misconduct, he cannot at common law be held liable for the misconduct of his codirectors.^^ When a director is aware of a course of conduct con- templated by his co-directors, which he regards as prejudicial to the interests of the corporation, it seems to be his duty to protest, and if the contemplated action involves a violation of the charter, to take measures to prevent it.^^ It is competent for directors to dele- gate certain functions of the board to committees ap- pointed from their number, and the directors who are not on such committees will not be held to the same degree of care and attention as the members, with reference to the matters intnisted to the latter, but such nonmembers are not entitled to relax their vigi- lance altogether, or to rely entirely upon the commit- teemen, but are bound to exercise a reasonable cir- cumspection of their conduct. ^^ Since directors are not responsible for errors of judgment not inconsistent with the possession of ordi- nary capacity and the exercise of ordinary care, and are not insurers of the honesty and capacity of their appointees, it follows that the amount of losses sus- 49. Brigfrs v. Spauldinp, 141 U. S. 1.32; Wheeler v. Aiken, etc., Bank, 75 Fed. 781; Warner v. Penoyer, 91 id. 587. 50. Fisher v. Graves, 80 Fed. 590; Brigss v. Spauldin?, 141 U. S. 132. 51. Grimwader v. Mutual Sodety. 52 L. T. X. S. 409: Paino V. Barnum, 9 How. Pr. 303 ; Percv v. Millaudon, 8 Mart. N. S. 68 ; Joint Stock Co. a". Brown. L. R.' 8 Eq. 381. 52. Warner v. Pennoyer, 91 Fed. 587; Williams v. McKay, 4G N. J. Eq. 25. 1G6 SUMMARY OF LAW OF PiaVATE COKPOIMTIONS. taimd by the corporation in the prosecution of its business is not necessarily the measure of their responsi- bility, but only the amount of losses which are at- tributable to their acts in excess of their authority, or to their failure to exercise reasonable care in the ex- ercise of the powers conferred upon them. Even when they have exceeded their authority, or have failed to exercise reasonable care in the exercise of their authority, there is, of course, in the absence of a statu- tory penalty, no liability, unless their misconduct in that respect can be regarded as the proximate cause of the losses suffered h\ the corporation. °^ § 170. Contracts between corporations and their directors. — In respect to the validity of contracts made between a corporation and a director therein three views have been taken: First, that such contracts are void; second, that they are voidable; and third, that they are valid if fair and just, and made in good faith. I. A few authorities maintain without qualification that such contracts are void as against public policy. These cases held that, as a director stands in a fiduciary relation to the corporation, he cannot be allowed to enter into any engagement in which he may have any personal interest conflicting with the interests of the corporation.^'* II. Other authorities hold that a contract between a corporf-tion and its directors is not void per se, but voidable at the option of the corporation, provided the option is exercised within a reasonable time.^^ 53. Bloom V. National, etc., Co., 152 N. Y. 114; Cockrill v. Abeles, 86 Fed. 50.5; Scott v. De Peyster. 1 Edw. Ch. 513. 54. Aberdeen R. Co. v. Blaikie, 1 Macq. H. L. (Scot.) 461; Wilbur V. Lynde. 49 Cal. 290; Port v. Russell, 36 Ind. 65; Gard- r.er v. Butler, 30 N. J. Eq. 702; Coleman v. Second Ave. R. Co., 38 N. Y. 201; Hay^vood v. Lincoln Lumber Co., 64 Wis. 647. 55. Thomas v. Brownville, etc., R. Co., 109 U. S. 522; Leaven vorth Co. V. Chicago, etc., R. Co., 134 id. 70« • f^^'ll v NjsUof ]0t Ind. 353: European, etc.. R. Co. v. Poor. 59 Me. 277; Hoffman Steam Coal Co. v. Cumberland Coal, etc., Co.. 16 Md. 456; Kelley V. Xewburyport, etc.. Horse R. Co., 141 Mass. 499; People v. 4 4 DIEECTOKS. 167 III. The third view is that such contracts, when fair in themselves, and entered into in good faith are valid; but the courts will closely scrutinize them to see that the;y; fulfill the above requisites.""^ § 171. Directors and shareholders. — " There is no legal privity, relation, or immediate connection between the holders of shares in a bank, in- their individual capacity, on the one side, and the directors of the bank on the other. The directors are not the bailees, the factors, agents, or trustees of such individual stockholders. The bank is a coqDoration and body politic having a sepa- rate existence as a distinct person in law, in whom the whole stock and property of the bank are vested, and to whom all agents, debtors, officers, and servants are responsible for all contracts, express or implied, made in reference to such capital, and for all torts and injuries diminishing or impairing it. The very puq^ose of incorporation is to create such legal and ideal person in law, distinct from all those persons composing it, in order to avoid the extreme difficulty, and perhaps it is not too much to say the utter im- practicability, if such a numbe-r of persons: acting to- gether in their individual capacities * * *. The stoakholders do, indeed, ordinarily elect the directors; but it is as parts and members of the corporation, in their corporate capacity, in modes pointed out by the charter and by-laws, so that the directors are the ap- pointees of the corporation, not of the individuals. * * * To the extent of this (his) separate and peculiar interest, a shareholder, no doubt, might main- Township Board. 11 Mich. 222: Currie v. School District. Xo. 26, 35 ]\Iinn. 163: Stewart v. Lehigh Valley R. Co., 38 N. J. L. 505; Munson v. Syracuse, etc., R. Co., 103 N. Y. 58. 56. Northwest Transportation Co. v. Beatty, L. R., 12 App. Cas. 589; Pneumatic Gas Co. v. Berry, 113 U.' S. 322; Smith v. Skeary, 47 Conn. 47 : German-American Seminarv v. Kiefer. 43 Mich. 105: Gamble v. Queens Co. Water Co., 123 N. Y. 91; Put- nam V. Rubicon, 32 Wis. 498. 168 SUMMARY OF LAW OF PEIVATE COErOKATIONS. tain his separate and special action, according to the nature of the wrong done to him in respect to it; as trover or trespass, for the conversion or tortious taking of his certificate; trespass on the case for refusing to make a transfer on a proper occasion; assumpsit for a dividend declared, and the like. But an injury done to the stock and capital, bj negligence or misfeasance, is not an injury to such separate interest, but to the whole body of stockholders in common." ^^ § 172. Directors and creditors. — Aside from statu- tory liability of directors to creditors, the general rule is that directors are not liable to creditors for their acts, unless fraud or connivance or gross delinquency be apparent and proved. " It has always been held that the directors are trus- tees for the shareholder — that is, the company. They are the managing partners of the company, and if they abuse their powers, which they hold in trust for the company, to the damage of the company for their own. benefit, they are liable to make good the breach of trust to their cestui que trust like any other trustees. But directors are not trustees for the creditors of the company. The creditors have certain rights against a company and its members, but they have no greater rights against the directors than against any other mem- bers of the company. They have only those statutory rights against the members which are given them in the winding up." ^^ " The directors of a bank are trustees for depositors, as well as for stockholders; * * * they are bound to the observance of ordinary care and diligence, and are hence liable for injuries resulting from their non- observance * * *." ^^ 57. Smith v. Hurd, 1.2 Mete. (Mass.) 371. See also Deaderick V. Wilson, S Baxt. (Tenn.) 108. 58. Wincham. etc.. Co.. L. R., 9 Ch. Div. 322-328. 59. Delano v. Case, 121 111. 247. DIRECTORS. 169 Directors " are trustees for the company, for the shareholders, for the creditors, and for the State. They must not only use good faith, but also care, at- tention, and circumspection in the affairs of the corpora- tion, and particularly in the safe-keeping and disburse- ment of funds committed to their custody and control. They must see that these funds are appropriated as in- tended to the purposes of the trust, and if they mis- appropriate them or allow others to divert them from these purposes, they must answer for it to their cestui^ que trust." ^^ This last statement means nothing save that an individual or a group of individuals must be hon- orable and honest in their dealings, and if guilty of a crime, they shall answer therefor to the State and the parties they have wronged. To say that directors " are trustees for the company, for the shareholders, for the creditors, and for the State," is going too far, and reaches a point which borders on the absurd. General rules as to the liability of directors to cred- itors may be stated as follows: In the absence of fraud or such gross negligence that it amounts to fraud on the part of the directors of a corporation, they are not liable to corporate creditors for mismanagement of the business of the concern or for waste of its assets. ^^ A director may be held personally liable to a creditor of the corporation because of the wrongful diversion of the corporate assets by his co-directors, although he was only guilty of gross negligence and inattention to his official duties;®^ but he is not liable for such ^vrong- ful diversion in the absence of personal delinquency or connivance.^ 60. Shea v. :\[abrv. 1 Lea (Tenn.1. 310-342. 61. Swentzel v. Penn. Bank. 147 Pa. St. 140: Vose v. Grant, 15 Mass. 505: Saranac. etc.. Rr. Co. v. Arnold, 41 App. Div. 482. 62. Nix V. Miller. 26 Colo. 203. 63. Saranac. etc.. Rv. Co. v. Arnold, 41 App. Div. (N. Y.) 482: s. c, 167 N. Y. 368. " 170 SUMMARY OF LAW OF PRIVATE CORPORATIONS. § 173. Director's right to compensation Directors of a coi-poration cannot recover compensation for services rendered, unless the compensation has been previously fixed by a by-law or a resolution before the services are performed. The office is usually filled by one whose interest in the company is supposed to be a motive for executing the duties of the office without compensation, and this presumption prevails unless and until there exists an express prearrangement as to compensation.^"* Directors usually fix their own compensation, but their act is not necessarily valid. The company object- ing, they cannot bind it by a contract made by them- selves with reference to their own compensation or em- ployment.^ But if a director is properly employed to perform services which do not pertain to his office as director, and such services are unquestionably beyond the range of his official duties, he is entitled to such compensa- tion 'as has been agreed upon or as the services are reasonably worth.^*' § 174. Directors preferring themselves.'^'^ — The right of directors who are at the same time creditors of the cor- poration wliicli is contemplating or actually insolvent, to prefer themselves, either by recei\ang payment or security for their debts, to the exclusion and detriment of the other creditors, is one which has received a double interpretation in that two distinct views exist. 64. Holder v. La Fayette, etc., Co., 71 111. 106; Kilpatrick v. Penrose, etc., Co.. 49 Pa. St. 118; Hall v. Vermont, etc., Ry. Co., 28 Vt. 401; New York, etc., Ry. Co. v. Ketchum, 27 Conn. 170; Ogden V. Murray, 39 N. Y. 202. 65. Gardner v. Butler, 30 N. J. Eq. 702; Butts v. Wood, 37 N. Y. 317; Jones v. Morrison, 31 Minn. 140. 66. Ibid. And see also Hodges v. Rutland, etc.. Ry. Co., 29 Vt. 220; Illinois Linen Co. v. Hough. 91 111. 63. Conf. Pew v. Gloucester Bank, 130 Mass. 391; Davis v. Memphis City Ry. Co.. 22 Fed. 883; New York, etc., Ry. Co. v. Ketchum, 27 Conn. 170. 67. See excellent summary of the cases generally, 13 Eng. & Am. Corp. Cas. (vol. 13) N. S. 252, and article in 1 Am. & Eng. Corp. Cas., 1 N. S. xxxix. DIEECTOKS. 171 That the entire transaction must be free from any suspicion of fraud or unfairness is the unanimous rule of the courts. In the absence of fraud or unfairness, we find numerous jurisdictions allowing such prefer- ences, on the general ground that there exists no differ- ence between the debt of a director and the debt of a stranger which should predicate one rule in respect to the director, and another in respect to the stranger. The United States courts seemingly allow it, but will set aside the transaction if it be sho^vn to be unfair,^^ and a number of the States allow preferences. On the other hand, the right is denied in the majority of jurisdictions. In some of them, the rule is of a statutory nature. But in absence of such a statute the power is denied on one or more of several grounds. " The law is that, where a corporation is insolvent, its capital is a trust fund for the payment of its debts. A director, creditor upon a debt theretofore existing, cannot take advantage of his superior means of informa- tion to secure his debt as against other creditors." ^^ " The rule in equity governing such cases, * * * is that, independent of any statute relating to prefer- ence of creditors' by an insolvent corporation, the directors of a corporation upon its insolvency become trustees for its creditors, and cannot use their own positions of trust to obtain for their own debts an in- ordinate share of the assets." ^° In I^ew York, it is held to be against public policy for the directors to prefer themselves.'