HI aESmmmSm mBOSSBSSSeSmsSi mMwMMm. K ■BH aartiWPIHpCMfli ■^H Hi ■b BDpHnMKEI •■'■ HI SHU bBSS - • l Si Hii'iF'i'y 1 il ■ ■'•'•■ mdHyn >->£i; 'x ; ^ *M ^ **■ ' A V ^ > ^ $ s< ^0 S * « k ^ A ■ v COMMENTARY ON THE SCIENCE OF ORGANIZATION AND BUSINESS DEVELOPMENT ROBERT J. FRANK, LL.B. OF THE CHICAGO BAR THIRD EDITION Chicago Commercial Publishing Company Chicago 1911 .Ft COPYRIGHT 1907 BY ROBERT J. FRANK COPYRIGHT 1909 BY ROBERT J. FRANK COPYRIGHT 1910 BY ROBERT J. FRANK COPYRIGHT 1911 BY ROBERT J. FRANK Press of Chicago Legal News Co., Chicago. $2.74' (CIA303072 A TREATISE ON THE LAW AND SCIENCE OF THE PROMOTION, ORGANIZATION, REORGANIZATION AND MANAGEMENT BUSINESS CORPORATIONS WITH SPECIAL REFERENCE TO APPROVED PLANS AND PROCEDURE FOR THE FINANCING OF MODERN BUSI- NESS ENTERPRISES "Science is nothing but trained and organized Common Sense, differing from the latter only as a Veteran may from a raw recruit, and its Methods differ from those of Common Sense, only as the guardsman's cut and thrust differ from the Manner in which a Savage Wields his Club." Huxley. PREFACE TO THIRD EDITION. The subject of the organization and control of busi- ness enterprises is now receiving universal attention, and while its importance has heretofore been appre- ciated by those who have been immediately connected with the development of modern business, it remained for the Supreme Court of the United States to empha- size, illustrate and impress upon the minds of all the people, by three recent epoch making decisions, the material as well as the economic importance of the subject. In the case commonly known and referred to as the "Corporation Tax Case" the public — and profession alike — were impressed with the reasoning of the court wherein it held that the privileges and advantages which inhere in a corporation (and not enjoyed by private firms and individuals) constitute property which may be taxed. In the "Standard Oil" and "Tobacco" cases the validity of the methods which have been heretofore pursued by the large business corporations have received their first important con- struction by this Court of last resort. The minor changes that have been made in this edition are accounted for by the fact that no extended discussion of the "holding company" or other ques- tionable plans of corporate manipulation or financing, — which have now been either expressly or by implica- tion condemned in the last two decisions above re- ferred to, — was attempted in the previous editions of this book, but it has been deemed advisable to make a few alterations and additions in the text so that the same may be more explicit, dependable and complete, in order to present a discussion of the settled law, practical plans and economically sound principles that should withstand the test of any reasonable present or future regulation of business affairs, by the state or national government. As it has been stated in previous editions, the object of this volume is to condense into one readable book an educational discussion of the fundamental practical questions which are presented in the legal organiza- tion, re-organization and financing, of business enter- prises that are not within the scope of a strictly legal treatise, for the benefit of incorporators, officers and directors of corporations, financiers and accountants as well as all other persons who are directly or in- directly interested in modern business. ROBERT J. FRANK. Chicago, November, 1911. CONTENTS INTEODUCTOEY. CHAPTEE I. ORGANIZATION. A Common Error. The Corporation and Its Advantages. How to Organize a Corporation. Where to Organize. CHAPTEE n. CORPORATE FINANCING. Capital, Bonds and Stocks. Capitalization of Corporations. Raising of Additional Capital. Transferring An Established Business to a Corporation. CHAPTEE III. CORPORATE MANAGEMENT. Directors, Officers — Their Duties and Liabilities. Stockholders' Rights and Liabilities. By-Laws and Their Uses. Corporate Records and Books of Account. Examination of Books and Records. 8 CONTENTS. CHAPTER IV. REORGANIZATION AND CONSOLIDATION OF ENTERPRISES. Reorganization — Possible Advantages Therefrom. Consolidation of Enterprises. Stock-Jobbing. CHAPTER V. PROMOTION OF ENTERPRISES. Promoters. Promotion Contracts. Good Will — Trademarks and Trade Names. Patents and Their Commercial Value. Mining Enterprises. APPENDIX. Containing General and Special Forms of Contracts, Reorganiza- tion and Installment Certificates, By-Laws, Resolutions, etc.; also a synopsis of the Corporation Laws of favorite States for incorpo- rating, rules for Listing Stocks and Bonds, forms of Option Con- tracts, table showing the Earnings of Stocks and Bonds, and other special matter relating to the above subjects. (See TABLE OF CONTENTS, PAGE 187.) INTRODUCTORY Frank's "Science of Organization" etc. INTRODUCTORY Before the advent of the corporation, or before the almost universal adoption of that form of conducting business, those responsible for the success or failure of an enterprise were principally concerned about its details. Now such details are delegated to subordi- nates, and the actual head of the enterprise is more intimately concerned with its policy and its financial plans and general undertakings. It has been said that the type of man who has genius for acquiring exact technical knowledge is not ordinarily a successful executive, and the accuracy of this statement must, in a measure, be admitted; but it must also appear to those familiar with present con- ditions that the successful executive not only neces- sarily possesses an intimate general knowledge of the science pertaining to the particular enterprise under his control, but an equal general knowledge of the established rules concerning corporate organization and finance, and the elementary rights of stockholders, as well as the duties and responsibilities of corporate officers. It is clearly beyond the possibility or legitimate pur- (11) 12 INTRODUCTORY. poses of any book to attempt to so qualify its readers as to enable them to dispense with the services of the legal profession; but it is possible to give such a general announcement of the law and approved procedure pertaining to corporate organization and financing — and particularly the practical features relating thereto — as will be of inestimable value to those charged with the responsibilities of such under- takings, and at the same time suggest to the practicing lawyer who has not specialized along those lines the important practical questions which inevitably arise for consideration in the course of such employment. Particularly is this true concerning the reorganiza- tion of a business enterprise where the adoption of corporate plans for its conduct is concerned. In- numerable questions there arise which ordinarily do not receive the attention they deserve on account of their far-reaching effect upon the success or failure of the enterprise, or upon the rights of the individuals interested therein. The contents of this volume may properly be termed a discussion of the middle ground between what has ordinarily heretofore been considered within the em- ployment and province of the lawyer — who is called upon to create the corporate entity which is to con- duct a new enterprise, or to take over the property of or reorganize an old one — and what might, with equal propriety, be considered within the province of INTRODUCTORY. 13 the promoter or the individuals interested in such undertaking. Every mistake in the organization of a business corporation discloses ample evidence of either lack of proper knowledge of the questions constituting the middle-ground referred to, or (what is equally as disastrous to the enterprise) the failure to put such knowledge into execution; and this might, and often does arise on account of the fact that the employment of or instructions given the corporation attorney have been limited to simply complying with the statutory formalities in the creation of the corporate entity. Strictly speaking, the lawyer's duty is discharged by simply complying with the instructions of his client, be they ever so faulty; and the client is rarely ever qualified to decide for himself the most important preliminary questions that arise when the first steps are to be taken in launching a modern business venture, namely : the creation of the corporation which is to own and conduct it. Its purpose, capitalization and financial plans, adequate protection for investors or the owners of property to be conveyed, and rules for internal conduct, etc., are each and all matters of first importance, either immediately or at some future period of development ; and these and other questions of like significance are not met with inevery-day affairs of business life, and rarely in the general practice of the law. 14 ISTTKODUCTOBY. A careful examination of all the works on corpora- tion law now in existence fails to disclose any adequate discussion of the field alluded to above; and this, per- haps, on account of the difficulty attending such a venture, owing to the great variety of conditions which are encountered in actual practice, and the almost hopeless task of attempting to cover such field in any satisfactory manner. But it is believed that a brief and concise announcement of the general prin- ciples covering the practical questions referred to, (which have been established by precedent as practical) and an equally general discussion of the law relating thereto, must necessarily be of value, particularly to the student or executive who is desirous of acquiring a knowledge along such lines, and who is not inclined or able to devote the time necessary to an extended research, much less to acquire the experience neces- sary to apply such knowledge once it is obtained. It may appear to those who simply review the con- tents of this volume, or who are unfamiliar with its purpose, that the arrangement of the subjects are somewhat unsystematic, and that it discusses only legal questions generally. It is to be hoped, however, that, upon a more careful study of the volume as a whole, the connection and continuity will be disclosed, and the fact appreciated that a general, rather than a particular discussion of the subjects in hand is more to be desired — as being of greater practical value, — than an extended discussion of details involving cir- cumstances or conditions which may never be met in actual business life. INTRODUCTORY. 15 The illustrations given in the Appendix are intended to supplement and explain certain important state- ments or plans referred to in the text, and at the same time serve as suggestions for adaptation by the Profession. In every work of this character many questions, often considered elementary, are necessarily discussed, for the reason that every book treating on any science must anticipate that such a work will more often fall into the hands of those unfamiliar with such questions than otherwise. A study of the legal phase of business organization and development necessarily involves the considera- tion of, at least, four distinct subjects, viz: Corpora- tion Law, Corporation Finance, Corporation Account- ing and Business Economics generally. Then the prac- tical questions that are ever presenting themselves for solution in the application of theoretical principles to practical demands, makes work in this comparatively modern field one of the most exacting of occupations and one that should eventually occupy a place among the various recognized specialties of which the prac- tice of law is now composed. ORGANIZATION Frank's "Science op Organization" etc. CHAPTER I. ORGANIZATION. A Common Eebob. The Corporation and Its Advantages. How to Organize a Corporation. Where to Organize. a com- Every business has peculiarities and mon Error, mysteries that cannot be solved by intu- ition, and the controlling elements that make for suc- cess (when recognized at all) are often the result of the accidental occurrence of circumstances rather than the result of any pre-conceived plan. But there are elements which lead to certain failure, and they may, in most cases, be "seen from afar" and avoided by seasonable consideration. More money has often been made or lost through the plans adopted for financing, organizing or re- organizing a business than in its operation ; at the same time mistakes in such plans often prevent well-merited success or occasion individual sacrifice. There is often a tendency in the selection and pro- motion of a new enterprise to look primarily, and almost exclusively, to the " opportunities ' ' of the busi- (19) 20 A COMMON ERROR. ness, and to disregard the equally important questions concerning the formation, or methods to be adopted for its successful conduct. Experience has demonstrated that a business oppor- tunity, otherwise promising, may be unsuccessful without a proper basis for operation, or executive ability behind it to organize the details and properly conduct such a business. To err in the inception of a business undertaking, in its organization, or in some apparently minor detail, may mean a handicap throughout; and the consequences of faulty formation, or errors of judg- ment are rarely discovered until experience has pointed them out, and frequently, after it is too late to remedy them. Then, it is but natural to refuse to see or admit such mistakes after they are once made, and to proceed upon a theory that has proven to be erroneous or without the promise of ultimate financial reward. Individually, serious losses of both money and property frequently occur through manipulations in the coalition or reorganization of business enterprises ; and opportunities for permanent and advantageous salaried connection with a consolidating organization are as often forfeited for lack of adequate protection for those entitled thereto. There are no undertakings in business affairs where so many opportunities for the exercise of skill and THE CORPORATION AND ITS ADVANTAGES. 