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Every observer is quite familiar with the ordinary tion of corporations, and, by constitutional procourse and origin of legislation. Bills are intro- visions for making all corporate franchises in the duced with reference to special cases, and, gene- future, subject to amendment or repcal. These rally, laws are amended to meet the need of some provisions are now found in nearly all State constibody's claim or remedy, or to provide for some tutions. With a view to limit the operation of the body's business job; and in this manner the har- rule of that case, many State constitutions provide mony of laws is destroyed.
.that all charters not acted on at the time of the This is especially the case where business projects adoption of such constitutions should be annulled, are involved and the furious passion for money and that no corporation previously organized should making is to be gratified. No aid to these is so have the benefit of any future legislation, special or generally effective as the corporate franchise. The general, without becoming subject to the general wildest, as well as the most dishonest, scheme of laws of the State, and to the privilege of repeal speculation or fraud may be carried on by its and amendment. means, without responsibility on the part of the Our own Constitution provides that no special manager, and with risk only for the public.
privileges or immunities shall be granted that the Before the adoption of the Constitution of 1851, General Assembly may not alter, revokc or repeal; the usual mode of creating corporations was by and our statutes provide that all corporations crespecial law. The people, in their anxiety to pro- ated before the adoption of the Constitution, that mote improvements and aid business enterprises, shall have acted under the provisions of the general stimulated, rather than checked, the abuses of legis- | laws since, shall thereby be deemed to have conlation in this form ; which was rendered much more sented to have and exercise their franchise, sulject mischievous by the ruling in the Dartmouth Coilege to the Constitution and laws. Like legislation has case, which, holding that a charter is a contract, been adopted in other States, and, practically, the and, when once granted, could not be revoked by country has thus, in the main, relieved itself of the subsequent legislation without the consent of the restrictions upon its powers over corporations imgrantee of the charter, inade the abuses of such posed by the rulings in the Dartmouth College case. legislation irrevocable. The consequences of that But this class of legislation aims at other kinds decision could hardly have been fully contem- of corporations than that involved in the celebrated plated at the time it was rendered. Parliament had case referred to. The founders of the Dartinouth possessed the power of changing franchises and College gave their property for charitable uses forprivileges granted of this character, whenever the
ever, without reserving any benefit therein to theminterests of the public called for it. There bad selves.
Any change in the charter, which was subbeen no question raised as to similar authority stantially a declaration of trust, would have been a among the States before the adoption of the Con- legislative alteration of the conditions of the trust stitution; nor afterwards, until this decision was without the donors' consent; and a repeal thereof, rendered. But, under this rule, the evil of bad if it was attempted after a lapse of time, would renlegislation and the mischief of ill-regulated corpo. der it difficult and perhaps impossible to distribute rate power became irremediable.
the property donated to those equitably entitled to Whatever may now be thought as to the wisdom it. But these difficulties do not apply to private or justice of it, it is established as a settled consti- corporations organized solely for the benefit of tutional rule, and will stand. It has been assailed those who contribute its property and who become with great ability, but without effect. The emi- its constituent members. They are the real owners, nence of the great lawyer to whose matchless logic are perpetually represented in its n management, and and eloquence its result is credited, and of the great their several interests are exactly defined by their jurist who decided it, has imparted to the case a stock. If they are not satisfied with the conditions sacredness and authority that makes it almost im- the State may impose as to the use of the corporate piety to question it. In my judgment, the judicial | franchise, they may surrender it, and, in their own history of the English-speaking race presents no right, take possession of their business and property equal work of trial and decision, of eloquence and for future management, as shall best serve their own learning, to this, and it will stand like other great interest. The like is also the case when the State creations of art and literature.
revokes the charter. The property is always for But, however sound the law of that decision may the use of those who give it and reverts to them, be, the judgment of our American community has whether it be a factory, store or farm. The State been against its policy and justice, especially as to gives the franchise, not for its own benefit, or that all corporations intended for protit, and the uses of of the general public, but for the sole use of the ingeneral business. Soon after its rendition States corporators and at their solicitation. It receives no began to provide, by general law, for the organiza-I consideration therefor, and the incorporators give
none. There is no element of contract, but a mere of the corporation, in any cvent, “shall be secured.” gratuity in the grant of corporate privileges. The The Legislature shall provide a substantial capital, repeal of its charter involves only the question, as and, in addition, an arlequate security for the sure to whether the property shall be heid and the busi- payment of the debts. The duty thus imposed has ness conducted in the corporate name, or in the been essentially and disastrously neglected. No name of the owners themselves and upon their per- adequate provisions for a capital have been made; sonal responsibility to creditors.