^^ The fact that the directors are sureties of claims which have been preferred in favor . of the stranger creditors does not render such preferences invalid, in 68. Northwestern, etc.. Co. v. Cotton, etc., Co., 70 Fed. 155; Jackson v. Ludelinof, 21 Wall. 616. 69. Hill V. Pioneer Lumber Co., 113 K C. 173. 70. V. C. Emorr in Temiant v. Apploljy, X. J. Ch. 1898, citing Montgomery v. Phillips. ^^ X. J. Eq. 203. 71. Throop V. Hatch Lith. Co., 125 N. Y. 530. 172 SUMMARY OF LAW OF PRIVATE CORPORATIOXS. the absence of statutory restriction, though the trans- action is closely scmtinizcd.'" § 175, Liability of directors for failure to file reports. — Most of the States have enacted statutes providing that the directors or officers of corporations shall file annually a report of the financial condition of the com- pany, and in case of failure to do so, provide, as a penalty, that the directors or officers shall be person- ally liable for the debts of the concern. These reports must be verified by certain officers. The statutes are strictly construed and must be strictly followed in order to relieve the directors and officers from liability.^^ In 1901, the State of Xew York changed its statute from one requiring an annual report from directors on penalty of personal liability, to one which requires a report from certain officers when the secretary of state shall demand it.'^* These statutes have uniformly been held to be penal in their nature — the liability not surviving.'^^ But they are not so penal in their nature as to prevent the director's liability outside of the State of the corpora- tion's citizenship."^ If no penalty is imposed, the direct- ors are not individually liable. ^^ This liability — being penal — attaches to the per- son, and makes the directors liable only for debts con- tracted while they are in office and continues in such office. If a director ceases to be such, he avoids debts 72. Corey v. Wadsworth, 118 Ala. 488; First Nat. Bank, etc. V. Dovetail, etc., Co.. 143 Ind. 550; Rollins v. Shaver, etc., Co., 80 Iowa, 380: Sehufeldt v. Smith, 131 Mo. 280. 73. Colorado, etc., Co. v. Lenhart, 6 Colo. App. 511; Shanklin V. Gray, 111 Cal. 88; President, etc., Manhattan Co. v. Kalden- berjr, 105 X. Y. 1. 74. New York Stock Corporation Law, § 30, as amended in 1901. 75. .Tones v. Barlow, G2 N. Y. 202 ; Bank of Saginaw v. Pierson, 112 Mich. 410. 76. Davis v. Mills, 99 Fed. 39. 77. Margage, etc., Co. v. Ziegler, 9 Pa. Sup. Ct. 438. OFFICERS AND AGENTS. 173 contracted subsequent to bis leaving tbe corporation even thougb tbe default continues; for a director can- not be beld liable for tbe subsequent failure of tbe otber directors/^ Tbe creditor's rigbt accrues at once upon tbe failure to file tbe report — for tbe statute does not require tbe creditor to exbaust legal remedies against tbe cor- poration — and judgment against tbe corporation is not a condition precedent to sucb rigbt of actionJ^ Tbe liability is one wbicb is joint and several, and may be brougbt against one or all of tbe directors in- dividually.^° Officers akd Agents — Other than Directors. § 176. Appointment. — It bas already been observed tbat "witbin tbe limits of its corporate powers a cor- poration may carry on its business, make contracts, and transact business generally in tbe same manner tbat an individual may do. Under sucb circumstances tbe ap- pointment of officers and agents may be made in writing and under seal, if tbe statute of frauds require it, or if not, tbe appointment may be oral, or tbe cor]:)ora- tion may accept tbe benefit of services rendered witbout any formality and in tbis way be bound by tbe doc- trine of estoppel and denied tbe rigbt to disclaim.^^ As a usual tbing, tbe by-laws provide tbe metbod ■and manner of tbe appointment of officers and otber agents, and also prescribe tbeir duties and powers. Directors usually elect tbe officers, fix tbeir salaries, and wbere tbe by-laws are silent as to tbeir powers and duties, tbe directors prescribe tbem. Agents, otber tban officers, may be appointed eitber by tbe officers 78. Bank of Saginaw v. Pierson, 112 Mich. 410; Sinclair v. Fuller. 158 N. Y. 608. 79. Camp. INIf?. Co. v. Reamer. 14 App. Div. (N. Y.) 408. 80. Fitzgerald v. Weidenbeck, 76 Fed. 695. 81. Sherman v. Fitch, 98 Mass. 59. 17-i SUMMAKY OF LAW OF PKIVATE CORPORATIONS. or by the directors, depending mucli upon the scope of authority given to them, though their appointment is usually made by the directors. § 177. Powers of — in general. — The law of agency applies to corporate officers; and if an officer is held out to the world as having certain authority by being allowed to exercise such authority for a considerable time, the corporation is liable for his acts within the scope of such authority, although the authority had never been expressly conferred upon him.^" " The fact that officers of a corporation, in dealing with a third person within their apparent powers, failed to conform to the rules made for their government by the cor[Doration, does not 'affect a third party dealing with them in good faith, and without knowledge of any irregularity." ^^ " The officers of a corporation cannot bind it by any unlawful act, nor by any ^act not clearly within the line of the business of the corporation, nor any act which is not within the scope of their official author- ity." 84 " The proper officers and directors and trustees, duly elected or appointed by a corporation, are authorized to exercise all the powers of the corporation which its charter imposes, or the usual course of business in like institutions give to such officers. It follows therefore that a corporation is bound by the acts of such officers done within the range of their official character." ^^ "Where a party deals with a corporation in good faith, and the transaction is not ultra vires, and he is unaware of any defect of authority or other irregularity on the part of those acting for the corporation, and 82. Commercial ]Mutual, otc, Ins. Co. v. Union, etc., Ins. Co., 19 How. (U. S.I 322. 83. Ashley Wire Co. v. Illinois Steel Co., 164 111. 149 (1898). 84. P.ank of Metropolis v. -Jone.s, 8 Pet. (U. R.) 12. 85. Credit Co. v. Howe, etc., Co., 54 Conn. 357. OFFICEKS A2s'D AGENTS. 175 there is nothing to excite suspicion of such defect or irregularity, the corporation is bound by the contract, although such defect or irregularity in fact exists. If the contract can be valid under any circumstances, an innocent party in such a case has a right to presume their existence, and the corporation is estopped to deny them." ^^ All parties dealing with the agents of corporations are conclusively presumed to be familiar with the pro- visions of the charter or by-laws as to the powers of such agents. " The principle, however, that persons dealing with the officers of a corporation are charged with notice of the authority conferred upon them, and of the limitations and restrictions upon it contained in the charter and bj-laws, is too well established to re- quire to be supported by a citation of authorities, and we cannot assent to the proposition that there is any grant of power in the name by which an officer is designated, especially when the authority given is speci- fied in the by-laws." ^^ It is accordingly the general inile that persons dealing with the agents or officers of a corporation are chargeable with notice of the extent of their authority,^® though we have seen that the general principles of agency will apply and bind the corporation in the absence of notice of any defect of authority or other irregularity. § 178. Right to compensation. — Officers and agents of a corporation may recover of it for services rendered as such under the same circumstances as would permit a recovery against a partnership or an individual.^^ Officers who are at the same time directors or tnistees must show, however, that their claims are for services 86. Merchants' Bank v. State Bank. 10 Wall. (U. S.) 044. 87. Adriance v. Roome. 52 Barb. (N. Y.) 390 88. Alexander v. Cauldwell, S3 N. Y. 485; Relfe v. Rundel, 103 U. S. 222. 89. Feiton v. West Iron Minin? Co., 16 Mont. 81 (1896). 176 SUMMAKY OF LAW OF PKIVATE COlirOKATIONS. performed outside of their ordinary duties as directors, and under circumstances sutiicient to show that the directors and other officers as well as the corporation understood that such services were to be paid for.^° Officers have no power to vote themselves salaries.^^ § 179. Secret profits. — Officers, directors, or agents have no right or authority to stipulate for a commission or bonus to be paid them by a person with whom they entered into a contract in behalf of the corporation. If they do so, they are liable to the corporation for the profits made by them.^^ § 180. liability of officers, etc., for false representa- tions. — The directors or officers of a corporation who make false statements of material facts, misrepresenta- tions as to solvency, and the like, the natural tendency^ of which is to deceive the public, are liable for the damages sustained by one who relies on such state- ments and is misled and suffers damages in conse- nt quence. But " the mere fact of being a director and stock- holder will not make one liable for the frauds and mis- representations of the active managers of a corporation, some knowledge and participation in the act complained of as being fraudulent must be brought home to the person charged. It is only where a director lends his name and influence to promote a fraud, or is guilty of some violation of law, or some other mismanagement, that he is pei-sonally liable." ^^ § 181. General manager. — The general manager of a corporation, appointed as such by the stockholders or directors, is presumed to have authority to manage the 90. Idem. 91. Hardee v. Stmset Oil Co., 56 Fed. 51. 92. Porrv v. Tuscaloosa, etc., Co., 93 Ala. 364; Higpins v. Lansinph, 154 111. 301. 93. :\rorrran v. Rkiddv, 62 N. Y. 319; Bank of Montreal v. Thnver. 2 :\rcCrarv (U. S. C.I. 1. 94. Arthur v. Griswold, 55 N. Y. 400. GENEEAL MANAGES. 177 business for which the corporation is chartered. TTi.^ acts are not invalid merely because certain special and enumerated powers, not excluding others, are conferred upon Mm by the by-laws.^^ " The powers of general managers and superintendents are much similar to those of presidents of corporations." ^^ Accordingly, in the absence of express restrictions upon his powers, with actual or constructive notice thereof to persons dealing with him, he has implied authority to make any con- tract or do any other act which is necessary or ap- propriate to the ordinary business of the corporation.^^ The extent of his powers will depend much upon the terms of his appointment, and if his management is subject to the direct control of the directors or superior officers or agents, his acts, aside from the particular duties intiTisted to him, must receive their approval. If he be intrusted with the entire business management and control, he may borrow money for the purposes of the corporation,^^ though he has not generally the power to execute negotiable paper for the corporation, unless the scope of his employment give him that authority.^ General management v^dll include all the powers and duties necessary to the execution of the ordinary business of the corporation, and in doing this he may enter into obligations and make such contracts as come within the scope of the ordinary business. As a rule, he has no power to lease, mortgage, pledge, or otherwise dispose of the real or personal property,^ though such power could unquestionably be given him 95. Fay v. Noble, 12 Ciish. (Mass.) 1. 96. Beach on Corporations, § 209. 97. Rathbun v. Snow, 123 N. Y. 343. 98. Matson v. Alley, 141 111. 284. 99. Railway, etc.. Co. v. Lincoln Xat. Bank, 82 Hun (X. Y.), 8: Rathbim v. Snow. 123 N. Y. 343. 1. England v. Dearborn, 141 Mass. 590; Titus v. Cairo, etc., Ry. Co., 37 N. J. L. 98. 12 178 SUMMARY OF LAW OF PEIVATE CORPORATIONS. expressly. Nor can he make an assignment of the prop- erty for the benefit of creditors.^ § 182. The president — " In the absence of legisla- tive enactment or provision made in the by-laws, cor- porations usually act through their president, or those representing him. He being the legal head of the body, when an act is performed by him the presumption will be indulged that the act is legally done, and is binding upon the body; and, as a general rule, in the absence of the president, or when a vacancy occurs in the office, the vice-president may act in his stead, and perform the duties which devolve upon the president." ^ Just what the duties of the president, as well as those of other officers are, will depend much upon the nature of the business transacted by the corporation, and fur- ther upon the authority delegated to him by the board of directors, as well as defined by the by-laws. It is e\a- dent that either one or both may invest him with authority to manage the company. And this may be done either expressly by resolution or by acquiescence in the course of the dealings. Contracts which other- Avise would be ultra vires will be deemed to be within the power of the president when the corporation has acquiesced in a course of dealing which clothes him with apparent authority.'* Some jurisdictions hold that the president has no more power than any other director, save that he is the presiding officer of the board."^ This is not the weight of authority however. 