21 experience are presented, and where the same are so essential to success, as in the construction of a new, or the re-adjustment of the affairs of an established business — such as the devising of practical and advan- tageous plans for the securing of additional capital, or a regeneration of its vitality. The business with a proper foundation is at least one- third a success; the other two-thirds may usually be acquired by opportunity, and proper and adequate facilities. ^ „ The Supreme Court of the United The Cor- ^ porationand States has said that " Private corpora- its Advan- tions are but associations of individuals tages * united for some common purpose, and permitted by the law to use a common name, and to change its members without dissolution of the association." And also, "A corporation is an arti- ficial person created by law as the representative of those persons, natural or artificial, who contribute to, or become holders of shares in the property entrusted to it for a common purpose. As it is the creature of positive law, its rights, powers and duties are prescribed by the law." The legitimate purposes of the corporation are to provide a modern system for the conduct of business, to 22 THE CORPORATION AND ITS ADVANTAGES. enable two or more individuals to combine their capi- tal and efforts in the accomplishment of a common purpose, and also to obviate the risks and many other disadvantages of the obsolete co-partnership and pri- vate ownership of enterprises. The fact that great fortunes have been amassed and "trusts" created through this modern system simply demonstrates the weakness in the laws of the various States where such organizations have their existence and domicile, and should not militate against the plan itself. The legitimate advantages of incorporating a busi- ness are many and varied. It is impractical to attempt to enumerate all, or any considerable number of them. Among the most prominent, however, are the follow- ing:— It exclusively perpetuates any trade name, and inci- dentally the good will attached thereto. It eliminates the dangers of personal liability be- yond the money originally invested which attaches to any business conducted by an individual or co-part- nership. It enables the organizer to engage in different pur- suits, to more successfully conduct an enterprise, or enlarge the same, with a limited amount of individual capital. Upon the death of a stockholder, or disagreement, THE CORPORATION AND ITS ADVANTAGES. 23 or separation of the management, the business is not necessarily hampered or interrupted, and the transfer of the individual interest of any stockholder is sim- plified, and its value readily determined. The capital invested can be increased at any time to admit of expanding the business, or to enable compet- ing enterprises to join forces, without disadvantage to either. Employes or customers may be permitted to become interested in the enterprise without the danger of dis- solution or other possible objectionable entanglements which almost invariably occur through disagreement of co-partners. Any stockholder may pledge his individual stock to obtain individual accommodation without jeopardiz- ing the interests of the corporation, which cannot be done by a partner in a co-partnership; besides, the individual debts or personal entanglements of any stockholder will not interfere with the existence or standing of the corporation. Then, the advantages of the individual stockholder of raising funds upon his individual interest in an enterprise (stock) over that of any other form of per- sonal property is apparent. In the majority of cases a business may be sold out- right to a much better advantage by first incorporat- ing it It is less difficult to find a number of persons 24 HOW TO ORGANIZE A CORPORATION. who would take stock in a company that owned an attractive business than to find an individual who could purchase the whole; and besides, the value of the Good Will can be, in this way, preserved and real- ized upon, and the price of the business fixed by the owner before it is offered for sale. Probably the most important of all the advantages are the opportunities which are possible to the re- sourceful individual, and which present themselves in almost every undertaking, and they depend entirely upon the skill, ability and experience of the organizer of the particular corporation. How to -"■* * s frequently difficult to appreciate organize a or remember that a corporation is an corporation, artificial being, and exists independently of the stockholders or persons interested in it. By comprehending and bearing this fact in mind, all ques- tions relating to a corporate existence are simplified. These artificial beings, "invisible and intangible," are created only by legislative enactment. All of the States, however, now have what is termed "General Acts," which means that the Legislatures of the vari- ous States have prescribed methods of creating corpo- rate bodies, and have delegated to a certain State offi- HOW TO ORGANIZE A CORPORATION. 25 rial, or officials, certain powers and duties which relieve the applicant for corporate license from the delays and other difficulties incident to direct application to the Legislature itself. Illinois, for instance, has such a "General Act," passed in 1872, and amended from time to time since its passage. In illustrating the mode of organizing a corporation, the law of Illinois will be here followed, and its provisions complied with. The first step in the organization of a business cor- poration is the determination by the parties to be interested therein upon some definite object to be accomplished; that involves the important question of business policy, which clients are usually expected to solve for themselves. For convenience, the advantages of incorporating have been treated under the preceding head; for it is important to understand such advantages in connec- tion with the purposes in view. In fact, the contents of this book are especially intended to be helpful in determining these and other important practical ques- tions, and the principal purpose thereof is to supply such information as is otherwise inaccessible, and it will be necessary to refer to the various headings for a full explanation and discussion on the questions here suggested. 26 HOW TO OBGANIZE A COBPOEATIOET. After the objects which it is desired to obtain have been agreed upon and formulated, the next step is to apply to the Secretary of State for a "license to open books of subscription to the capital stock, " etc., and for the appointment of commissioners to complete the organization. This application sets forth the corpor- ate name selected; the objects for which the cor- poration is to be formed; the amount of capital stock; the amount of each share; the number of shares; the location of the corporation, and its duration of cor- porate life. In selecting the corporate name, reference should be had to the business contemplated, if this is feasible, and the name should be as short and euphonious as possible. The retention of an established trade name is always desirable, and can usually be accomplished without difficulty. Care should be exercised in avoiding the selection of the name of a corporation in existence, either in the State where the charter is obtained, or elsewhere, for under the recent law of "Unfair Competition," now recognized by all courts, it has been held that an in- junction would lie to restrain the use of a corporate name so similar to one already in existence that it would create confusion in trade, and otherwise be injurious to the business of the company having a prior corporate existence. HOW TO ORGANIZE A CORPORATION. 27 The objects of the corporation are, perhaps, the most important rights to be protected in the formation of a corporation, for they frequently give the incor- porators many advantages in the development of the business. While it is always desirable to m&ke the objects contemplated as broad as possible, this may be overdone, and under the present Illinois statutes it is necessary to limit the objects of the corporation; besides, the doing of business ultra vires (outside the scope of the objects set forth in the application) is unlawful, and may result in loss to the company and lead to other complications. Determining the amount of capital stock is treated under a separate heading.* The amount of the shares must not be less than $10, nor more than $100 in the State of Illinois. As to the duration of the existence of the corporation, this may be made the safeguard or otherwise of the rights of the parties; that is, if it is desired to con- duct the enterprise for a limited time, that fact can be set forth in the application, and, in consequence, the corporation's life will end upon the termination of the time limit thus set forth. This means that the affairs of the corporation must be wound up at that time, regardless of the wishes of the stockholders, and with- out any further action being taken by them. •"Capitalization of Corporations," page 51. 28 HOW TO ORGANIZE A CORPORATION. On the other hand, if it is not desired to have a lim- ited undertaking, the duration of the corporation should be ninety-nine years (the time limit in Illinois), for one of the chief assets of a business is its trade name, and this should be more valuable each succeed- ing year. Upon the receipt of the application, properly exe- cuted, the Secretary of State issues what is termed a "license to open books of subscription. ' * This instru- ment empowers the parties named therein to complete the organization — that is, to have the stock subscribed for according to law, and to give notices, under the statute, to parties subscribing for such stock, of the holding of a meeting to elect directors, etc. The stat- utes provide that the notice for the holding of the first meeting must be mailed to all subscribers to the capital stock at least ten days prior to the meeting day, as determined by the commissioners and sub- scribers, and set forth in the notice referred to. There is now a custom among many incorporators of formally waiving the statutory notice above re- ferred to, and of holding the first meeting, to organize, immediately upon receipt of the license from the Secretary of State. The question of the legality of so doing was submitted to the Supreme Court of Illinois in 1906 and the court held that "the only persons interested in the result to be obtained by giving notice HOW TO ORGANIZE A CORPORATION. 29 of the object, time and place of a meeting of the sub- scribers to the Capital Stock of a corporation for the purposes specified in the statutes are the subscribers themselves,' ' and that, therefore, if all the subscribers join in such waiver of notice, and the meeting to organize is actually held in accordance with such waiver, the purpose of the statute has thereby been accomplished. In pursuing this method of completing the organiza- tion of a corporation, the waiver of notice should be entered in the Minute Book of the corporation, and bear the original signatures of all the subscribers. Under the present state of our "General Act" it makes it necessary for the commissioners named in the license referred to, to take over, as such commis- sioners and trustees, for the new corporation when formed, any property which it is contemplated shall be transferred to the new corporation, and this, of course, includes the payment of money, which, under the present act, is required to be done on or before the meeting called by the notice above described, to the extent of 50 percent of the capital stock ; that is, one- half of the capital stock must now be paid to the com- missioners in advance of complete organization of every business corporation. Great care must be exercised in the accepting of property in payment for capital stock by the commis- 30 HOW TO OBGANIZE A COBPORATION". sioners in question, or they assume a liability which they may not contemplate, or intend to assume. In the Appendix will be found a copy of a resolu- tion which it is considered covers this question in a practical way,* and the subject of taking over assets other than cash in payment of stock in a new corpora- tion is treated at length hereinafter.! Appraisals of property to be taken in payment for stock are always advisable, if not necessary, both by the commissioners and directors when elected, and as to the valuation of such property, that is also treated hereinafter.! Separate minutes of the acceptance and appraisal of property by the commissioners should be entered in the Minute Book for their own protection, and as a basis for a resolution, by the directors, taking over the property from such commissioners, after the cor- poration is formed. Upon the meeting day of the subscribers to the capital stock, set forth in the notice referred to, the usual formalities should be observed in all particulars, in the holding of the first meeting and transaction of business thereat, and the minutes should be pre- served and recorded in the Minute Book of the cor- poration, and signed by the parties in interest, if they ♦Appendix, page 200. t "Transferring of An Established Business to a Corporation," page 69. HOW TO ORGANIZE A CORPORATION. 