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Home -> Essel R. Dillavou -> Principles Of Business Law -> CHAPTER XI

Principles Of Business Law - CHAPTER XI

1. CHAPTER I

2. CHAPTER II

3. CHAPTER III

4. BOOK I CHAPTER I

5. CHAPTER II

6. CHAPTER III

7. CHAPTER IV

8. CHAPTER V

9. CHAPTER VI

10. CHAPTER VII

11. CHAPTER VIII

12. BOOK II CHAPTER I

13. CHAPTER II

14. CHAPTER III

15. CHAPTER IV

16. BOOK III CHAPTER I

17. CHAPTER II

18. CHAPTER III

19. CHAPTER IV

20. CHAPTER V

21. CHAPTER VI

22. CHAPTER VII

23. CHAPTER VIII

24. CHAPTER IX

25. CHAPTER X

26. BOOK IV CHAPTER I

27. CHAPTER II

28. CHAPTER III

29. CHAPTER IV

30. CHAPTER V

31. CHAPTER VI

32. CHAPTER VII

33. CHAPTER VIII

34. CHAPTER IX

35. CHAPTER X

36. CHAPTER XI

37. CHAPTER XII

38. CHAPTER XIII

39. BOOK V CHAPTER I

40. CHAPTER II

41. CHAPTER III

42. BOOK VI CHAPTER I

43. CHAPTER II

44. CHAPTER III

45. CHAPTER IV

46. CHAPTER V

47. BOOK VII CHAPTER I

48. CHAPTER II

49. CHAPTER III

50. CHAPTER IV

51. BOOK VIII CHAPTER I

52. CHAPTER II

53. CHAPTER III







CHAPTER XI
MANAGEMENT OF CORPORATIONS

Sec. 104. In general. Regulation and control of a corporation
rest in the stockholders. The majority of the stockholders, by
vote, has a right to bind the corporation and all its members in any
transaction or proceeding within the scope of the corporate powers
as authorized by the corporate charter. 1

The charter may, however, vest control and management of the
corporation exclusively within the board of directors. The power
of the stockholders is then limited to the extent of securing a new
board of directors, if they are not satisfied with the acts of the pres-
ent board.

The extent of the powers of the corporation is defined by the
statute creating the corporation and by its charter. The by-laws
regulate the conduct and define the duties of the officers and the
members between themselves and the corporation, with respect to
carrying out the powers given to the corporation by the state.

Sec. 105. By-laws. A by-law is a rule of conduct which regu-
lates and defines the duties of the members and the officers of a cor-
poration among themselves. Every corporation has implied power
to enact by-laws for the purpose of carrying out the power con-
ferred upon it by the state. These by-laws must not violate any
rules of law; they must be general in their nature and must not be
directed toward the conduct of any particular individual. The by-
laws are binding upon all the stockholders. They must be consist-
ent with the purpose and objects for which the corporation is cre-
ated and are not binding upon third persons unless third persons
have knowledge of such rules.

The stockholders have power to amend, to add to, and to repeal
the by-laws to the same extent as they have power to create by-
laws in the first instance. They cannot, however, repeal, amend,
or add to the by-laws, where such change will affect the vested
rights of a stockholder.

The stockholders may delegate to the board of directors the right
to adopt new by-laws, or to repeal or to add to them. The board
of directors, however, cannot change the by-laws with respect to
limitation or power or duty given to them by the stockholders.

The by-laws usually provide for the number of officers and direc-
tors, the method of electing them, and the enumeration of their

1 Hodge et al. v. U.S. Steel Corporation, 1903, 64 N.J. Eq. 807, 54 Atl. 7; p. 717.

295



296 BUSINESS ORGANIZATIONS CORPORATIONS

duties. They also specify the time and place of the meetings of the
directors and the stockholders. If the corporation is a nonstock
corporation, the by-laws specify the requirements and the method
for membership.

Sec. 106. Stockholders meetings. Action by the stockholders
normally binds the corporation only when taken in regular or prop-
erly called special meeting, after such notice as is required by the
by-laws or statute has been given. However, it is generally con-
ceded that action approved informally by all stockholders will bind
the corporation. Unless otherwise provided by statute, notice of
regular meetings need not be given if the by-laws provide for a defi-
nite place and time of meeting. Most by-laws and many state
statutes provide that notice must be given of regular as well as spe-
cial meetings.

Notice of a called meeting must include a statement concerning
the matters to be acted upon at the meeting, and any action taken
on other matters will be ineffective. If unusual action, such as a
sale of corporate assets, is to be taken at a regular meeting, notice
of the meeting must call attention to that fact.

Failure to give proper notice of a meeting generally invalidates
the action taken at the meeting. A stockholder who, having failed
to receive notice, attends and participates in a meeting is said to
waive the notice by his presence.

A quorum of stockholders must be present in order to transact
business, such quorum being a majority of the voting shares out-
standing, unless some statute or the by-laws provide for a smaller
percentage. Affirmative action is approved by majority vote of the
shares present at a meeting, providing a quorum exists. There are
certain unusual matters, such as merger or sale of all corporate
assets, which, at common law, required unanimous vote. Today,
statutes usually provide that such action can be taken by vote of
two-thirds or three-fourths of the stockholders. Many of these
statutes also provide that the dissenting shareholders have the right
to surrender their shares and receive their fair value in case they
disapprove of the action taken.