2. Norton v. National Bank, 102 Ala. 420; Hadden v. Linville, 86 Md. 210. 3. Smith V. Smith, C2 111. 493 ; Titus v. Railway Co., 37 N. J. L. 98. 4. Mt. Sterling, etc., Ry. Co. v. Looney, 1 Met. (Ky.) 550. See also Kraft v. Freeman, etc., Co., 87 N. Y. G28 ; Dougherty v. Hunter, 54 Pa. St. 380. 5. Chicago, etc., Ry. Co. v. James, 22 Wis. 187; Walworth, etc., Bank v. Farmers' Loan, etc., Co., 14 id. 351; Titus v. Cairo, etc., Ry. Co., 37 N. J. L. 98; Bliss v. Kaweah Canal, etc., Co., 65 Cal. 502. OFFICEES OF THE CORPORATION. 179 § 183. Other officers — The vice-president, secretary, and treasu:.*er are usually confined in their operations and duties by either the control of the directors or the by-laws. Authority may be conferred upon them which extends beyond the ordinary duties of such officers, and where these officers exceed their authority and the act is acquiesced in, and the benefit taken advantage of by the corjDoration, the corjioration will be bound in the same way as stated above. But generally, no authority will attach to any of these officers by virtue- of their office, save those ordinary duties common" to it. § 184. Knowledge of officers — Notice to the corpora- tion. — The principles of agency apply here, and hold that knowledge of an agent binds the principal the same as if the principal had known it, and it be a transaction in which the agent represents the principal. " In order for the knowledge of an officer to be notice binding upon the corporation, it must be knowledge, coming to him while he is concerned for the corporation, and in the course of the very transaction which is the subject of the suit, or so near before it that he must be pre- sumed to recollect it." ^ But in a transaction where a corj^orate officer or agent acts for himself, and deals with the corporation as if he had no official relations with it, the corpora- tion is not charged with his knowledge.^ § 185. Revocation of agent's powers. — The rules of agency also apply here, and the power and authority of the agent exists only at the will of the principal. In a corporation the principal is the stockholders, and all others are agents. The directors and managing agents 6. Conger v. Chicago, etc., Ry. Co., 24 Wis. 157; :Miller v. Illi- nois Cent. Rv. Co., 24 Barb. (X. Y.) 312; Smith v. South Royal- ton Bank, 32 Vt. 341. 7. Bowditch V. Xew Enirland, etc.. Ins. Co.. l-il ^Tqs«. 20-1; Barnes v. Trenton Gas Light Co., 37 N. J. Eq. 33 ; La Farge, etc., Ins. Co. V. Bell, 22 Barb. (X. Y.) 54. 180 SUMMARY OF LAW OF PKIVATE CORPOEATIOIS'S. have authority to revoke the powers and authority of agents appointed by theui, but they have no authority to revoke the powers of an agent who is appointed by the vote of the shareholders, or whose office is fixed and regulated by the charter. Xor can they expel an individual director — his appointment having been made by the shareholders.^ § 186. Removal of directors. — Statutes have in some cases provided means for the removal of directors, but generally speaking the power to remove does not exist, even in a majority of shareholders at a shareholders' meeting, if their term of office is prescribed by the charter or by-laws of the company.^ The charter or by-laws may pro\ade for removal " for negligence, mis- conduct in office, or other reasonable cause." Under such circumstances, " the expression ' reasonable cause ' does not refer to such a cause as would be deemed reasonable in a court of justice, but only to such a cause as is deemed reasonaljle by the shareholders, and the discretion of the shareholders in detennining what is reasonable cannot be interfered with, in the absence of direct fraud." ^"^ " Individual stockholders cannot question, in judicial proceedings, the corporate acts of directors, if the same are within the powers of the corjioration and in further- ance of its purposes, are not unlawful or against good morals, and are done in good faith, and in the exercise of an honest judgment. Questions of policy of manage- ment, of expediency of contracts, of action, of adequacy of consideration not grossly disproportionate, of lawful appropriation of corporate funds to advance corporate interests and the like, are left solely to the honest de- 8. People V. Throop, 12 Wend. (N. Y.) 183. 9. But see Thompson on Corporations. § 3972. 10. Morawetz. § .542. citincr Tnderwick v. Snell, 2 MacN. & Gr. 216. See also Re The A. A. Griffing Iron Co., 63 N. J. L. 168. REMOVAL OF DIRECTORS. 181 cision of the directors, if their powers are without limitation, and free from restraint." ^^ " It is clear that a court of equity has no jurisdiction to remove an oiScer of a corporation from an office of which he has possession, or to declare the forfeiture of such office. Its decree vnll not, like the judgment of a court of law, operate in rem, and remove or oust any one from an office which he in fact holds. When the object is simply to deteiTtiine the regularity of an elec- tion, or to declare an office to which any one has been duly elected forfeited, a court of law" is the only com- petent and proper tribunal." Officers and directors may be restrained in actual or threatened wrongs, but courts of equity will not remove or restrain except in case of absolute necessity. 11. Ellerman v. Chicago, etc., Co., 49 N. J. Eq. 217. 4 CHAPTER IX. Transfer. (a) Lien ox Stock. (b) Gift of Stock. (c) Transfer in General. (a) Lien on Stock. § 187. No lien at common law — Liens upon stock for debts due the corporation when they exist result en- tirely from statutory provisions, or from a by-law en- acted by the corporation. At common law, a corpora- tion has no lien on the shares of its shareholders for an indebtedness to it.^ § 188. How lien is created. — The lien is frequently created by statute, however, either in the form of a provision in the charter, or in the general laws. By weight of authority, tliere is no doubt as to the au- thority of the legislature to create such a lien.^ There is some conflict among the authorities as to the right of a coi^Doration to create such a lien by a by-law, in the absence of statutory authority. The weight of authority is in favor of corporate power to enact such a by-law which will bind all persons dealing in the com- pany's stock.^ 1. Driseoll v. West Bradley, etc., Co., 59 K Y. 96; Merchants' Bank v. Shouse, 102 Pa. St. 488; Van Sands v. Middlesex, etc., Bank, 2G Conn. 144; Massachusetts Iron Co. v. Hooper, 7 Cush. (Mass.) is;]. 2. National Bank v. Watsontown Bank, 10.") U. S. 217: Pitts- burgh, etc., Rv. C'o. V. Clarke. 20 Pa. St. 140; First Nat. Bank v. Hartford, etc.", Ins. Co., 45 Conn. 22; Leggett v. Bank, 24 N. Y. 283; Sabin v. Bank, 21 Vt. 353. 3. People V. Crockett, Cal. 113; Lockwood v. .Mechanics' Nat. Bank, 9 R. I. 308; Brent v. Bank of Washinirton. 10 Pet. (35 U. S.) 590; Young v. Vough, 23 N. J. Eq. 325; :Mechanics' Bank V. Merchants' Bank, 45 Md. 513. [182] LIENS ON STOCK. 183 " There is, nevertheless, strong authority for the rale that such a by-law cannot create a lien on the stock, so as to bind a bona fide purchaser, or other persons into whose hands the shares may come, to whom actual knowledge of the by-law cannot be imputed." * §189. National banks — Xo statute exists in the United States laws giving national banks a lien upon stock for debts due by stockholders, and it is inferred that such power shall not be given to banks.^ § 190. What statutory provisions in themselves create a lien — • " When the articles of association of a bank provide that no shareholder shall be permitted to trans- fer his shares or receive a dividend thereon, who shall owe the bank a debt then due, unless by consent, and authority is given whenever such a debt is past due to sell the stock and apply the proceeds to pay the debt, these provisions taken together create a lien upon the stock in favor of the bank for the debts of the holder." ^ § 191. Statutes which authorize corporations to create liens. — In those jurisdictions where it is held that a corporation has not, mthout statutory authority, the power to enact a by-law creating a lien on its stock, the principal question is, what language in the statute or charter is necessary to create such authority? The power granted " to make by-laws not inconsistent with the laws of this State for the organization of the com- pany, for management of its property, the regulation of its affairs, and for carrying on all kinds of business 4. Cook on Stockholders, § 522 ; Driseoll v. West Bradley, etc., Co., 59 N. Y. 96: Merchants' Bank v. Shouse, 102 Pa. St. 488; Billiard v. National Eagle Bank, IS Wall. (85 U. S.) 589. See also Carroll v. Mullanphv, etc.. Bank, 8 Mo. App. 249; vSteamship Dock Co. V. Heron's Adinr., 52 Pa. St. 280. 5. First Nat. Bank v. Lanier. 11 Wall. (78 U. S.) 369; Bullard V. National Eagle Bank, IS id. 589 ; Conklin v. Second Nat. Bank, 45 N. Y. 055. 6. Arnold v. Suffolk Bank, 27 Barb. (N. Y.) 424. To the same effect see Derring v. Ilibernian, etc.. Co., 16 W. R. 578; Van Sands v. Middlesex, etc.. Bank, 2G Conn. 144; Jennings v. Bank of California, 79 Cal. 323: but see Lockwood v. Mechanic's Nat. Bank. 9 R. T. 308: In re Dnnkerson. 4 Bi^s. (V. S. C.) 2-?7. and Bath Sav. Inst. v. Sagadahoc, etc., Bank, 89 ]\Ie. 500, contra. 184 SUMMARY OF LAW OF PRIVATE CORPORATIONS. within the objects and purposes of the company " will, it has been held, give the corporation the right to enact a bv-law declaring in effect that no transfer of stock shall be made on the books of the company until all payments " of all indebtedness due to the bank by the person in whose name the stock stands on the books of the bank."^ § 192. What by-laws create the lien. — A by-law pro- viding that no transfer shall be made without the con- sent of the board of directors by any stockholder who shall be liable to the bank, either as principal debtor or otherwise, will create such a lien.^ But if the by-law is enacted subsequently to the trans- fer it cannot affect the rights of the parties to that transfer,^ nor will it affect the judgment creditors of the stockholder.^^ § 193. Notice of lien and by-laws. — Persons dealing with a corporation are bound to take notice of any pro- visions contained in its charter or in a general law con- ferring liens upon stock.-'^ But the existence of a by-law pro\ading for such a lien is not enough to charge the purchaser vdth notice.^^ It is self evident that if a purchaser have notice of such lien he takes the stock subject to the lien and cannot have it transferred to him Avithout first discharging the lien. § 194. Shares covered by the lien. — The lien attaches not only to shares of which the shareholder has the 7. Pendergast v. Bank of Stockton, 2 Sawy. (U. S. C. C.) 108; Lockwood V. Mechanics' Bank, 9 R. I. 308 : Spurlock v. Pacific Ry. Co., 61 Mo. 319; Knight v. Old Nat. Bank, 3 Cliff. (U. S. C. C.) 429. Contra. Bank of Attica v. Manufacturers' Bank, 20 X. Y. 501; Driscoll v. West Bradley, etc.. Co.. 59 id. 96. 8. In re Dimkerson. 4 Biss. {V. S. C.) 227. 9. People V. Crockett, 9 Cal. 112. 10. Brvan v. Carter, 22 La. Ann. 98. 11. Bishop V. Globe Co., 135 Mass. 132; Brent v. Bank of Washington, 10 Pet. (35 U. S.) 596; McReady v. Rumsey, 6 Diier, 574. 12. Anglo-California Bank v. Grangers' Bank. 63 Cal. 359; Bank of Hollv Sprinfrs v. Pinson, 58 Miss. 421 ; Driscoll v. West Bradley, ete.,^Co., 59 N. Y. 96. LIENS ON STOCK. 185 legal title, but also where he has the beneficial title only.^^ So to where shares stand in name of fictitious party ;^^ to shares obtained by forgery ;^^ to shares standing in name of trustee;^^ and to pledgee who has notice of such lien.^^ But it does not attach to a pledgee who has no notice of the lien.^^ The lien also attaches to dividends.^^ § 195. Debts secured by the lien. — This lien is not limited to indebtedness for calls or assessments on the particular shares which are desired to be transferred, but enables the company to refuse to transfer if the member is indebted to them on any account whatever.^'' A general indebtedness by note comes within the pro- hibition,^^ and this is true although the note is not yet payable.^^ It even extends to the shares of an in- dividual who is a partner in a concern which is indebted to the bank ^^ and takes in the stock held by a trustee who is indebted to the corporation,^* unless the corpora- tion knew the shareholder held the stock as trustee.^^ The corporation is entitled to a lien upon the stock for debts accruing after the date of the transfer, but before it has received notice thereof.^^ But after the 13. Planters' Ins. Co. v. Selma Bank, 63 Ala. 585. 14. Stebbins v. Phoenix Ins. Co., 3 Paige Ch. 350. 15. Mt. Holly Paper Co.'s Appeal, 99 Pa. St. 513. 16. Young V. Vough, 23 N. J. Eq. 325. 17. Bank of Atchinson v. Durfee, 118 Mo. 431. 18. Idem. 19. Bates v. X. Y. Ins. Co.. 3 Johns. Cas. (X. Y.) 238; Hnvne v. Dandeson, 2 Exch. 741. Contra, Merchants' Bank v. Shouse, 102 Pa. St. 488; Brent v. Bank of Washington, 2 Cranch (U. S. C.i, 517. 20. Ex parte Stringer. L. B.. 9 Q. B. Div. 4''fi. 21. Cunningham v. Alabama Life Ins., etc., Co., 4 Ala. 593. 22. Idem. See also Pittsbursh. etc.. Rv. Co. v. Clarke. 29 Pn. St. 146: Leggett v. Bank of Sing Sins:. 24 N. Y. 283. 23. Arnold v. Suffolk Bank. 27 Barb. 424; Planters, etc., Ins. Co. V. Selma Bank. 63 Ala. 585. 24. London, etc.. Bank v. Brockleband. L. R., 21 Ch. Div. 302. 25. Mechanics' Bank v. S-ton. 1 Pet. (20 V. S. i 290. 26. Sabin v. Bank of Woodstock, 21 Vt. 353; Piatt v. Bir- mingham, etc., Co., 41 Conn. 255. 