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§ 12 in interest of the stockholders, the by-laws providing that all questions as

to elections should be governed by the Corporation Act of 1896. (Weinburgh v. Union Street Railway Advertising Co., 55 N. J. Eq., 640.)

For further cases as to by-laws see notes to Section 1, p. 5, ante.

12. The business of every corporation shall be managed by its directors, who shall respectively be shareholders therein; they shall be not less than three in number, and, except as hereinafter provided, they shall be chosen annually by the stockholders at the time and place* provided in the by-laws, and shall hold office for one year and until others are chosen and qualified in their stead; but by so providing in its certificate of incorporation, any corporation organized under this act may classify its directors in respect to the time for which they shall severally hold office, the several classes to be elected for different terms; provided, that no class shall be elected for a shorter period than one year or for a longer period than five years, and that the term of office of at least one class shall expire in each year; any corporation which shall have more than one kind of stock, may, by so providing in its certificate of incorporation, confer the right to choose the directors of any class upon the stockholders of any class or classes, to the exclusion of the others; one director of every corporation of this state shall be an actual resident of this state, and it shall not be necessary for more than one director to be a resident of this state, notwithstanding the provisions of any special charter or other act.

P. L. 1846, pp. 65, 66; P. L. 1849, p. 302; P. L. 1872, p. 89; Act of 1875, § 16; P. L. 1881, p. 122; P. L. 1889, p. 413; P. L. 1892, p. 90; P. L. 1893, P. 444.

Unless the certificate of incorporation contains limitations upon the powers of the directors, the executive power of the corporation is vested in the board of directors. Vice-Chancellor Pitney said in Loewenthal v. Rubber Reclaiming Co. (52 N. J. Eq., 440) :

"In this connection it is worthy of remark that the stockholders, as such, have no power to make any contract or execute any work. Their power is confined to electing directors and advising them in their conduct of the business of the company."

In Plaquemines Tropical Fruit Co. v. Buck (52 N. J. Eq., 219, at p. 238) Vice-Chancellor Green used the following language:

"It may sometimes become necessary in the transaction of some kind *The place must be the registered office of the company in New Jersey. (Sec. 44, p. 81.)

of business of a corporation to have the consent of all the stockholders, § 12

or of a certain proportion of them, and resolutions giving such consent or advice have the effect of empowering the directors to act. But the board of directors is the legal executive, recognized as such, not only in practice and on principle, but by the statute."

"If stockholders in a corporation disapprove of the company's management, conducted without fraud or gross abuse of trust, or consider their speculation a bad one, their remedy is to elect new officers or sell their shares and withdraw." (McGill, C., in Benedict v. Columbus Construction Co., 49 N. J. Eq., 23.)

"Individual stockholders cannot question, in judicial proceedings corporate acts of directors if the same are within the powers of the cor poration, and, in furtherance of its purposes, are not unlawful or against good morals, and are done in good faith and in the exercise of an honest judgment. Questions of policy of management, of expediency of contracts or action, of adequacy of consideration not grossly disproportionate, of lawful appropriation of corporate funds, are left solely to the honest decision of the directors if their powers are without limitation and free from restraint. To hold otherwise would be to substitute the judgment and discretion of others in the place of those determined on by the scheme of incorporation." (Green, V. C., in Ellerman v. Chicago Junction Rys., &c., Co., 49 N. J. Eq., 217, 232. See also Edison v. Edison United Phonograph Co., 52 N. J. Eq., 620; Hunt v. American Grocery Co., 80 Fed. Rep., 70.)

The board of directors must act as a board. A single director has no power merely by virtue of his office. For any power he undertakes to exercise he must get authority from the board. (Titus v. Cairo and Fulton R. R. Co., 37 N. J. Law, 98.)

A majority of the directors of a corporation, in the absence of any regulation in the charter, is a quorum, and a majority of such quorum when convened can do any act within the power of the directors. (Wells v. Rahway White Rubber Co., 19 N. J. Eq., 402; Barnert v. Paterson, 48 N. J. Law, 395; Met. Tel. Co. v. Dom. Tel. Co., 44 N. J. Eq., 568; Cadmus v. Farr, 47 N. J. Law, 208.)