31 are not too numerous; at any rate, they should be signed by the commissioners, and attested by the secre- tary. At this meeting, the subscribers to the capital stock elect the first Board of Directors, and this is important in relation to the future management and control of the corporation, for the ensuing year, at least ; for it must be borne in mind that the directors control the offices of the corporation, and not the stock- holders, and that the officers in turn transact the busi- ness of the corporation. The Statutes of Illinois relating to directors pro- vide that the number of directors shall be fixed at the first meeting of the subscribers, and their number depends wholly upon the will of the incorporators. Such subscribers may, if they see fit, by resolution, divide the Board of Directors into three classes; the term of office of the first class expiring on the date of the annual election of the company then next ensuing ; the second class one year thereafter, and the third class two years thereafter. Thus, at each annual elec- tion for directors after such classification, the stock- holders elect, for the term of three years, the number of directors constituting such class whose term then expires. In this way, one or more directors will hold office from the beginning of the organization for three years, others for two years, and still others for one 32 HOW TO ORGANIZE A CORPORATION. year, if for any reason this plan be advisable, as it frequently is in large corporations. The usual plan, however, is to elect the entire Board of Directors for a period of one year, particularly in small or close cor- porations. We now have (at least) three commissioners hold- ing the title to the property or funds of the corpora- tion in process of formation, which have been turned over to them in accordance with the law, and all neces- sary steps have thus far been taken, including the election of the first Board of Directors, and the record- ing of the minutes thereof in the Minute Book. A report in due form of these proceedings is now prepared and forwarded to the Secretary of State, and upon its receipt (if in all things it complies with the law and the original application) a certificate of complete organization is issued and forwarded to the commissioners, who should at once record the same in the office of the Eecorder of Deeds of the county where the principal office of the corporation is located; for this is a condition precedent to the corporate life of the company, or its right to transact any other busi- ness than that already explained. The next step is the adoption of a code of by-laws for the government of the company, and it is well to remember that the by-laws are the internal laws of the corporation, and as such should set forth the rules HOW TO OEGANIZE A COEPORATION. 33 lecessary for the proper conduct of the business. This ms been made the subject of separate discussion,* md, therefore, need not be further alluded to at this time. While it is impossible to prepare " stock by-laws " that will meet all the requirements of incorporators generally, still the form given in the Appendix heretof will be found to be adaptable, with minor changes, to the ordinary business corporation organized under the laws of Illinois. After the adoption of a set of by-laws for the gov- ernment of the corporation, the next step to be taken is the election of officers, and they will be such as the by-laws have provided for. The laws of Illinois require every business corporation to have a Presi- dent, a Secretary and a Treasurer; and leaves it dis- cretionary with the directors as to how many addi- tional offices they shall create. After the election of officers, if assets have been turned over to the commissioners, to be applied upon the payment of stock subscriptions, the Board of Directors then proceed to appraise and take over the same (if it be property), and to approve or disapprove of the action of the commissioners in this regard. There is no direction in the law for the carrying out of its provisions under which advance payments are • By-Laws and Their Uses," page 94. f Appendix, page 217. 34 HOW TO ORGANIZE A CORPORATION. required, except that they shall be paid. It is mani- fest, however, that inasmuch as the corporation contemplated is not yet in existence, the commissioners are the only proper persons to take title to property, or to receive advance payments on account of stock subscriptions ; and for that purpose, they stand in the relation of trustees for the new corporation when formed. The approved method of taking over property or advance payments made by the stockholders to the com- missioners, in advance of complete organization, is for the Board of Directors, by proper resolution, to ratify, confirm and adopt the acts of the commission- ers in this behalf, if such acts are in fact proper and deemed for the best interest of the corporation. A form of resolution applicable for this purpose may be found in the Appendix,* and will serve as a guide to what is usual under the circumstances here indi- cated. The rules relating to the valuation, appraisal and purchase of assets by a new corporation are further, and at length, discussed under the title, "Transfer- ring of An Established Business to a Corporation. ' 'f After the foregoing steps have been taken, and the minutes of the various meetings written up in the Corporate Eecord Book, the ordinary business cor- • Appendix, page 209. t^age 69. HOW TO ORGANIZE A CORPORATION. 35 poration is in existence, fully organized and ready for the transaction of any business for which it was incorporated. The question of "how to create the corporate entity before the principal capital becomes interested' ' fre- quently arises. Particularly is this so where the incor- porators have a limited amount of capital, or the cor- poration is being created for the purpose of taking over a business already established, or for reorganiza- tion purposes, and the details of such undertaking have not been entirely settled. In such a case it is possible to accomplish the object, and fully comply with the law requiring 50 percent of the capital stock to be paid in before complete organization, etc., by first incorporating with a nominal capitalization, and afterward increasing the capital stock to the amount originally contemplated or desired. The Corporation Laws of the various States differ somewhat materially in the manner and form of creat- ing a corporation, and it is beyond the scope of this book to undertake to discuss the details of the various acts; the formalities required for their compliance must necessarily be entrusted to those familiar with such laws as they exist at the time of organization; but the essential practical features of the organization of business corporations are much the same every- where, and they are discussed under the various head- ings herein. 36 WHERE TO ORGANIZE. where to Like most questions of procedure, this organize. is one depending largely upon the cir- cumstances of each individual case. There are no general rules which can be applied when the ultimate success of the enterprise is considered. So far as the most favorable laws are concerned, that is always subordinate to the more important questions of business policy. For instance, one State may offer inducements in the way of reduced ineor- portion fees and enlarged privileges — in short, a more favorable franchise; but when this is compared with the other objects sought to be accomplished, it is of little importance to the organizer. Many a corporation has been handicapped by mak- ing the fatal mistake in organizing under the laws of some foreign State. Usually companies with ulterior objects seek domicile in a State offering the greatest latitude for their purposes — this fact being so noto- rious that it is prima facie a, reflection upon legitimate undertakings to go away from "home" for the pur- pose of organization. However, this reflection may be removed by explanation, when the peculiar circum- stances of the particular case justify the selection of a foreign State for incorporation, as they frequently do. New Jersey, Maine and Delaware have gone a long way toward encouraging corporations to organize in WHERE TO ORGANIZE. 37 their respective States; North and South Dakota and Arizona have attempted to do likewise, and the laws of all these States have their peculiar advantages, particularly over those of some of the other States where corporations would naturally desire to locate on account of the business advantages offered. It will be found that in the States where business is most centralized, and where the actual business of most business corporations is transacted, the laws are more or less stringent, and some are unreasonable and obsolete; but, in some of these last-mentioned States the intention at least is to protect stockholders and creditors, and for the legitimate, well-meaning enterprise it is often best to submit to these condi- tions and organize at home. Particularly is this true where outside capital is to be interested. Prospective investors, as a rule, invest their money under the advice of legal counsel, and local attorneys are naturally more familiar with the laws and decisions of the courts thereabout, in their own State, and can advise their clients more readily and securely; and in addition to this fact, the invest- ing clients themselves feel more secure in their rights when the corporation is organized under the local State laws. The State of West Virginia was the first to offer inducements to foreign corporations in the way of 38 WHEKE TO ORGANIZE. reduced incorporation fees and enlarged powers and limited liability. A large number of the modern com- bination organizations were attracted to that State on that account, but after organizing there, the Legis- lature changed the laws, and it was otherwise deemed necessary to leave the State and incorporate else- where, particularly in New Jersey. It must be borne in mind that in nearly all of the States the right to change the General Incorporation Act is reserved by the Legislature, and the advan- tages offered may be diminished or repealed at any time, and the privileges of the corporation curtailed. In addition to this possible objection, most States have recognized the fact that their local capital have sought other States for the purpose of organization only to evade the payment of the local incorporation fees, and to otherwise evade the provisions of the laws of 'the respective States where such corporations in fact intend to operate. To protect themselves, special acts have been passed by most of the States, similar to that now in force in Illinois, which defeats nearly all of the advantages heretofore obtained by organiz- ing in any of the foreign jurisdictions. The present act of Illinois relating to "Foreign Corporations" is given verbatim in the Appendix;* and most of the States have the same or a very simi- * Appendix, page 258. (WHERE TO ORGANIZE. 39 lar statute for the regulation of foreign corporations. For the convenience of prospective incorporators, a synopsis of the Corporation Laws of the States of New Jersey, Delaware, Maine and South Dakota will also be found in the Appendix,! which shows the spe- cial powers, statutory fees and other information desirable for a preliminary understanding and con- sideration of the questions to be taken into account when selecting a State in which to organize. The various statutes of those States deemed most favorable, and above referred to, have numerous minor provisions, presumably for the protection of stockholders and the public generally, which often serve to furnish dissatisfied stockholders with the means of annoying and otherwise interfering with the business of a corporation organized in a foreign juris- diction. It will be seen, by reference to these statutes, that the objects to be obtained, and suggested here, must be taken into consideration, first in this as well as in other questions relating to the organization of a busi- ness corporation ; and the important question to decide is always, What effect will the organization of the par- ticular corporation under the laws of a foreign State have upon its business success ? t Appendix, page 247. 