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.
Directors sometimes go astray and cases are constantly arising to
determine their liability. When a corporation has failed or passed a
dividend nothing is more common than to accuse its directors of
negligence, incompetence or fraud. The legal rule of liability is
quite a different thing. Let us try to give this in the fewest words
possible. The charters of corporations, or statutes that apply to
directors, prescribe some definite things which they must do or not
do, and if these are violated they are clearly liable. The directors
of a bank are required to make a statement of its affairs to a
government official at a stated period, and if they neglect to do it,
or intentionally make a wrong and deceptive one, they are liable. By
many statutes they are forbidden to make loans above a certain amount,
or a fixed proportion of their bank's capital, and if they violate
this plain law they are liable. In all other cases where by charter or
statute a plain rule of duty is prescribed for directors, they are
liable, should they disregard it.
Besides these clearly defined lines of duty are other lines of duty in
which the proper course of action is not so clearly defined, indeed is
largely discretionary. From the nature of the business of almost any
kind of corporation, it is impossible to prescribe in detail the
course of action directors must follow. Much must be left to their
judgment. They must on all occasions be honest and free from fraud.
This is one limitation. If they are guilty of doing things tainted or
marked with fraud, they are liable. Fraud may be of two kinds,
omission and commission. If a director knew that his fellow directors
were doing fraudulent things, and he kept away from directors'
meetings because he did not wish to participate in their wrongdoing,
or dared not go and try to stop them, or kept silent when he should
have exposed them, he must suffer in the end as one of the number
though entirely innocent of actual participation in the fraud. Many a
director knowing or suspecting with good reason that his fellow
directors were running the corporation in an illegal manner, has
quietly sold out leaving the stockholders to find out afterwards and
from some other source about the wrongdoing of their agents. In all
such cases of omission of duty a director is held responsible for the
wrongs of his associates.
Recently a court has declared that a director who desires to escape
further responsibility by resigning his position must make sure that
his resignation reaches the board. If therefore he should send it to
the secretary, who failed to deliver it to the board, his resignation
would not be effective and he would still be responsible like the
other directors for whatever the board might do.
What acts are fraudulent are sometimes difficult to determine.
Different courts interpret the same act sometimes in different ways.
They do not differ so much on the application of the principle--for
all acts of fraud, whether of omission or commission, directors are
liable.
There is another series of acts for which they are liable, those of
gross negligence. How gross must the act be? If it is so gross as to
amount to a fraud, they are liable; if not so gross, if no fraud is
found of any kind, nothing but negligence pure and simple, they are
not liable at all. Most courts though go further and declare that if
they are guilty of gross negligence, even though the smell or taint of
fraud is not perceptible, they are liable. What, then, is the nature
of the acts that constitute gross negligence? These cannot be easily
defined, they differ in each case; so each case stands by itself. This
is the conclusion of the highest court in the land and which is
followed by many others. The same case therefore may be regarded
differently by different tribunals. Thus some directors were tried not
long since for wrecking a national bank. The lower court decided that
all the directors were guilty of gross negligence, on appeal the
reviewing court decided that the president only was guilty of fraud
and acquitted the others.
DIVIDENDS.
One of the most cheerful things a corporation can do is to declare a
dividend, especially if it be a large one. Until a dividend is
declared the profits of a corporation are simply its assets, do not
belong to the stockholders, and should it become insolvent must be
used to pay creditors. But if a dividend has been declared and the
corporation afterwards becomes insolvent before paying it, the
stockholders may insist on its payment to them instead of paying it to
the creditors.
Dividends must be paid from net profits. They can never be taken from
the capital, for this would impair it and, if continued, result in the
insolvency of the corporation. The laws everywhere forbid this, and,
if violated, the directors are usually penalized. It is not an
infrequent thing to declare a dividend that has not been earned in
order to keep up the value of the stock, and enable the directors and
their friends to sell out before the true condition of things has
become public. Such action is a palpable fraud which the law
recognizes and for which the guilty ones must answer.
Nor can dividends be declared out of borrowed money, for this is no
profit, though money may be temporarily borrowed for this purpose. A
profit may have been actually made, which may not have been reduced to
money, that will justify a corporation in borrowing to pay a dividend,
assured that the loan will soon be repaid. But the rule or practice is
hedged about with limitations. Thus the premiums received by an
insurance company and interest on its capital stock constitute the
fund from which dividends are paid. Unearned premiums that have been
paid do not form a part of that fund, for, while the risk is still
running, the company may be obliged to pay them out in settling
losses.
The profits of coal and other mining corporations may be divided
without making any deduction for decrease in the value of the mine
from extracting minerals. The same principle applies to all
corporations organized to operate wasting property like a mine or
patent, though in thus dividing all its net profits and accumulating
no surplus the value of the property is lessened. Except such cases,
before a corporation can lawfully set apart its profit as a dividend,
a sufficient sum must be set aside to represent the wear and tear for
the purpose of creating a fund to renew and improve the property of
the corporation.
Dividends illegally declared and paid, not based on profits may be
recovered either by the corporation or by its representative for the
benefit of creditors. The fact, says Clark, that the directors acted
in good faith under a misconception of the amount of profits possessed
by the company or that were available for that purpose is immaterial.
And if the capital stock of a company has been wrongfully paid away by
the directors as dividends, it may be recovered by the creditors from
anyone who is not an innocent receiver.
Whether a dividend shall be declared, and also the amount, are
questions lying largely within the discretion of the directors. A
company may earn a large net profit, yet the directors may think it
should be used for improvements or kept for a future contingency in
business, perhaps a time of business depression. Courts will not
interfere in such cases. Corporations are sometimes organized with the
well understood intention that the earnings shall be kept until a
large surplus has been accumulated. On the other hand directors are
not permitted to abuse their power; they must act in good faith. They
cannot withhold dividends in order to depress the value of the
property and buy its stock at a lower price.
Dividends must be distributed among the stockholders without unjust
discrimination. "The dividends," said a court, "must be general on all
the stock so that each stockholder will receive his proportionate
share. The directors have no right to declare a dividend on any other
principle. They cannot exclude any portion of the stockholders from an
equal participation of the profits of the company." A stockholder
cannot be deprived of his dividend because he purchased his stock a
very short time before the action of the directors in declaring a
dividend. On one occasion a person held bonds convertible into stock.
Shortly after the conversion a dividend was declared. He was as much
entitled to his dividend as any other stockholder.