Putnam's Handy Law Book for the Layman

Offers and rewards are often made through the newspapers. Thus the owner of a carbolic smoke ball offered to pay a specified sum to any one who suffered from influenza after using one of his smoke balls in accordance with directions if he was not cured. A person who failed to receive the benefit advertised recovered the reward. Two other cases may be mentioned that illustrate the uncertainty of the law. An excited farmer offered the following reward, "Harness stolen! Owner offers $100 to any one who will find the thief, and another $100 to prosecute him!" The farmer cooled off and declined to pay after the thief was caught and the court relieved him, declaring that his advertisement was not an offer to pay a reward, but simply an explosion of wrath. In another case a man's house was burning, and he offered $5,000 to any one who would bring down his wife dead or alive. A brave fireman accomplished the feat. This offerer too cooled off and declined to pay, but he did not escape on the ground that this was only an explosion of affection, and was obliged to pay.

Lastly a contract dates from the time of acceptance, and is construed or interpreted by the law of the place where it was made. If it is to be performed in another place, then the parties must be governed by the law of that place in performing it.

A contract having been made, next follows its execution. When a contract is not executed, or not executed properly, the party injured usually may recover his loss. Sometimes the contract states what the offending or wrongful party must pay should he fail to execute it. Many questions have arisen from such agreements. Suppose a contractor agrees to build a home for another and to finish it within a fixed time, and, failing to do so, shall forfeit or pay to the other $5,000 as a penalty for his failure. One would think that if he failed to execute it the other party could demand the $5,000. But the courts have a way of their own in looking at things. Suppose the contractor's failure did not in fact result in any loss whatever to the other party? The courts in such a case are very reluctant to enforce the agreement. If there had been a loss, something like that amount, then the courts would compel him to pay. In other words, the most general rule is, notwithstanding such a clearly written agreement, the courts seek to do justice between the parties. Whenever the parties do not attempt to fix the damages themselves, should their contract not be fulfilled, then the amount that may be recovered depends on a great variety of circumstances. Suppose a woman should go to a store to buy a piece of silk. She asks if the piece shown to her by the saleswoman is all silk, who makes an affirmative reply. The buyer knows much more about it than the saleswoman, which is often the case in buying things, and knows it is half cotton, can the buyer recover anything? Surely she has not been deceived. The seller may have tried to fool her but did not, and having failed, the buyer has no legal ground for an action. On the other hand, if the buyer was ignorant, knew nothing about silk and had been deceived by the seller, then she would have a clear case. This is one of the fundamentals in that large class of cases growing out of deceit. The party seeking redress, must have been deceived, and also injured by the deceit in order to recover. The remedies that may be employed whenever contracting parties have failed, or partly failed to fulfill their agreements or promises will be considered under other heads. See Deceit; Drunkenness; Quasi Contract.

Corporations.– There are many kinds of corporations. Those most generally known are business corporations; and though many of them are very large, legally they are private corporations. A railroad corporation, though performing a public service, nevertheless is a private corporation.

Public corporations are formed for governing the people and are often called municipal corporations. They are created or chartered by the legislatures of the states wherein they exist. Formerly, all private corporations in this country were granted charters by the legislative power, and many corporations are doing business by virtue of the authority thus granted to them. More recently general statutes have been enacted whereby individuals may form such corporations without the aid of a legislature. Authority has been conferred on the courts, secretary of state, or other official to grant to individuals, who may apply for them, charters on complying with the requirements of these statutes. There are other kinds of corporations, religious, charitable and the like; only one other need be mentioned, to which the term quasi has been applied. These resemble corporations in some ways, and this is the reason for calling them quasi corporations. A county or school district is such a corporation. The supervisors of a county, or the trustees of a school district, can make contracts, own and manage real estate for their respective bodies, sue and be sued like the officers of other corporations.

By the general comity existing between the states corporations created in one state are permitted to carry on any lawful business in another, and to acquire, hold and transfer property there like individuals.

FORMATION OF CORPORATIONS

Formerly charters were granted to corporations for a long term of years, or forever. The policy of the law has changed in this regard, and the duration of their existence is limited to a comparatively short period. The life of a national bank is only for twenty years; at the end of that period the charter is renewed, and the charters of the older national banks have been renewed several times. Perpetual charters are infrequently granted, and some of the older ones have been limited by legislative or judicial action. A private corporation had perpetual authority to build and maintain a bridge across the Susquehanna River at Harrisburg, nor could any other company build one within the distance of ten miles above or below. Notwithstanding this clear and exclusive grant, another company was formed which attempted to build a bridge within a mile of the other. The old company tried to prevent by law the new company from building the bridge. The court said that "perpetual" did not mean literally perpetual, but a long time, that the old company had enjoyed its exclusive grant a long time, long enough, and that the new company was justified in its undertaking.