40 WHERE TO ORGANIZE. Whenever the laws, conditions, purposes or plans justify the decision to incorporate in a state other than that in which the parties in interest reside, or where the principal operations are to be conducted, it is of first importance that a proper statutory agent or local representative be chosen to represent the new corpora- tion, both to bring it into existence, and thereafter in qualifying under the laws of the state relating to domicile, such as maintaining a statutory office, acting as local resident agent, director or officer — as the laws may require — for the acceptance of service of legal process, the keeping of certain corporate books or rec- ords, etc., all of which require reliable, competent and permanent attention in order that such new corpora- tion may not suffer loss through unknown, or unneces- sary litigation, statutory fines, etc. Similar important services are necessary when any corporation attempts to comply with the various "Foreign Corporation Acts' ' by establishing local branches in states foreign to that of their creation; and here as before the questions of reliability, experi- ence, facilities to serve, and permanency (rather than economy) should control in the selection of a repre- sentative for the conduct of such foreign affairs. CORPORATE FINANCING Frank's "Science of Organization" etc. CHAPTER II. CORPORATE FINANCING. Capital, Bonds and Stocks. Capitalization of Corporations. Raising of Additional Capital. Transferring of An Established Business to a Corporation. capital, ^ e questions of finance are among Bonds and the most difficult — if not the most im- stocks. portant — with which the organizer of a business corporation has to deal, and like other ques- tions of business policy, they are necessarily governed by the circumstances of the undertaking in hand. It is necessary for a correct understanding of the questions of corporation finance that the distinction between the terms capital stock, shares of stock and capital be understood. At the same time, an under- standing of the nature and peculiar characteristics of stock as property is essential. The difference between the capital stock and capital of a corporation is, that the former constitutes the amount divided into shares or parts at which the in- corporators have limited the issuance of stock — in other words, the amount upon which calls may be made (43) 44 CAPITAL, BONDS AND STOCKS. upon the stockholders and dividends paid; while the capital of a corporation is the proceeds of the sale of this capital stock, and, in addition thereto, all money or property of the corporation acquired from any and all lawful sources. The former amount remains the same until changed by consent of the State, while the latter may vary according to the success of the enter- prise. The term shares of stock means the several parts into which the capital stock is divided, e. g., if the cap- ital stock of a corporation is $100,000, and the denom- ination of the shares is fixed at $100 each, a share of stock represents one one-thousandth interest in the corporation. Then these shares of stock are repre- sented by stock certificates, which may be made out to represent one, or any number of shares of the cap- ital stock, according to the will of the makers of the certificates. The proceeds of the sale of the capital stock — the capital — belongs to the corporation, and the owners of such capital stock have no right to withdraw any part of such proceeds after it is once paid into the treasury; and this is the law, even if all the capital stock is owned and held by one individual. As here- tofore stated, the corporation is a legal entity — a per- son in the eyes of the law — and the stockholders, directors and officers combined do not constitute the CAPITAL, BONDS AND STOCKS. 45 corporation. A stockholder, by reason of his owning stock in a corporation, does not thereby acquire title or right to the profits or surplus of a corporation, until the same has been formally and legally "de- clared' ' by the Board of Directors and formally set apart for the stockholders ; at the same time, a stock- holder has no title or individual interest in, or rights to, the property of a corporation until a dissolution takes place. He cannot even acquire a good title to the property of a corporation by purchasing all of its stock and then abandoning the corporate existence. There are but two general classes of stock in a business corporation which need be here referred to, namely, common and preferred. Many American writers on Corporation Law give other classifications, such as "watered stock" "deferred stock/ 9 "special stock" and "over-issued stock," but they all fall within the above classification, or are of no importance in this connection, except to understand the meaning of the terms employed. "Watered stock" means simply stock that has been issued and not paid for, in money or money's worth, to the extent of the face value of the stock issued; "deferred stock" is in reality a bond under another name; "over-issued stock" — as its name implies — is stock that is issued in excess of that authorized by law, or for which the corporation was originally cap- 46 CAPITAL,, BONDS AND STOCKS. italized; and the term "special stock" is a class of corporate property unknown in any other State but Massachusetts, where it is created and authorized by the laws of the State. Common stock is a general interest in common in the property of a corporation. It is, like all other stock, divided into parts or shares which represent a certain proportionate part of the whole. This class of stock confers equal rights and privileges among all its owners, such as the right to share in the profits of the business; to vote for directors; and upon a disso- lution of the corporation, to share equally with all other stockholders, in the division of the assets, etc. Preferred stock is a special interest and contract combined whereby the corporation agrees to pay its owners a certain specified dividend out of the net profits of the business in advance and in preference to the common stockholders. It may not be amiss to here refer to some of the important differences between preferred and common stock. The former provides for a guaranteed divi- dend out of the net profits, usually the customary rate of interest of the State where the corporation is or- ganized. Such dividends can be made cumulative or non-cumulative; that is, should the net profits for any one year be insufficient to pay the dividend pro- vided for cumulative preferred stock, any unpaid por- CAPITAL, BONDS AND STOCKS. 47 tion of such dividend must be made up and paid out of the profits of any subsequent year, before dividends can be applied to the common stock, or any other class. Common stock has no guaranty of dividends, even if there should be net profits, but is entitled to all of the earnings of the company after the dividend is paid on the preferred stock; and unless the conditions of the preferred stock are such as to prevent, it will pro- rate with the common stock in all dividends that may be earned and declared, after the dividend has been paid on the preferred stock, and an equal amount paid to the holders of the common stock. The conditions upon which preferred stock is issued govern all the rights of its holders, and constitute a contract between the corporation and the holder; and in the absence of a condition to the contrary, preferred stockholders may vote and exercise all the rights of the holders of the common stock. Some of the State statutes do not provide for the issuing of preferred stock, but it has been repeatedly held that such stock may, nevertheless, be issued if it is provided for at the time of organization; and such preferred stock may also be issued at any time there- after, with the consent of the holders of all the com- mon stock of the corporation. A Stock Certificate is not necessary to the owner- ship of stock in a corporation. It is merely evidence 48 CAPITAL, BONDS AND STOCKS. of the ownership; the stock exists independently of the certificate itself. Shares of stock are a peculiar species of property. They are intangible, and resemble what is termed in law a chose in action — that is, a right or claim which can be reduced to writing and enforced in a court of law. Shares of stock are, in the absence of a statute ex- pressly authorizing the same, not subject to levy and sale upon execution, like other personal property; however, most of the States have enacted laws whereby such levy may be made. It is necessary to follow such statutes strictly in order to divest the record holder of stock of his title by attachment; and it has been decided that attempting to reach the interest of a stockholder by garnisheeing the corporation is in- effectual, which demonstrates the principle above stated that this species of property is somewhat pe- culiar, and differs from a claim for money or prop- erty, in that particular at least. Then, in addition, shares of stock possess many features of negotiability. For instance, by simply indorsing the certificate in blank, stock may be trans- ferred from one individual to another by delivery of the certificate, and the right to insert the name of any intermediate or ultimate owner, and to have the stock transferred to such owner, upon the books of the com- CAPITAL,, BONDS AND STOCKS. 49 Dany, passes with the certificate indorsed in that way — rtiich enables the possessor of this species of property readily use the same as security for financial accom- odation. Bonds are formal obligations executed by a corpora- tion and usually secured by trust deed upon the plant or assets of the company. They are ordinarily issued in denominations of a size that will enable the corpora- tion to negotiate a large loan among a number of investors, and to secure alike any number of holders of such obligations. The terms of payment and security of bonds are wholly dependent upon the will of the corporation creating them. The usual object of issuing this form of obligation is to obtain what is termed a "permanent loan," or financial accommodation for a long time, and upon a low rate of interest, in order that the same may be used for the advancement of the business, and to be repaid out of the profits of the enterprise. It is customary to make such obligations payable to the bearer ; and when this is done, they are suscept- ible of being transmitted from one person to another without formality of any kind. The law presumes ownership with their possession, when made in that way. The conditions of a trust deed made to secure such bonds, as well as the terms of the bonds themselves, 50 CAPITAL, BONDS AND STOCKS. may be made to facilitate or hinder their sale ; conse- quently great care is necessary in the preparation of both. Bonds may be drawn so as to be convertible into stock, at the option of the holder, and in this way facilitate their sale, by enabling the owner to practi- cally invest in the enterprise, and in case of success, to convert his bond holdings into stock. And on the other hand, if the venture proves less profitable as an investment than the interest guaranteed by the bonds, the holder is secured, and can ultimately recover his investment, with interest. Bonds may also be issued in payment of dividends ; by so doing, the amount of the dividend may be re- tained in the business for development purposes, and the* stockholders will have received what is equivalent to the dividend as well. The foregoing simply explains the latitude and some of the advantages afforded the creator of bonds and stocks. The terms that may be incorporated in stock certificates and industrial bonds are always a subject of contract between the corporation and the purchaser; such terms are limited only by general rules of law and business expediency. The term debenture is often used interchangeably with, or substituted for, the word bond. While the meaning of the term debenture is, strictly speaking, CAPITALIZATION OF CORPORATIONS. 