[PART II. secretaries, treasurers, and cashiers of banks; all of whom are usually designated as officers with powers defined in the act of incorporation or the by-laws; while their selection and the general employment of clerks, messengers, operatives, attorneys, and others, with the length of service and rates of compensation, are all matters left to a great extent under the control of the directors themselves.1 A board of directors, authorized to conduct the affairs of a bank, may empower the president, or the president and cashier, to borrow money, indorse its notes, or obtain a discount for the use of the bank.2 § 225. The Same Subject. But the authority to borrow money requires to be carefully guarded; and where a corporation is organized for manufacturing and other more general purposes, the directors are not presumed to have financial powers to delegate or exercise so extensive.3 And under all circumstances the purposes of the incorporation must be regarded; nor are boards of directors empowered to go beyond their charter. They cannot alienate, pledge, or mortgage as individuals property essential for the corporate purposes, misappropriate moneys, assign over the corporation effects, speculate, make donations to themselves or their friends, or in any way deal with the funds entrusted to their keeping other than as honest and prudent men who feel bound to follow the terms of their authority and have no adverse or sinister ends to subserve.5 In England the rule in this and other respects is a strict one; and even compensation for their services has been refused, unless rendered under some express contract or a vote of the company; though the American.

1 Union Bank v. Ridgely, 1 Har. & G. 324; Dedham Bank v. Chickering, 3 Pick. 335; Ang. & Ames, § 285; Waite v. Windham, &c. Mining Co., 37 Vt. 608; Morawetz, § 248; Taylor, §§ 233–246.

2 Fleckner v. U. S. Bank, 8 Wheat. 338; Merrick v. Bank of Metropolis, 8 Gill, 59; Olcott v. Tioga R., 27 N. Y. 546.

3 See Burmester v. Norris, 6 Ex. 796.

Gibson v. Goldthwaite, 7 Ala. 281; Redmond v. Dickerson, 1 Stockt. 507; Morawetz, § 242; Pickering v. Stephenson, L. R. 14 Eq. 322; 1 Pet. 171; Taylor, § 192.

5 York Railway Co. v. Hudson, 16 Beav. 495; Butts v. Wood, 37 N. Y. 317; Abb. Dig. Corp. 280, 284; Butler v. Cornwall Iron Co., 22 Conn. 335; Koehler v. Black River, &c. Co., 2 Black, 715; Hoyle v. Plattsburgh R., 54 N. Y. 314; Morawetz,

4 Rollins v. Clay, 33 Maine, 132; §§ 243-245.

rule in this respect is more liberal. The officers and directors of a corporation are often regarded as trustees for the stockholders, rather than agents; and in securing to themselves an advantage not common to all, they certainly commit a plain breach of official duty.1 Directors cannot as a rule wind up the concern, nor dispose of the assets as tantamount to such procedure.2 Nor does their authority to manage the stock, property, and affairs of the corporation, give them authority to make important changes in the scheme and nature of the corporate enterprise, or to apply to the legis lature for enlarging the corporate powers.3 Nor to exclude members from a reasonable right to inspect their books; since they would thus be unduly shielded from responsibility for their official conduct. And yet some of these powers might have been conferred expressly upon the board of directors, by charter or otherwise, and in consequence would be rightfully exercised. By inference from a charter for business purposes, directors have the honest discretion of declaring dividends or not.5

§ 226. The Same Subject.-Persons dealing with a cor

1 Ib. Directors ought not to represent the company where they have conflicting private interests to sub

serve.

Morawetz, § 245; 54 N. Y. 314; Pennsylvania R.'s Appeal, 80 Penn. St. 265; Wardell v. Railroad, 103 U. S. 651. A director ought not to purchase assets of the corporation. McCowell v. Arkansas Co., 38 Ark. 17. As to a director's personal liability for wrongfully appropriating the corporate funds, see 21 Ch. D. 322. It is a breach of trust for directors to sell their own shares to the corporation. Shattuck v. Oakland Co., 58 Cal. 550.