186 SUMMAKY OF LAW OF PRIVATE COKPORATIOXS. Stockholder has divested himself of his title to the stock, by sale, gift, or pledge, and the corporation has notice thereof, it has no right to extend credit to him upon the faith of this licn.^^ § 196. Debts due on stock account. — The general rule is that the liability to pay for the amount of stock sub- scribed is an indebtedness within the meaning of the statute or provision in charter or by-laws, and even though calls have not been made at the time of trans- fer, the lien holds good.*^ The jurisdictions are divided, however, as to the ques- tion whether the lien attaches to all the shares the shareholder owns, or only such as remain unpaid for. In Xew York the former is the rule, but it is not the rule in other jurisdictions.^ §197. Waiver of lien. — A coi-poration may waive its lien upon the shares of a stockholder indebted to it. The failure to assert the lien before transfer, when notice is given of such transfer, and the issue of a new certificate to the transferee, even though the certifi- cate contain terms making the shares transferable only after the holder pays all his liabilities to said corpora- tion, amounts to a waiver."^ Tho fact that tlie corporation takes from the debtor other security does not thereby, without affirmative evidence to the contrary, waive such lien.^* Estoppel will prevent the enforcement of the lien in 27. Bank of America v. McNeil, 10 Bush (Ky.), 54; Nesmith V. Washington Bank, Pick. (Mass.) 324. But see Bradford, etc.. Co. V. EripsTS, L. R., 31 Ch. Div. 19. 28. Pittsburgh, etc, Ry. Co. v. Clarke, 29 Pa. St. 146; Mc- Readv v. Rumsev, Duer (N. Y.), .574. 29. Stfbbins v. Phrrnix Fire Ins. Co., 3 Paige Ch. (X. Y.) 3.50. But see Hall v. U. S. Ins. Co., .5 Gill (Md.), 484; Hubbersty v. jManoliostcr. etc., Rv. Co., L. R.. 2 0. B. 471. 30. Cecil, etc.. Bank v. Watsonto\vn Bank. 10.5 U. S. 217; In re Hoy Lake Ry. Co., L. R., 9 Ch. 2.57; Des Moines, etc., Co. v. Des Moinos Nat." Bank, 97 Iowa, OOS ; Hall v. Pine River Bank, 45 N. H. .'^00 : Hiirgs v. Northern, etc., Co., L. R., 4 Ex. 387. 31. Union Bank v. Laird, 2 Wheat. (15 U. S.) 390. 1 LIENS ON STOCK. 187 cases where the corporation represents the stock as free and clear of liens, and a party acting under those representations is induced to purchase such stock.^^ § 198. Enforcement of the lien — The lien is usually enforced by the cor]^x)ration refusing to register a trans- fer of the shares upon its books until the debt is paid. The liability is one fixed by contract between the parties, and generally no action is necessary on the part of the coi'poration to enforce the lien.^'' The stock may be regarded in the light of a pledge, and the pledgee has the right to sell the same and apply the proceeds to the debt, the owner thereof being entitled to any sui-plus which may remain after the debt is extinguished.^* The corporation may make application to a court of equity and have the shares sold.^^ § 199. Right of the corporation to refuse to register transfers. — From preceding statements it will be seen that this right will depend upon the interpretation of the language of the statute, charter, or by-law which contains the provision giving to the corporation this right of lien. If the provision include all debts of wliatsoever kind, whether present or future, the right to refuse exists,^*^ and if the transferee wishes the stock transferred in his own name he must first dis- charo:e the indebtedness of the transferrer;^^ and this 32. Cecil, etc.. Bank v. Watsontown Bank, 105 U. S. 217; Moore v. Bank of Commerce, 52 Mo. 377. For instances which do not amount to waiver, see Reese v. Bank of Commerce, 14 INId. 271; First Nat. Bank v. Hartford, etc., Ins. Co., 45 Conn. 22; Citizens, etc., Bank v. Kalamazoo, etc.. Bank. 69 N. \V. 0(5.3 ; Bishop V. Globe Co., 135 Mass. 132; Jennings v. Bank of Cali- fornia, 79 Cal. 323. 33. Sewall v. Lancaster Bank, 17 S. & R. 285; Elliott v. Sib- ley, 13 So. 500. 34. Morris v. Cheney, 51 111. 451; Colcr v. Grainger, 74 Fed. IG ; Do\\Tiie v. Hoover, 12 Wis. 174. 35. Brent v. Bank of Washington. 10 Pet. (35 U. S.) 596. 36. Pierson v. Bank of Washington, 3 Cranch (U. S. C), 363; First Nat. Bank v. Hartford, etc.. Ins. Co., 45 Conn. 22. 37. Mt. Holly Paper Co.'s Appeal, 99 Pa. St. 514. 188 SUMMARY OF LAW OF PRIVATE CORPORATIONS. is true even in a sale under execution.^^ It is also evident that the lien existed at the date of transfer, for no by-law passed after a transfer had been made would be operative. As between transferrer and transferee, the property passes to the transferee and is held by the purchaser subject to the lien.^^ So an assignee in bankruptcy acquires only the rights which the bankrupt had prior to the adjudication of insolvency, and if stock of the bankrupt was subject to a lien, he acquires the in- solvent's interest subject to the same lien.^^ (b) Gift of Stock. § 200. Gifts of stock in a corporation are as valid as the gift of any other property.^^ For the sake of clearness they may be divided into gifts infer vivos and gifts causa mortis. § 201. Gifts inter vivos. — "Delivery is essential to constitute a valid gift. The deliverv'^ must be such as to vest the donee with the control and dominion over the property, and to absolutely divest the donor of his dominion and control, and the delivery must be made -with the intent to vest the title of the property in the donee. The intent is a necessary element of the transaction. Delivery, without intent to vest the title in the donee, could pass no title to him." ^^ A mere delivery of the certificate suffices, without any transfer, if given as compensation for services perfonned,^^ Imt in order to constitute it a valid gift 38. Mechanics' Bank v. Merchants' Bank, 45 Md. 513. 39. Cecil Bank v. Watsontown Bank, 105 U. S. 217; Johnson V. Laflin, 103 id. 800. 40. In re Dunkerson. 4 Biss. (U. S. C.) 227. 41. Cook on Corporations (4th ed.), 408; Thomas, etc. v. Lewis, 89 Va. 1. 42. Jackson v. Twenty-third St. Ry. Co., 88 N. Y. 520. See also Williams v. Guile, 117 id. 343. 43. Reed v. Copeland, 50 Conn. 472. GIFTS OF STOCK. 189 the certificate must be indorsed bj the donor.'*^ But in some jurisdictions this would not make a valid gift, as the stock must be transferred on the books of the corporation.^'^ A gift of dividends forever is a gift of stock, and so too where one executes a declaration of trust in cer- tain stock and names his beneficiaries, making himself trustee, but without securing a transfer, it was held a valid gift.^° If the gift be fully executed, i. e., properly indorsed and transferred on the books of the corporation, it cannot be revoked by the donor ;^^ and this is true even though the donee be unaware of the gift.^® § 202. Gifts causa mortis. — Mere delivery of the cer- tificate of shares with intention to donate, without any indorsement on the back, will constitute a valid gift causa mortis ;^^ so too the delivery of the keys of the depository of the stock is sufficient,^^ or the delivery of the depository itself.^^ TRAIfSFER. § 203. In general. — " A share in a corporation which has for its object a division of profits among its stockholders, has been defined ' a right to partake, according to the amount of the party's subscription, of the suii^lus profits from the use and disposal of 44. Matthews v. Hoagland, 48 N. J. Eq. 455. 45. Bennington v. Gittings, 2 Gill & J. (Md.) 208; Nauney v. Morgan, L. R.. 35 Ch. Div. 598. Contra, Gilkerson v. Third Ave. Rv. Co., 47 App. Div. (N. Y.) 472. '46. Locke v. Farmers' Loan & Tr. Co., 140 X. Y. 1.35. See also Dickerson's Appeal, 115 Pa. St. 198. 47. Walker v. Joseph, etc., Co., 47 N. J. Eq. 342. 48. Francis v. New York, etc., Ry. Co.. 108 N. Y. 93. 49. Walsh v. Sexton, 55 Barb. 251; Roberts' Appeal, 85 Pa. St. 84. 50. Tliomas' Adnir. v. Lewis, 89 Va. 1. 51. Com. V. Crompton, 137 Pa. St. 138. See also Grjmes v. Hone, 49 N. Y. 17. 190 SUMMAKY OF LAW OF PRIVATE CORPOKATIOXS. the capital stock of the company to the purposes for which the company is constituted.' iVngell 6z Ames on Coi-jDorations, § 557. "It cannot be disputed that this right is property of a definite and important character, with many of the qualities of visible, tangible, personal property, and having a value, and as capable of appreciation as ves- sels or merchandise, or other personal chattels." Shaw, C. J., in Fisher v. Essex Bank, 5 Gray, 377. From this is follows, by inevitable inference, that it may be the subject of sale as much as any other species of property, real or personal, so that, as between vendor and vendee, the title may pass by their own act, and be thereby vested absolutely in the vendee. " It seems too clear for argument, that the OA\Tier- ship of the shares passes from the seller to the buyer by force of the contract of sale, and not by operation of law; and if that be so, the buyer's title, so far as the seller is concerned, attaches the moment this con- tract is fully consummated between them. " This kind of property, being an intangible right, somewhat akin to the right to receive money due upon a bond or other chose in action, is incapable of actual manual delivery. All the seller can do, that corre- sponds at all to the delivery of personal chattels in other cases of sale, is, to hand over to the buyer his certificate, with a sufiicient assignment by deed or otherwise to entitle him to a transfer of the shares on the books of the company. When the seller has done this, his power and duty in the matter are ended, and it is at the option of the purchaser whether the transfer shall be recorded or not. " If the purchaser omits to have the record made, he can claim no rights as a member of the corporation; and he also incurs the further risk of having his title il TRANSFEES OF STOCK. 191 defeated by a subsequent attackment or sale to a hona fide purchaser." ^" In the absence of a statutory or charter provision, or of a bj-law passed in pursuance of legislative au- thority prescribing an exclusive manner in which the stock of a corjooration shall be transferred, the o^vner may transfer the same to a purchaser, pledgee, or donee by the delivery of the stock certificate with a written assignment thereof. Such a transfer is suffi- cient at common law to convey the legal as well as the equitable title as against all persons, including the corporation. The assigTiment may be in blank and pass from one to another by the delivery of the cer- tificate without further indorsement, the person hold- ing the certificate having the right to fill up the blank at any time.^^ § 201. Contract to transfer must be in writing. — " There is nothing in the nature of stocks, or shares in companies, which in reason or sound policy should exempt contracts in respect to them from those rea- sonable restrictions, designed by the statute to prevent frauds in the sale of other commodities. On the con- trary, these companies have become so numerous, so large an amount of the property is invested in them, and as the ordinary indicia of property, arising from delivery and possession, cannot take place, there seems to be peculiar reason for extending the provisions of this statute to them. As they may properly be in- cluded under the term goods, as they are within the reason and policy of the act, the court are of opinion, that a contract for the sale of shares, in the absence of the other requisites, must be proved by some note or memorandum in writing." ^* 52. Scripture v. Francestown Soapstone Co.. 50 N". H. 571. 53. Boston, etc.. Assn. v. Corv, 120 Mass. 435. 54. Tisdale v. Harris, 20 Pick. (Mass.) 9. 192 SUMMARY OF LAW OF PRIVATE CORPORATIOXS. § 205. Restrictions upon. — Statutory or charter pro- visions may be imposed affecting the transfer of shares. As has been noted, such provisions are binding upon purchasers who are chargeable with notice thereof. Few statutory or charter provisions restrict the trans- fer 'altogether, but the majority of the States have j)rovisions in their general laws which regulate and require them to be made in a certain way.^"* The power of a corporation to enact by-laws regu- lating the transfer of shares, which by-laws are deemed necessary to protect the corporation and the share- holder as well, is not doubted. " Stock in an incorporated company is personal prop- erty. Transfers of personal property, to be valid as against attaching creditors, sli^uld be attended by a visible change of possession, or else evidence of the transfer should be spread upon a public record. We have an express provision of statute for property where a visible change of possession can be made. In the case of stock in an incorjiorated company, no visible change of possession can be made. Stock is a share in the interests and rights of the corporation. Cer- tificates are mere evidence. They may never be is- sued. It is not essential that they should be. "When issued, they are merely for convenience. The object of the imperative provision that transfers of stock shall be recorded unquestionably is that the ownership may be made apparent." ^^ But provisions of these kind do not warrant the cor- poration or its directors in going beyond reasonable precautions in refusing transfers. The object is to protect the corporation, and the method of doing it must be reasonable. "Although there is express power to tlie directors to refuse to assent to or register a 55. Fisher v. Esspx Bank. 5 Gray (Mass.). 373. 