An express contract between a director and the corporation is not void, but voidable, to be avoided at the option of the corporation, exerIcised within a reasonable time. It matters not whether the contract be fair and honest and to the advantage of the company. Said Mr. Justice Dixon, in the case of Stewart v. Lehigh Valley R. R. Co. (38 N. J. Law, 505, at p. 522): "The vice which inheres in the judgment of a judge in his own cause contaminates the contract; the mind of the director, or trustee is the forum in which he and his cestui que trust are urging their rival claims, and when his opposing litigant appeals from the judgment there pronounced, that judgment must fall. It matters not that the contract seems a fair one. Fraud is too cunning and evasive for courts

§ 12 to establish a rule that invites its presence

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nor is it proper for one of a board of directors to support his contract with his company upon the ground that he abstained from participating as director in the negotiation for and final adoption of the bargain by his co-directors; the very words in which he asserts his right declares the wrong; he ought to have participated, and in the interest of the stockholders, and if he did not, and they have thereby suffered loss, of which they shall be the judges, he must restore the rights he has obtained-he must hold against them no advantage that he has got through neglect of his duty 'toward them." (See also Guild, Ex'r, v. Parker, Rec'r, 43 N. J. Law, 430; Elkins v. Camden & Atl. R. R. Co., 36 N. J. Eq., 467, at p. 470; Gardner v. Butler, 30 N. J. Eq., 702; Stroud v. Consumers Water Co., 56 N. J. Law, 422, 427; Hickman v. Hickman Hose Co., 13 N. J. L. J., 111; but see Twin Lick Oil Co. v. Marbury, 91 U. S., 587; Barr v. Pittsburg Plate Glass Co., 57 Fed. Rep., 86.)

This rule, however, is for the benefit of the corporation, and as to others the contract is valid and enforceable. (Barnes v. Trenton Gas Light Co., 27 N. J. Eq., 33; Stratton v. Allen, 16 N. J. Eq., 229.) And so when the director of a bank, who was also a member of a firm, offered a note belonging to the firm to the bank, for discount, which was procured from the maker by fraud, of which he as a member of the firm had notice, it was held that the knowledge of the director was not constructive notice to the bank, such director not having acted with the board in making the discount and not having communicated his knowledge to any of the officers of the bank. He was regarded in the transaction as a stranger. (First Nat. Bank of Hightstown v. Christopher, 40 N. J. Law, 435; see also Sudbury v. Merchantville Building & Loan Association, 57 N. J. Eq., 342, 345.)

A director of two corporations which contract with each other is incapacitated to take part in settling the terms of the contract. (Met. Tel. Co. v. Dom. Tel. Co., 44 N. J. Eq., 568, 573.)

Where the corporation is insolvent the directors are trustees for the creditors. (See Section 64 and notes.)

By statute (P. L. 1895, p. 166, Section 64 of the Revision of 1896) corporations are prohibited from conveying or assigning any of their assets after they have become insolvent or suspended their ordinary business for want of funds to carry on the same. But even before the passage of this statute a board of directors of an insolvent company could not prefer one of its own members. "The weight of authority is in support of the wholesome rule that the directors of an insolvent corporation are trustees of its funds for its creditors * * by no act of such director can he obtain a position superior to that of the other creditors for whose benefit he holds the trust assets." (Montgomery v. Phillips, 53 N. J. Eq., 203, 217; Wilkinson v. Bauerle, 41 N. J. Eq., 635; Savage v. Miller, 56 N. J. Eq., 432.)

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"Equity regards the property of a corporation as a fund held in trust for the payment of its debts, and if other than bona fide creditors of the corporation, or purchasers, possess themselves of it, they take it charged with this trust, which a court of equity will enforce against them. This is now a well-recognized rule of equity jurisprudence.” (Natl. Trust Co. v. Miller, 33 N. J. Eq., 155, 163.)

