Commercial Law

by Richard D. Currier; Richard William Hill; Samuel Williston

POWERS OF CORPORATIONS.—A corporation is unable to do anything beyond such powers as are granted it by law. As to the extent of the powers possessed by a corporation, we may conveniently divide corporate powers into those which are express and those which are implied. Express powers may be considered as including those which are mentioned in the official documents used or granted upon the beginning of the existence of the corporation. These official documents are spoken of as "charters" or "certificates of incorporation." Whatever term may be applied to them there is generally in such documents a statement of the general purposes or objects for which the corporation is formed; in other words, of the general business in which it is to engage. There is also a statement of the general powers of the corporation which is to engage in the business mentioned. The powers so mentioned in such official documents may be termed, as we have stated, express powers of the corporation. Needless to say, however, it is not usual or possible to attempt to indicate in any such official documents all the details of the operations of business. Therefore, it is necessary to imply that in addition to such express powers the corporation 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, obviously, have as express powers, the power to build the road and to operate it between the towns mentioned. It would also have as implied powers the power to do any act reasonably necessary or incidental to the operation of a railroad, such for example as the purchase of rails, ties or other railroad supplies, the hiring of employees, erection of stations and the power also to give negotiable paper in payment for such supplies or the raising of money by mortgaging its property or otherwise where necessary to carry on its business. In other words, the corporation may be said to have as implied powers all the powers which an individual would reasonably and usually exercise if he were operating the railroad. However, the corporation would have no power, express or implied, to do any act not reasonably necessary to the railroad business, such, for example, as the purchase of a stock farm or the operation of a steamer line or a grocery store, or the leasing of its line. If the corporation, then, should make any contract with relation to engaging in these outside matters—the corporation having no power to engage in them—a valid contract could not arise and therefore the corporation could not be held liable thereon.

ULTRA VIRES ACTS.—Where a corporation attempts to do an act which is clearly beyond its express or implied powers, such act is generally termed an "ultra vires" act, and it may frequently consist in an attempted contract by a corporation. Hence we must consider with some care contracts of corporations which may be termed ultra vires. As the corporation lacks power it is generally said that the contract does not arise and hence neither the corporation nor the person with whom it attempted to contract would theoretically be bound thereon. Yet, in many States, a special rule has been adopted whereby a corporation may be held upon such contract in certain cases even though it had no power to make it. This may be termed the "doctrine of estoppel," and generally includes cases where the corporation has assumed to make a contract which was 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 to have the power to make the contract and where the person dealing with it had no reason to suspect or doubt its power in that regard, and where the person dealing with the corporation had parted with some value of the kind mentioned, in his reliance that the contract was within the corporate powers of and therefore binding upon the corporation. Thus, where such person has done nothing toward carrying out his duty under the contract he would have no claim or right to enforce the same as a binding obligation of the corporation. Many courts also treat him somewhat differently and take the attitude that an outsider who has dealt with the corporation is entitled not to enforce the attempted contract, but is entitled only to recover from the corporation the reasonable value of such goods or service as it has voluntarily accepted from him.

DE FACTO AND DE JURE CORPORATIONS.—It sometimes happens that a group of persons may attempt to organize a corporation and fail to comply with all the provisions of the law in the State in which they attempt to organize. The question arises then: What have we? Of course, we do not have a full completed organization, which we would call a corporation de jure (by right of law). We may have what is called a corporation de facto (in fact). In order to constitute a corporation de facto, it is generally held that the following requisites 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, and this is usually done in a suit by the attorney-general. If the parties have not even complied with the requisites of a de facto corporation, the authorities are divided as to what kind of an organization it is, although, perhaps, the best decisions would hold the parties liable as partners. They must have contemplated some kind of liability and failing to create even a corporation de facto, a partnership liability is all that is left, except individual liability, and that is apparently just what they did not intend.

PROMOTERS.—A promoter is a very common person in the modern industrial world. He is a person who brings about the organization of corporations, gets the people together who are interested in the enterprise, aids in procuring subscriptions, and takes general charge of all the matters incident to the formation of the corporation. In other ways, he is governed by the rules of agency and his position is that of a fiduciary. The majority of the courts hold that there is no liability on the part of the corporation 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 liable for the acts of a promoter before the corporation came into existence. It may, however, after coming into existence adopt the acts of the promoter and thereby render itself liable. If, knowing the terms of an agreement made by a promoter, the corporation takes advantage of the agreement or recognizes it, it thereby in effect itself becomes a party to the agreement. Unless the terms of a promoter's agreement expressly state the contrary, the promoter is personally liable upon it as a contractor.