56. Ft. Madison Lumber Co. v. Batavian Bank, 71 Iowa, 270. TJRANSFEKS OF STOCK. 193 transfer, this power must be exercised in a reasonable manner and hoiia fide, and they must have some valid and lawful reason for refusing to register." " The power can only go to the extent of prescribing condi- tions essential to the protection of the association against fraudulent transfers, or such as may be de- signed to evade the just responsibility of the stock- holder. It is to be exercised reasonably. Under the pretense of prescribing the manner of the transfer, the association cannot clog the manner of the transfer or make it dependent upon the consent of the directors or other shareholders." ^^ An agreement between shareholders of a corpora- tion not to sell or transfer their shares without the con- sent of all the parties thereto is void as in restraint of trade, if there is no other consideration than the inutual 'promises of the stockholders.''^ On the other hand, it seems that the principle has no operation where a valid consideration is the basis of such an agreement.^^ An agreement between the corj)oration, with power to purchase its own shares, and a shareholder, giving the former the right or option to purchase the shares before they shall be offered to others is valid.^° Sub- stitute another or a group of other shareholders, whose power to purchase is unquestioned, for the corporation, and upon what principle can an adverse decision be based? § 206. Negotiability of certificates of shares. — " Tbe rule is well settled, that a hona fide purchaser of a ne- gotiable bill, bond, or note, payable to bearer, although be buys from a thief, acquires a good title, if he pays 57. Johnston v. Laflin, 5 Dill. 65 ; s. c, 103 U. S. 800. 58. Williams v. Montgomery, 68 Hun (N. Y.), 416; s. c, 148 N. Y. 519. But see 2 Thompson, § 2311. 59. Vansands v. ]\Iiddlesex Co. Bank. 26 Conn. 144; Jenninj^s V. Bank of Colorado. 79 Cal. 323: Stafford v. Produce Exch. Bank, 61 Ohio St. 160. 60. New England Trust Co. v. Abbott, 162 Mass. 148. 13 194 SUMMARY OF LAW OF PKIVATE COUrOKATIONS. value for it without notice of the infinnity of his ven- dor's title. The authorities are clear in support of the view, that a certificate of corporate shares of stock, in the ordinary form, is not negotiahle paper, and that a purchaser of such certificate, although indorsed in blank by the owner, where no question arises under the regis- tration laws, obtains no better title to the stock than his vendor had, in the absence of all negligence on the part of the o\\Tier, or his authority to make the sale. This question arose, and was decided by the jSTew York Court of Appeals. It was there held that such a certificate does not partake of the character of a negotiable in- strument, and that a bona fide assignee, with full power to transfer the stock, takes the certificate subject to the equities which existed against his assignor. ' Such certificates,' said Comstock, J., ' contain no words of negotiability. They declare simply that the person named is entitled to certain shares of stock. They do not, like negotiable instruments, run to the bearer, or order of the party to whom they are given.' They were said to be, in some respects, like a bill of lading, or warehouse receipt, being ' the representative of property existing under certain conditions, and the documentary evidence of title thereto.' The most that can be said is, that all such instruments possess a sort of quasi-negotiability, dependent upon the cus- tom of merchants and the convenience of trade. They are not, in the matter of transferability, protected strictly as negotiable paper." ^^ § 207. Unauthorized or fraudulent transfers. — " ' There is a class of cases, * * * where the holder of such a certificate of stock, indorsed in blank, is clothed with power as agent or tinistee, to deal with such stock to a limited extent, and transfers it by exceeding his powers, or in breach of his tnist. In such cases, it 61. East Birmingham Land Co. v. Dennis, 85 Ala. 565. TRANSFERS OF STOCK. 195 has often been held that the true owner, having con- ferred on the holder, by contract, all the external in- dicia of title, and an apparently unlimited power of disposition over the stock, * is estopped to assert his title as against a third person, who, acting in good faith, acquires it for value from the apparent owner.' These cases rest on the principle, that it is more just and reasonable, where one of two innocent parties must suffer loss, that he should be the loser who has put trust and confidence in the deceiver, than a stranger who has been negligent in trusting no one.' Allen v. Maury & Co., 66 Ala. 10." ^^ § 208. The effect of a transfer of shares. — "'A trans- fer of shares in a coi^Doration means the substitution of a new shareholder in place of an outgoing share- holder in the company, and an assumption by the former of all the rights and obligations which attached to the transferring shareholder by reason of his owner- ship of the shares. This involves a novation of the contract of membership. The transferrer ceases to be a shareholder in the company. Unless the contrary be expressly provided in the company's charter, he is thus discharged from all further liability to contribute capital,^^ and loses all right to share in the company's profits and to participate in the management of its affairs.^* " ' The transferee, on the other hand, becomes a share- holder in place of the retiring member. He impliedly assumes all the obligations which rested upon the former holder as member of the company, and is liable 62. Idem; McNeil v. Tenth Nat. Bank, 40 X. Y. 325; X. Y., etc.. Ry. Co. v. Schuyler, 34 id. 30. 63. Isham v. Buckingham, 49 N. Y. 21G; Johnson v. Laflin, 5 Dill. 65; s. c. 103 U. S. 800; Allen v. Montgomery, etc., Ry. Co., 11 Ala. 451; Harrison's Case, L. R.. 6 Ch. 286, etc. 64. Boardman v. Lake Shore, etc., Ry. Co., 84 N. Y. 157; Bris- bane V. D., L. & W. Ry. Co., 94 id. 204. 196 SUMMARY OF LAW OF PRIVATE CORPORATIONS. for calls to the same extent as the former holder before the transfer was made.*^^ " ^ He also becomes entitled to all the privileges of membership and may claim all dividends declared while he is a shareholder in the company.' ^^ (1 Morawetz, § 159.) § 209. Unregistered transfers as between the parties thereto. — The weight of authority seems to be in favor of the proposition that where a provision exists in statute or charter that the shares shall be transferable only on the books of the corporation, the transferee gets only an equitable right and not the legal title, holding that registration is necessary to complete or pass the legal title. This equitable right will prevail as against all persons who seek to enforce a right ac- quired with notice of the transfer, but it will not pro- tect the transferee where notice cannot be imputed to an innocent purchaser/^' There are a number of excellent jurisdictions which claim that, inasmuch as the provision is intended merely as protection for the corporation, as between the parties themselves both the legal title and equitable rights pass, but consent to the practically unanimous authority that as between the corporation and hona fide purchasers, the equitable right only passes.^^ § 210. As against the corporation. — Where a valid provision exists in statute, charter, or by-law requir- ing the transfer on the books of the company, the trans- 65. Webster v. Upton, 91 U. S. 65; Pullman v. Upton, 96 id. 328. 66. March v. Eastern Rv. Co., 4.3 N. H. 515; .Jones v. Terre Haute, etc., Ry. Co., 57 N. Y. 196; Gifford v. Thompson, 115 Mass. 478. 67. Fisher v. Essex Bank, 5 Gray, 373; Scripture v. Francea- town Soapstone Co., 50 N. H. 571 : .Johnson v. Laflin, 103 U. S. 800: Lippitt v. American Wood, etc., Co., 15 R. I. 141. 68. McNeil v. Tenth, etc, Bank, 46 N. Y. 325; Broadway Bank v. McElrath, 13 N. J. Eq. 24; McLean v. Charles Wright, etc., Co., 96 Mich. 479. TEANSFEES OF STOCK. 197 fer must be made, or notice, which will amount to a waiver or estoppel, given before the transferrer can be relieved from liability to the coii^oration.^^ The reason for the provision is the protection of the cor- poration, to enable it to know just who its shareholders are. '' The general rule is that a corporation looks only to its books for the purpose of ascertaining who are its shareholders and entitled to the rights as such." "" § 211. As against creditors. — The provisions affect- ing registration are regarded as not only for the pro- tection of the corporation, but also for the protection of persons dealing with the corporation, so that they may know just who the stockholders are. Under this, it is a general rule that a transfer which is not regis- tered does not relieve the transferrer from liability to the creditors, which may be imposed by the statutes.'^ § 212. Shareholder's right to a transfer — "'The pur- chaser of a stock certificate regular on its face, who is willing to comply with the corporate regulations re- specting the transfer of shares, may maintain an action in equity against the corporation to compel it to trans- fer the shares to him.'^ Or, on the refusal of the cor- poration to make the transfer, he may sue it for damages,^^ and as damages recover the market value of the shares at the time of its refusal.*^^ If, however, the relief demanded is in the alternative for specific performance or for damages, a judgment for damages 69. Union Bank. etc. v. Laird, 2 Wheat. 390; Brisbane v. D., L. & W. Rv. Co.. 94 N. Y. 204. 70. 2 Thompson. § 2387. 71. Eichmond v. Irons. 121 U. S. 27: Shellington v. Howland, 53 N. Y. 371 : Harpold v. Stobart, 40 Ohio St. 397. 72. Driscoll v. West Bradley, etc.. Co.. 59 N. Y. 9G ; Hill v. Eockingham Bank, 44 N. H. 567; Siblev v. Quinsigamond Bank, 133 Mass. 515. 73. Kortright v. BufTalo. etc.. Bank. 20 Wend. ( N. Y.) 91; German Union, etc. v. Sendmever. 50 Pa. St. 07; Galbraitli v. Building Assn.. 43 N. J. L. 389: Case v. Bank. 100 U. S. 440. 74. Galegher v. Jones. 129 U. 8. 193; Wright v. Bank of Metropolis. 110 N. Y. 237. 198 SUMMARY OF LAW OF PRIVATE CORPORATIONS. is improper unless it appear that the corporation is unable to deliver the shares or similar ones.'^ And when a person whom a coi*poration refuses to recognize as a shareholder elects to treat such refusal as a con- version of the shares and sues for damages in trover, he can maintain no action for dividends declared after the commencement of his suit J^ The great preponder- ance of authority is that mandamus will not lie to com- pel a corporation to transfer shares." "^^ 7.5. otter v. Brevoort Petroleum Co., 50 Barb. (X. Y.) 247. 76. Hughes v. Vermont Copper, etc., Co., 72 N. Y. 207. 77. Tavlor (.ith ed.). S 599; Kino- v. Bank of England. 2 Doug. 524; Ex parte Firemen's Ins. Co., 6 Hill (N. Y.), 24.3; Galbraith V. Building Assn., 43 N. J. L. 389; Townes v. Nichols, 73 Me. 515. CHAPTER X. Ceeditoes' Rights and Remedies. (a) The Ckeditoe and the Corporation. (b) The Creditor and the Shareholder. (A) The Creditor and the Corporation. § 213. In general. — The relations between a creditor and the corporation are those which are founded on contract, and come within the terms of debtor arid cred- itor. " That the relation of debtor and creditor is not a confidential one there can, of course, be no doubt. It is absurd to say that the creation of that relation involves aught of accident, mistake, or ig- norance. That a debtor has property of his creditor which in equity and good conscience belongs to the creditor, because the debt contracted in its sale has not been paid, there is no warrant for saying. Equally^ unwarranted is the idea that in equity all the property of a debtor who has become insolvent belongs to the creditor, and is held by the debtor in trust for him. And this idea of ownership in the cestui que trust un- derlies the whole doctrine of trusts of every descrip- tion. In all trusts the legal title is in one, the equitable ownership in another. A mere debt against one who has property, whether solvent or insolvent, is not o^\Tier- ship, nor is a right to charge a fund, or a lien upon it, the beneficial ownership of it." ^ 'Nov is this relation- ship created by contract a fiduciary one whereby the creditor can hold either the corporation or its mana- gers to account because of any duty owed by them to 1. O'Bear, etc., Co. v. Volfer. lOfi Ala. 205. [199] 200 SUMMARY OF LAW OF J'lUVATE COKrOKATIONS. the creditor. The duty, if any exists at all, is simply the duty which an individual owes to his creditor and no more, and generally speaking the creditor of a cor- poration has the same rights against the corjioration that an individual creditor has against an individual debtor and no more. § 214. Creditors' right to interfere with the manage- ment. — . The creditors of a corporation have no right, either at law or equity, merely because they are cred- itors, to interfere in the management, or to come into a court of equity to restrain it from making contracts or disposing of property, unless there is fraud or breach of trust to give a court of equity jurisdiction." The property of a corporation belongs to it and they may- dispose of it to the same extent as a natural person. If it makes conveyances or transfers property on which creditors have a lien, or if it makes them not in good faith, but with intent to hinder or delay its creditors, they may come into a court of equity, after obtaining judgment and obtain relief. Or, if the remedy is given by statute they may proceed by attachment, but in the absence of fraud or breach of trust, equity will not afford them relief, and this even if ultra vires are alleged or that the corporation is insolvent.