Cyclopædia of Political Science, Political Economy, and the Political History of the United States
CORPORATIONS, Law of. A corporation is a body consisting of one or more natural persons, empowered by law to act as an individual, and continued by a succession of members. If it consist of but one member at a time, it is called a corporation sole; if of two or more, it is a corporation aggregate. Bishops, parsons and vicars of the state church of England are illustrations of corporations sole, but in the United States few if any exist. Corporations are also divided into public, or those which are created exclusively for the public interest, as cities, counties, towns, state universities and other incorporated bodies for public instruction, etc.; and private. or those which are wholly or in part for the private emolument of the members, as railroad companies, banks, manufacturing and mining companies, etc. They are further classified as ecclesiastical, or those which are established to secure the public worship of God; eleemosynary, or such as are for the purposes of charity; and lay, or such as exist for merely secular purposes. Lay incorporated bodies are commonly known as civil corporations; but in countries where there is no state church, and where organizations for religious purposes are formed and incorporated at the will of the associates, these are properly classed as civil corporations also. Corporate bodies whose members at discretion fill by appointment all vacancies occurring in their membership, are sometimes called close corporations.
—The power to be a corporation is a franchise, which can only exist by sovereign grant, or by prescription which presupposes such a grant; and this, according to the constitution of the country, may emanate either from the executive or the legislature. Formerly, in England, corporations were created by royal charter, but in modern times almost exclusively by parliamentary grant: in the United States only the legislative power can create them. There are two distinct methods in which corporations may be called into being: first, by a specific grant of the franchise to the members; and second, by a general grant, which becomes operative in favor of particular persons when they organize for the purpose of availing themselves of its provisions. When the specific grant is made, it is called a charter: it specifies the grantees, indicates the purpose to be subserved by the corporation, and the powers and privileges it shall possess to that end, perhaps imposes special restrictions upon the corporate action and special liabilities and penalties for abuse, and makes provision for perpetual succession of members by a transfer of interests, or by elections or appointments to fill vacancies. In the case of private corporations the charter must be accepted by the members, since corporate powers can not be forced upon them against their will; but the charter is sufficiently accepted by their acting under it. Public corporations, on the other hand, may be organized at the legislative discretion, without consulting the pleasure of the people incorporated When special charters are not granted, a general law is passed, under which individuals may voluntarily associate, and, by complying with the provisions of the law, take to their organization corporate powers. In some of the United States private corporations are not suffered to be created otherwise than under general laws, and in others public corporations are created in the same way. One reason for forbidding special charters is, to preclude favoritism where the franchise is or may be valuable, and another is, to have uniformity of power and privilege in corporations of a kindred nature, and like rules for all. Some public bodies which exist without special charters are called quasi corporations. Of this class are towns, counties and school districts, which differ from cities, boroughs and villages mainly in being less perfectly organized, and having less complete powers of government. A corporation is sometimes said to exist by implication; as where powers are conferred or duties imposed upon individuals which can only be made effective or performed through corporate action; in which case it will be assumed that a corporate entity was intended though the grant does not say so.
—A corporation must have a name, by which it shall be known in law and in the transaction of its business, and be capable of suing and being sued. The name will be given to it in its charter or articles of association, and must be adhered to, though doubtless a corporation might render itself liable on engagements assumed in another name which it had used as its own, and it is possible for a corporation to have two names, as has sometimes been the case with municipal bodies, which are permitted to make contracts or bring suits in one name for one purpose, and in another name for another.
—The particular powers and privileges which a corporation has under its grant, are called its franchises. The following franchises are said to pertain to all corporations: first, the power of perpetual succession of members; second, the power to sue and be sued in the corporate name, and to transact in that name all such business as is within the intent of the grant; third, to purchase, take and hold property, and to sell and convey the same, except as may be forbidden; fourth, to have a common seal under which to transact its business, and to alter the same at pleasure; fifth, to make by-laws for its government, provided they be not unreasonable or inconsistent with law. In respect to each of these attributes a few remarks are essential.
—1. The succession of members is kept up in different ways according to the nature of the corporation. In a municipal corporation in the United States the members are the citizens; the number is indefinite; one ceases to be a member when he changes his residence, while every new resident becomes a member when by law he becomes entitled to the privileges of local citizenship. On the other hand, in Great Britain, the corporate powers of municipalities have until recently been in the hands of small and self-elective councils, but this was changed for England in 1835, and soon after for the other two kingdoms, and a popular character given to all these municipal bodies by general law. In corporations created for the emolument of their members, interests are represented by shares, which may be transferred by their owners, and the assignee becomes entitled to the rights of membership when the transfer is recorded; and if the owner dies, his personal representative becomes a member for the time being. In such corporations also shares may be sold in satisfaction of debts against their owners.