51 debt, and unsecured ; but common usage has established many qualifications to the word bond, and they are ap- proved in the world of finance, and their meaning and significance understood. capitaiiza- -^ * s comparatively a simple matter to tion of cor- determine the questions relating to capi- porations. talization where the number of parties in interest are few, or in a case where the business to be capitalized is what is termed a " close corpora- tion.' ' In such cases the objects to be accomplished are usually confined to the conduct of a single business venture for the benefit of a limited number of per- sons, and the questions that arise under other, and ordinary circumstances, are absent. It is, therefore, unnecessary to discuss the capitalization of such a corporation as is here alluded to, for it is presumed that no outside assistance or interest will be desired. It is where the rights of the parties are to be con- sidered at the time of organization — in order that they may be protected under present conditions and future business developments, and that the needs of a business may be provided for at the time of organi- zation, as well as in the future — that this subject re- quires special attention. 52 CAPITALIZATION OF COEPOEATIONS. A business with a good foundation and prospects may be greatly handicapped, and its opportunities for successful promotion be "killed," by over-capitaliza- tion. For example, A had a valuable patented device that was, in itself, the foundation for a success- ful business venture. He formed a corporation and capitalized it at $2,000,000, when as a matter of fact, $100,000 was all the working capital which was neces- sary for the successful conduct of the business. By manipulations, hereinafter more fully explained, the business was so arranged as to offer this stock at a ridiculous figure (below par, of course), with the result that after disposing of a certain amount of this stock — enough to get the business thoroughly en- tangled, and to demonstrate that such a plan was not feasible, and that sufficient money could not be raised thereby to exploit the device and promote the busi- ness — it became necessary to reorganize the company, and to re-capitalize it at a reasonable amount, before the business could be financed sufficiently to dem- onstrate the earning capacity of the device. Numerous other cases illustrating the principle above set forth could be given, but they are of such frequent occurrence as to be familiar to everyone who has had experience in business organization. At the same time, the capitalization of a business corporation at an amount less than the immediate or CAPITALIZATION OF CORPORATIONS. 53 future prospective requirements of the business will admit, may, and usually does, furnish an occasion for reorganization. "What may be considered suffi- cient capital for present needs may prove wholly in- adequate after the business has been developed, and unless this contingency has been taken into account at the time of organization the providing of addi- tional capital is always a difficult question; for the rights of the stockholders will have accrued in the meantime, and their consent to such an object may be necessary and difficult to obtain. Under the laws of Illinois (and most other States) it is necessary to obtain the consent of stockholders owning two-thirds of the capital stock before an in- crease of the same can be legally . accomplished ; and unless the amount of capitalization at the time of organization is sufficient to provide for the future needs of a business the absence of this consent may defeat the raising of such needed capital, in that way. There is, of course, no arbitrary or settled rule for fixing the amount of capitalization of a business cor- poration, but the effectual and conservative rule usually adopted for the guidance of incorporators is that the demonstrated or reasonably prospective earn- ing capacity of a business should control in fixing the amount. If the question arises in the reorganization of a going business, its past record and reasonable 54 CAPITALIZATION OF CORPORATIONS. future prospects based thereon, are legitimate sub- jects for consideration and guidance in fixing the capitalization. As an illustration: Where a business has shown a net profit of 15% on the capital employed, it would not be out of proportion to capitalize a cor- poration, which was to operate such a business in the future, at three times the amount formerly invested therein. On the other hand, if the proposition under consideration is a wholly new business venture, its present and conservatively estimated future prospects should form the basis of capitalization; and these prospects may be arrived at by various methods usually known to those experienced in the particular line of business under consideration. There are usually but two important considerations in fixing the capitalization of a corporation, and they are, first, to enable the company to obtain working capital; and second, to protect the rights of the pres- ent parties in interest. In accomplishing the former, due regard should be entertained for the opinions and judgment of those who may be invited to invest in the undertaking. The manner of capitalizing a corporation, that is in fixing the classification of stock to be issued— whether preferred or common, or both — is also im- portant, and this should be done at the time of organization, as far as possible, for reasons already alluded to. CAPITALIZATION OF CORPORATIONS. 55 In the reorganization of a corporation or business it is frequently desirable that the former owners of le business should continue to be interested in the iterprise, by accepting stocks or bonds, or both, in payment for their interest conveyed to the corpora- ion. This may be accomplished by issuing preferred stock to cover all the interest of such persons, or to 5 sue bonds to cover the conservative value of the mgible property, and common stock in payment of the Good Will and other intangible assets conveyed. If, on the other hand, it is the desire of those interested to ultimately dispose of their holdings entirely (in other words, to incorporate for the purpose of dis- posing of their business), this may be accomplished through the bond issue, or by the issuing of preferred stock which is preferred as to the assets as well as to profits; for they are both more likely to find a ready sale than common stock, particularly while the enter- prise is in its infancy. The question of whether the interest conveyed shall be paid in preferred stock or bonds is simply one of expediency; in either event, the party interested is protected. The principal and controlling difference between preferred stock (such as is here suggested) and bonds secured by a trust deed on the plant of an established business, is that the bonds secure the holder ahead of subsequent creditors and guarantee 56 CAPITALIZATION OF COKPORATIONS. the payment of a certain rate of interest, while the preferred stock does not insure a dividend unless it is earned, and is not a lien on the assets; and with these differences, they may be considered as of equal value and security. If the business management and conditions justify the accepting of preferred stock of this character, it is frequently desirable to do so in preference to issuing bonds ; for with such preferred stock there is no indebtedness against the business to injure its credit and prospects, which would be the case if a bond issue was adopted. The capitalization of a new venture without a nucleus or established business as a basis, and where the organizers depend upon the sale of stock for work- ing capital, presents more difficulties. Ordinarily, there are a number of persons interested in such undertaking at the time of organization who propose to contribute a certain amount toward its promotion and establishment but expect to raise the majority of the capital by the sale of stock. Where such a condition exists, it is advisable to have both preferred and common stock, the proportion of which must depend upon the circumstances of the particular case in hand. An approved and dem- onstrated plan, however, is to have the stock divided equally; that is, one-half preferred and one-half com- mon, and to capitalize the corporation at an amount CAPITALIZATION OF CORPORATIONS. 57 sufficient to make the proceeds from the sale of the ^referred stock furnish the immediate working capi- tal, and to leave the common stock for sale for future levelopment purposes, after its earning capacity has )een demonstrated; or if it is feasible to do so, have le preferred stock cumulative as to dividends, and referred as to assets, and to sell as near as possible equal proportion of each class of stock at the out- set. In this way, the investor is insured a dividend m one-half his investment, if the business earns snough to pay it ; and in the event of a dissolution or failure, he would be protected ahead of common stock- lolders in the same proportion. Then enough of this preferred stock would be retained to aid the sale of the common stock, should the business require it. There are numbers of circumstances which permit of the issuing of all common stock, particularly among the smaller undertakings, and of course this is to be recommended whenever the conditions will justify such a course — that is, when the capital necessary for the needs of the business can be as readily obtained in that way. After the amount and manner of capitalization of a business corporation has been determined there still remain for consideration the terms and manner of payment of the stock sold or subscribed for. The statutes of most of the States provide for a 58 CAPITALIZATION OF CORPORATIONS. certain mininmm amount with which a corporation may begin business, and this, of course, must be paid in at the time of organization. In the absence of a statute to the contrary, the payment for all stock in a corporation is a fit subject of contract (as between the subscriber and corporation), and in the absence of any contract such payment is subject to call of the Board of Directors. In a case where it is necessary to sell stock to be paid for in installments, or to sell stock in small blocks or installments, the approved method for accomplish- ing this purpose is to issue an "installment certifi- cate' 9 or contract for the ultimate delivery of the reg- ular stock certificate upon complete payment, or when a certain number of shares shall have been paid for, etc. Where it is necessary to adopt such methods for the raising of capital, it is usually advisable to issue such contracts in lieu of stock, and to have their terms provide for the delivery of the regular stock certifi- cates upon a certain specified date, far enough in the future to insure the sale of all stock which it is con- templated will be sold, or which it is deemed necessary to sell, in that way. For, if the regular stock certifi- cates are delivered as the stock is sold, circumstances may make it necessary or profitable for the purchasers to dispose of some or all of their stock before the com- pany's unissued stock is sold, and in this way create CAPITALIZATION OF CORPORATIONS. 59 a competition between such stockholders and the cor- poration, and, in consequence, demoralize the market and hinder the sale of the balance of the company's stock. Such a certificate as is here alluded to must be drawn with special reference to each particular state of facts. An approved general form illustrating the application of the plan here referred to will be found in the Appendix.* Kecurring to the subject of bonds : Their terms and conditions, and the terms and conditions of the trust deed made for their security, are matters of impor- tance from a practical standpoint, both to the corpora- tion issuing them and to the prospective purchaser in the open market. While it is necessary that these provisions should be all that is reasonably required for the protection of the investor, care should be exercised in making their terms to suit the convenience and possible contingen- cies of the business of the corporation; as an exam- ple, in the terms of their payment it may be provided that any of a certain series of bonds may be retired by the corporation upon giving reasonable notice to that effect upon any annual interest day, and by pay- ing a certain reasonable amount for the privilege, in the shape of advance interest. In addition, the de- * Appendix, page 214. 