Part 7

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.

Having elected directors, the management of a corporation is confided to them. What authority do they possess? This is defined by charter, statute, by-law, and custom. Says Morawetz: "The rule limiting the authority of the power of the majority to the general supervision of the affairs of the corporation is established for the protection of the individual shareholders, as well as for reasons of practical consequence." Directors also have wide discretion in delegating their authority. Their rights and limitations in this regard are also bounded by charter, by-laws and usage. Formerly bank directors loaned the money of their bank; this was their most important duty. Of late years, especially in the larger cities, this business has been largely delegated to a committee, chosen from their number, or to two or three officials of the bank. The directors continue to meet, very much as before and at their meetings the action of those who have been entrusted with power to lend the bank's money is ratified. More and more authority to direct or do the greater things in a corporation are concentrated in the hands of a smaller number of individuals. Time is ever becoming a more important element, a smaller number of men can act more quickly than a larger number, and so business must be more and more concentrated to be done efficiently.

A director has no authority to act separately and independently. Only as a board, properly convened, does he represent his corporation. While this is the law, he can and does in fact often act singly, and his action becomes effective to bind his corporation by ratification. Such action plays a great part in the modern corporation.

Though a principal may at any time, as a general rule, revoke the authority he has given to an agent, this does not apply to the directors of corporations. Says Morawetz: "The majority of the board clearly have no power to expel an individual director, or to exclude him from inspecting the company's books and participating in its management, although they may believe him to be hostile to the interests of the association." A president or other official is chosen pursuant to the charter to serve for a year or other period, and is simply an agent in serving the corporation, he cannot be turned away like an ordinary agent. If he conducts fraudulently, he may be removed, but this is not an easy process as corporations long ago found out.

Directors in most cases receive no compensation though the practice is growing of rewarding them. Unless this is fixed by charter or by the stockholders they can get nothing, for they cannot legally vote salaries to themselves. A director who performs a different service, serves as an attorney, for example, may receive compensation for it. This is a salutary rule of the law, which the courts everywhere do not hesitate to enforce. By another rule, hardly less important, directors cannot bind their corporation by any contract made with themselves, or represent their corporation in transactions wherein they have an interest. This is only another application of a rule of agency, that an agent cannot act at the same time for both parties. Yet there is increasing difficulty in applying this rule because the business of corporations has become so intermingled, and also the business of directors, directly or indirectly, with that of the corporations they represent. From this state of things has come another rule, that the transactions between directors and their corporations are not actually void but voidable, in other words if they are tainted with fraud, they can be set aside provided proper action is taken as soon as the fraud is discovered.

Suppose directors had defrauded their corporation, but the fraud was not discovered until several years afterward. Once it was held that they could shield themselves behind the Statute of Limitations (see _Statute of Limitations_) if the discovery of the fraud did not occur until after the Statute had become effective to protect them. This is no longer the law. Action however must be begun against them within the proper time after discovering the fraud, otherwise the Statute may be interposed as a bar to proceeding against them.

The complication of business has led to the adoption of another principle in managing corporations. A majority of the directors may lawfully act as opposed to the minority; in other words if a majority are not interested in a matter that concerns one or more of the minority directors, the interests of the corporation are supposed to be properly safeguarded. Yet an illustration discloses the dangerous character of this method of doing business. Suppose each director of a bank wished to obtain a loan of money from it. They could not legally make such loans, for no one would represent the bank. Suppose a single director made such an application, that would be a proper thing for him to do and for them to grant, for the bank would be represented by all the directors except the applicant. Suppose it were agreed in advance that each would make an application at different meetings that should be favorably regarded, the series of loans would be in fact only a single transaction in which the bank was not represented.

The knowledge of a director or other officer is imputed to, or regarded in the law as known by the bank on all matters relating to it. Thus if a director knew that a note was signed by a minor which was afterwards presented for discount at a directors' meeting at which this director was present, and he forgot to tell the directors what he knew and it was discounted, the bank would be regarded as having knowledge that the maker was a minor, who of course could not be held on the note. This principle has a very wide application, yet is very difficult to apply. The tendency of the law is to narrow the application of the rule, for directors do not in many cases impart their knowledge, either through forgetfulness or other cause, and it is not just to hold their corporation always for their unintentional neglect. Often they are busy men, have greater interests of their own, and do not remember the things they learn about matters relating to their corporation, and if it were always held as knowing as much as they do on all occasions, the way of a corporation would be fraught with a grave peril.

A proper distinction is made in the imputation of knowledge between that of a bank director for example who is engaged chiefly in some other business, and that of its president whose chief employment is the management of his bank. Suppose he should learn about a defective note before it was presented for discount, the bank would be very properly charged with his knowledge, because it would be his clear duty to remember what he had learned and impart it to his fellow directors.