—2. The necessity for the use of the corporate name in the transaction of business, flows from the fact that, in corporate affairs, the law knows the corporation as an individual, and takes no notice of the constituent members—3. The power to purchase and hold property is commonly limited by express law. The English mortmain acts, passed to prevent the accumulation of real estate in the hands of ecclesiastics, have not been re-enacted in this country; but it has been customary, in granting charters, to limit the value or amount of property which the corporation chartered may purchase or hold; and, if the limit is exceeded, the state, on the proper inquiry, may take it away. A purchase in excess, however, would be good as against all other parties.
—4. It was formerly supposed that a corporation could transact no business except under its corporate seal; but now it is only in the execution of solemn instruments, such as deeds, bonds, mortgages, etc., that the seal is commonly used. Most of the business of the corporation is necessarily carried on with as little formality as it would be if transacted by an individual. For example, a mining corporation will employ agents and workmen, make contracts of purchase and sale, and carry on its mining operations, without any reference to or use of a corporate seal, unless the instrument to be executed is such that a seal would be essential if made by an individual; in which case the corporate seal must be employed.
—5. The laws which corporations may make for their own government are made under the several heads of by laws, ordinances, rules and regulations; and they are made by the governing body for any object not foreign to the corporate purposes. A municipal corporation, for example, makes ordinances for the cleaning and lighting of its streets, for the government of its police force, for the beautifying and regulation of its parks, for the supply of water to its citizens, and for the punishment of all breaches of its regulations. A railway corporation establishes regulations for signals, for the running of trains, for the receipt, forwarding and delivery of freight, and for the observance by passengers of good order and prudent conduct on the cars. The power to make such regulations is essential to the proper conduct of any business, since the general law of the state can not descend to such minutia, especially in matters in respect to which frequent changes might be desirable and necessary. But the bylaws must not be inconsistent with the charter, nor with the general law of the land. A municipal corporation, for example, could not pass retrospective ordinances for the punishment of petty offenders, because retrospective laws are forbidden by the constitution; nor could it forbid the use of its streets by others than its own citizens, because by the general law of the state all highways are open to the common use of all the people. And a railroad company could not make a rule that it would carry goods for one class of persons only, because, as common carrier, the law of the state requires it to carry impartially for all. The requirement that all by-laws shall be reasonable is equally imperative; since otherwise they might provide for indifferent matters to an extent that would be intolerable. A railroad company may properly and justly require every passenger to remain upon the car until it is brought to a stand, because prudence and safety require this; but a regulation that no one should leave his seat after taking it until he left it to leave the car would have no such considerations to support it. The question what is and what is not reasonable is one of law.
—In strictness corporations have no extra-territorial existence; for one state can not create corporations for another. In respect to private corporations, however, the comity of states has gone a great way in permitting to them the full exercise of powers in other states which they may lawfully exercise within the state from which they derive their charter. For example, a mining corporation chartered in Massachusetts or New York may have its field of operations in Colorado or Nevada, and by comity the courts of those states will recognize and protect it, and enforce contracts and other obligations by or against it. But there are some limits to this comity, in the very nature of things. If, for example, a railroad company should be chartered in New Jersey, with no personal liability on the part of the stockholders, the comity of states would not require that it be suffered to build a railroad in Michigan, under whose constitution corporators in all private corporations are made responsible for labor debts. So a lottery company chartered in Kentucky can have no claim, by the comity of states, to do business as a corporation in Indiana or Ohio, whose laws forbid lotteries; and in all cases any general policy of the state into which a foreign corporation comes to do business must limit the requirements of comity. The operations of municipal corporations, from their very nature, must be local; though for the purpose of enforcing rights, they might be and would be suffered to bring suits abroad when necessary. Some other corporations are also always considered local, because each state is likely to have a policy of its own in respect to them. This is particularly the case in respect to banks.
