ORDINARY BUSINESS CORPORATIONS The development of business corporations in the United States has in general been substantially similar to that of joint stock companies in England, but there are a number of important di vergencies between the business practices and law of the two countries. The legal differences are in part the consequence of a difference in business practices, in part due to different views of public policy and in part to the peculiarities of the American federal system of government.
It is a well settled princi ple of American law that power to create corporations is vested in the legislature alone, and the word legislature in this connection means, in general, the legislature of some one of the States. The U.S. Congress has implied power to create many kinds of cor porations, but it has rarely done so except in the case of national banks. Persons desiring to incorporate for other than banking purposes must therefore look to some State legislature for assistance.
During the early years of the i9th century, this assistance was given sparingly, the incorpora tion of every enterprise requiring a special legislative act. During the last ioo years, however, more liberal views have prevailed, and in all the States to-day there are general laws enabling persons de siring to incorporate to do so by performing certain specified acts. In the case of ordinary business corporations, the principal statutory requirements are the payment of certain fees and the signing and filing of a document, called "articles of incorporation" or some similar name, which sets forth the powers which the cor poration is to have, and certain other matters, such as the total amount of the authorized capital and whether preferred as well as common stock is to be issued.
Although the statutes thus determine the legal framework of the enterprise, the actual or ganization of a business corporation usually involves many things to vvhich the statutes make no reference. Most corporations are formed to develop some particular property or to take over some existing business. Important preliminary agreements are ordinarily entered into by the promoters of the enterprise prior to incorporation. Although these agreements are not in legal theory binding upon the subsequently formed corporation, in practice one of the first acts of the corporation upon its forma tion is the adoption of them.
Moreover, although incorporation laws frequently provide for the making of a minimum number of subscriptions in some statu tory form, they generally permit additional subscriptions to be made either prior or subsequent to incorporation by informal contracts subject only to certain statutory regulations with regard to payment. Furthermore, although it is well settled that a cor poration has power to finance itself through the issue of bonds, as well as by subscriptions to stock, the issue of bonds is not as a general rule based upon any provision in the statute but upon the implied power of borrowing money which is possessed by all business corporations.
In addition to the acts which are necessary to incorporation, the statutes generally contemplate the doing of additional acts before the corporation shall be in a position to do business. Thus, most incorporation acts provide that the incorporators shall, be fore engaging in business, meet together for the purpose of adopt ing by-laws and electing directors.
The laws of the severai States differ considerably both as to the manner in which incor poration may be obtained and as to the powers which corporations may have. In view of these differences, the question how far it is possible to become incorporated in a State whose laws are peculiarly favourable to the sort of organization which the pro moters of the enterprise desire and to retain the benefits of such incorporation while carrying on business in another State is one of great importance. The courts have held that a corporation formed in one State may engage in business in another State un less expressly forbidden to do so and that, under such circum stances, its internal organization continues to be governed by the laws of the State in which it was created. Nevertheless, except in so far as the corporation's business is interstate commerce, the second State may, by statute, deny it the right to do business therein or may, as the price of permitting it to do so, impose severe restrictions upon it.
In practice, corporations of one State are, with few excep tions, permitted to do business in other States, subject to certain regulations. In some cases these regulations are sufficiently bur densome to make it desirable for the owners of an incorporated enterprise to organize a second corporation under the laws of the second State for the purpose of carrying on the business done in that State. Frequently, however, the situation is such that per sons desiring to do business mainly or even wholly in one State deem it for their advantage to incorporate in another.
Although the corporation laws of the States differ in a number of important respects, they all pos sess the common feature of limiting to some extent the liability of the stockholders for the corporate debts, the limit of liability being in most States the amount of the stockholders' subscription. In order to prevent this stockholders' liability from approaching the vanishing point, it was until recently generally provided that all stock issued must have a par value and that the subscribers to the stock should remain liable to the corporation's creditors until they or their transferees had paid either in cash, property or serv ices, a sum equal to this par value. The practical consequences of these laws have been regarded by mo4t persons concerned with the financing of corporations as undesirable and their criticisms have in recent years led to the enactment of laws permitting the issue of stock without par value.
No-par stock is a device to insure greater flexibility in capitalization and to relieve stockholders from what may in some cases be regarded as an unfair burden of liability. Permission to use such a device certainly does not diminish the need of surrounding the issue of corporate stock with safeguards designed to protect the investor against being misled by fraudu lent or over-optimistic promoters and stock salesmen. In order, if possible, to discourage the activities of such persons, the majority of the States have in recent years enacted so-called "blue sky" laws which make it a criminal offence to sell stock without a licence from a public official, who is under a duty of refusing to grant a licence if he believes the plan of incorporation to be illegal, fraudulent or unfair. Certain classes of securities, such as those listed on a stock exchange, are generally exempted from the requirements of these statutes.
The enactment of such laws may tend to reduce somewhat the tendency to carelessness with re spect to compliance with incorporation laws, which has been a source of considerable difficulty in American corporation law. As a result of such carelessness it not infrequently happens that persons engage in business under what they believe to be a corporate form of organization without being legally incorporated. The courts have treated organizations of this type as having a de facto corporate existence, a view of the situation which has no parallel in the law of England.
The powers which corporations possess depend in the main upon the provisions in their articles, though there are certain powers which are im plied from the mere fact of incorporation, and other powers which are denied to all corporations regardless of what their articles may provide. One important power which is freely granted in some States while rigidly refused in others is the power to hold stock in other companies, a power which enables one corporation to control another through ownership of a majority of its stock. It not infrequently happens that the managing officers of corpora tions attempt to do in the corporate name acts which the cor poration is not authorized to do. In contrast to the English view that such ultra vires acts are wholly void, American courts have in general held that they will, in many cases, confer rights and impose liability upon the corporation.
The legal principles which govern the activities of an American corporation once it becomes a going concern are, however, in the main, substantially similar to those which govern an English joint-stock company. Both are managed by officers under the supervision of boards of directors, who possess auto cratic powers but are liable to their corporations for losses due to ultra vires acts or to gross negligence, and are accountable for any profits derived. from taking an unfair advantage of their position.
Stockholders' Rights.—The stockholders in American corpo rations, like those in English companies, have no share in the management of the enterprise but have the right of meeting to gether, generally at annual intervals, to elect directors, amend the articles of incorporation or the by-laws, and approve or disapprove certain voidable acts of the directors. As a general rule the prin ciple governing such stockholders' action is one of majority con trol, although devices for obtaining what may amount to minority control, such as the disfranchisement of certain classes of stock or the organization of voting trusts, are permissible in some States.
In addition to the voting rights which he generally possesses, a stockholder's more important rights include the right to share in any dividend paid to the class of stockholders to which he belongs, the right to subscribe to any new stock issued, to share in the assets on dissolution, to transfer his stock and to sue to redress wrongs done to the corporation where the directors fraudulently or unreasonably refuse to act.
Dissolution.—The laws of most States contain elaborate pro visions for the dissolution of corporations and the distribution of their assets among stockholders and creditors. In the case of in solvent corporations, however, what practically amounts to a dis solution of the corporation is frequently obtained without resort to these statutes, either by the institution of bankruptcy pro ceedings against the corporation or by a receivership. Such pro ceedings often result in a reorganization rather than an aban donment of the enterprise.