60 RAISING OF ADDITIONAL CAPITAL.. nomination and time of payment should be considered. If it is desired to sell such bonds in a private way, or in a locality wherein the persons interested are known, the making of small denominations may greatly facilitate their sale among small investors; and the time of payment should be placed at a conserv- ative distance in the future to insure the ability of the company to repay the principal when due. It is often advisable and necessary that the stocks and bonds of a corporation should be listed with the local Stock Exchange, in order that they may have a market among investors in securities, who naturally look to such a source for information concerning the value and regularity of the issue offered for sale. Such Exchanges have rules for the protection of their members and the public which must be complied with; a copy of that portion of the By-Laws of the Chicago Stock Exchange is given in the Appendix,* and the conditions there imposed are similar in all respects to those of such Exchanges in other cities. Raising If the corporation is legally formed of Additional w ith due consideration for its possible capital. future developments and financial needs, and the business has been legitimately and success- * Page 245. fully conducted, and its books and records accurately and systematically kept, the question of raising addi- tional capital is comparatively a simple one, and its acquirement is based primarily upon the financial re- sponsibility and business prospects of such an enter- prise. Conditions that influence sales of stocks and bonds are often created at the time of the organization of the corporation creating them. It is when some or all of the foregoing features are lacking that difficulties are encountered and failures occur, where the business itself would otherwise justify a different result. And, it might be added, that the majority of failures are, in some measure at least, due to the fact that the proper attention has not been given to some practical ques- tion concerning the organization, or other essential matters, at the inception of the undertaking. When the corporation is confronted with embar- rassing questions of finance, the defects, if any, in its formation or subsequent conduct " stand out in bold relief," and often make it quite impossible to accom- plish the result desired, without a reorganization.* Capital is a power well known to the average pos- sessor, and it is necessary to take this fact into con- sideration when it is sought after ; then, the viewpoint of the man with money must also be taken into account. ♦See "Reorganization," page 115. 62 BAISING OF ADDITIONAL CAPITAL. While there are many selfish and grasping persons, the average business man looking for a business oppor- tunity is fair and reasonable from his point of view; and if that can be ascertained, and his requirements fulfilled, the matter of interesting him in a business is simplified. The business corporations which are ordinarily seeking capital might properly be included within the following three general classifications, and they will therefore be here adopted, and considered in their order, namely: First: The new undertaking which has passed through the experimental period (which is usually the first year), and finds itself without sufficient capital to accomplish the original objects. Second: The established business which has been built up by a firm or individual, and transferred to a corporation, but for some reason the capital at its disposal proves insufficient. Third: The business with visionary plans, and whose objects are impractical, desiring to obtain capi- tal for its conduct or continued operation. In considering the first class of enterprises named it will be assumed that all necessary and proper steps have been taken in the organization, and that the business itself is of recognized merit. It is also here assumed that no mistakes had been made, either in RAISING OF ADDITIONAL CAPITAL.. 63 the domicil, amount of capitalization, or other practi- cal features, and also, that the business itself shows a fair and reasonable prospect for ultimate success. In this case, as in all others, the particular circum- stances must govern ; but generally the increasing of the capital stock of such a company is the most satisfac- tory method to acquire additional capital, particularly from a financial standpoint. Of course, the sale of such stock is necessary, and if the business will admit of additional executive assistance, the inducement to an investor of filling an office of responsibility — with reasonable compensation — is always a great help and an important element in effecting such a sale. The sale of a large issue of stock is always difficult, unless the corporation is well known, in the hands of recognized dealers in the line of business, or its stock is listed on the local Stock Exchange. The issuance of bonds or preferred stock with a common stock bonus, is always to be discouraged from a business standpoint, if from no other; and the con- servative man of money is rarely, if ever, influenced thereby. Many of the questions here presented have been already considered in determining the capitalization of a new corporation — under the preceding heading — and therefore need not be repeated; the general prin- ciples there announced will be found useful in the solu- 64 RAISING OF ADDITIONAL. CAPITAL. tion of questions of finance whenever a business falling within this classification requires financial assistance. The next class of business corporations seeking cap- ital, and referred to above, are not as numerous as the first. For, assuming that no mistakes have been made in the essential features of reorganization and that the business is established, little difficulty should be met in raising any reasonable amount of necessary capital consistent with the security to be given. Here we are also confronted with the peculiar, im- portant circumstances which surround every case of this character. Generally such a business has assets of a permanent nature — often a plant which would readily be accepted as ample security for a bond issue sufficient to provide the necessary working capital; and where this can be done to advantage, it is well to be considered, as such bonds usually are salable at par, and bear a low rate of interest and can be made to mature far enough in the future to make such a plan advisable from every standpoint. Then the question of changing location is to be con- sidered here, as it is in the class of companies first above named; numerous outlying towns and localities desire additional manufacturing industries, and they are frequently prepared to provide locations and financial assistance, either in the form of a bonus, or by subscribing for a certain amount of additional RAISING OF ADDITIONAL CAPITAL. 65 capital stock. These opportunities may be investi- gated, and reliable information obtained by consult- ing the Industrial Agents of the various railroads, whose business it is to give assistance in such mat- ters, both to the industry seeking a location and to the town in procuring the enterprise desired. The third class of enterprises named comprise the majority of the seekers after capital, and this fact alone makes it more difficult for the legitimate and worthy enterprises to secure such assistance. Manifestly, the greatest benefit to all persons in- terested in such a company would be to wind up its affairs as speedily and economically as possible; but it is safe to predict that few readers of this book will ever concede that their undertakings or business ven- tures fall within the lines here drawn. It is surprising, however, to know the large per- centage of enterprises struggling to keep alive and going which in reality may be fairly considered within this class. It is not infrequent, however, for the lawyer to be called upon to scrutinize the affairs of such enter- prises, and he should be qualified and ready to advise his client, not alone upon the legal status of affairs but upon the general aspect of the business and its pros- pects. This he may do by simply investigating along lines that are well defined and demonstrated by ex- 66 RAISING OF ADDITIONAL CAPITAL. perience. For instance, a company that to all intents and purposes has "stock-jobbing"* for its principal object should be avoided and condemned; a company organized for the purpose of conducting some specu- lative venture at a great distance is suspicious ; a busi- ness with vast natural resources wanting "a small amount of money for development purposes," which should readily be obtained upon the company's alleged assets, is usually a fraud; the company that has been incorporated without an established business for a nucleus, and is dependent upon the sale of its stock for working capital, and which has sold a portion of its stock to a number of small investors, the proceeds received from such sale being insufficient to dem- onstrate the success of the business contemplated, or to materially advance it beyond the organization or ex- perimental period, is, as a rule, of doubtful prospects — and so on. In fact the earmarks of unworthiness are as appar- ent in a business enterprise as elsewhere, and are dis- cernible by proper investigation, and knowledge of the affairs investigated. No one is justified in undertaking a business venture without at least the moderate capital usually required to carry it on (or the means of raising such capital), and trusting to financial accommodations and credit ♦See "Stock-Jobbing," page 129. RAISING OF ADDITIONAL CAPITAL. 67 or success. It is undoubtedly true that no one who as tried to establish a business without a suitable pital, even if he has succeeded, would advise another o attempt to do likewise ; for it involves an amount of ety, labor, embarrassment and hazard which is pleasant to reflect upon. To do business altogether >n credit requires a fortunate combination of circum- tances to make it successful that no prudent man ould predict. It might be said with propriety that the universal law of trade is that the enterprise which attempts to conduct its business upon borrowed capital alone must sooner or later fail — that is, where the company at- tempts to conduct its business upon financial accom- modations secured from regular sources, such as bank- ing houses, brokers, etc., upon trade paper. At the same time, a company may do a large increased volume of business upon such accommodations ; in fact, a large Chicago corporation practically conducts the principal volume of its business upon funds secured in that way, and loans its own capital through banking and regular financial channels, upon a higher rate of interest than it is required to pay for its own accom- modation. But it is not such a corporation as the ordinary business enterprise could safely imitate; its securities or trade paper could be converted into 68 RAISING OF ADDITIONAL CAPITAL. money at any time and under any circumstances, with- out difficulty. There is a tendency among aggressive business men to "mortgage the future," so to speak, and this with- out regard to repayment. The securing of judicious, long-time loans upon a bond issue where the busi- ness requires additional capital, is not alone a saving in the rate of interest but renders the undertaking less hazardous, and more convenient and certain of pay- ment out of the profits that may be safely estimated; besides, the bonds of a staple business concern, with tangible assets, are invariably in good favor with in- vestors. The practical questions concerning the issu- ing of such bonds and preferred stock as well, have already been considered.* In regard to the extent to which the credit of a business enterprise may safely be extended — that is, the proportion which the capital of an enterprise should bear to its liabilities — necessarily varies with conditions. It has been stated, however, by eminent and experienced financiers that a man should not ex- tend his business more than three times the amount of his capital under the most favorable circumstances, and if it be a large business, not more than twice his capital. We have already alluded to what has proven to be ♦See "Capital, Bonds and Stocks," also "Capitalization of Corporations." TRANSFERRING AN ESTABLISHED BUSINESS, 69 a very satisfactory method for the raising of addi- tional capital, under ordinary circumstances, and that is by the issuance of bonds, drawing a reasonable rate of interest, that may be convertible into stock within a certain given period, at the option of the holder. This enables the purchaser of such bonds to avail him- self of the privilege of becoming a stockholder at any time within the period provided in such bonds, should he so elect, after the business has demonstrated its merit, and the enterprise is thereby provided with the necessary additional capital, which it can repay out of the profits. Many business men will readily invest in such bonds, with the privilege of changing the form of investment after the business is established, who would not in the first instance purchase stock. The topic of this section has fur- Tin \ n n i s ^ e d the material for much of the un- Estabiished favorable criticism which has been made Business to upon the corporate plan and abuses of a corpora- ^ cor p 0ra t e system; and this is made Hon. . the subject of a separate discussion un- der appropriate headings.* At the same time, some ♦See "Consolidation of Enterprises" and "Stock- Jobbing." 