—Every corporation must confine its operations within the sphere of its chartered powers; if it acts beyond these, it acts ultra vires. Thus it is ultra vires for a bank or an insurance company to construct a railroad; and any contract for that purpose would be void, because the sovereign, in granting the franchise to be a corporation, has given it for a particular purpose, and by implication limited its authority to that purpose. So a municipal corporation can not engage in trade, or build roads or canals outside its limits, or contract debts for any but municipal purposes. So one corporation can not consolidate itself with another, unless by express authority of law, and the governing board of a corporation can not sell its franchises and thus terminate its power to perform its functions; for the members are elected to continue the corporation, not to destroy it. The question of ultra vires may almost always be raised by or against a corporation, though there are a few cases in which either party might be estopped from relying upon it. For example, if a corporation by its charter has power to issue negotiable paper, and does so for an unauthorized purpose, the paper may nevertheless be good in the hands of a bona fide holder; and a private individual who should obtain municipal moneys under an unauthorized arrangement would not be able to defend his retention of it under the plea of ultra vires.
—Most important questions frequently arise respecting the power to control corporations and their business, and to limit or take away any of their franchises. It should be observed, that in the United States the creation of corporations is a state function, except that in the territories and the District of Columbia the general government may create them, though it usually leaves this to the local legislature when there is one. When a state charters a public corporation, it does so for convenience in properly performing its own functions, and the corporation is considered a part of the machinery of state government. This charter the state may alter and amend at discretion, or it may repeal it and substitute a different one or none at all in its place. With all this the general government has nothing to do; and the corporation is so essentially a part of the state that the general government can no more tax it or its property than it could tax the state itself. In general, also, the state may control the corporation in the management and disposition of its property, though it could not take the property away and apply it to uses not local. It is only of grace if the state consults the locality in respect to the local powers or the framework of local government. Marked differences appear when private corporations are considered. The corporators in these exercise their own discretion in the acceptance of the charter, and if they do accept it, they are supposed to do so from a consideration of their own interest, while the state is supposed to grant the charter from a consideration of public advantage. Thus in giving and accepting a charter, the state and the corporators occupy the position of contracting parties, the state granting franchises which are to be the consideration for the performance by the grantees of the corporate functions. The charter thus constitutes an inviolable contract, and the interests of the corporators therein are in the nature of property, and can not be taken away by the state which has granted them. This very important principle has led to serious inconvenience in some cases of ill-advised and improvident grants of corporate powers, and it has been deemed necessary to impose restraints upon the power to make such grants. One important restraint consists in limiting corporate grants to some short period; say to 30 years, so that the grant, if otherwise improvident, must soon terminate. Some states, by their constitution, impose this limitation; so that corporate grants are restricted to the period named, whether mentioned in the charter or not. Another and still more important restraint is a provision making the charter subject to alteration, amendment and repeal at the will of the legislature. This, also, has in some states been made a part of the constitution. It must be evident that the differences in the charters must make great differences in the legislative power of control, and we shall briefly indicate what these are under the different circumstances—1. While the state which has granted a municipal charter has full power to alter, amend or repeal it at discretion, it has no such right as to the charter of a private corporation, unless the right was reserved in granting the charter. And under the head of charter here, we include general laws of incorporation as well as special grants, though the former will always be repealable so far as concerns organizations to be made in the future.
—2. Any corporation, whether its charter is amendable or not, is at all times subject to the exercise of the general police powers of the state. These powers have for their object the general regulation of rights for the common good; they are supposed to take away no rights, but to harmonize the enjoyment of all. The whole property of the country is subject to the police power, and so is the use of all public easements and other public rights. Every man in general is permitted to manage his property to please himself; but a merchant would not be suffered to store powder in a densely built part of a city, because it would be dangerous to others; and a lot owner would be forbidden to build of combustible materials in the same quarter, for the same reason. So the use of dangerous fluids may be altogether forbidden, though private citizens may desire it. Corporations can claim no exemption from these rules. A few cases will be mentioned in which corporations have contested regulations made by law, upon the ground that they exceeded the proper scope of the police power, and were in effect amendments of their charters. One of these is the regulation that corporations—and natural persons as well—shall be liable to a private action for damages in case death shall be caused by their negligence or default. No such action would lie at the common law, and the responsibility might therefore well be said not to be within the contemplation of the parties granting and receiving a charter before any such liability was established. But such a regulation is perfectly just, and damages will be payable under it only where there is fault. It tends to make all parties more circumspect and careful; it makes life safer; it imposes upon a corporation no obligation except to conduct its business without