Commercial Law

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ater, after the lots had been sold, several of them were conveyed to a corporation composed exclusively of negroes. The corporation knew, when it purchased the tract of land, of this restriction in the deed, and the land was bought by it for the purpose of establishing an amusement park for colored people. Suit was brought in a court of equity to compel the cancellation of the deed to the corporation. Stated boldly, the decision of the Vi

deed, but I will pay the necessary expenses, if you, with two of your friends, will form a corporation to take title to this property, in which corporation each of your friends will own one share and you the balance, thus retaining control yourself. I will then deed the property to the corporation and will thereby get around the covenant in my deed preventi

al property or personal property, must be made by the corporation, and cannot be made by the members or shareholders as individuals. It also follows that all suits against or by the corporation must be brought against the corporation

purposes of government, such as cities, towns, villages, and institutions founded by the State, and managed by it for governmental purposes. Quasi-public corporations are such as are engaged in a private business which is affected with a public interest, such as railroads, both steam and electric, gas companies, water companies, lighting companies, and the like

paper sets forth the facts which are required under the laws of the State wherein the corporation is to be formed. These laws, while not uniform, generally require a statement as to the name to be used by the corporation, the names of the proposed directors and incorporators, a statement of the general purposes or objects of the corporation, the location of its principal office and place of business, how long it is to last, the amount of its authorized capital, the par value of its stock, as well as a statement in regard to any preferred stock which may be contemplated. Other details are sometimes required under the various State laws. This official document must generally be signed or executed by those persons who are the incorporators of the corporation. As a rule, three or more incorporators are requ

ence a State may keep all insurance companies, incorporated outside of its area, from doing business in that State by discriminating legislation against foreign insurance corporations. Insurance is not looked upon as interstate commerce, about which the individual States may not legislate, and as a corporation is not a citizen within the meaning of Article 4, Section 2, such insurance companies have no redress. In one sense, however, a corporation is looked upon as a citizen. Where a suit is between citi

orporation has power to do such acts as may be reasonably necessary or incidental to the carrying on of the business mentioned. Powers so implied, without words, are termed "implied powers." Therefore, the total powers of a corporation consist of the express powers, namely, such as are named in the official documents containing a statement of its purposes and the business in which it is to engage, and the powers which would be reasonably implied under the rule just mentioned, as necessary and incidental to the carrying out of the express powers. Such implied powers do not give the corporation any power to do acts which are not reasonably necessary and incidental in its regular business. To allow validity to acts not so reasonably necessary and incidental would be in reality allowing the corporation to engage in outside business, which, under its charter, it has no power to engage in. As an illustration of this let us assume that the X company was incorporated to build, run and operate a railroad between two towns named A and B. The official charter of the corporation may state further details of the corporation's powers or it may not. But, if such details are not stated, the corporation would, obviousl

ultra vires or beyond its powers but which would appear to an outsider as incidental to the corporate business and therefore as within its corporate powers. In such circumstances, if the outsider with whom the corporation assumed to make the contract does in fact rely reasonably upon the corporate power to make it, having been deceived by appearances and having no warning that the corporation actually lacked power, and having paid over money or delivered goods or performed services or parted with other value under the contract, he may generally enforce the contract against the corporation. In other words, under such circumstances, the corporation is estopped or forbidden to evade its obligation by asserting the point that it had no power to make such contract. However, this is strictly limited to cases where the corporation appeared

equisites must exist: There must be a valid law which authorizes the formation of such a corporation; a colorable attempt to organize under the provision of such law; and an assumption of corporate power, or, as is sometimes called, a user. If these facts exist, we then have a corporation de facto, and persons dealing with such a corporation are usually held to the same responsibilities as though it was an actual de jure corporation. The State, ordinarily, is the only person which can question the existence of such a body

orporation to pay for his expenses and his services, in promoting the organization, unless the corporation as an organization expressly promises to pay or otherwise clearly recognizes the obligation. Because of the fiduciary relationship, which a promoter occupies, he is not permitted to make any secret profits at the expense of the corporation. If he secures property for $1,000,000, he may not turn it over to the corporation for $1,500,000 and pocket the profit himself. A corporation cannot be lia

one. A furious conflict ensued between the State and the trustees. The State finally brought suit to recover the corporate seal and records which were held by a Mr. Woodward, who held them under the amendatory act to which we have referred. The case is known as Dartmouth College v. Woodward, 4 Wheaton 518. The Dartmouth College trustees were represented by Daniel Webster, and this is one of his famous cases before the Supreme Court. He took the position that the charter granted by the King of England and afterwards recognized by the State of New Hampshire, was a contract between the State and the trustees. This being so, it was protected by the provision in the United States Constitution which provides that no State shall pass any law impairing the obligation of contracts. The United States Supreme Court upheld this position. The act of the legislature of New Hampshire was held invalid. We then found ourselves in the position of having States creating corporations and then not being able to control them.