"The directors of an incorporated company cannot speculate with the funds or credit of the company, and appropriate to themselves the profits of such speculations. They cannot, in making sales or purchases for the company, take advantage of their position as directors, and either directly or indirectly speculate upon the company. If they are the only persons interested as stockholders, yet, if such speculations impair the capital stock, and have a tendency to substitute a fictitious for a real value, such transactions are opposed to the policy of their act of incorporation, and cannot, in any manner, be countenanced by a court of equity." (Redmond v. Dickerson et al., 9 N. J. Eq., 507, 516.)

A contract by the directors to promote another corporation in another state, for the furtherance of the interests of their company, and to take a majority of its stock, held not to be ultra vires. Rubino v. Pressed Steel Car Co., (V. C. Stevenson) May, 1902.

Qualification of directors.-See note to Section 39.

Resignation of director. A director of an ordinary business corporation can resign orally or in writing, unless there is some provision to the contrary in the charter or by-laws. (Fearing v. Glenn, 73 Fed. Rep. 116.) A written resignation takes effect on delivery to the president; acceptance by the board is not necessary. (International Bank v. Faber, 86 Fed. Rep., 443.)

Annual elections.-"That provision of the charter, which declares that annual meetings of the stockholders shall be held for the election of directors, grants to the stockholders a highly important and valuable right, which the directors can neither defeat nor impair * * * The right, therefore, to change the day for the annual meeting is one which, from its very nature, can alone be exercised by the stockholders. No board of directors can, without the stockholders' consent, hold office for a period longer than one year. (Elkins v. Camden & Atl. R. R. Co., 36 N. J. Eq., 467; Archer v. American Water Works Co., 50 N. J. Eq., 33.)

Chancellor Green in Hilles v. Parrish, 14 N. J. Eq., 380, declared that any action by the directors of a corporation, which was designed to retain themselves in office, and thus perpetuate their control over the affairs of the corporation, against the will of the holders of a majority of the stock, was illegal and void, and that the injured stockholders, in such a case, were entitled to relief by injunction.

For further cases as to elections, see notes to §§ 34, 36 and 42.

§ 12

$13

Classification of directors.

The classification provided for by the statute is twofold:

1. Classification by terms, the effect of which is to continue the directors in office for a longer term than one year and to cause the board to rotate in classes, so that in no one year can the personnel of the entire board be changed.

2. Classification by stock, by which one class of stock elects exclusively a certain number of directors. Thus it is possible to place the control of the company, to the extent of electing a majority of the directors, in any class of the stockholders, whether that class be a majority or a minority of the whole stock.

Either classification may be used without the other, or both may be combined.

Executive committee. The powers of directors of a corporation to delegate their authority to committees, in the absence of express power of delegation contained in the certificate of incorporation, is not yet fully settled in this State. The general rule is, that directors may not delegate authority in matters committed to their discretion and judgment.

It would seem from the case of the Metropolitan Telephone Co. v. Domestic Telegraph Co. (44 N. J. Eq., 568) that the courts are inclined to relax the rigor of the general rule and to recognize the power of directors to delegate current and ordinary business to a committee or committees. That is now not an uncommon practice among business corporations.

It was held in New York (Hoyt v. Thompson's Exr., 19 N. Y., 207) that a board of twenty-three directors may delegate to a "quorum of any five of their number authority to transact all ordinary business." (See also Olcott v. Tioga R. R. Co., 27 N. Y., 558; Sheridan Elec. Light Co. v. C. N. Bank, 127 N. Y., 522.)

Provision should be made in the certificate of incorporation for the appointment of an executive committee and its powers.

Such provision is sometimes made in the by-laws.

13. Officers.

Every corporation organized under this act shall have a president, secretary and treasurer, who shall be chosen either by the directors or stockholders, as the by-laws may direct, and shall hold their offices until others are chosen and qualified in their stead; the president shall be chosen from among the directors; the secretary shall be sworn to the faithful discharge of his duty, and shall record all the votes of the corporation

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