the remedy for enforcing the additional liability is It has indecil been strenuously urged that corpo- crude and ill-defined, and no laivs exist to further rate franchises should never be granted for private secure the creditor, while there has been given, on use and profit; that, as it power of government, it the other hand, ample authority for the issuing of sliould never be used for private purposes; that it | bonds and incuring of debt. In this condition of assists to aggregate wealth, and create monopoly; | legislation, the State has equipped its irresponsible that it tends to withdraw property from circulation creatures and sent them out clothed with an imposand place it in mortmin; that it places alt lisadvan- | ing, though false, appearance of substance, with tage individual enterprise and smaller capital, in :uthority to trade and contract debt among its citithat lesser and distributed milnagement that constitutes the great nursery of the business training
I feel confident no one means, active in the busiand indepenılence of our people. There is great
mess conduct of this country, during the past forty force in this objection, but the policy of granting years, has been so productive of loss and frand to the such franchises for such purposes is so firmly fixed community at large, and has transferred of their in the legislation of the country that it cannot be
substance so much to the pockets of those who have re:dily disturbed. So far as it may id legitimate been permitted to use these ill-advised franchises, private business, without danger to society, I do not
without consideration. It has stimulated unscrupropose any interference. But the regulation of pulous adventure, and furnished a lawful cover for such franchises is first subject to the control of the scandalous rascality. Let us look at the matter with public interest ; private convenience should be some cletail. served only after the general sulety and interest of
Sec. 3244 of the Revision of the Corporation Laws, society shall have been secured.
in 1878, aiming to correct the confusion then existTo some of the special climgers and abuse's that ing, as 10 subscription and payment of stock, rehave developed themselves in the management of quired that tilty per cevt of the capital stock should corporations I wish to call your attention. The
be subscribed, and that ten per cent should be paid Constitutional Convention in 1851 recognized the before the corporation should be orgavized. This need of careful restriction upon the grant of corpo- restriction was not permitted to stand long By the rate franchises in the provisions I have referred 10.
Act of April 5th, 1880, it was amended so as to reBut of more practical value ihan these, is the third quire il subscription of merely ten per cent of the section of the thirteenth article, which provides capital stock, without the payment of any portion of that the “dues from corporations shall be secured | it, as it condition of organization. Upon making a by such individual liability of the stockholders, and certificate that such subscription had been made, and other means, as may be prescribed by law; but in tiling the same with the Secretary of State, the corall cases each stockholder shall be liable over and poration is authorized to organize, and upon its orabove the stock by bim owneil, and any amount paid ganization is fully equipped for its work. Without thereon, to a further sum at least equal in amount to
a dollar in the treasury, or a dollar paid upon its such stock."
subscriptions, it eng:ges in business and begins conThis charges upon the Legislature a specific duty tracting debts and issuing bonds. which has in it several important elements:
The mode of manipulating these corporations 1. It contemplates iit the outset and requires that
varies according to the circumstances and condia capital should be provided.
tions of the business or enterprise in which they shall 2. It requires that the stockholders should be engage. But in all cases they have the two elemade liable also, in addition to stock subscribed ments; little or no capital, and business at the risk and constituting the capital of the corporation, for of their creditors. It is now common in this couna furtlicr equal amount.
try to find corporations, every dollar of whose means 3. In addition to the capitai and the further lia- is furnished by creditors, and every dollar of whose bility so providel, it requires that the debts of the stock actually represents no assets, with the mancorporation 'shall be secured” generally by il lia- agement of their affairs in the hands of those who bility of stockholders and such other means ils may have no pecuniary investment in them, and with the be prescribed by law."
actualinvestor excluded from all voice in their operaThe idea underlying this secticu is, that the debts / tion.
