CHAPTER XXVI.

CORPORATIONS.

EVERY one has a general idea of what is meant by a "corporation." For various purposes of public importance, governments have been accustomed to create artificial or fictitious persons. Such an 66 artificial" person may consist of a single individual; but more frequently, in modern law, a number of natural persons are united as members in one corporate body. The theory is that the corporation is a distinct legal entity, a different person in law, from either or all of the men and women composing it. Some important results are that (if the pure original theory of incorporation is applied) the individual members. are not responsible for the acts done or authorized by the aggregation; they are not liable for its debts; and the death or resignation of some of them makes no difference in the existence of the artificial body.

BLACKSTONE'S ACCOUNT.

Corporations were known and in use in English and American law long before our Independence. Therefore no extended explanation of their nature and management is needed here. The advance and growth of this branch of the law is the chief topic. A century ago they were limited in number and confined within a small field. Blackstone could give a satisfactory account of them in less than twenty of his small pages, while at the present day a score of volumes would scarcely suffice. The chief uses of corporations in his time were to hold and administer permanent endowments of religious, educational, and charitable institutions, and to receive and exercise powers of local government. They

are still used in greater numbers than ever for these functions. Thus, a church, a hospital, a college, a city, is commonly incorporated, so that its affairs may be as little as possible dependent on the precarious lives or variable wishes of its members. But the advance of civilization has introduced a great variety of enterprises and vocations which can be better carried on by these permanent organizations than by individuals; and an immense number of chartered bodies, such as were unknown or scarcely mentioned a century ago, are now in active operation throughout the land. Some very important branches of business are wholly engrossed by them, such as railroads and telegraphs. They have nearly superseded individual enterprise in banking, insurance, and express transportation. The most important and extended manufacturing establishments in many parts of the country are chartered. And in many other branches they are active and prosperous competitors with private persons and firms.

The operation of the principle that individuals might unite in a corporation, each contributing a certain sum to be expended in the enterprise, while the members incurred no risk of debt or loss beyond that sum, very early gave rise to fraudulent and injudicious projects. About a century and a half ago, there occurred a period of frantic, reckless speculation, during which John Law's chimerical schemes and the South-Sea Bubble were the most prominent hallucinations; but a great number of fanciful, illusory corporate projects were advertised. It seems

amazing that such proposals as were published could have won the slightest credence; but there were so many, and they had such success in deceiving the people, that government was forced to interpose to abolish or prohibit them. Companies were formed, prospectuses issued, and subscriptions solicited for the most. absurd schemes, such as for building and rebuilding houses throughout all England; for effectually settling the islands of

Blanco and Sal Tortugas; for improving the art of making soap; for a settlement on the island of Santa Cruz; for a wheel for perpetual motion, capital one million; for insuring and increasing children's fortunes; for carrying on a trade in the River Orinoco; for insuring to all masters and mistresses the losses they may sustain by servants; for extracting silver from lead; for the transmutation of quicksilver into a malleable fine metal. One party of speculators issued proposals for carrying on "an undertaking of great advantage, nobody to know what it is." In England this tendency of the law of corporations to give opportunity to speculators for visionary and even dishonest enterprises not only led to several statutory penalties and prohibitions, but also encouraged the policy of restricting the granting of charters for business enterprises. In that country these are sometimes given in the full sense of implying that the members of the body shall not be personally liable for its debts; but it is more common to withhold a full charter and the name 66 corporation," and to give the body of persons some other name, usually "public company," sometimes "joint-stock association," authorizing them to carry forward their enterprises under “limited liability."

INDIVIDUAL LIABILITY.

The same general object has been attained in the United States by a somewhat different method. It has been common to use the name "corporation" freely for the various bodies chartered by the legislatures or organized under general acts, but to impose an individual liability on the members by a specific enactment. Thus, though they are called a corporation, the full common-law exemption of the individual members from the corporate debts is not given. If the enterprise fails and losses are incurred, the members must respond out of their own property to the demands of creditors within the limit fixed by the law, notwithstanding they are incorporated. The difference is more in words than in substance. Practically it does not make much

difference whether a club of persons operating a factory is called a "public company (limited)," to signify that the members are only partially liable for debts, or is called a "corporation," but members are subjected to a partial liability specially imposed.

Besides the individual liability of members, there is an important and comprehensive series of decisions holding that the promoters and officers of these companies or corporations who personally take part in publishing any false prospectuses, advertisements, or circulars, inviting the public to subscribe to the establishment, or deal with it upon exaggerated statements of its resources, are liable in damages to persons who are defrauded. A director is not at liberty to say that he did not know the advertisement which he joined in issuing was false. He is bound to know the general condition of the affairs of the company in which he is a director.

LIABILITIES OF DIRECTORS.

Many precautions and regulations have been introduced in the modern law of corporations for holding directors to a strict responsibility for a faithful performance of their duties. Not only are they required to know the condition of the company's affairs, and chargeable with damages for publishing any untrue statements, but, with regard to many classes of business corporations, they are directed by law to file in the public office and publish in the newspapers, annually (or oftener), correct statements of the business done and the present condition of the enterprise; and for neglect to do this a personal liability for the debts of the company is a very common penalty. There needs no extended explanation of the principle that for any wilful wrong and intended fraud, any embezzlement or peculation, directors are liable to parties injured, and, in many cases, personally punishable. There are numerous statutes embodying this principle, and many trials and decisions have enforced it and exemplified its application.

A topic of greater doubt and deeper interest is, How far will

the law enforce judicious management upon directors, and hold them responsible where there is no charge of fraud, no suggestion of intentional mismanagement, but the complaint is of mere easy-going carelessness? Suppose that, in a bank or insurance company, well-meaning directors hold meetings now and then; some attend, and others do not; a report or two is heard, an order or two made; all details are left to subordinates; and so business proceeds until, some day, there is a defalcation or a robbery, from mere failure to prescribe and enforce strict rules. Have the losers any remedy against directors for feebleness in executive management?

Years ago the rule on this subject seems to have been rather favorable to directors. When Kane, the secretary of the National Insurance Company, embezzled nearly two hundred thousand dollars, the directors were sued to make good the loss, upon charges that several of them knew he was a gambler and a bad character; that they did not exact any bonds from him, nor exercise any supervision over his accounts, and that this neglect enabled him to make away with the money. But the directors disproved any knowledge of his bad character, and showed that it was not usual to take bonds from an insurance secretary. And the court held that they had a right to elect a secretary, and trust the business to him, according to the usual course of the companies; they were not bound to attend every day and inspect his books.*-In a Pennsylvania case, more recent, the charges came home even closer to the directors in person, yet they escaped adverse judgment. They were sued for squandering the property of a trust company; and the proof showed that their management had been very unwise; the money had been invested in unsafe securities, and loaned on doubtful collaterals; there were losses from injudicious investments in land, and from burning of buildings which the directors had failed to insure;

*Scott v. Depeyster, 1 Edw. 513.