^ " A corporation is a distinct entity. Its affairs are necessarily managed by officers and agents, it is true; but in law it is as distinct a being as an individual is, and is entitled to hold property (if not contrary to its charter) as absolutely as an individual can hold it. Its estate is the same, its interest is the same, its possession is the same. Its stockholders may call the officers to account, and may prevent any malversation of funds or fraudulent disposal of property on their part. But 2. Mills V. Northern Ry. Co., L. R.. .5 Ch. App. 621 ; Pond v. Framingham. etc.. Rv. Co., 130 Mass. 194; Graham v. Railroad Co.. 102 IT. S. 148. 3. Idem. k i I CEEDITOKS' BIGHTS A:SJ) KEMEDIES. 201 that is done in the exercise of their corporate rights, not adverse to the coi*porate interests, but coincident with them. When a coi-poration becomes insolvent it is so far civilly dead that its property may be admin- istered as a trust fund for the benefit of its stockhold- ers and creditors. A court of equity, at the instance of the proper parties, will then make those funds trust funds, which, in other circumstances, are as much the absolute property of the corporation as any man's prop- erty is his. We see no reason why the disposal by a corporation of any of its i>roperty should be questioned by subsequent creditors of the corporation any more than a like disposal by an individual of his property should be so." ^ § 215. The " trust fund " theory. — It has long been a favorite theory with the various United States juris- dictions that the capital stock of a corporation is a trust fund in the hands of the corporation for the pay- ment of its debts and that the corporation stands in the relation of tnistee to the creditors and shareholders. This theory was first formulated by Justice Story in Wood V. Dummer ^ (1835), and from that time to this, has obtained to a greater or less extent in all juris- dictions. Indeed, the Supreme Court of Tennessee has gone to the extent of holding that the capital stock is a trust fund not only for the creditors and the share- holders, but for the State and public generally.^ On the other hand, the United States courts as well as many of the State courts have qualified the theory to a considerable extent. " The case of Graham v. Railroad Co., 102 U. S. 148, was an action by a subsequent creditor to subject certain property, alleged to have been wrongfully conveyed by the corporation debtor, to the satisfaction of his judg- 4. Graham v. Eailroad Co.. 102 U. S. 148. 5. .3 Mason (IT. S. C). ;U)S. 6. Shea v. Mabry. 1 Lea (Tcnn.). .310. 202 SUMMAEY OF LAW OF PRIVATE CORFORATIOXS. ment. And the very proposition here presented was then considered, and in respect to it the court, by Bradley, J., said (p. 160): ' It is contended, however, bj] the appeUant that a corporation debtor does not stand on the same footing as an individual debtor; that while the latter has supreme dominion over his own property, a corporation is a mere trustee, holding its property for the benefit of its stockholders and cred- itors, and if it fails to pursue its rights against third persons, whether arising out of fraud or otherwise, it is a breach of trust, and creditors may come into equity to compel an enforcement of the corporate duty. This, as we understand, is the substance of the position taken. " We do not concur in this view. It is at war with the notions which we derive from the English law with regard to the nature of corporate bodies. A corpora- tion is a distinct entity. Its affairs are necessarily man- aged by officers and agents, it is true; but in law it is as distinct a being as an individual is, and is entitled to hold property (if not contrary to its charter) as ab- solutely as an individual can hold it. Its estate is the same, its interest is the same, its possession is the same. Its stockholders may call the officers to account, and may prevent any malversation of funds or fraudulent disposal of property on their part. ■ But that is done in the exercise of their corporate rights, not adverse to the cori:)orate interests, but coincident with them. " When a corporation becomes insolvent it is so far civilly dead that its property may be administered as a trust for the benefit of its stockholders and creditors. A court of equity, at the instance of the proper parties, will then make those funds trust funds, which, in other circumstances, are as much the absolute property of the corporation as any man's property is his.' " With reference to the suggestion in this last para- creditors' rights and remedies. 203 graph, it maj be observed that the court does not at- tempt to determine who are the proper parties to main- tain a suit for the administration of the assets of an insolvent corporation. All that it decides is that when a court of equity does take into possession the assets of an insolvent corporation, it will administer them on the theory that they in equity belong to the creditors and stockholders rather than to the corporation itself. In other words — and that is the idea which underlies all these expressions in reference to ' trust ' in con- nection with the property of a corporation — the cor- poration is an entity, distinct from its stockholders as from its creditors. Solvent, it holds its property as any individual holds his, free from the touch of a creditor who has acquired no lien; free also from the touch of a stockholder who, though equitably interested in, has no legal right to the property. Becoming insolvent, the equitable interest of the stockholders in the property, to- gether with their conditional liability to the creditors, places the property in a condition of trust, first for the creditors and then for the stockholders. AMiatever of trust there is, arises from the peculiar and diverse equitable rights of the stockholders as against the cor- poration in its property and their conditional liability to its creditors. It is rather a trust in the administration of the assets after possession by a court of equity than a trust attaching to the property as such for the direct benefit of either creditor or stockholder." ^ Eef erring to "Wabash, etc., Ry. Co. v. Ham, 115 TJ. S. 587; Fogg v. Blair, 133 id. 504; and Hawkins V. Glenn, 131 id. 319, the court said: "These cases negative the idea of any direct trust or lien attaching to the property of a corporation in favor of its cred- itors, and at the same time are entirely consistent with those cases in which the assets of a corporation are 7. Hollins V. Brierfield Coal & Iron Co., 150 U. S. 371. 204 SUMMARY OF LAW OF PRIVATE CORPORATIONS. spoken of as a trust fund, using the term in the sense that "vve have said it was used. " The same idea of equitable lien and trusts exist to some extent in the case of partnership property. AVhencvcr, a partnership becoming insolvent, a court of equity takes possession of its property, it recognizes the fact that in equity the partnership creditors have a right to payment out of those funds in preference to individual creditors, as well superior to any claims of the partners themselves. And the partnership property is therefore sometimes said not to inapply, to be held in trust for the partnership creditors, or that they have an equitable lien on such property. Yet all that is meant by such expressions is the existence of an equita- ble right which will be enforced whenever a court of equity, at the instance of a proper party and in a proper proceeding, has taken possession of the assets. It is never understood that there is a specific lien or a direct trust. " A party may deal with a coi*poration m respect to its property in the same manner as with an individual owner, and with no greater danger of being held to have received into his possession property burdened with a trust or lien. The officers of a corporation act in a fiduciary capacity in respect to its property in their hands, and may be called to account for fraud or some- times even mere mismanagement in respect thereto; but as between itself and its creditors, the corporation is simply a debtor, and docs not hold its property in trust or subject to a lien in their favor in any other sense than does an individual debtor. This is certainly the general rule, and if there be any exceptions thereto, they are not presented by any facts in this case, l^either the insolvency of the corporation, nor the ex- ecution of an illegal trust deed, nor the failure to collect in full all stock subscriptions, nor all together, gave to I creditors' rights and remedies. 205 these simple contract creditors any lien upon the prop- erty of the corporation nor charged any direct trust thereon." ^ It may therefore be accepted as a general principle that the capital stock of a solvent corporation is not a trust fund, any more than the assets of an individual is a trust fund for his creditors. Relief will be granted to creditors of a corporation in quite the same way, and to quite the same extent that it will be granted to the creditors of an individual. This relief is threefold: (1) at common law, by obtaining a judgment and hav- ing the same executed; (2) at equity, in securing pos- session of equitable assets or rights which cannot be secured under process of execution; and, (3) where statute will allow it, by attachment. But it is conceded by all courts that there is a point when the capital stock and assets of a corporation do become a trust fund for the benefit of creditors and shareholders, and that point, just as in the case of an individual, is where insolvency is imminent or actual. Under such circumstances creditors may interfere; when there is an attempt to convey or transfer or other- wise dispose of the property, either through fraud or breach of trust, in such a way as to defeat creditors' claims. Tlie property of a coq>oration " is so far regarded as in tlie nature of trust property that it can be recovered by the company from any person who has obtained it from the directors with notice that they are acting be- yond their powers." ^ On the same principle, cor- porate funds may be followed by creditors in the hands of any person to whom they have been transferred with- 8. Ibid. See also O'Bear, etc., Co. v. Volfer, 106 Ala. 205: Worthen v. Griffith, 59 Ark. 562; Marvin v. Anderson, 111 Wis. 387 9. Cole V. Millerton Iron Co., 13.3 N. Y. 164. 20G SUMMARY OF LAW OF FKIVATE COEPOKATIONS. out consideration, or who receives them with knowledge of the diversion of them from their proper channels.^*^ An attempt therefore to place assets beyond the reach of creditors, by reincorporation or reorganization and transferring the assets of the old corporation to the new corporation without consideration would result in equity following the property of the old company, and subjecting it to the creditors' claims.-^^ § 21G. Remedy at law. — The only remedy of a cred- itor against the corporation at law is sequestration, or to levy and sell the property thereof under execution. There is a difficulty here, however, in the case of quasi- public corporations in that public policy requires that the property essential to the coi-porate functions shall be retained by the corporation. But the personal prop- erty of the company, subject as it is to the voluntary sale, mortgage by the company itself, is also the subject of levy and sale on execution, and the same thing may be said of any property Avhich is not in actual use, or necessarj^ to the proper performance of coi^porate func- tions.^^ If there be no duty owing to the public by the coi-poration, in other words, if it be a strictly private company, its property, both real and personal, and usually the franchise and rights are subject to the legal right of sequestration. § 217. Remedy in equity. — The trust fund theory al- ready stated is the basis for equitable relief. Under this theory, it is possible for creditors to restrain the misapplication of funds by an application for an in- 10. Ibid. See also Wood v. Dummer, 3 Mason, 308; Railroad Co. V. Howard, 7 Wall. (74 U. S.) 392; Chicago, etc., Ry. Co. v. Chicago Bank. 134 U. S. 276. 11. Montgomery, etc., Ry. Co. v. Branch, 59 Ala. 139; Mumma V. The Potomac Co., 8 Pet. (33 U. S.) 281; Thornton v. Marginal, etc.. Rv. Co.. 123 Mass. 32. 12. Plymouth, etc., Ry. Co. v. Cohvell, 39 Pa. St. 337 : 1 Free- man on Executions, § 179; Coe v. Columbus, etc., Ry. Co., 10 Ohio St. 372; Boston, etc., Ry. Co. v. Gilmore, 37 N. H. 410; Louis- ville, etc., Ry. Co. v. Boenv, 117 Ind. 501. i 12 Ch. D. 738. 21. Ladywell Mining Co. v. Brooks, 35 Ch. D. 400. PROMOTEKS. 243 § 252. Liability to subscribers. — As a usual thing, promoters are liable to account for secret profits only to the corporation. But where a promoter is acting as an agent for the intended corporation, he cannot take advantage of his position to personally benefit himself. So, if promoters invite others to join them on terms of equality in acquiring property with a view of profit to be made from it by a coi'poration to be organized for that pur- pose and to be comprised of the associates, they will not be allowed to profit at the expense of the others, but all profits must be shared by the associates.