Many corporations have been organized for the without remedy, unless it shall throw the loss upon construction of works, such as railways, water the innocent purchasers of such stock who may have works and others for public use; bonds and stocks paid full consideration therefor. The fair rate which have been issued and manipulated by the promoters the public should be called upon to pay should be and managers of the corporation, so that the one is that, only, which may be necessary, after the paysold at par or a discount, and the other held as a ment of reasonable expenses, to afford a just and bonus in such sale, without other consideration. reasonable return to the investor, for the use of the The company is thus represented by stock not rep- capital actually invested in the work. resenting a copper of capital, and its money re If the scheme fails, we have another aspect of its ceived from the sale of bonds, which represent the evils. With no capital, with its property mortwhole investment, and often considerably exceed it. gaged as an insufficient security for the payment of If the venture proves successful, the bonds are paid, its bonds, and a general indebtedness, without any or made good, and the profits realized by the holder security, the deceived creditors find themselves of the stock, for which nothing is paid.
bearing the sole burden of the loss. This is usually The mischief arising from these enterprises is ob- attended with great distress, such as commonly folvious. The profits of the corporation are derived | lows great failures. The laborer and his family are from charges or rates paid by the public for the uses stinted or starved with the loss of his
the such corporation furnish. The amount of stock is contractor broken up and bankrupted, and trusts of sued and bonds outstanding with the amount of
every description, for charities, schools, widows, dividends, which, it must be conceded, honest stock | helpless age and infancy alike are impaired or is fairly entitled to, and the amount of interest which wrecked by bonds issued by these corporations with bonds, representing real loans, are entitled to claim, little or no security to uphold them. The broker's constitute the basis upon which fair rates are cal
skill is found equal to the work of foisting them culated.
upon the inexperienced and simple. The secrecy And, on this pretense, the public are required, in
and mystery of corporate management renders insuch cases, to pay greatly more than fair rates for vestigation fruitless and gives full scope to the bond the services rendered, and if complaints are made of broker's doubtful arts and plausible inducements. such charges, the dividends upon the pretended capi- And thus we have disaster after disaster visited upon tal and the payment of interest upon bonds that
the suffering communities of the country, who remay have been sold at a cliscount, become the ex
ceive and endure them much as they do the devascuse or justification. Indeed the situation becomes
tation of wind or fire, as visitations of God with such that it is difficult to resist, by fair reasoning, which they are classed. The author of this waste the claim for sufficient rates to pay such interests
with such of the plunder as he can save, may now and dividends. The bonds are held, finally, by in
address bimself to such new venture as he may
denocent purchasers. The purchaser may well say to
vise. the State “You have authorized or enabled this
Stock liability is inadequate or wholly worthless corporation to issue its stock without the payment as a security for the creditor. In some cases the of any money for it, we have bought it and paid full
stock is manipulated in the name of an irresponsible consideration, and if there is any fraud for which dummy." In others, stockbooks disappear, and I any one should sufler, it should be the public, who
hare known cases of the pursuit of them, with the have authorized the issue of stock and enabled it to
aid of secret agents, from one city to another in an be done without the investment of a copper by the eventful search, chiefly useful as disclosing the ways original stockholders, and you shoull pot destroy of concealment, and mode of escaping liability. our dividends, which we are entitled to receive, by And where the ownership can be traced it is often the unfair reduction of rates."
found that, by transfers of stock and novation of On the other hand, the stockholders of the cor
corporate indebtedness, the responsible stockholder poration meet the appeal for the advance of wages, has been released and in his place substituted an iron the part of the employe, or enforce rednction responsible one who has received the stock as a gift against them, with the same plea that the busi or pretended sale. Protection is found against the ness is not paying sufficient to afford an adequato claim upon the bonds by inserting in them, as a part dividend to the stockholders, and to pay the inter- of their conditions, the release of statutory liability. est upon its indebtedness; and thus this fictitious Indeed, I think the experience of the profession stock becomes the necessity for extorting from the will bear me out in the statement that, as each new public, on one hand, and oppressing the wage-earner, catastrophe comes to these forms of business venture, on the other. The projectors of this scheme, which and these managers grow in experience and skill in legislative neglect renılers practicable, are the only their manipulations, less and less is got by creditors ones that profit by the situation, and society suffers | out of the statutory liability of stockholders. When
the end approaches, the managers of the scheme dis So it may be entirely proper to organize an existing appear; a wreck follows; the captain and his asso business carried on by individuals, or partnerships, ciates, at å safe distance, may look on without into a corporation. But the assets of such business anxiety, but with, it is to be hoped, a decent sym- should not be transferred upon a valuation fixed by pathy for the distress and clisaster in which the the owner, in payment of stock subscriptions, but passengers and crew are involved.