fault or negligence. And no one can claim a contract right to be exempt from responsibility for wrongs. On the other hand, it has been justly held that the legislature could not impose upon a railroad corporation the obligation to meet the funeral expenses of any one dying from casualty or other cause on its cars, irrespective of any fault on its part. Another of these is the regulation that railroad companies shall fence their tracks, and shall be liable for all cattle killed or injured in consequence of the regulation not being complied with. This regulation presents more opportunity for question than the last, but it has, nevertheless, been universally sustained, as being necessary for the protection of the traveling public, and therefore proper, even if no other considerations were involved Another is, the requirement that a flagman shall be stationed at all dangerous railroad crossings. The limit to the exercise of the police power in these cases has been said to be this: the regulations must have reference to the comfort, safety or welfare of society; they must not be in conflict with any of the provisions of the charter; they must not, under pretense of regulation, take from the corporation any of its essential rights or privileges which the charter confers. In short, they must be police regulations in fact, and not amendments of the charter in curtailment of the corporate franchise. And here it should be said that the charter may unquestionably contain provisions in limitation of the police power, and constituting, nevertheless, a part of its contract obligation. Thus, though under the police power, a state may, as we have seen, compel a railway company to fence its track, yet if it should grant a charter expressly providing that the corporation should not be under that obligation, the police power would to that extent be limited by the charter contract. But the authority of the state to contract not to exercise any of its essential powers can not extend very far: if it were unlimited, the government might, by injudicious action, deprive itself-at length of the power to fulfill the purposes of its creation. It is certainly not within the province of the state to bind itself by contract to permit those things which are immoral, and which are prejudicial to the state for that reason. It has often been held competent to forbid altogether whatever the public sentiment of the state pronounced immoral and mischievous, notwithstanding contracts might thereby indirectly be affected or defeated. Thus, the manufacture and sale of intoxicating drinks may be prohibited, though the effect of the prohibition would be to preclude corporations established to manufacture such liquors from any further exercise of corporate powers. So lottery corporations may indirectly be annihilated by making the drawing of lotteries penal. If this were otherwise, a public nuisance might be made perpetual, by giving to the parties responsible for it a corporate charter.
—3. Where a charter is made subject to amendment or repeal at any time, the corporators must be understood to have confided such interests as they acquire under their charters to the sense of justice and fair dealing on the part of those who administer the affairs of the state; and if they are wronged, it is because the confidence proves in the particular case to be misplaced, or because the state errs in its judgment of what is just. For example, if a railroad charter is subject to amendment, the state may so amend it as to require the company to establish a certain station and erect suitable structures to accommodate its business at that point. A more severe amendment might be one limiting the charges the company should be at liberty to make for the transportation of persons and freight. It is conceivable—though too improbable to be seriously apprehended—that these charges might be so limited as to render the operation of the road a practical impossibility; and, without doubt, under the power to repeal, the corporate franchises might be taken away altogether, and the interests of the corporators thereby rendered of little or no value. But the power to repeal in such cases may fairly be understood as reserved for cases of gross and manifest abuse of corporate powers and privileges, or for such great and unanticipated changes as should render the exercise of such powers and privileges mischievous, or at least, unimportant.
—4. There is a class of cases in which it has been held that the state possesses an exceptional power of control, which at first blush seems to be inconsistent with the property rights of the corporators, and may be exercised so unjustly and unfairly as in effect to appropriate those property rights for the common benefit. One of these concerns the tolls or other charges that may be levied or made by those corporations which are chartered to facilitate public travel or trade. There is no doubt whatever, irrespective of any reserved power to amend, that the state may legislate to compel such corporations to deal impartially with the public, and may therefore forbid a railway company imposing upon the people of one locality heavier charges than those imposed upon the people of other localities for similar services. But it is going but a step further to forbid the company making excessive charges to any one; and it seems to be now settled, that, where the charter of the company contains no provision that would be violated thereby, it is competent for the state to limit its charges so as to prevent injustice and extortion, and to require that its tariffs for passage and freight shall be fixed at stated periods, and remain unchanged until another of those periods shall arrive. It is not pretended that the state could have any such power in the case of corporations in general; but those which are permitted to furnish to the state its principal avenues of trade and commerce, and are clothed with important public functions to that end, may well be held to occupy a peculiar position, and to be subject to peculiar restraints because of their extraordinary privileges. It has been held, also, that corporations whose business and circumstances were such as to give them a practical monopoly of some branch of traffic which concerns the general public—such as corporations owning and controlling the elevators for the receipt and storage of grain at important points—were subject to have their charges limited in the same way. But in the case of railroad companies and elevator companies, it is the nature and circumstances of the business that give this exceptional power of restraint and control, and not the fact that they possess corporate powers.