or. Because of his negligent treatment of a patient, the court held that the corporation was liable for the negligent acts of its agent. Corporations may also be held liable for such torts as involve a mental element, like fraud and libel. A corporation may be criminally responsible for failure to perform a duty imposed upon it by law, and in many States there are statutes which make it a criminal offense for a corporation to do or fail to do certain acts. It is generally held, however, that a corporation cannot commit a crime which involves a mental operation, as for example, murder. Murd

or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by a fine not exceeding $5,000, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court." The second section of this act reads: "Every person who shall monopolize, or attempt to monopolize, o

Federal act, relates only to interstate commerce. That kind of business, conducted by corporations, which is intrastate, if controlled at all by similar legislation, would be by virtue of a State act. Perhaps the most famous of the Sherman Anti-Trust Act cases decided by the United States Supreme Court is that of the U

ons which all by-laws must possess. They must be reasonable and not inconsistent with law or any rule of public policy. It would not be possible for a majority of the stockholders at a regular stockholders' meeting to pass by-laws which would deliberately deprive the minority stockholders of rights which belong to them. Th

s stockholders may interfere with the action of directors in connection with the general management of a corporation, or may even oust the directors from their positions. These cases are extremely rare, since the power of directors is supreme as to all corporate matters as to which the statutes or by-laws do not provide for concurrence or other action by the stockholders. Where proof is offered, however, of fraud, violation of law or gross negligence of the directors whereby loss has been caused or is threatened, stockholders may in some cases obtain the ousting of directors. This sometimes results in placing a receiver in temporary charge of the corporation or in the holding of a special election of new directors. No complaint, however, will generally be entertained against directors merely because their judgment does not agree with that of the stockholders even if some action of the directors may not have resulted favorably to the corporati

ompany organized in New Jersey may enter the State of New York and do business. If, however, the New Jersey corporation comes to New York and makes a regular practice of doing business, it must comply with the provisions of the corporation law of New York, and secur

of the president or any other officer. However, where a person deals with the president or any other officer of a corporation in behalf of the corporation, he may usually rely reasonably upon the president or other officer having similar power to that generally possessed by such an officer, and in many cases the corporation would be held bound by the acts of such officer even though he actually violated some limits placed upon him by the directors. This may be illustrated by assuming that the X Company was in the business of manufacturing furniture, and A, the president thereof, had made a contract with B, an outsider, for the purchase from the latter of certain wood to be used in the corporate business. As a matter of fact, however, A, the president, had no power to make such contract, since the directors had passed a resolution forbidding him to purchase any raw materials without first having the proposed purchase approved by the board of directors. Therefore, A, as a matter of fact, would have no power to make the contract with B, on behalf of the corporation. Yet, B had not in any way been warned of this limitation upon A's power, and as the purchase of mate

stockholders to concentrate their votes upon one or two of the candidates and thus have some representation upon the board of directors. As an illustration of this, let us assume that the X Company had an authorized capital stock of $100,000, composed of 1,000 shares at the par value of $100 per share, and that all these 1,000 shares are issued and fully paid up. Let us further assume that six individuals each own 100 shares of stock and act in unison, thereby constituting a majority, the other 400 shares of stock being held by the minority stockholders. Each stockholder would usually have one vote for each share of stock owned by him, and therefore, if five directors were to be elected under the usual method of voting, those individuals composing the majority of the stockholders would succeed in casting a majority of votes for each of the five directors. This would leave the minority without representation upon the board. If, however, cumulative voting were used, the minority having a total of 2,000 votes (400 multiplied by 5, the number of directors to be elected) could concentrate 2,000 votes upon one or two of their candidates and this would probably insure the election of such candidates to the board, thus giving the m