A corporation has no heirs like an individual; it continues through succession, one sells his interest or stock to another, and thus it lives to the end of its charter unless it fails or, through some other event, comes to an end. Suppose a stockholder buys all the stock of the other members, does the corporation still exist? It does for a limited time. How long? No court has answered this question. It depends on the particular case. The courts also say, that he can sell his stock to other individuals and thus practically revive a dying corporation. A stockholder who had bought all the stock of a corporation claimed that he should be taxed as a corporation, which was at a lower or favored rate than that paid by individuals. The court said the game would not work, that for the purposes of taxation the concern must be regarded as an individual. So the stockholder knew more after that decision than he did before.

CAPITAL

Every private corporation has a capital composed usually of money, which is advanced or paid by its members or shareholders. Among the reasons for forming corporations two may be stated. It is a way for collecting money from many sources needful for an enterprise; the many contributors are like the small streams that unite and create a great reservoir. The other reason is, the contributors are free from the liabilities that attach to every member of a partnership for its entire indebtedness. A stockholder may indeed, if his corporation does not succeed, lose a part or all of the capital he has contributed, but no more or only a fixed amount, as will be hereafter explained.

Almost anyone can subscribe for stock, with a few limitations. A minor cannot subscribe for stock, nor can his guardian act for him. Doubtless they do subscribe in some cases; the practical difficulties will be shown in another connection. A married woman cannot always subscribe, unless by virtue of a statute. What usually happens when she wishes to subscribe is to act through a friend, who, after the corporation is fully formed, transfers the stock to her. There is no legal stone in the way of such a course.

Sometimes fictitious subscriptions are made to induce others to subscribe for stock. Whenever the fraud is found out an innocent subscriber can do one of three things. If he has paid for his stock, he can bring an action to recover it; if he has not paid, he can refuse to do so, and set up the fraud as a defense. He can do another thing, accept the stock and sue for the damage he has sustained by the deceit that has been practiced on him. The discovery of a fictitious subscriber among the number, after all have subscribed, where his action in subscribing did not affect their action, will not justify them in not fulfilling their obligation to pay for their shares.

The issuing of a share certificate is not an essential condition of ownership. It is merely evidence of it, like the deed of a piece of real estate. All the shareholders of a corporation are the owners whether any certificates are issued to them or not. Of course a stockholder desires to have his certificate for obvious reasons.

Whenever the capital stock of a company is increased, each shareholder has a right to his proportionate number of the new shares on fulfilling the terms on which they are issued before they can be offered to the public. Occasionally a clique seeks to get control of a corporation by the issue of new stock and taking it among themselves. They can be defeated for the courts carefully guard the rights of all stockholders to take their shares of new stock before it can be offered to, and taken by others.

Of late years private corporations have been issuing a kind of stock, called preferred, that must be explained. Formerly such stock was more like a loan of money to a company, and was issued primarily as the most feasible way of getting a fresh supply of money capital. The lenders or takers of the stock received a fixed per cent. on their money, which was paid before the common shareholders received anything. His preference or dividend was not guaranteed, but the probability of regular payment was so strong in most cases that his shares usually possessed a real value. Preferred shareholders are not liable for the debts of their corporations, and the right to vote at any meeting of the shareholders is sometimes given to them, though not always. The tendency of the day is to confer this right on them. Whether, when the amount of the preferred stock is increased, the preferred shareholders are entitled to subscribe for their proportionate amount, like common shareholders, is an open question.

The authority of agents or commissioners to receive subscriptions is strictly regarded. They cannot refuse to receive a subscription made by a competent person, nor release a subscriber, nor vary the terms of subscription to anyone.

A subscription for shares is a contract in writing and cannot be proved by oral evidence unless the original subscription paper has been lost. As the contract is an open one, any subscriber must inform himself of the legal consequences of subscribing, and cannot therefore refuse to execute it on the ground of ignorance or misunderstanding. Suppose an agent who was soliciting subscriptions, in reply to questions concerning the laws relating to the proposed company, should give incorrect answers to a subscriber, these would furnish no ground for refusing to pay, as he has promised to do, for he could have found out what the laws were without inquiring of the agent. This may seem a hard rule, yet it has a wide application. In one sense it is true that every person can find out the law for himself, the books are open, the statutes especially may be easily found, but how many know enough to find the laws in which they are interested?