Sec. 107. Voting. Every member of a corporation is entitled
to vote. In nonstock companies the members are entitled to one
vote. In stock companies the members are entitled to as many
votes as they own shares of stock. 2 The stockholder whose name
appears upon the corporate record is usually designated by the by-
laws as the person entitled to vote. Preferred stockholders, by
their contract with the corporation, may not be entitled to a vote.
All jurisdictions hold, however, that every stockholder, whether

-State ex rel. White v. Ferris, 1875, 42 Conn. 560; p. 717.



MANAGEMENT OF CORPORATIONS 297

preferred or not, is entitled to vote unless agreed otherwise. A
stockholder cannot be deprived of a right to vote by a by-law.
However, unless expressly prohibited by statute, the corporation
may issue stock in the future, either common or preferred, and spe-
cify that the holder shall not vote.

The statutes of some states provide that a stockholder, in the
election of directors by cumulative voting, may cast as many votes
for one candidate for a given office as there are offices to be filled,
multiplied by the number of his shares of stock ; or he may distrib-
ute this same number of votes among the candidates as he sees fit.

A stockholder is entitled to vote only by virtue of his ownership
in the stock, and, under the common law, this right can only be ex-
ercised in person. However, by statute, or the charter, or the by-
laws, a stockholder may specifically authorize another to vote his*
stock. This authorization is made by power of attorney and must,
specifically state that the agent of the stockholder has power to
vote his principal's stock. This method of voting is called voting
by proxy. It is a personal relationship, and may be revoked at any
time by the stockholder before the authority is exercised. The
laws relative to principal and agent control this relationship.

A stockholder, unlike a director, is permitted to vote on a matter
in which he has a personal interest. In certain respects he repre-
sents the corporation welfare in his voting, whereas in other re-
spects he votes in such a manner as he thinks will best serve his
interest. The majority of stockholders may not take action, how-
ever, which is clearly detrimental to the corporation and minority
interests. This becomes particularly significant when the majority
of the shareholders also own most of the stock of an allied or re-
lated enterprise and seek to operate the first corporation in such a
manner as to profit the second at the expense of the first. If it is
clear that the affairs of the first corporation are being mishandled
in order to benefit the second, such action may be enjoined by the
minority interests.

Sec. 108. Voting pools and trust agreements. Various devices
have been used whereby minority interests or a group of stock-
holders may effectively control a corporation. The creation of a
holding company, the issuance of non- voting shares or the issuance
of shares with voting rights but with a small or nominal par value,
voting pools and voting trusts, have all been utilized for this pur-
pose, and in general all of them are effective means for obtaining
control. A voting pool arises whenever a number of stockholders
agree to vote their stock as a unit in accordance with a certain plan.
Such an agreement is enforceable unless the purpose to be accom-
plished is improper.



298 BUSINESS ORGANIZATIONS CORPORATIONS

A voting trust develops from the transfer of title of their shares
by various stockholders to a trustee for the purpose of voting the
stock. The stock is then registered in his name, he votes at the
meetings of shareholders, and receives dividends as they are de-
clared. He issues to each stockholder, whose stock he holds, a cer-
tificate of beneficial interest which entitles the owner thereof to
have his shares returned at the termination of the trust and to re-
ceive dividends within a given time after they are paid. Some
courts have held voting trusts unenforceable because they tend to
separate ownership from control and management. Many of the
courts, including most of those rendering recent decisions, enforce
the trust agreement unless its objectives are improper or the period
of its continuance unreasonably long. 3 The Uniform Business

Corporations Act sets a limit of ten years upon voting trusts.

*

Directors

Sec. 109, Qualifications and powers. The directors of a cor-
poration are, with the possible exception of the first board, elected
by the stockholders. In a few states, the corporate charter names
the first board of directors. In the absence of a provision in the
charter, by-laws, or statute, it is not essential that directors hold
stock in the corporation. Since they are to supervise the business
activities, select key employees, and plan for the future develop-
ment of the enterprise, they are presumably elected because of
their business ability.

The directors have power to take such action as is necessary in
the ordinary business activities of enterprises of the type being
managed. They may not exceed the power granted to the corpo-
ration by its charter, amend the charter, approve a merger, or bring
about a consolidation with another corporation. Charter amend-
ments, consolidations, and mergers require the approval of a rather
large percentage of the stockholders.

Directors are presumed to be free to exercise their independent
judgment upon all matters presented to them. Consequently, their
management of the business cannot be interfered with by action
on the part of the stockholders. 4 Similarly, any contract made by
a director with a stockholder concerning a particular matter before
the board is contrary to public policy and unenforceable. Free
and independent action by directors is required for the best inter-
ests of the corporation itself as distinct from the interests of a few
stockholders.