such assets should be valued by disinterested apAnother case of a corporation, with large capital praisers, under the direction of an impartial and stock, but little or no capital, is found in the or competent public authority, as is provided in the ganization of a bankrupt partnership into a corpora laws of some of the most careful and conservative tion, or a bankrupt corporation sold out and reor States. ganized. I know of no method, except discharge In the case I have just described, the owners of in bankruptcy, more effective than that which has the property acted as both buyer and seller, as trusbeen occasionally used by insolvent firms, to relieve tees for the corporation and representatives of their their members of the loss or ruin resulting from in own interests, and the corporation was made subsuccessful business.
stantially the administrator of the business of a Take an example: A and B are partners in an in
worthless partnership, for the real purpose and withi solvent concern. They organize a corporation, fix the real result of relieving the partners from liabilits capital at a large sum, subscribe for the stock,
ity and throwing the loss upon the creditors. giving clerks and employes a share each to make up
The same result is achieved in the reorganization a board of directors, and upon a stuffed invoice,
of bankrupt corporations, including especially railpartly fictitious and excessively overvalued, they road companies and other corporations for operattransfer the firm business to the new corporation, in ing a public use. These enterprises begin witlı satisfaction of their stock subscription, the corpo- inadequate capital, with the ntmost use of credit, ration assuming the indebtedness of the partnership. resulting in contracting a large debt with an unfinThe first step then begins. The obligations of the
ished work. In the process of foreclosure it is sold
for a small suim. Under the laws of this State, corporation are substituted for those of the partners, and in time their liability as such is discharged.
which have been from time to time amended, and The second step thien follows. The stock taken by
especially under the act of April 24, 1890, a syndithe partners is transferred to a clerk for a consider
cate of persons are authorized to become the pur
chaser of both the property and franchise. Upon ation that is never paid or expected to be paid, and then another change of indebtedness takes place and filing deed therefor with the secretary of State they
become a corporation with full capacity to maintain the partners are thus relieved of their statutory lia
and operate such road. They are not required to bility to their creditors.
pay a dollar in any subscription to capital stock, Usually it takes some money and a little time to
but are authorized to provide for the purchase price carry through these processes, and in one case com
of the property, by the issue of capital stock, and ing under my observation, the partners, advancing bonds secured by mortgage, in whatever amount the necessary funds for this purpose, after having the incorporators may have agreed on, which stock secured their release from their debt as partners, and bonds so issued shall be valid, and taken as and their liability as stockholders, took al mortgage fully paid for, by the transfer to the corporation of upon the assets that were left to secure to them the re
such property. It imposes no limit upon
the amount payment of the money they had been compelled to
of bonds and stock with reference to the value of advance to support the corporation while their
the property purchased, or the amount of security scheme was in process. Upon foreclosure, they take which shall be afforded for the payment of such the proceeds of corporate property, and leave their
bonds. creditors, the victims of their schemes, to bear the
We have thus provided by express legislation the whole loss. In this case there was a semblance of an legalized means of perpetrating the abuses and adequate capital at the outset, and also of an ade
frauds to which I have referred. Many such propquate security to creditors in responsible stockholderties are fit only for gambling uses, consisting of ers, but the capital is a sham, and the escape from railroads that answer no public need, or are many statutory liability easy and entirely practicable, un
years in advance of the public necessity. der existing legislation.