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.

If the by-laws require that an annual meeting shall be held at a particular time, and those whose duty it is to call it, forget to do so, it may be held afterwards, and the officers elected and other business transacted would be as valid as if the meeting had been held at the proper time.

Should the officer who ought to call a meeting refuse to do so he may be compelled by law to call it. This proceeding is called a mandamus, and is issued at the instance or request of the shareholders.

"Besides annual meetings, corporations hold many stated or regular meetings at monthly or other times. Thus if a meeting of proprietors must be called by twelve of them, a call signed by eleven is defective. If a statute requires a committee of a society to sign the call, it cannot be signed by the clerk, nor by him for them. If the trustees of a corporation must issue the call, this cannot be done by the president. If exclusive authority to issue the call is vested in the directors, it cannot be exercised by the president and secretary. If the articles of association provide that meetings of shareholders may be called by the board of directors, or by any three shareholders, the president and cashier cannot issue a valid call. But if a board consists of three members and there is a vacancy, the other two may act and give the notice."

A well understood distinction exists between the calling of regular and special meetings. Regular meetings are held in the way set forth in the charter and by-laws of a corporation; special meetings are called at irregular times on proper authority. A notice for a special meeting must state the object of it, and no other business can be transacted. On the other hand unless the regular meeting is of great importance no mention need be made of its object in the notice.

An authorized meeting may be adjourned from time to time without giving further notice, for it is only a continuation of the original meeting. Says an eminent judge: whether a meeting is continued without interruption for many days, or is adjourned from day to day, or from time to time, many days intervening, it is evident that it must be considered the same meeting.

A meeting may be legally held though one of its members is incapable, physically or mentally, from receiving notice. "The law cannot look into the capacity of the stockholders to transact business, but can only regard the capacity of the aggregate body when duly assembled." On the death of a stockholder, the purchaser, if the stock has been sold, should have it transferred, or give distinct notice to the company how notices of its meetings should be sent to him; if neglecting to do this, he cannot charge the corporation with neglect should it continue to send notices to the former address.

Two other points may be mentioned concerning notices. One is, they may be waived and this is often done. Many a question though arises, what action amounts to a waiver of notice. If each shareholder attends in person or by proxy and participates in the meeting, he cannot afterward question its legality because he received no notice of it. An improper notice may also be cured by ratification. Thus if a secretary calls a meeting instead of the directors, and his action is properly ratified by them, the call is effective. More generally, the action of a meeting will be declared valid where it appears that every stockholder who did not participate in the meeting ratified its action afterwards. An election of trustees of a church may be valid even though the notice lacked the proper length of time and the names of the trustees whose seats became vacant at the election, if it was fairly conducted and all who had the right to vote were present. Likewise a stockholder who knows of the sale of his railroad, though not legally notified of the meeting which authorized its sale, and was not present, may be bound by its action through acquiescence. And a stockholder who, after receiving notice of a meeting called by the directors to consider their neglect of duty and who decides not to go, is not thereby prevented from taking action against them by the stockholders who did attend and authorized their unauthorized action. Lastly a stockholder who was present cannot complain that notice was not given to others; the objection is personal.

Next we may inquire, who can vote at such meetings? Unless prevented by charter, statute or by-law a stockholder may vote at any corporate meeting even though no certificate of stock has been issued to him. Nor does his indebtedness for his stock prevent him from voting. On the other hand if inspectors were not bound by the record of ownership in the company's books and went behind them to find out the real ownership of the company's stock, they would often have a grave task before them. Consequently in many, perhaps all of the states, only stockholders or those holding proxies for them can vote at a general election. By statute the stock record of ownership is usually made the conclusive test of the right to vote. Stockholders who thus appear on the stock books at the date of a meeting are entitled to vote the stock.

A trustee is the legal owner of stock standing in his name and may vote the stock for all purposes; but a testator may impose limitations on his voting power. Should trustees under a will holding a majority of the stock of a corporation disagree, and one of them should be enjoined from voting it, a minority stockholder would be entitled to an injunction to restrain the other trustee from holding an election or voting the stock alone until the right to vote the stock had been legally decided.

A different rule applies to a naked trustee who holds the title to the stock without any real interest in it. He can indeed vote, but in the way directed by the beneficiary or real owner. In Colorado, by statute, perhaps in some other states, a person to whom stock has been issued as trustee without the knowledge of the owner, is not a bona fide stockholder and cannot vote.

