Popular Law-making / A study of the origin, history, and present tendencies of law-making by statute

by Frederic Jesup Stimson

It has not been the intention of the committee to draft a law which will be favorable to the organization of large corporations popularly known as "trusts." Inasmuch as the recommended law requires taxes to be paid upon the full value of the corporate franchise, which is, at least to some extent, measured by the amount of capitalization, there will always be this very potent reason for keeping capitalization at the lowest possible point. Indeed, it is apprehended that the organization of a corporation large enough to control a monopoly of any staple article is practically prohibited by the provisions of the recommended law as to taxation, which will be referred to in greater detail in part II of this report. At all events, it is no better for the State to leave its citizens at the mercy of the large corporations created by other less careful sovereignties, than to permit the organization of corporations adequate to the demands of modern business under its own laws, subject to its own more careful regulation and control. Under our State and Federal system it is practically impossible for any one State, by its own laws, to control foreign corporations, but so far as possible at present the committee has sought to subject them to the same safeguards of reasonable publicity and accurate returns, both as to organization and annual condition, as the State requires of its own corporations. The simple requirement of an annual excise tax, based on the capitalization of such foreign corporations, will serve to bring them under the control of this State and the way will be open for their further regulation if desirable. This annual tax has been levied upon the same principle as the corresponding tax paid by home corporations. The State should impose no greater burden on foreign corporations than on its own, but should, so far as possible, subject them to its own laws.

The recommendations of the committee have, therefore, been controlled by three principles, which may be summarized as follows:

First.—The relation of the State to the corporation.

The committee would repeat its opinion that, so far as purely business corporations are concerned, and excluding insurance, financial and public service corporations, the State cannot assume to act, directly or indirectly, as guarantor or sponsor for any organization under corporate form. It can and should require for itself and for the use of all persons interested in the corporation, the fullest and most detailed information, consistent with practical business methods, as to the details of its organization, the powers and restrictions imposed upon its stockholders and as to the property against which stock is to be or has been issued. Provision is, therefore, made in the law drafted by the committee for the organization of such corporations for any lawful purpose other than for such purposes as the manufacture and distilling of intoxicating liquors or the buying and selling of real estate which it has been the consistent policy of the commonwealth to except from incorporation under the general law. Any desired capitalization above a minimum of one thousand dollars may be fixed. Capital stock may be paid for in cash or by property. If it is paid for in cash, it may be paid for in full or by instalments, and a machinery has been created for protecting the corporation against the failure of the subscribers to stock to pay the balance of their subscriptions. If stock is paid for by property, the incorporators and not the State are to pass upon its value. Before any stock, however, can be issued for property, a description of the property sufficient for purposes of identification, to the satisfaction of the Commissioner of Corporations, must be filed in the office of the Secretary of the Commonwealth. This document becomes a public record and may be consulted by any one interested in the corporation. If the officers of a corporation make a return which is false and which is known to be false, they are liable to any one injured for actual damages. If a full and honest description is made of property against which stock is issued, a stockholder cannot complain because of his failure to inform himself by personal examination or investigation of the value of the property in which he is, or contemplates becoming, an investor.

Second.—Duties of the State in regulating the relations between the corporation and its officers and stockholders.

The second principle upon which the committee has acted in its specific recommendations is this: that the State should permit the utmost freedom of self-regulation if it provides quick and effective machinery for the punishment of fraud, and gives to each stockholder the right to obtain the fullest information in regard to his own rights and privileges before and after he becomes the owner of stock.

Upon this theory the committee has recommended a law which permits the corporation to determine the classes of its stock and the rights and liabilities of its stockholders. The recommended law provides for increasing or decreasing the amount of capital stock upon the affirmative vote of a majority of its stockholders. For the protection of a minority interest of stockholders it requires a two-thirds vote to change the classes of capital stock or their voting power, to change the corporate name or the nature of the business of the corporation, or to authorize a sale, lease, or exchange of its property or assets.

Directors are made liable, jointly and severally, for actual damages caused by their fraudulent acts, but no director is made so liable unless he concurs in the act and has knowledge of the fraud. The liability of stockholders is limited to the payment of stock for which they have subscribed, to debts to employees, and in cases of a reduction of capital when they concur in the vote authorizing a distribution of assets which results in the insolvency of the corporation. An attempt has been made to give to the stockholder an opportunity of securing for himself the fullest information on all points touching his interest.

Third.—The relation of the State to foreign corporations.

The committee has been guided upon this subject by the theory that the treatment of foreign corporations by the Commonwealth should, so far as practicable, be the same as of its own, particularly so far as concerns the liabilities of officers and stockholders, the statements filed with the State authorities for the information of stockholders or others as to their capitalization and the methods adopted of paying in their stock, and the annual reports of condition required for taxation purposes or otherwise. On the same principle a nominal franchise tax is annually imposed corresponding to the tax imposed by the State on its own corporations and made approximately proportional in amount.