2 Ang. & Ames, § 280; Morawetz, § 240; Rollins v. Clay, 33 Me. 132; 1 Harring. Ch. 106. But directors, by virtue of an authority to pay debts, may convey assets in trust for the benefit of creditors, as some cases hold. 52 Ind. 473; 13 Met. 497;

Morawetz, § 240. And where the charter or good usage justifies such action, directors may borrow money for the corporation, and even secure the indebtedness by a pledge of the corporate personal property. Saltmarsh v. Spaulding, 147 Mass. 224; Taylor, § 225. But directors have no inherent power to increase or decrease the capital stock. Railway Co. v. Allerton, 18 Wall. 233. Nor to transfer property essential to continuing the corporate business. Burke v. Smith, 16 Wall. 390. See Taylor, §§ 227-230.

8 2 Conn. 579; Morawetz, § 239; Taylor, § 221; Railway Co. v. Allerton, 18 Wall. 233.

4 People v. Throop, 12 Wend. 183.

5 Morawetz, § 348; L. R. 5 Ch. 621; Smith v. Prattville Man. Co., 29 Ala. 503; Pratt v. Pratt, 33 Conn. 446.

poration must take notice of whatever is contained in the law under which it was organized; for a corporation cannot vary from the law of its creation. Hence, if the charter or act of incorporation prescribes the mode in which the officers must act, that mode must be followed in order to render their acts obligatory on the corporation.1 But where formalities have long been disregarded by the directors, and yet they have acted within the scope of their general authority, the corporation will not be permitted in law or equity to set up the negligence of its own agents to the prejudice of third parties. And while directors act as the majority of a quorum, or by such other requisite number as the charter may prescribe, the record of their acts is not in general necessary to the validity of the acts, since requirements concerning the corporation records are usually directory and nothing more.3

§ 227. The Same Subject. As to the liability of a corporation officer to the corporation for all damages occasioned by a violation of his duties and obligations, the principle is much the same as in an ordinary agency. For all damages occasioned by the violation of his official duties, the officer of a corporation is responsible to his principal; and this principal is the corporation, and not individual stockholders. Hence, proceedings brought to enforce the responsibilities of directors must usually be conducted in the name of the corporation. But equity, in furtherance of natural justice, and for the reason that there can be no wrong without a remedy, has permitted stockholders, as the real parties in interest, to file a bill in their own names where there is such collusion and fraud in the control of the corporation that prosecution

1 Ang. & Ames, § 291; Taylor, § 201; Williams v. Chester R. R. Co., 5 E. L. & Eq. 503. See Head v. Providence Ins. Co., 2 Cr. 166.

2 Bargate v. Shortridge, 5 H. L. Cas. 297; Zabriskie v. Cleveland R. R. Co., 23 How. 381, 398; Ang. & Ames, § 291; Morawetz, § 246; Pennsylvania R.'s Appeal, 80 Penn. St. 265.

8 Hutchins v. Byrnes, 9 Gray, 370. The formalities of a meeting of the directors seem, however, to be rather strictly insisted upon in England. See D'Arcy v. Tamar R. R. Co., L. R. 2 Ex. 158; Waite v. Windham &c. Mining Co., 37 Vt. 608.

4 Ang. & Ames, § 312; Brown v. Vandyke, 4 Halst. 795; Abbott v. Merriam, 8 Cush, 588.

they are not made

is obstructed.1 Of course, the directors of a corporation are not to be presumed infallible; and for losses suffered through mere error of judgment on their part, there being neither culpable negligence nor fraud apparent, liable, more than the agents of natural persons would be under similar circumstances; and this principle is frequently applied where subordinates are selected by them who prove unworthy of trust and bring mischief to the corporation.2 Directors, on the other hand, who sanction a breach of trust and aid in embezzlement are certainly responsible for their misconduct. And a director renders himself liable, as it is held, who has knowingly assented to a dividend amounting to more than the profits, or to making false reports to the shareholders; for this is a violation of duty both towards the stockholders and the public. In fine, the powers, rights, duties, and obligations of directors are, when uncontrolled by the act of incorporation or the by-laws of the corporation, to be determined on the principles of the law of agency; and in adjusting controversies of this sort, as between themselves and the corporation at large, we must examine in every case the act of incorporation and the by-laws; since the general power of making by-laws may remain in the stockholders at large, who are then at liberty to circumscribe the power of the directors as they may deem fit.5

