Putnam's Handy Law Book for the Layman

by Albert Sidney Bolles

Of course if a person has been deceived by an agent, if a fraud has been practised on him, he can avoid his contract. Thus a person who, unable to read a subscription paper, was induced to subscribe through misrepresentation of its contents, was not bound by it. If he wishes to act, he must lose no time after discovering the fraud that has been practiced on him. He cannot say, "I will abide by a company if successful, and will leave it if it fails." He must therefore decide at once either to continue his membership or withdraw.

A company cannot purchase its own shares unless by charter or statute such action is clearly authorized. For, to do this is to reduce its assets or fund for paying its indebtedness, which the law will not permit to be done. If a company has no debts, a reduction in its capital made in an open manner in accordance with law, is legal. The tendency of the times everywhere is to increase the capitals of private corporations; reductions though are sometimes made to lessen especially the burden of taxation.

A corporation has no lien on its stock for the indebtedness of the owner unless conferred by charter or statute. Once such a lien could be established by usage or by-law under authority given to a corporation to regulate the transfer of its stock. The national banking law prohibits the creation of such liens, and the strong current of the law runs in this direction. But a bank can retain a dividend that has been declared to reduce the indebtedness of the owner to the bank for his stock.

LIABILITY OF SHAREHOLDERS.

The liability of the shareholders of a corporation is very unlike that of members of a partnership. It was the liability of each partner for all the debts of a concern that kept many persons from forming that relation. The shareholders of many corporations are liable only for the amount they have contributed and paid, or have agreed to pay. National bank shareholders are liable for another sum, equal to the par value of their stock, provided as much may be needed to pay its debts should the bank fail. Thus if a shareholder owned ten shares, having a par value of $100 a share, he might be required to pay, should the bank fail, $1,000 more provided as much was needed to pay its debts. In a few states shareholders are required to pay twice the amount of the par value of the stock if as much may be needed to pay its indebtedness.

If a corporation fail, one or more persons are usually appointed by a court to settle its affairs, who are called receivers. Several years are sometimes required to settle the affairs of a corporation. First an inventory is made of its property, names of the debtors and creditors, and the amounts due from and to them, and as soon as its property can be converted into cash, dividends are declared and paid to the creditors; and this work is continued until there has been a disposition of all the property, and the amount received therefrom less the expense of the receivership, has been paid to the creditors. When the shareholders are required to pay more, as above explained, on the failure of their corporation, they are notified by the receiver how much and when they must pay. This requirement is based on an order from the court that appointed him, which, in turn, is based on information which he has furnished to the court of the amount that may be needed to pay the debts of the corporation. Several assessments may be ordered, but they never exceed in the aggregate more than the amount of liability fixed by law, the amount or twice the amount of the par value of the stock subscribed. Should shareholders decline to pay these assessments as ordered, the receiver sues them and obtains judgments, the proceeds of which are paid to the creditors.

MEETINGS.

The power of a corporation vests or rests in its members. The charter and statutes provide that they shall meet, organize, elect officers, and adopt by-laws for the more detailed governing of the corporation. One of the most general principles pertaining to them is, the majority shall rule. This however may be modified by charter or statute. There are a few ancient charters which provide that, notwithstanding the quantity of stock a shareholder may own, he is entitled to only one vote. The writer knows of a case in which a shareholder bought nearly all the stock of a corporation and went to the annual meeting supposing that he could and would do as he pleased. On learning the unwelcome truth that he had only one vote like the others he quickly put on his hat and walked out.

The statutes usually prescribe how notice of the joint meeting shall be given. They are not mandatory, but directory, hence if all the persons in a corporation should come together without any notice or call whatever, and accept the charter, and do any other thing needful to form the corporation, their action would be valid. Where the regulations of a corporation definitely fix the place, the day, and hour of the annual meeting at which the directors are to be elected, no further notice of the meeting to the stockholders is needed unless required by its charter or by-laws.

A case may arise in which other persons than those designated by statute may call a meeting. Suppose a statute prescribes that the persons named in the certificate of incorporation, or any three of them, may call a meeting of the shareholders, and before giving notice all of them had died? Then the meeting could be called by others. Again, authority to create a corporation may fail through long delay in calling a meeting and organizing. Should the notices for the first meeting not be given as the law requires, it is nevertheless valid if the shareholders have notice and join in waiving the mailing of the required notices. Likewise a subscriber waives his notice of the first meeting when he afterwards offers to pay for his shares.