^^ Though it is not usual, promoters may create a fiduciary relation between themselves and the subscrib- ers, in which event it is necessary that all facts %vithin their knowledge should be disclosed, and a failure to so disclose the facts to the subscribers will render them liable in damages.^^ An action for damages will lie against promoters by the subscribers to the stock of a corporation which sub- scriptions have been induced by misrepresentations made in such a way as to deceive and mislead the sub- scriber, " This misrepresentation, however, must be an assertion of fact as distinguished froir^ an expression of an opinion." "■* The omission to state facts do not generally furnish ground for actions of deceit, though if the omission were to make the facts stated false, then fraudulent misrepresentation would anse.^^ The subscriber has a right to rely upon representations of material and existing facts, nor is he bound to in- vestigate, unless he had notice sufficient to put him on 22. Emerv v. Pnrrott, 107 Mass. 95; Gcttv v. Devlin, 54 N. Y. 403; s. c, 70 id. 504. 23. Brewster v. Hatch, 122 N. Y. 349; Teachout v. Van Hoesen, 76 Iowa, 113. 24. Alger, § 132, and cases cited. 25. Peek v. Gurney, L. R., G H. L. Cas. 377. 244 SUMMAKY OF LAW OF PRIVATE COKPORATIOXS. his guard."^ " He must show that he relied upon or was materially influenced by the false statement, and that he was misled by it to his injury " in order to re- cover, and prove that he has suffered damage thereby.^' So, an action for misrepresentation will lie against promoters who falsely represent to purchasers that the capital stock has been paid in, or that the shares are fully paid, or by fraudulent pufhng induce others to purchase shares at fictitious rates, which shares hav(^ been issued either at a discount or in payment of prop- erty greatly ovei'^'alued."* Promoters are not presumptively partners, and one is not therefore lyrima facie liable for misrepresenta- tions made by a copromoter. In order to hold one promoter liable for misrepresentations made by a co- promoter, it must be shown that the copromoter was authorized, either expressly or impliedly, to act as an agent, and the misrepresentation was made within the scope of the authority.^^ § 253, Failure to organize. — If the scheme proves a failure, the money paid in to the promoters must be returned. If the ones originating the scheme, after procuring the money to be paid in, abandon it, the sub- scribers may recover back the money ]>aid without any deduction for the expenses incurred,^" unless the sub- scriber has authorized his deposit to be so applied. The subscribers' remedy in such a xjase is by an action at law,^^ unless in a case of fraud, or an account- 26. Warner v, Seymour, 89 Wis. 290; Salem Rubber Co. v. Adams. 23 Pick. (Mass) 2.5G. 27. Alijer, § 1.5.5, and cases cited. 28. Flajjlor. etc.. Co. v. Flajrlcr. 19 Fed. 468; Miller v. Barber, 66 N. Y. 558 ; Paddock v. Fletcher, 42 Vt. 389. 29. ]\reachem on Agency. § 743. and cases cited. 30. But see Nockcls v.* Crosby, 3 Barn. & C. 814; Hutton v. Tliompson. ?> II. L. Cas. 161. 31. Denton v. :\IacXeil. L. R.. 2 Eq. 352. PROMOTERS. 245 ing is found to be necessary, when the aid of equity may be invoked, "" § 254. Rights and liabilities of the corporation on promoters' contracts. — The weight of authority is in favor of the rule that unless the corporation has adopted a contract made for it by its promoters, no liability is imposed upon it by reason of such contracts. If tliere be any exception to this it is confined within very narrow limits. Generally, promises made or con- tracts entered into by promoters before the corpora- tion comes into being will impose no liability upon the corporation.^^ '• * * * where the fonnation of a corporation was in contemplation and the promoters of the corpora- tion were taking initiatory steps to perfect its organiza- tion and obtain a charter and provide in advance the means necessary for its successful operation, all con- tracts made by such promoters for the benefit of the future corporation and which were reasonable and proper to put it in operation, the benefits of which were afterward accepted by the corporation, became binding on the corporation without any formal contract to pay * * * but the plaintiff must show either an express promise by the corporation or that the contract was made with persons then engaged in its formation and taking preliminary steps thereto, and that the contract was made on behalf of the cor]>oration in the expecta- tion on the part of the plaintiff and with the assurance on the part of the projectors that it would become a corporate debt; and that the corporation afterward en- tered upon and enjoyed the benefit of the contract and by no other title than that derived through it." ^* 32. Williams v. Page, 24 Beav. 654. 33. Tift V. Quakerr etc.. Bank. 141 Pa. St. .550: Re Shaw's Claim. L. R., 10 Ch. App. 177: Dnyton. etc.. Co. v. Coy. 13 Ohio St. 84: Carmodv v. Power!?, 60 Mich. 26; Morrison v. Gold, etc., Co . 52 Cnl. 306. 34. Little Rock, etc., Ry. Co. v. Perry, 37 Ark. 164. I'-IG SUMMxVKY OF LAW OF PRIVATE COKl'ORATIONS. A corporation can have no agents until it is brought into existence and after that it acts and becomes obli- gated only through the instrumentality of its authorized representatives.^^ A contract made in the name of and for the benefit of a corporation to be subsequently or- ganized can in no way bind or affect it.^^ § 255. Ratification or adoption of contracts. — Much discussion has been entered into as to the power of a corporation to ratify contracts entered into between promoters and individuals before the corporation came into being. The weight of authority seems to be in favor of the rule that contracts made before the corpora- tion has acquired life may not be ratified. But it may unquestionably make contracts when it comes into exist- ence and there seems no distinction to be made between accepting and adopting contracts made in advance of the incoi-poration and the making of an entirely new con- tract."'^ In other words, novation and adoption would seem to be interchangeable in meaning. The accept- ance or adoption may be in express language or it may be implied from the acts of the corporation, as for in- stance, the corporation taking benefit of the contract. "Whatever be the method employed, the corporation is unquestionably obligated to fulfill the agreement thus adopted, under the general principles of contract. It cannot be said that the law is well settled on this subject. In England and in Massachusetts it is held that a corporation may neither ratify or adopt, and thus make the contract binding, though they will allow an action on quasi-contract, if the corporation accepts the benefit of such contracts.^^ In the majority of 35. Davis, etc., Wheel Co. v. Davis, etc., Wagon Co., 20 Fed. fiao. 36. Winters v. Hub, etc., Co.. .57 Fed. 287. 37. Gent v. :Mannfac'turers' Co., 107 111. 652; Rogers v. New York, etc.. Co., 134 N. Y. 197. 38. Kelner v. Baxter, L. R., 2 C. P. 174; Abbott v. Hapgood, 150 Mass. 252. PROMOTEKS. 247 States, however, actions are allowed on the contract itself, the familiar principle that one who adopts the benefit of an act which another volunteers in his name and on his behalf is bound to take the burden with the benefit being regarded as broad enough to hold the corporation to a fulfillment of the contract.^^ § 256. Promoters' rights to compensation for services rendered. — (a) Before incorporation. — A claim for money expended and time employed before the incor- poration of a company cannot be regarded as a debt of the institution. So, ia corporation is not liable for services rendered in procuring subscription to the capital stock, nor for services rendered to the pro- moters which are not adopted by the corporation.^*^ (&) After incorporation. — In New Hampshire and Vermont it has been held that if the charter has actu- ally been granted, or if the institution has held itself out as a corporation, it may be liable although its organ- ization was not completed. Hence necessary expense in procuring subscriptions after the granting of the charter may be recovered of the company.'*^ So, where after the charter has been granted and before organiza- tion, services are rendered which are necessary to com- plete the organization, and after it has been perfected the corporation elects to take the benefits of such ser- vices knowing they were rendered with the understand- ing that compensation should be made, it will be com- pelled to. pay for those services.^^ But the general weight of authority seems to be against these rules, and 39. Stanton v. New York, etc., Ry. Co., 59 Conn. 272 ; Western, etc., Co. V. Cawsley, 72 111. 531 ; McArthiir v. Times Co., 48 Minn. 319; Scadden, etc.', Co. v. Scadden, 121 Cal. 33. 40. IMarchand v. Loan, etc.. Co.. 20 La. Ann. .389: New York, etc., Ry. Co. v. Ketehum, 27 Conn. 170; Safety, etc., Co. v. Smith, 65 111. 309; Weatherford, etc. v. Granger, 86 Tex. 350. 41. Hall V. Vermont, etc., Ry. Co., 28 Vt. 401. 42. Low V. Connecticut, etc., Ry. Co.. 4^ N. H. 370. See dis- cussion of the subject generally, Alger, §§ 218-224. 248 SUMMAKY OF LAW OF PRIVATE CORPORATIONS. in favor of the rule that a corporation is not liable to a promoter for services rendered, § 257. Liability of promoters on contracts made before incorporation — This liability will depend very much upon the nature of the particular contract. If the pro- moter binds himself personally by a contract, the adop- tion of that contract by the corporation will not re- lieve him from liability, unless the other party con- sents to the substitution of parties, in which case there is a novation. If this be done, then the corporation alone becomes liable.^^ If the promoter contracts, with the understanding that the other party shall look to the corporation only, when it is formed, no personal liability will attach to the promoter,^"* for, as a matter of fact, there is no contract. In the absence of such an understanding, and a con- tract be made, the promoter is liable,^^ and, of course, is able to enforce the contract in his own name.'**' § 258. Summary of the statements heretofore made. — In the matter of negotiations prior to incorporation, the promoter is in some ways regarded' as an agent, acting on behalf of the future corporations. In others, as a principal, the corporation not yet being in ex- istence. Circumstances may arise which make his re- lation to the proposed stockholders a fiduciary one. Ills relation to third parties. — (1) In making con- tracts he is personally liable unless there be an agree- ment to the contrary. (2) If, however, the third party relies upon the corporation, the promoter is not liable. 43. Queen Citv, etc., Co. v. Crawford, 127 Mo. 356; Chapin V. Longworth, 31 Ohio St. 421; Kelner v. Baxter, L. R., 2 C. P. 174. 44. Re Heckman's Estate, 172 Pa. St. 18.5; Smith v. Parker, 148 Ind. 127; Lewis v. Weedenfeld, 114 Mich. 581. 45. Carmody \. Powers, 60 Mich. 26; Roberts, etc., Co. v. Schlick, 02 Minn. 332. 46. Abbott V. Hapgood, 150 Mass. 252. PROMOTERS. 249 (3) If there are several promoters, one is not liable for the acts of the others as his agent, unless expressly or impliedly authorized so to act. (-i) If he owns prop- erty, he can sell it to the corporation at whatever price the corporation is willing to pay. His relation to the corporation. — The relation is a fiduciary one, hence he can be held to an accounting for secret profits by the corporation, and under some circumstances by the stockholders individually. (2) If he assumes contract liabilities as promoter and the corporation afterward adopts or novates the contract, and accepts the benefit, he is relieved from liability, or if not relieved from his liability on the con- tract, the corporation must indemnify him from his liability. (3) The corporation is not bound to pay him for his services as a promoter, either before or after incorpora- tion, and before organization, some jurisdictions to the contrary. The corporation s lidbility on contracts entered into by promoters. — (1) If the corporation adopts or novates them, and this is assented to by the third parties, the corporation is bound. (2) But the corporation is not bound if no voluntaiy action is taken by it, even though benefit accrues to it bv virtue of them. I INDEX. [References are to pages.] ACCEPTANCE: of charter, 16. repeal or alteration of charter before, 37. ADVERSE POSSESSION: power to take by, 63. AGENTS. (See Officers and Agents.) appointment of, 173. powers of, to receive subscriptions, 105, 111. ratification of acts of, by corporation, 95. torts, liability of corporation for, 94. AGGREGATE CORPORATIONS: defined, 4. AGREEMENTS : secret effect of, 109. to form a corporation, 102. ALTERATION OF CHARTER: power of state to make, 33. extent of the power, 34. ALIENATION OF PROPERTY: power to make, 66. by majority, 155. AMENDMENTS TO CHARTER: power of state to make, 33. extent of such power, 34. AMERICAN CORPORATIONS: earliest, 3. ASSESSMENTS AND CALLS, 114, 115. (See Calls.) ASSIGN^IENT FOR BENEFIT OF CREDITORS, 209. BOOKS OF CORPORATION: subject to inspection, 121, 122, 123. BUSINESS CORPORATIONS: defined, 4. 