POWER OF THE STATE OVER A CORPORATION.—It must follow, that if a State creates a corporation, then it should have certain control over it. The United States Supreme Court has recognized the right of visitation as residing in the State. Visitation is, in law, the act of a superior or superintendent officer who visits a corporation to examine into its manner of conducting business and its observance of the laws. The visitation of National banks by the Comptroller of the Currency is a common example of the exercise of this authority. One of the most famous cases in the United States Supreme Court is the Dartmouth College case. In 1769, the King of England granted a charter to twelve people under the name of "The Trustees of Dartmouth College." They were authorized to conduct a college and they founded Dartmouth College in Hanover, New Hampshire. In 1816, the legislature in the State of New Hampshire undertook to amend the charter in many ways, among other things, increasing the number of trustees to twenty-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. Whatever may be said in regard to the law as laid down by the United States Supreme Court, this situation was unfortunate. Shortly thereafter in the various State legislatures, a method to meet the situation was devised, and this is what was done: When a general corporation law is passed, the State inserts in it a clause to this effect: "The State hereby reserves the right to alter, amend, or repeal the charter of any corporation organized under this act." This, then, makes this clause a part of the contract when a new corporation is organized. It knows that it is subject to having its charter amended or repealed without its consent. The effects, therefore, of the Dartmouth College decision have been practically nullified by such clauses inserted in the various incorporation laws. Such incorporation acts do not relate to corporations organized before such act was passed. Under this method of procedure, the legislature today surely has an efficacious method of controlling the corporations which it creates.

LIABILITY FOR TORTS AND CRIMES.—A corporation is ordinarily liable, the same as an individual, for all torts committed by its agents in the scope of their authority. A corporation may even be liable for acts which are beyond its authority. For example, in the case of Hannon v. Siegel-Cooper Co., 167 N. Y. 244, it was held that the department store of the Siegel-Cooper Company, a corporation, was liable for mal-practice in dentistry. The charter of the company did not give the company the right to practice dentistry, but space in the store was rented to a dentist who conducted a dental parlor. 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. Murder involves a mental operation; it is "killing with malice aforethought." Then again, it would be difficult to punish a corporation for the crime of murder, because under our State constitutions, the punishment for murder is either death or life imprisonment. Although a corporation is a separate person, there is no way to kill it or imprison it for life. You surely would not do so by inflicting this penalty on all the stockholders. It is generally provided, then, by statute that such crimes that a corporation can commit are to be punished either by a fine or by imprisonment of the directors.

SHERMAN ANTI-TRUST ACT.—On July 2, 1890, the Sherman Anti-Trust Act was passed by Congress. The first section of this act reads: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal. Every person who shall make any such contract, 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, or combine or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states, or with foreign nations, 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."

It would be impossible, in a small amount of space, to call attention, except in a general way, to the importance of this act and the difficulty of understanding it, without carefully reading the various conflicting decisions of the United States Supreme Court handed down since the passage of the act. The act, being a 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 United States v. Standard Oil Co., 221 U. S. 1, where the majority opinion was written by the late Chief Justice White, and in which he enunciated the so-called "rule of reason" which brings the interpretation of that act very much in harmony with the rules of the common law in regard to illegal contracts and monopolies.

BY-LAWS.—A by-law is a permanent rule for the government of a corporation and its officers. The purpose of a by-law is to regulate and define the duties of the members of the corporation toward the corporation and between themselves. The power to make the by-laws is vested in the stockholders. There are certain qualifications 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. The by-laws are, of course, always subject to the provisions of the charter of the corporation, and if a corporation is authorized to operate a railroad, it could not, by passing a by-law, to the effect that it was deemed wise to enter into the steel manufacturing business, change the nature of the corporation in that manner.

STOCKHOLDERS' MEETING.—In order that the acts of the majority of stockholders shall be valid, they must be authorized at a regular stockholders' meeting. This must be held in the principal office of the company, and the notice required by the by-laws must be given to all of the stockholders. After this is done, the majority of the stockholders may transact business and bind the corporation. Of course, in a large corporation with a hundred thousand shareholders, as is the case with some of our bigger corporations like the United States Steel Corporation and the Pennsylvania Railroad, very few of the stockholders actually attend the meetings. The directors usually send out with the notice of the meeting, a proxy, and the stockholders who are not able to be present send in their proxy authorizing certain persons to vote for them. In this way, a majority of the stockholders are present at the meeting, either in person or by proxy. In certain cases 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 corporation, provided such action was taken honestly and with all due care and regard to law. As an illustration, the directors of the X Company made a certain contract on behalf of the corporation whereby it was agreed with Y that property of the corporation should be transferred to the latter for much less than its evident actual value. This operation would usually indicate fraud on the part of the directors, or at least such gross negligence as would in many cases justify stockholders in asking a legal inquiry into the action of the directors, which would result, if sufficient facts were proved, in their removal and an injunction against the performance of the contract. However, if the value of the property were doubtful and the directors had used all due care and effort to ascertain its true value and to obtain the best available price, no complaint could usually be made although it should later develop that a better price might have been obtained.