Clark v. Foster et al., 1917, 98 Wash. 241, 167 Pac. 908; p. 718.
*Charlestown Boot and Shoe Co. v. Ihmsmore et al., 1880, 60 N.H. 85; p. 719.



MANAGEMENT OF CORPORATIONS 299

Sec. 110. Meetings, The statute, charter, and by-laws usually
provide for the number of directors. In most cases, not less than
three directors are required. Since the board of directors must act
as a unit, it is necessary that it assemble at board meetings. 5 The
by-laws usually provide for the method of calling directors' meet-
ings and for the time and the place of meeting. A record is usually
kept of the activities of the board of directors, and the evidence of
the exercise of its powers is usually stated in resolutions kept in the
corporate record book. A majority of the members of the board of
directors is necessary to constitute a quorum. Special meetings
are proper only when all directors are notified or are present at the
meeting. Directors may not vote by proxy, having been selected as
agents because of their personal qualifications.

Sec. 111. Liabilities of directors. Directors are said to stand
in relation to the corporation as trustees, for both the corporation
and the stockholders. However, they are not trustees in the strict
sense. They are agents with more than the usual authority of an
agent. 6 Therefore, a director occupies a position of trust and con-
fidence with respect to the corporation, and cannot, by reason of his
position, directly or indirectly derive any personal benefits that are
not enjoyed by the corporation or the stockholders. All secret
profits obtained by a director in the pursuit of the corporate busi-
ness must be accounted for to the corporation.

A director may contract with the corporation which he represents,
but he is subject to the same limitations that an agent is in dealing
with his principal. He is required to disclose his interest in all
contracts and, because of his fiduciary relation, to volunteer all
pertinent information regarding the subject matter involved. Fur-
thermore, he is forbidden to vote as a director on any matter in
which he has a personal interest. Even though his vote is not nec-
essary to carry the proposition considered, most courts consider the
action taken to be voidable. Some courts go so far as to hold that,
if he is present at the meeting, favorable action will not be binding.
Clearly, if his presence is required to make a quorum, no transaction
in which he is interested should be acted upon. These rather se-
vere rules are enforced so that directors will not be tempted to use
their position to profit at the expense of the corporation.

Directors are personally liable when they willfully misuse their
power and misapply the funds of the corporation. They are also
personally liable where they issue stock as fully paid when it is not
paid in full. They are not liable, however, for accidents and mis-

6 Baldwin et al. v. Canfield, 1879, 26 Minn. 43, 1 N.W. 261; p. 720,
6 Briggs v. Spaulding, 1890, 141 U.S. 132, 35 L. ed. 662; p. 721.



300 BUSINESS ORGANIZATIONS CORPORATIONS

takes of judgment or for losses, if they have acted in good faith and
have exercised ordinary care, skill, and diligence.

The directors, although holding a fiduciary relation to the cor-
poration, have no such relationship with the individual stockhold-
ers. In a sale of stock by a stockholder to a director, they deal at
arm's length. The director who, because of his relation to the cor-
poration, is in a position to know many factors which affect the
value of the stock, is not obligated to volunteer such information to
the stockholder. There is a strong minority view and a tendency
in recent decisions to support a fiduciary relationship.

Sec. 112. Compensation. In the absence of a stipulation in
the charter or by-laws, directors receive no compensation for their
services as such. If they do work not recognized as falling within
the duties of a director, they may recover for the reasonable value
of their services. Directors who are appointed as officers of the
corporation should have their salaries fixed at a meeting of the
shareholders or in the by-laws. Since directors are not supposed to
vote on any matter in which they have a personal interest, it is
difficult for director-officers of small corporations to fix their rate of
compensation. Any action to determine salaries should be ratified
by the stockholders in order to insure the validity of the employ-
ment contracts.

Review Questions and Problems

1. A majority of the stockholders of a corporation happen to meet at
the corporation offices. While there, they hold a meeting and transact
certain corporate business. Are their actions effective?

2. Who usually has power to adopt or to alter by-laws?

3. A holds a certificate of stock for five shares in the X Company.
How many votes is he entitled to cast at a stockholders' meeting? Does
a preferred stockholder have a right to vote?

4. May a stockholder vote by proxy? May he terminate the proxy
whenever he desires? May a director vote by proxy?

5. With whom does the management of a corporation usually rest?
Who usually elects the officers and selects the employees of the corpora-
tion?

6. A, a stockholder in a corporation, desires to sell certain real estate
to the corporation. He is present at the meeting of the stockholders
when the matter is considered and votes in favor of the purchase. As-
sinning that a majority favors the purchase, has a minority stockholder
any right to object? Suppose A had been a director and the matter had
been before a meeting of the board of directors?

7. What is the purpose of a voting pool?

8. Name the various methods used to gain control of corporate man-
agement through voting power.



MANAGEMENT OF CORPORATIONS 301

9. A, B y and C are directors of a small corporation and, as such, ap-
point themselves as officers of the corporation at fabulous salaries. May
they later be made to account to the corporation for any amount received
in excess of the reasonable value of their services?

10. A was elected director of a certain corporation by the majority in-
terests upon his promise to vote for B as the general manager. Was A's
promise enforceable?




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