70 TKANSFEKRING AN ESTABLISHED BUSINESS. of the legitimate advantages offered through the con- summation of transactions of this character have already been pointed ont.f In the preceding pages we have necessarily dis- cussed many of the important questions pertaining to, and which invariably arise in the transferring of an established business to a corporation. Those hereto- fore discussed have had to do with the advance finan- cial arrangements and objects to be accomplished rather than to the subsequent rights of the parties to be protected. In the following pages particular atten- tion is given to the substantial benefits to be derived from the corporate plan of conducting business, as well as the rights of the parties interested therein. It is through transactions of this character that advantages are obtained by the owners of a business, such as the preservation of the good will, facilitating the sale of a part or the whole of the business, and the obtaining of an advantageous price for the business transferred, etc. The opportunity last referred to is frequently abused; that is, the valuation placed upon a business about to be transferred to a corporation is inflated, and the question frequently occurs "to what extent may a business or property be over- valued without rendering the parties in interest liable therefor?" tSee "The Corporation and Its Advantages." TRANSFERRING AN ESTABLISHED BUSINESS. 71 This question has been the subject of much litiga- tion, and different courts have taken different views thereon. Without attempting to enumerate the rules announced in the various decisions, the most favored rule, and the one to be everywhere regarded as safe, reliable and sound, is that if the directors act in good faith, and the property transferred has a substantial value, and there is no fraud connected with the trans- fer, their valuation is final, even if excessive. A different rule, however, obtains in some of the States, where the statutes make the action of the Board of Directors in relation to such matters final in the absence of actual fraud. This rule obtains in Dela- ware, Maine, New Jersey and New York ; and in some States, where mines and mining is the chief subject of corporate organizations, this rule is recognized either by statute or by the courts to encourage de- velopment of the States mining resources. More latitude is everywhere allowed in the valua- tion of what are known as speculative assets than where the property is staple and easily valued ; and in every case the question of what the property is worth to the corporation, rather than what it is worth to the individuals selling, will govern. A business that has been established by an individ- ual or an association of individuals under a firm name, usually possesses a valuable property right in the 72 TRANSFERRING AN ESTABLISHED BUSINESS. name itself — which is in reality the subject-matter of the good will. While the good will of a firm, or individual doing business alone, may be the subject of transfer and sale, and therefore valued and conveyed, still it is never possible to utilize and protect this form of property, or obtain its full value, except by trans- ferring the same to a corporation. The reason of this is that while the trade name may be thoroughly estab- lished and the means of influencing trade, it is, in a measure, perishable, and loses much of its value once the individuals who have created it are known to be no longer its owners; while if it is transferred to a corporation organized by the same persons who es- tablished the name, it becomes permanently associated with the corporation and with the other advantages that accrue to the trade name of a corporation (that are not possible to an individual) it thereby derives a permanency and utility that cannot be lost. It is these and other considerations which justify the adequate valuation of the immaterial assets of a firm or co-partnership when transferring the same to a corporation for the ultimate purpose of effecting an advantageous sale — enlargement or permanent estab- lishment of a business. There is much of the "personal relation" existing between the proprietor of a business conducted by an individual or co-partnership and the patrons thereof TRANSFERRING AN ESTABLISHED BUSINESS. 73 that has its advantages, and in some degree at least — and in certain forms of enterprises — may argue in favor of the personal as against the impersonal, i. e., corporation relation ; but the details of the business of a corporation can and should be so organized as to overcome this objection — that is, by creating personal responsibility, if not a personal interest, for depart- ment heads in the various important departments of the corporation, and in that way retain the personal interest and responsibility so essential to the welfare of every business conducted upon the competitive sys- tem. As to the approved manner of transferring assets of an established business to a corporation for money, bonds or in payment for its stock: If the business is to be valued and purchased from an inventory, where the property conveyed is itemized, the resolution of the Board of Directors taking over or purchasing such property should recite that the property had been itemized and valued at the aggregate sum of whatever is to be paid for the business conveyed; and the inven- tory may, with propriety, be copied and made a part of the bill of sale. If, on the other hand, the business is purchased in bulk — or the amount of property esti- mated — then the resolution of the Board should recite that the property had been appraised in bulk and val- 74 TBANSFEBBING AN ESTABLISHED BUSINESS. ued by the Directors at the total amount to be paid therefor. It is essential that all due formality should be ob- served in the purchase and transfer of assets to a cor- poration in payment for its stock or otherwise, and where it is feasible, the proposition to sell should be made to the corporation by formal writing. This will enable the officers to make proper investigation of the business offered, and at the same time the written proposition will form the basis of an appropriate reso- lution of purchase and a complete contract of sale when accepted. If there is real estate involved in the transfer, naturally the title will be carefully examined by com- petent legal counsel, before passing upon the proposi- tion to purchase; and in such cases the resolution should recite that such examination had been made and the title found merchantable or otherwise, and that the proper conveyance or title deed had been exe- cuted by the owner or owners and tendered to the cor- poration at the time of the proposed formal acceptance of the offer by the Board of Directors. In the Appendix hereto, will be found a general form of resolution which, according to the facts there assumed, purports to purchase and take over — through the commissioners appointed by the Secretary of State TEANSFEBRING AN ESTABLISHED BUSINESS. 75 of Illinois — from a corporation that is in the process of reorganization, an established business in payment for stock subscribed for by the reorganizer mentioned in the Eeorganization Certificate shown.* The reso- lution there given will suggest the method, and also the form of resolution applicable for the purchase of any established business by a corporation except that in the case there assumed no written proposition was made or necessary, on account of the fact that the purchasing company was incorporated for the express purpose of operating the business purchased, and the directors are assumed to be all the stockholders as well, and all present and acquiesce in the terms of pur- chase and sale. In such a case, the peculiar facts there assumed (for the purpose of illustrating an approved plan of effecting a reorganization which will be fur- ther explained under a subsequent heading), dispense with such written proposition. In every case where a business is transferred from one or more of the directors, or parties in interest, to the corporation, it is always advisable to have the formal consent of the stockholders to such a purchase ; and this may be done by convening a special meeting of the stockholders for that purpose, and submitting the question of purchase to a vote, and having the j *See form, page 209. 76 TRANSFERRING AN ESTABLISHED BUSINESS. action of the stockholders in that regard, a matter of record. Such a resolution would simply recite the facts, and authorize and direct the Board of Directors to consummate the transaction and purchase the busi- ness at a given price, or at the best price obtainable. And, it might be added, that the consent of the stock- holders to the acquiring of a separate business, or to the transaction of any unusual important business, is always to be recommended. Particularly is this ad- visable where the stockholders are few, or the cor- poration small. In acquiring property a business corporation usu- ally stands in the same position as that of an indi- vidual, and all the important questions that would con- cern a natural person relating to title, incumbrances, right to transfer, etc., are necessarily present ; so when a going business is acquired by one corporation from another it is necessary to see that all formalities are observed by the selling corporation as well, and that lawful authority is obtained to make such sale. At common law the sale of a going solvent and pros- perous business could not be effected without the unan- imous consent of all stockholders of such corpora- tion; however, the statutes of the various states fur- nish authority for such transfers, but require the con- sent of a majority of the capital stock issued, usually two-thirds. If, however, the selling corporation is in- solvent or in a failing condition, or unable to succeed in its undertaking, a recital of such facts in the resolu- tion of sale will usually authorize a sale of all the com- pany's assets by the Board of Directors alone. CORPORATE MANAGEMENT Frank's "Science of Organization" etc. CHAPTER ni. CORPORATE MANAGEMENT. Directors, Officers — Their Duties and Liabilities. Stockholders' Rights and Liabilities. By-Laws and Their Uses. Corporate Records and Books of Account. Examination of Books and Records. _, The duties and liabilities of a director Directo r s and officers. °f a business corporation are co-exten- Tneir Duties sive — that is, his powers and authority and Liabil- Qn ^ e one ^^ are f sue } 1 a nature ities. that they lead to a corresponding re- sponsibility both to the corporation and its creditors. As has been heretofore shown, the authority to bind the corporation emanates from the Board of Directors; and in consequence, the officers are responsible to them. The officers are chosen by the Board of Direct- ors, and, unless restricted by the by-laws, they may be removed by the Board for sufficient cause; and if the by-laws so provide, any officer may be removed at the pleasure of the Board. Directors cannot, however, act individually; they must do so as a body. That is, no legislation on be- (79) 80 DIRECTORS, OFFICERS — DUTIES AND LIABILITIES. half of the corporation can be enacted except by the Board in meeting assembled, and the will of the Board when thus indicated, is to be carried into effect by the officers of the corporation. The peculiar characteristics of a corporation often renders notice to a director or officer also notice to the corporation; and this is important in relation to the conduct of all corporate business; such notice simply means information. In order to charge a corporation with such notice, however, the directors or officers must be shown to be acting for the corporation at the time the notice is received, and also that the employment of the director or officer concerns the subject-matter of the notice; in other words, the director or officer must be then engaged for the corporation in such a way as to ren- der the notice appropriate to his office or employ- ment. Notice to a Board of Directors while assembled, and such notice to one of them, who afterward com- municates the same to the Board in session, is suffi- cient notice to the corporation in any event. Under the common law, directors are liable for issu- ing stock as fully paid, when in fact the same is not so. They are also liable for the payment of dividends out of the capital stock of the company, and for any ultra vires acts and fraud generally, as well as for DIRECTORS, OFFICERS DUTIES AND LIABILITIES. 81 egligence which results in a loss to the corporation, other words, they are responsible for many acts of »mission, as well as commission. Under the statutes of the various States they have further liability imposed, whereby they are held to e responsibility of a trustee under certain circum- ances. They are always trustees for the creditors a corporation, and also in certain dealings in rela- ion to the property of it. The question of their deal- ing directly with the corporation is frequently the sub- ject of litigation, and they are invariably held to a strict rule of conduct in such matters. A business corporation has no power or authority to loan money, except it be to further the ends of its business; hence it could not lawfully do so to a di- rector. And the rule that one cannot properly oc- cupy the dual position of buyer and seller is particu- larly applicable to directors of such companies — to the extent that any secret advantage thus acquired may be recovered from such directors. At the same time, ! they may not abuse any information acquired as a director, or obtain secret advantages therefrom to the detriment of the company. A safe rule for the director to adopt is to act in all things pertaining to his office and the company of which he is such a director in the same way as he would act if the business transacted for the corpora- tion was his own exclusively. 