a number of persons in the hands of one or a few persons. The latter are termed "voting trustees." It is necessary to consult the statutes of the various States with regard to the legality of such voting trusts, but they are generally permitted, with the restriction, however, that the agreement under whi

d value of the corporation's capital, however little the property may actually be worth. In other States, however, an official must approve the valuation put upon property transferred as payment for stock, and in such States it may be assumed that the assets of a corporation when it begins business represent at least approximately the amount of its capital stock; even in such States, however, there is no difficulty in promoting

nute investigation of the new security from many different viewpoints, made by and in behalf of the banker. The investor can never know from the banker's printed circular, descriptive of the issue, the great amount of original work which underlies it and of which it is a meager reflection. The circular is a summary of the banker's investigation

a promissory note or a bond. The bond is a sealed writing whereby the borrower binds himself, his heirs, administrators or executors, or assigns, to pay the lender a given sum of money at a specified time, together with interest. The second paper given as security for the note or bond, is a mortgage,

s of so great value that he desired to obtain a loan of several millions of dollars, he would find it difficult, or even impossible, to find any one person willing to lend him so large an amount. If, however, the borrower could find a number of persons who could and would jointly contribute enough money to equal the amount of the loan, he could divide this total amount into equal parts and each lender could have such a proportionate interest as might be desired. This, then, is the case with large corporations, which are legalized persons. Owing to the fact that the holders of the bonds have only a fractional interest in the loan and therefore in any property that may be pledged to secure it, it is impossible to create separate mortgages in favor of the individual bondholders on any particular part of the property. No portion of the property can be specifically designated-the interests of the bondholders a

d is sometimes limited by State statutes. In the event that the corporation desired to borrow in excess of the limitation, additional capital stock is sometimes authorized thereby creating a larger basis for borrowing. If this premise is not incorporated, its omission does not affect the status of the indenture, but it is generally placed, as many other premises are, in the indenture, for the sake of logic, and to show that the matter has been considered, and that the fact is admitted by the parties to the indenture. The purpose for which the bonds are to be issued is sometimes duly set forth, as for instance, to refund certain maturing obligations, to construct a certain extension, to build new terminals, etc. While the purpose may not always be mentioned in the indenture, nevertheless it must accord with the charter of the corporation and the laws of the State. The company cannot exceed the powers that have been granted to it. We next want to know whether the authority to borrow money and issue bonds therefor ha

iven in all respects pursuant to statute of the State involved. As these corporate mortgages not only are given as security for a single loan of money but also furnish security often for very large amounts of bonds, the matter of the authority of the directors and the validity of the mortgage becomes of great importance. Therefore the statutes of the State involved must be followed closely as to the procedure in connection with the giving of a mortgage. It may be stated, however, with regard to this matter and the other special matters mentioned, the statutes generally provide that some form of authorization should be obtained from the stockholders, generally through their vote at a special meeting called for that purpose, of which pro

ucted by the corporation. With respect to dividends properly declared, the declaration of the directors generally provides that they shall be paid to all stockholders registered upon the books of the company at a specified date in the future. Hence, if a stockholder should sell or otherwise transfer his stock, after

e holder of one share of a non-cumulative preferred stock would receive the usual 7% dividend only in 1922. If the stock were cumulative he would receive 14%. In other words the unearned dividends accumulate and become a charge which the corporation must pay when sufficient is earned in prosperous years before t

oration, not for themselves; and whatever may be recovered, is recovered for the benefit of the corporation. The duty of the directors and officers of the corporation is analogous to the duty of any agent to his principal. That is, each officer or director must exercise reasonable diligence in the performance of his work and must observe fidelity to his principal. The application of these principles to particular fact is not always easy, but the principles themselves are plain. Especially the degree of care which directors are bound to use presents a troublesome question of fact. In a small business it may be the duty of a director to take active control of the policy of the company and supervise with some minuteness each business operation. Such direction is impossible where a great railroad or industrial corporation is concerned. In such a case directors necessarily derive their information from subordinate agents and cannot investigate facts for themselves. Di

pply the assets of an insolvent corporation they are personally liable to the creditors for the injury caused thereby. They are liable sometimes by statute, but also even apart from statute, for false statements of the condition of the corporation in reliance upon which credit is given the corporation. Like other agents, the officers of a corporation impliedly warrant to persons with whom