An executor has the power to vote the stock of his testator. And if one of joint executors issues a proxy authorizing the vote of the stock belonging to the estate, and the other executor is present at the stockholders' meeting, the vote of the stock by the executor who is present is deemed a revocation of the proxy given by his co-executor. And if a will gives to one of three executors the power to vote the stock, and directs the other two to give him a proxy for that purpose, which they decline to do, a court will order the proxy to be given. And whenever stock is held by executors who are not united in voting it, they cannot vote at all. A foreign executor should present to the inspectors of election an exemplified copy of his letters of administration, and having done so may vote on the stock standing in the testator's name. An administrator has the right to vote stock belonging to the estate, even though it has not been transferred to him in the corporation's books.

A partner of a firm who owns stock in a corporation may represent the stock in all meetings. He may therefore receive and waive notice of them, vote when attending them, in short, participate in all matters. And on the death of a partner the surviving partner has the right to represent the partnership and vote on its stock.

Two other kinds of stockholders still require mention, sellers and purchasers of stock and pledgors and pledgees. Until a transfer is entered on the books of a corporation, "the transferee, as between himself and the company, has no right beyond that of having the transfer properly entered. Until that is done, the person in whose name the stock is entered on the books of the company is, as between himself and the company, the owner to all intents and purposes, and particularly for the purpose of an election."

Many questions have arisen between pledgors and pledgees about their rights to vote the pledged stock. Of course, whenever an agreement has been made by them this must be respected. In other cases, if the record remains unchanged, the pledgor can vote the stock. But if the pledgor has transferred his right to vote the stock, he cannot ask a court to restore his right to vote it until the purpose for which it was pledged has been satisfied. Again a pledgor who pledges his stock not in good faith as security for a loan, but to enable the pledgee to vote it and effect an unlawful purpose, cannot do this and so defeat a statute which provides that the real owner, the pledgor, may vote his stock.

Passing to the pledgee, whenever he is registered as owner of the stock on the company's books, its officers will not look behind these to ascertain whether he is the real owner or not when he is voting his stock. A court of equity though may do this, and enjoin a pledgee from voting the stock whenever the pledgor's rights would be affected. Should the pledgor acquiesce for years in the control of the stock by the pledgee, who is the record owner, and not inform the company of his ownership until the holding of a contested election, he would be too late to claim the right to vote. Finally when a certificate of stock has been assigned in blank as collateral security, which is often done, and never transferred to the pledgee on the books of the corporation, a memorandum only having been made on the stub of the certificate in the stock book, the pledgee is not a stockholder and cannot vote the stock. It may be added that notices of meetings should be sent to whoever has the right to vote the stock, to the pledgor if the stock still stands in his name, to the pledgee if the stock has been transferred to him and stands in his name.

DIRECTORS

Shareholders manage their corporations through directors or trustees elected for that purpose. The business of some corporations is managed by trustees who are named in the charter and who fill vacancies in their number by electing others themselves, a self-perpetuating body. Many savings banks especially are thus organized and continued. From their number they usually select a smaller number to manage or direct its affairs.

The directors are always shareholders, unless the charter of a corporation permits the election of outsiders, a thing that rarely happens. The national banking act requires that every director shall own at least ten shares of stock, and many other corporations have similar requirements. The charter or statutes prescribe at least the minimum number that must be elected, but the maximum number is left to the stockholders themselves. A national bank must have five directors, not infrequently the board is composed of ten, fifteen, or even more. A director is chosen for some real service that he is likely or willing to perform. An individual may be chosen a bank director who may not be able to do much in directing the affairs of the bank, yet by reason of his wealth or business relations he may be able to attract business to the bank and thus greatly promote its prosperity.

He is elected by a majority of the votes of the shareholders. More recently the cumulative system of voting has come into general favor. By this system a voter may cast as many votes for each of the candidates as he holds shares of stock, or he may distribute or cumulate his votes on a smaller number. "Where the votes under such a system are cast and counted, the validity of the election must be determined precisely as in all other cases." Where the shareholders have failed, whether voting cumulatively or otherwise, to elect a quorum of the new board, at an annual meeting of stockholders, it is the privilege of the shareholders to ask for successive voting for directors to fill the board. The ruling of a chairman on one occasion, that because of a tie further balloting could not proceed, and that the old board held over was arbitrary and illegal. A stockholder who has votes enough to elect himself and other directors by cumulating his shares in voting, but refrains from doing so in consequence of a verbal agreement among the stockholders that he shall be chosen president, which they fail to carry out, cannot obtain any satisfaction from a court. A court says in effect stockholders should not be trusted to make such agreements, and will not aid the tricked stockholder by ordering a new election. Probably he will be fooled only once.