Our statute provides, likewise, for what is called While it is true that corporations may, with en-“capitalization “ of debt and stock of railroad comtire propriety, take needed property such as may be panies that have become embarrassed, by an agreenecessary for corporate purposes, in payment of ment between the stockholders, bondholders, and stock subscriptions, they should be permitted to general creditors; and upon sale of the railroad, in take nothing else than such necessary property. | pursuance of such agreement, they are authorized
tv reorganize the corporation, and to issue capital public, or an evidence that the original value of stock and bonds therefor, of such amount :is they the corporate property has become depreciated. If may deem proper,
may fix by agreement, with it be once admitted that a corporation may issue out any reference to the actual value of the prop- stock without receiving a consideration therefor, erty so capitalized.
and where it does not represent actual value, or In other cases, stock dividends are made. By substituted value in corporation assets, there is, apgeneral provision, our statute authorizes corpora- parently, no limit to the extent to which the origitions for profit to increase their capital stock. It nal stock may be watered, except the caprice of prescribes no limit and defines no purpose for which stockholders.” the stock may be issued, nor does it control in any I cannot believe that it is necessary to legitimate manner the anthority of the corporation is to its and prosperous business, under the conduct of cordisposition.
porations, that their stock books should be made, It has been estimated that in water-works prop- substantially “lies,” and its stock and bonds the erty alone, in the United States, there is outstand- juggler's scheme for deceiving the public. There ing $150,000,000 of stock wholly fictitious, or, in is no doubt of the usefulness of railroads and the other words, to use the general phrase, “wholly necessity for all legitimate encouragement for their watered.” The Interstate Commerce Commission construction and operation, but surely that, like all says: “It is believed that cases are now comparil other business, may be done honestly. Their stock tively rare in which the capital stock of our railroad may represent ilctual values, and their bonds real companies, is the same now exist, was actually is credit and consideration. Or, must it needs be that sued for cash to bona fille investors."
the false pretense and deceit that sends the vulgar A few years ago the Western Union Telegraph criminal, who obtains money from the confiding Company declared a stock dividend of $15,000,000, countryman on our city streets, to the station house which the Court of Appeals of New York held to and police court, must be tolerated as a necessary be legal.
In 1868 the New York Central made i rule of business, in the conduct of the great busistock dividend of $23,036,000, being eighty per cent ness corporations of the country? of the capital stock then existing: This device of Wiat would be thought of issuing warehouse reVanderbilt was adopted in order to apparently re-ceipts for definite amounts of grain to represent a duce the great percentage of dividend upon stock less holding in the elevitor; or executing deeds for earned by the remarkable growth and prosperity of a specific quantity of land, there being much less liis road, instead of reducing his rate of freight and to answer the description; or the use of a yardfares.
stick of indefinite length, or of a dollar of fluctuatWhat is true of the corporations named, is also ing value? Safe and honest business requires the an index to that which is true with respect to nearly elimination of every element of uncertainıy that is all classes of the great corporations of the country, practicable
. Gambling thrives amid confusion of whose profits are derived from the rates and charges prices, or values, or quantities. The grain pit and made to the public. These companies, being of a the pool room live upon the element of mere chance, semi-public character, in the exercise and perform and the railroad wrecker upon the mystery and conance of the public use, and accountable to the peo fusion of railroad values and conditions. ple and the State, are compelled to guard against It is true that these abuses are not all allowed by legislative interference with their charges, by ex- legislation, nor indeed sanctioned by judicial depedients of that description. The charges, especision, but where they are without authority of laiv cially by gas, water, and railway companies, have the remedy is ina lequate. been the subject of frequent examination and criti It is greatly to be regretted, in my judgment, cism, and also of legislative action. The “water that the Supreme Court of the United States has ing” process, with respect to their stock, becomes, gone so far in three decisions, reported in 139 U. S., in in il considerable measure, a matter of necessity to legalizing the sale of unissued stock, or in giving it enable them to maintain their rates as against the away, without receiving payment therefor of its acpublic demand for a reduction.
tual amount. It is not questioned by that court, or Justice Brown, in Uandley v. Stutz, 139 U. S., any court that I know of, that a corporation cannot thus describes the uses of stock certificates:
issue its certificates of stock, in the first instance, at “The stock of a corporation is supposed to stand its inception without full payment of the whole in the place of actual property of substantial value, value thereof, and that, by no device, can the payand as being it convenient method of representing ment for such stock then issued be avoided by any the interest of each stock holder in such property. arrangement between the corporation and its stockTo the extent to which it fails to represent such holders, its against the claim of creditors. But it is value, it is either a deception or a fraud upon the really difficult to comprehend the distinction in