251 252 INDEX. [References are to pages.] BY-LAWS: power of corporation to make, 74, 157. rights of shareholders under, 158. of third parties under, 159. which create liens on stock, 184. CALLS AND ASSESSMENTS, 114. when necessary, 114. who may make, 114. manner of making, 115. must be equal, 115. upon increased capital stock, 116. CAPITAL : as distinguished from capital stock, 99. CAPITAL STOCK: defined, 99. calls upon. (See Calls.) increased, IIG. "good-will" as payment for, 215. property as payment for, 216. CERTIFICATE OF SHARES: right of shareholder to, 118. CHARTER : acceptance of, 16. interpretation of, 32. power of state to alter, amend, and repeal, 33. CITIZEN: corporation as a, 17. CITIZENSHIP: of corporations, 17. of consolidated corporations, 19. COMBINATIONS. (See Pooling Agreements; Voting Trusts; Trust Combinations ; Consolidation ; Reorganization.) CONDITIONS : to formation of corporations de jure, 20. of corporations de facto, 23. subscriptions upon, 107. precedent to becoming a shareholder, 107. waiver of, by subscriber, 108. CONSIDERATION: paid for stock, good-will as, 215. CONSOLIDATED CORPORATIONS: citizenship of, 19. INDEX. ZO-i [References are to pages.] CONSOLIDATION OF CORPORATIONS: meaning of, 220. methods of, 220. right to, at common law, 221. shareholders' rights under, 223. creditors' rights under, 224. unauthorized, 222. shareholders' consent, 222. CONTEMPT OF COURT : corporation subject to, 97. CONTRACTS : charters as, 29. effect of dissolution upon, 55. of membership, 101. power of corporation to make, 59. promoters, 245. liability of corporation on, 245. ratification by corporation of promoters', 246. reservations in charter, 31. ultra vires. (See Ultra Vires.) CONVEYANCES : power to make, GO. ultra vires, 65. CORPORATE : acts, presumption as to, 78. liability, for torts, 89-96. for acts of agents, 94, 95, 105. meetings, 150, 151. residence, 18. records, right to inspect, 121. CORPORATIONS : defined, 6. distinguished from partnerships, 7. from joint-stock companies, 9. from shareholder, 10. creation of, in general, 13. in United States, 14. by legislature, 14. under general laws, 16. citizenship of, 17. and the state, 29. de jure, 20. de facto, 22. 254 INDEX. [References are to pages.] CORPORATIONS — Continued : by estoppel, 27. dissolution of, 50. (See Dissolution.) and directors, 1G3. (See Directors.) and creditors, 199. (See Creditors.) powers of, 57. (See Powers.) taxation of, 44. (See Taxation.) as subscribers to shares, 99. and promoters, 237. (See Promoters.) CREDITORS : relation to corporation, 199. rights as, against shareholders, 140, 210. at common law, 139, 206. at equity, 140, 206. rights to enforce payment of shares, 143, 144, 146, 213, 217. to a receiver, 209. to interfere with corporate business, 200. under reorganization, 228. under consolidation, 224. as shareholders, 212. assignment for benefit of, 209. legal relation of, to other creditors, 218. DAMAGES: recoverable for corporate torts, 95. DARTMOUTH COLLEGE CASE, 30. DEBTS: under the statute, 146. secured by liens on stock, 185, 186. DE FACTO CORPORATIONS: defined, 22. DE JURE CORPORATIONS: defined, 20. DELEGATION: of power to create by state, 15. DEVISE: power of corporation to take by, 64. DIRECTORS : qualifications of, 160. powers of, 160. and tlie corporation, 163. liability to the corporation, 163. contracts with the corporation, 166. INDEX. 255 [References are to pages.] DIRECTORS — Continued : relation to shareholders, 167. to creditors, 168. right to declare dividends, 126. rights to compensation, 170. preference by, 170. liability for failure to file reports, 172. removal of, 180. DISSOLUTION: of corporations, methods of, 50. by act of legislature, 51. forfeiture of charter, 51. grounds of, 52. surrender of charter, 53. expiration of charter, 54. effect of, 55. DIVIDENDS : defined, 124, out of what paid, 125. not a debt, 126. ^ who may declare, 126. " declared " defined, 127. shareholders' rights to, 124. what shareholders entitled to, 127. shareholder's right to compel, 130. stock, 129. ELEMENTS: necessary to de facto existence, 23. EMINENT DOMAIN: defined, 40. rights of state under, 40. ENGLISH RULE: as to ultra vires, 82. ESTOPPEL: corporations by, 27. EXEMPTION ; from taxation by state, 47. EXPIRATION OF CHARTER, 54. EQUITY : courts of, will aid shareholder, 133. when aid may be invoked, 134. liability of shareholders to creditors in, 141. 256 INDEX. [References are to pages.] FACULTIES OF CORPORATION: outlined, G. FIFTH AMENDMENT: and its effect upon corporate powers, 29. FOREIGN CORPORATIONS: state control over, 42. FORFEITURE : of charter by state, 52. of shares by corporation, 139. FOURTEENTH AMENDMENT: and its effect, 29. FRANCHISE : charter as, 45. taxation of, 45. GENERAL LAWS: creation of corporations under, 16. GENERAL MANAGER: powers of, 17G. GIFTS: of stock, 188. cau«a mortis, 189. inter vivos, 188. GOOD-WILL: as consideration for stock, 215. HISTORY OF CORPORATIONS, 1. ILLEGAL ACTS OF CORPORATION: effects of, 84. INCIDENTAL POWERS OF CORPORATION, 76. INFANTS : as subscribers and shareholders, 98. INSPECTION : of corporate records, 121. books which may be inspected, 122. who may make, 123. books of insolvent corporation, 123. INTENT : necessary to form a corporation, 7. INTERPRETATION OF CHARTERS, 32. I INDEX. 2d7 [References are to pages.] JOINT CONTRACTS: ... ,. legality of, 230. ■ JOINT-STOCK CORPORATIONS: distinguished from corporations, 9. LEASE: power of corporation to make, G6. LEGISLATURE : power of, to create corporations, 14. control over corporations, 33. (See State's Control Over.) forfeiture of charter by, 51. (See Dissolution.) LIABILITY OF MEMBERS, 137. (See Shareholder's Liability.) LIEN ON STOCK: at common law, 182. how created, 182. national banks, 183. statutory provisions creating, 183. by-laws which create, 184. notice of, and of by-laws, 1S4. shares covered by, 184. debts secured by, 185, 186. waiver of, by corporation, .186. enforcement of, 187. right of corporation to refuse transfer because of, 187. LIMITED COMPANIES: defined, 5. MAJORITY: power of, 153. to alienate property, 155. MANAGEMENT OF CORPORATIONS, 149. MANDAMUS TO COMPEL INSPECTION, 123. MARRIED WOMEN: as subscribers and shareholders, 99. MEETINGS : of corporation, 150. notice of. 151. time of, 152. place of, 152. MEMBERS. (See Shareholders.) 258 INDEX. [References are to pages.] MEMBERSHIP: rights and liabilities in general, 98-148. contracts of, 101. rights in particular, IIC. MORTGAGE: power of corporation to make, 67. NEGOTIABLE PAPER: power of corporation to issue, 68. "NET PROFITS": defined, 124. NOTICE OF CORPORATE MEETINGS, 151. of by-laws, 159. which create lien, 184. to officers notice to corporation, 179. NUL TIEL CORPORATION : plea of, 27. OFFICERS AND AGENTS: appointment of, 173. powers in general, 174. rights to compensation, 175. secret profits not allowed, 176. liability for false representations, 176. general manager, duties and powers, 176. president, duties and powers, 178. other officers, duties and powers, 179. knowledge of, notice to corporation, 179. removal of, 180. revocation of powers, 179. ORIGIN OF CORPORATIONS, 1. " PAID-UP " SHARES, 146. PARTIES: to action to compel pajTnent of shares, 144. PARTNERSHIP : distinguished from corporation, 7. power of corporation to enter into, 13. PLACE OF CORPORATE MEETINGS, 152. POLICE POWER: defined, 37 scope of, 38. limitations upon, 39. INDEX. 250 [References are to pages.] POOLING AGREEMENTS, 229. validity of, 229. POWERS OF CORPORATIONS, 6, 57, 76. in general, 57. implied, 57. limitations upon, 58. to make contracts, 59. to take and hold property, 60. limitations upon, 62. to take by devise, 64. to alienate property, 66. to lease property, 66. to borrow money, 67. to mortgage its property, 67. to issue negotiable paper, 68. to act as trustee, 69. to enter into a partnership, 70. to acquire its own stock, 72. to acquire stock of other corporations, 73. to make by-laws, 74. POWER OF STATE : to alter, repeal, etc., 33. to create corporations, 13. PREFERENCE : right of shareholder to an increase, 124. of creditors, 209. of directors, 170. PRESIDENT: powers and duties, 178. PRIVATE CORPORATIONS : defined, 4. PROFITS : defined, 124. PROMOTERS : meaning of term, 237. relation to the corporation, 238. duties to the corporation, 239. who are, 240. liability to subscribers, 104, 243, 248. for failure to organize, 244. rights of corporation as against, 245. liabilities of corporation on contracts of, 245. 260 INDEX. [References are to pages.] PROMOTERS — Continued : rights to compensation, 247. liability on contracts, 248. PROPERTY: alienation of, 66, 155. as papnent for stock, 216. "true value" rule, 216. "good faith" rule, 217. PROXY VOTING, 121. PUBLIC CORPORATION: defined, 4. PUBLIC SERVICE CORPORATION defined, 5. QUASI-PUBLIC CORPORATION : defined, 5. QUO WARRANTO: writ of, 26. REAL ESTATE: power of corporation to take and hold, 60. RECEIVER: shareholder's right to, 136. creditor's right to, 209. RESCISSION OF SUBSCRIPTION: English rule, 112. U. S. rule, 113. REORGANIZATION : ■ meaning of teim, 225. authority for, 226. methods of, 227. who may participate, 228. REIEAL OF CHARTER: power of state to, 33. limitations of power of state to, 34. REPORTS : liability of directors for failure to file, 172. RESIDENCE OF CORPORATIONS, 18. ROIVIAN CORPORATIONS, 1. SCIRE FACIAS: ^\Tit of, 3, 26. I INDEX. 261 [References are to pageS.] "SET-OFF^': by shareholders, 148. against unpaid subscriptions, 148. under statutory liability, 148. SHARES OF STOCK: defined, 100. transfer of, 118. (See Transfer.) " paid-up." meaning of. 140. covered by lien, 184. gifts of, 188. negotiability of certificates, 191. liens on, 183. (See Liens.) taxation of, 48. SLANDER : corporate liability for, 92. SOLE: corporations, 4. SPECIAL SANCTION: to create, 7, S. STATE : creation of corporations by, 14. delegation of power to create, 15. control over corporations, 33. power to repeal, alter, etc., 33. police power, 37. eminent domain, 40. foreign corporations, 42. to tax corporations, 44. to dissolve corporations, 50. STOCK. (See Capital Stock.) SHAREHOLDERS: who may become such, 98. infants as, 98. married women as, 99. corporations as, 99. trustees as, 99. relation to directors, 167. as creditors, 212. distinguislied from corporation. 3, 10, SHAREHOLDER'S RIGHTS: to prevent ultra vires acts, 87. to a certificate of shares. 117. 262 INDEX. [References are to pages.] SHAREHOLDER'S RIGHTS — Continued: to transfer his shares, 117, 197. to vote, lis. to inspect corporate records. 121. to dividends, 124. to compel dividends, 130. to interfere with corporate business, 132. to a receiver, 130. to a preference on increased stock, 131. to stock dividends, 129. under consolidation. 223. reorganization, 228. by-laws, 158. to set-off, 148. SHAREHOLDER'S LIABILITY: in general, 137. to the corporation, 137. to other shareholders, 138. to creditors, 140, 141, 210. under statutes, 144, 145. what shareholders liable, 146. effect of repeal of statute, 147. set-off under, 148. to pay full value of shares, 213. for ultra vires acts of corporation, 86. for ultra vires torts of corporation, 87. SUBSCRIBERS AND PROMOTERS, 243. 244. SUBSCRIPTIONS FOR STOCK. 102. agreements to form a corporation, 102. actual subscriptions thereto, 102. made to promoters. 104. after incorporation, 105. powers of agents to receive, 105. formalities and modes of, 106. upon conditions, 107. conditions precedent. 107. waiver of conditions for, 108. upon special terms, 108. secret agreements, 109. induced by fraud. 110. right to rescind, 112, 113. INDEX. 263 [References are to pages.] ^ SURPLUS : defined, 124. SURRENDER OF CHARTER, 53. TAXATION: defined, 44. corporate property subject to, 44. franchise as property, 45. limitations upon, by state, 45. methods of, 46. of shares of stock, 48. TENANTS IN COMMON: corporation may hold as, 63. TIME OF MEETINGS, 152. TORTS : liability of corporation for, 89. of corporation for ultra vires, 86. of corporation for agents' torts, 94. civil liability of corporation for, 89. criminal liability of corporation for, 96. TRANSFER: of shares, in general, 189. agreements not to, 193. restrictions upon, 192. contract for, must be in writing, 191. unauthorized, 194. effect of, 195. unregistered, as between parties, 196. as against corporation, 196. creditors, 197. shareholder's right to, 197. corporation's right to refuse, under lien, 187. TRUST: power of corporation to hold in, 63. TRUST FUND THEORY, 142, 201. •' TRUST " COMBINATIONS : definition, 232. features of, objections to, 233. where allowable, 235. 264 iM>p:Xi [References are to pages.] TRUSTEE: power of corporation to act as, (JO. as subscribers and shareholders, &9. ULTRA VIRES: acts, 78, 84. conveyances, G5. contracts, 78. meaning of term, 79. origin of, 80. United States rule, 82. English rule, 80. rule when contracts wholly or partly executory, 84. when contracts fully executed, 85. when contracts executed on either side, 86. as to negotiable paper issued, 80. torts, 86. shareholder's liability for, 87. corporation's liability for, 86. shareholder's right to prevent, 87. who may plead it. 87. UNAUTHORIZED: acts of agents, liability for, 94. transfers, 194. consolidation, 222. UNITED STATES: creation of corporations in, 14. courts, citizenship of corporations in, 23. constitution, as affecting corporate contracts, 29. VALIDITY: of statutes oeating corporations, 26. VOTING : who entitled to, 118. cumulative, 119. by proxy, 120, 121. VOTING TRUSTS: meaning of, 2.30. validity of, 230. WAIVER : of lien on shares, 186. \ ■^" ■'*''. ♦.■«'"i «.. «1^ ,^C SOUTHERN REGIONAL V LIBRARY FACILITY ■^ ' 0' li^^'iJt- ,,-^^3 830997 i ,\\ \- ^ i0- ^ *' V ^ . .^^Vv^s^^> n^^j ■- • L>.^-^|