—The cases in which legislation has been held to violate the obligation of charter contracts demand brief attention. The first of these concerned Dartmouth college, whose charter was a royal grant, and reserved no power of amendment. The state undertook to amend by various provisions, which, among other things, greatly changed the governing board and popularized its membership. No doubt it might do this under its general legislative authority, but for a provision in the constitution of the United States which expressly declares that no state shall pass any law impairing the obligation of contracts. This case first presented the question whether such a charter was a contract, and it was decided by the supreme court of the United States in the affirmative. Of course, any important change therein which the state had not reserved the power to make, would impair its obligation; and the legislation in question was therefore declared invalid. Another representative case was that of the taxation of the Ohio state banks. They had been organized under charters which expressly provided how and to what extent they should be taxed; but the state subsequently undertook to tax them differently. They denied the right of the state to do this, and brought the issue for decision to the federal supreme court. That court sustained the position of the banks. It was conceded that the state possessed the general power to tax, and that all persons, rights and things within the state were subject to it. It was also conceded that all presumptions were against any intention on the part of the state to limit or restrain, this power. But it was nevertheless declared, that the state, for a consideration satisfactory to itself, might contract not to exercise the power in respect to particular subjects or things, or only to exercise it in the manner agreed upon, and that such a contract was obligatory. The state of Ohio was found to have made such an agreement with its banks, and the attempt to avoid it was therefore enjoined. For another representative case, that of the Binghamton bridge may be taken. The state of New York had granted the franchise of constructing a bridge across one of its rivers at a named point, and of charging and collecting tolls for its use. Subsequently, it made another grant for the construction of another bridge, which would be a competitor with the first for the same business. The first grantees contested the second grant, contending that a certain provision in their own grant was equivalent to an undertaking on the part of the state that no other should be given, but theirs should be exclusive. It was conceded, that, if they were right in their view of the proper construction of the charter, their position was impregnable, and it was judicially determined that they were. These cases are sufficient to show, not only the protection which corporations have in the case of stipulations relied upon as contracts, but also the great danger that states may prejudice the interests of their people by ill-advised and especially by exclusive grants. It should be observed of exclusive grants, however, that the state possesses an undoubted right to appropriate them, or allow them to be appropriated, for public purposes, on making compensation therefor.
—Corporations are said to be immortal. This phrase was in common use when it was customary to give grants without limitation of time, but it has an application to all corporations in the sense that they do not perish when their members die. The members change, but the corporate entity is unchangeable. The king of Great Britain and Ireland is a corporation sole, and in contemplation of law there is never a time when there is not such a monarch. "The king is dead; long live the king!" But corporations may cease to exist in various ways. 1. The abolition of a system to which corporations pertain would abolish all such corporations. Thus, if the state church of England were abolished, many corporations sole would disappear with it. 2. A corporation ceases to exist when it was limited by its charter to a certain period of time, and that period has elapsed. 3. A corporation may be terminated by a repeal of its charter when a right to repeal was reserved. If, however, the right was only reserved to repeal for abuse or forfeiture of corporate powers, the abuse must be judicially determined; for this presents a question on which the corporators have a right to be heard and to present their evidence. 4. Corporators may voluntarily surrender their franchises to the state; and the law makes provision for dissolution in this manner, and for the application of the assets to the satisfaction of claims upon them. 5. In the case of some corporations, the natural death of all the members may operate as a dissolution; but this could only be the case when they were not owners of property interests which would pass on their death to representatives, and when there was no means of supplying the vacancies. 6. A corporation may be dissolved by a judicial finding of forfeiture. Of this, it is to be observed that the question of forfeiture is one which only the state can raise. If causes of forfeiture exist, the sovereignty may waive them, and individuals will not be permitted, in their own suits, to raise questions of forfeiture. The proceeding to determine a forfeiture is commonly one by quo warranto, or some analogous statutory proceeding, and the corporation is summoned by the state to meet the charges made against it. These may be either charges of misuser or non-user; and for either a forfeiture may be declared.
—It was the old rule, that, when a corporation ceased to exist, its real estate reverted to the former owner, and its personal estate passed to the sovereign. But the general rule now is, that, where the property is derived from the corporators, it is considered in equity as belonging to them on the dissolution, subject to the payment of the corporate debts; and statutes are passed for the winding up of the corporate concerns and the division of the property. It is usual, also, to provide for the winding up of corporations which are found to be insolvent—Every corporation is said to have a visitor, who is a person entitled of right to inquire into its concerns and investigate the corporate management. In case of a charity founded by private benevolence, the founder is the visitor, but in the United States the general rule is that the legislature possesses the visitorial powers.
THOMAS M. COOLEY.
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