18. Can. directors and officers make contracts with thentscives?—This is an important question that fre quently arises on account of the wide business con nections of the executives of' large corporations. Un fortunately the law is not uniform. Nearly all the states, howes-er, agree that contracts in which direc tors or officers are personally interested are voidable by the stockholders. If an action were brought by a stockholder to have such a contract set aside the bur den would be placed on the director to show that the contract was beneficial to the company and that its terms were fair. It is always better for interested directors to take no part in the deliberation or ac tions of the board when a contract involving his per sonal interests is being discussed. The directors act in a fiduciary position. They must have an eye sin crle to the ifitcFe-sts of the company. But where the con tract he makes with the company iS fair and intra vires, there is no reason why, in the absence of a con trary provision, he should not as a shareholder vote to ratify the contract. In order to avoid doubts on the point, the disability of directors to contract with the company is now often waived by provisions in the charter or by-laws. Generally these enact that a di rector may contract with the company; that he shall not be liable to account for any profit provided that he discloses the nature of his interest at the directors' meeting at which the contract is decided upon; and that lie shall not vote upon the acceptance of the con tract. Many large corporations have passed by-laws similar to the following clause taken from the by-laws of the United States Steel Corporation: Inasmuch as the directors of this company are likely to be connected with other corporations with which from time to time this company must have business dealings, no con tract or other transaction between this company and any' other corporation shall be affected by the fact that direc tors of this company are interested in, or are directors or officers of, such other corporation, if, at the meeting of the board, or of the committee of this company, making, author izing or confirming such contract or transaction, there shall be present a quorum of directors not so interested; and any director individually may be a party to, or may be inter ested in, any contract or transaction of this company, pro vided that such contract or transaction shall be approved or be ratified by the affirmative vote of at least three direc tors not so interested.
Section 10 of the Clayton Law prohibits railroads from having dealings in securities, supplies or other articles of comnierce, or from making contracts for construction or maintenance of any kind, to the amount of more than $50,000 in the aggregate in any one year with another corporation, firm, partnership or association when the said common carrier shall have upon its board of direc tors, or as its president, manager or as its purchasing or selling officer, or agent in the particular transaction, any person who is at the same thne a director, manager, or pur chasing or selling officer of, or who has any substantial in terest in, such other corporation, firm, partnership or asso ciation, unless and except such purchases shall be made from, or such dealings shall be with, the bidder whose bid is the most favorable to such common carrier, to be ascertained by competitive bidding under regulations to be prescribed by rule or otherwise by the Interstate Commerce Commission.
The Dominion Railway Act specially provides that no person shall be capable of being a director of a railway who is interested in any contract with the company.
19. Liabilities of holding office in a corporation ought to protect themselves by study ing the laws of the state in which the corporation ex ists and in which they are acting. All kinds of fraud
ulent acts by corporate officers are usually made penal offenses by the statutes and sometimes acts which seem to be harmless are condemned. Thus in New York it is a misdemeanor, punishable by imprison ment for not more than six months, or a fine not exceeding five thousand dollars, or by both, for a director to sell "short" the shares of his company or to purchase stock of the company on behalf of the company except out of surplus. In many states the directors are liable for selling stock below par.
The Canadian law as to 'the liability of directors may be briefly stated. The Dominion. Winding-up Act states only well-known common law principles in declaring that a director is liable to the company where he has misapplied or retained in his own hands, or be conie liable or accountable for any moneys of the com pany, or been guilty of any misfeasance or breach of trust in relation to the company, and must repay or make compensation to the company.for the loss. Di rectors are liable also for losses resulting from acts done by them as directors which are 'ultra vires the company, tho there may be no question as to their honesty and good intention. To pay dividends out of capital or when the company is insolvent is ultra vires; yet it has been held that the directors would not in s'uch a case be liable if they were misled by statements of officials in whom they had not placed undue confidence or trust, and provided they have not themselves been negligent. Directors must act in good faith and with reasonable care. Their pri vate interests must be always subordinated. Broadly speaking, in order to make directors liable for breach of trust on the ground of negligence, it must be shown that they did not really exercise their judgment in the matter as trustees or agents for the company, and that as a result the company incurred a loss. They are not prima facie liable for the acts of agents or officials whom they appoint, unless these are notori ously unfit. Unless a director expressly or tacitly permits wrongful acts of co-directors lie is not liable therefor. He is not liable for acts of co-directors committed without his knowledge at a meeting at which be was not present or after lie left the meeting. If he knows that a breach of trust is contemplated by his co-directors, a mere protest by him will not free him; he must act positively as the situation may re quire, to prevent the act. Directors who are parties to the payment of a fictitious dividend to raise the price of the shares may be both civilly and criminally 20. Compensation of directors and is always prudent to let the stockholders fix the salaries of directors and officers. Directors as such are not entitled to pay, but the by-laws usually provide that they shall receive a fce for' every meeting attended. When the salaries of officers are being fixed by di rectors, the officer whose salary is in question should not participate in the discussion or vote. If he does he will be entitled to recover not the contract price hut the fair value of his services. While directors have no inherent power to remove officers, they may do so indirectly by changing the by-laws to give them that power and by proceeding to remove the officer. If the officer is not guilty of a breach of trust, his contract for salary will be broken and Ile may sue for damages. In voting salaries it is usual, therefore, to provide that the salary shall be payable airing incumbency in office.