1 Koehler v. Black River Co., 2 Black, 715; Turquand v. Marshall, L. R. 6 Eq. 112.

2 See Scott v. Depeyster, 1 Edw. Ch. 513; Williams v. Gregg, 2 Strobh. Eq. 316; Spering's Appeal, 71 Penn. St. 11; Dunn v. Keyle, 14 Bush, 134. 8 Attorney-General v. Leicester, 7 Beav. 176.

4 Hill v. Frazier, 22 Penn. St. 320; Flitcroft's Case, 21 Ch. D. 322.

5 See Ang. & Ames, §§ 299, 315; Pratt v. Hudson River R. R. Co., 21 N. Y. 305; Hotchin v. Kent, 8 Mich. 526.

The implied powers of the president of a corporation depend upon the nature of the company's business and

the measure of authority delegated to him by the board of directors. There are recent cases which, admitting the difficulty of defining precisely the nature and extent of these powers, deny to the president the general right to dispose of corporate property at his personal discretion, or to be otherwise regarded, save for a delegated authority as executive, as more than the presiding director at the board. See 37 N. J. L. 98, 102; Chicago R. v. James, 22 Wis. 198; 14 Wis. 325. Yet the peculiar business, charter, usage, &c., may relax such a rule. See Smith v. Smith, 62 Ill. 493; Morawetz, §§ 251, 252.

The peculiar functions and exten

From what has

§ 228. By-laws of a Private Corporation. already been said, the reader will gather that the by-laws of a corporation are of considerable influence in shaping the distribution of corporate powers and determining the methods of its organization and management. The power of making by-laws, or, as they are called, private statutes, for its government and support, is an incident to every corporation, included in the very act of incorporation. "For," says Blackstone, "as natural reason is given to the natural body for the governing it, so by-laws or statutes are a sort of political reason to govern the body politic."1 Yet this power is not generally left to implication, but will be almost always found expressly conferred by the act of incorporation; that being a sort of "private constitution," to which the by-laws of the corporation, like the legislative acts of a State, must always conform. Of course, the by-law of a corporation in this country must not contravene the State or United States constitution, nor, indeed, should the charter; and, besides being subject to these and the charter creating it, the by-law of a corporation must be in itself reasonable; whence, by-laws in restraint of trade or repugnant to sound morals have been pronounced void; while a by-law which might under one construction be unreasonable has received another construction which would make it reasonable.2 A by-law may be good in part and bad in part; or the whole may be vitiated by the bad part, according to circumstances. The power of making by-laws is to be exercised by the members at large according to common-law methods, or rather after the same manner in which the charter directs them to transact their general business; and here again the act of incorporation, whether special

sive authority of the cashier or executive officer of a bank are discussed at length in 3 Mason, 506, per Mr. Justice Story; Merchants' Bank v. State Bank, 10 Wall. 604, and other cases cited; Morawetz, §§ 253, 254.

11 Bl. Com. 476; Abb. Dig. Corp. "By-Laws;" Ang. & Ames, §§ 110, 325; 1 Kyd, 69; Hob. 211; Taylor, $ 582.

2 Ib.; Hob. 210; Brightly Fed. Dig. 188, 189; Kennebec R. R. Co. v. Kendall, 31 Me. 470; Commonwealth v. Worcester, 3 Pick. 462; Queen v. Saddlers' Company, 10 H. L. Cas. 404; Vedder v. Fellows, 20 N. Y. 126.

3 See Abb. Dig. supra; Rogers v. Jones, 1 Wend. 237.