e directors actually had their attention called to the mismanagement of the affairs of the bank, or to the misconduct of subordinate officers. It is sufficient to show that the evidence of the management or misconduct were such that it must have been brought to their knowledge unless they were grossly negligent or wilfully careless in the discharge of their duties." They are liable for the consequences not only of their own fraud but of their ultra vires acts. They are liable for approving the discount of notes known to be worthl

ority to conduct the litigation of the bank; he may employ counsel. He may generally indorse negotiable paper of the bank. On the other hand, he will be personally liable if he permits improper loans or over-drafts; if he fails to give proper instructions to inferior officers; if it is his duty to require a bond from an inferior officer, and he fails to

ebt due to it, and, indeed, of all its movable property; as making entry in its books and as keeping its accounts and a record of its proceedings. In many banks these duties are performed in part by tellers, clerks, or assistants, but generally, it is believed, under his superintendence, and he might at any time assume the performance of them and perform them, if able to do so, without such assistance. His true position appears to be that of a general agent for the performance of his official and accustomed duties. While acting within the scope of this authority he would bind the bank,

The courts have almost universally held that a mere statement of opinion does not give rise to a cause of action for fraud, whereas a mistatement of fact does. Hence if I state to you when selling you 100 shares of the Bonanza Gold Mining Corporation that the company has never paid less than 20% in dividends during the last five years and you purchase the stock relying on this misrepresentation of fact (the situation actually being the company has never paid a dividend) you would have a cause of action in deceit against me. If, howeve

n this second class of non-actionable statements. There are few statements of fact but many glowing statements in the nature of "seller's talk." We all know, however, that enormous quantities of worthless stock are sold each year by this method. When busines

s are crude, some have been held unconstitutional, and many are difficult of enforcement. Recently, however, more care has been taken in drafting such legislation, and many of the earlier laws will undoubtedly be amended to conform with this later legislation. We

director of the issuer, or any owner or dealer, is covered by the Act. Illinois fiscal corporations such as banks, trust companies, in

Illinois act covers th

this Act securities are divid

their sale and disposition without the perpetration of

both parties to the sale thereof, assure their sale and disposition withou

ished income, which shall be k

ctive income, which shall be k

s in Class "A" shall

rnmental agency, or by anybody hav

loan association of this State, or insurance company organized or unde

herein there is or was at the time of issuance thereof in effect any law

ladelphia, Pittsburgh, Cleveland or Detroit Stock Exchange, respectively, pursuant to official au

ated market reports published as news items, and not as advertising, in a daily newspaper of general circulation, published in this or in an adjoinin

ry profit or organized exclusively for educational, ben

real estate, and when in case it is not a first mortgage lien or is on a leasehold, the mortgage and notes or bonds secured thereby (not including interest notes or coupons) shall each bear a legend

angible or physical property, when such mortgage

he provisions of any statute of any State of the United States providing

of payment of the price of goods, wares or merchandise purchased by the issuer of such notes in the ordinary course of bu

issioners to incorporate a company under the laws of this State where no commis

sales thereof shall not be subje

s in Class "B" shall

clusively when not made in the course of continu

ong its stockholders without the payment of any commission or expense to

ss in this State under the supervision of the Department of Trade and Commerce; or of the auditor of Public Accounts; or by or to any building and loan assoc

's sale, or at any sale by a receiver or trustee in insolvency or bankrup

ersons and in the manner provided by this section,

in Class "C" shall c

a property, business or industry, which has been in continuous operation not less than

ss than one and one-half times the annual interest ch

less than one and one-half times the

tock not less than 3% per a

ed of, sold or offered for sale upon compliance

iled in the office of

tedness, preferred stock or common s

which and the time when

bilities of such issuer and income of profit and loss

ses of its principal officers a

rmation establishing that the securities

enty-five copies of such statement, wholly printed or wholly typewritten, shall at the time of filing the original statement be fi

ois Securities Law," followed by the

ed. Neither the State of Illinois, nor any officer of the State, assumes any responsibilit

ling within Class "A," "B" and "C," respective

ith the Secretary of State before securities of Class "D" may be sold.

ths to five years. Although there is great need for a Federal incorporation act there is even greater need for a Federal blue sky law. With different acts in the different States, the