82 DIRECTORS, OFFICERS — DUTIES AND LIABILITIES. A director is not disqualified to act in any official capacity for his corporation on account of his being a director. In fact, it is usual for directors to be also the officers of the corporation. Particularly is this true in small or medium-sized companies. It is always necessary that there should be a Presi- dent and Secretary in every business corporation, and it is usual and necessary under the laws of some States (e. g. } Illinois) to have a Treasurer, as well. The number of officers that a company may have is only limited by the will of the Board of Directors. It is frequently provided by the by-laws that cer- tain officers of the corporation should also be direct- ors, and this is proper and convenient; for, if they are directors as well as officers, they are at all times conversant with the consensus of opinion of the Board in relation to its policy, and upon all matters pertain- ing to the business. The powers and duties of the officers of a corpora- tion depend entirely upon the provisions of the by- laws, and the delegating of such powers, and the classification and the stating of the duties of the various officers is a subject that should receive special attention at the time of the organization of every cor- poration. By properly defining the powers and responsibilities of each officer the best possible results are obtained, DIRECTORS, OFFICERS — DUTIES AND LIABILITIES. 83 d each officer has a certain clearly-defined responsi- bility; besides, any possibility of controversy over con- flicting authority is thereby averted. The compensation of both directors and officers is a proper question for the directors themselves; it is a proper subject of resolution by the Board of Direct- ors, enacted and recorded on the records of the cor- poration prior to the performance of the service in question, and unless abused, the action of the directors in this regard is final. Directors are not entitled to compensation unless it is expressly provided that they shall receive pay for their services; and a salary voted to a director after the services have been performed is voidable by the stockholders. Directors are usually vitally inter- ested in the corporate enterprise, and their election as directors is usually due to that fact. A director who performs extra services, outside of his duties as a director, however, may be entitled to compensation therefor. The established rule concerning compensation of i directors is that authority for its payment must be obtained without fraud, either actual or constructive, and that the amount thereof must be reasonable for the services performed. A salary paid to directors under certain circum- stances, e. g., when the corporation is insolvent or 84 DIKECTOKS, OFFICEKS DUTIES AND LIABILITIES. financially embarrassed, or where the amount is excessive or paid out of the capital of the corporation to the detriment of the stockholders, may be recovered from the directors by an appropriate proceeding. Another familiar principle concerning compensation of directors and officers alike is that where the salary is authorized by the vote of the party receiving it — that is, if his vote is necessary to its creation — such compensation is illegal. At the same time proper and adequate compensation may be voted directors and officers, and the amount of such compensation must be governed by the circumstances of the particu- lar case. There is a growing disposition among legislators generally to increase the visitorial power of the State over corporations, and to this end require cer- tain reports to be made by officers periodically con- cerning their affairs, such as the furnishing of names and addresses of all directors and officers; whether the corporation is availing itself of the privileges con- ferred by its charter; the amount of the capital stock paid in since its organization, etc., and providing cer- tain penalties and responsibilities for such officers for the failure to comply therewith. In addition to such penalties imposed by the State, an officer may be held liable to the corporation for any injury resulting from his negligence or failure to comply with such laws; DIRECTORS, OFFICERS DUTIES AND LIABILITIES. 85 and generally an officer may be held liable to the cor- poration for all negligence or fraud. Nearly all the States now have special laws regulat- ing foreign corporations; that is, where corporations organize in one State and undertake to do business in another, in the latter State they are regarded as "for- eign corporations." The special acts of the various States in relation to such foreign corporations are far- reaching in their effect, as will be seen upon reference to the copy of such Act now in force in the State of Illinois, given in the Appendix.* It will be observed that in Illinois a foreign corporation is obliged to com- ply with the act referred to, before doing business in the State. What constitutes "doing business" means the establishment of a local agency or branch for the carrying on of the business ; in which event, it is neces- sary to designate some person upon whom service of process can be had in case of litigation, and to other- wise comply with such act. Upon the failure of such foreign corporations to comply with the terms of such local laws, no contract can be enforced by it in the foreign State; and it has been held in Illinois that subsequent compliance with such provision of the law will not entitle such foreign corporations to enforce a contract that was made prior to such compliance. * Page 258. 86 stockholders' rights and liabilities. The functions of stockholders in a Stockhold- ers' Rights business corporation are limited; the and Liabii- general and principal rights of the ities# stockholder are (a), to form the cor- poration, or bring it into existence in the first instance ; (b) to elect its Board of Directors from time to time ; (c) to make its by-laws, unless that power is delegated to the directors; (d) to increase or decrease the capital stock; (e) to authorize all amendments to the charter; (f ) to participate in the dividends ; (g) to dissolve the corporation ; (h) to authorize the giving of mortgages, in case the statutes of the State require it; (i) to examine the books and records of the corporation at all reasonable times; (j) to pass upon the necessity or advisability of the sale of the entire business. The liabilities of a stockholder are even less than his rights as such. It might be said, if the corpora- tion is regularly and legally formed, that the stock- holder's liabilities are limited to the unpaid portion — if any — of the stock held by him; and unless the laws of the State under which the corporation is formed are complied with the stockholders are liable in the same manner and to the same extent as partners. In some States the stockholder has a liability in addition to the par value of his stock. This liability is imposed by the statutes of such States. Such liability is strictly construed by the courts where the same STOCKHOLDER ' RIGHTS AND LIABILITIES. 87 exists, and it is now confined to but a few States, and the tendency is to abolish it altogether. In discussing the liabilities of a stockholder, they will be referred to in the order in which they naturally arise — that is, the liability of an original stockholder for any unpaid portion of the stock standing in his name, and in connection therewith, the liability of the transferee of such stock. Most of the States hold the transferee liable jointly with the original subscriber or owner of stock, where the same has not been fully paid for at the time the stock was issued. It has been already shown that stock originally issued upon inadequate consideration, i. e., where property has been fraudulently accepted by the direc- tors in exchange for stock, or where the value of the property has been flagrantly inflated, is not thereby paid for, even as between the corporation and the seller, notwithstanding the stock certificate upon its face purports to be " fully paid and non-assessible." In such cases, the transferee is liable jointly with the transferor (especially to creditors of the corporation) for the differences between the value of the property received by the corporation and the par value of the stock issued therefor. Where the statutes of a State do not make the action of the Board of Directors in this regard final in any 88 stockholders' eights and liabilities. event, the above mentioned rule applies to both the original owner of the stock and any subsequent trans- feree; and the only difficulty in determining the lia- bility of a subsequent stockholder in such a case is to establish sufficient notice to the transferee of unpaid stock, or to determine what circumstances or state of facts will constitute legal notice that the stock accepted by him is not fully paid, when the stock cer- tificate recites on its face that the stock thereby rep- resented is fully paid and non-assessible. The rule laid down in Illinois is that an exchange of property for stock in a corporation must constitute a valid contract of bargain and sale in good faith and by the result of honest judgment of the Board of Directors of the corporation accepting such property, or the person to whom such stock is issued is liable, both to the corporation and its creditors for the dif- ference between the actual value of the property con- veyed and the face or par value of the stock received ; and as to what constitutes constructive notice to a subsequent purchaser of such stock may be illustrated by a leading case in Illinois on that question : A corporation was organized for $1,000,000, and all its stock, excepting two shares, was issued for an interest in a patent. The stock certificates issued for this invention recited on their face that the capital stock represented thereby was " fully paid and non- STOCKHOLDEKS* EIGHTS AND LIABILITIES. 89 assessible." Some of this stock was sold or conveyed to a third party, namely, one who was not originally connected with the organization of the corporation. The corporation in question failed, and the creditors instituted appropriate proceedings for the purpose of holding the assignee of such stock jointly liable with the original owner. In holding that the transferee was liable as con- tended, the Supreme Court of Illinois said: "It is not conceivable that a person of ordinary intelligence and prudence buying shares of stock in such a cor- poration would not become advised as to what prop- erty the corporation had. * * # It is clear that appellees knew that the corporation had no money and no property aside from the patent, and it would not be creditable to them to say that they believed the pat- ent to be worth $999,800.' ' * * # "We regard the proof as establishing the fact of notice to appellees of the transaction and over- valuation. They knew that the corporation did not have a paid-up capital of $1,000,000 and that * * * had not paid for the stock, unless it was given for the patent.' ' Hence it will be seen that not only the original sub- scribers of stock may be liable for any unpaid portion thereof, but that in many cases subsequent owners of such stock may be likewise liable. In the language of the Illinois Supreme Court: "The relation of the 90 STOCKHOLDERS ' RIGHTS AND LIABILITIES. stockholder who has not paid for his stock, to the cor- poration or the creditors, is the ordinary one of debtor." The presumption is that a corporation has, or at some time had, money or property equal in value to the amount of its capital stock, and creditors have a right to presume that such is the case ; hence the issu- ing of stock for less than the par value is ordinarily held to be a fraud upon the law, creditors and sub- sequent purchasers. It is ultra vires of the corpora- tion to issue stock for less than its face value in money, and creditors (and under certain circumstances other stockholders) may insist upon the balance being paid into the treasury. There is a rule, however, that where a corporation has increased its capital stock, and becomes insolvent, it may then issue any portion of such increased stock for the best price obtainable and no one will be liable therein, especially to existing creditors; but such a practice is not to be encouraged, particularly where the rights of subsequent creditors are to be considered. One of the fundamental principles in the law of cor- porations is that the majority may exercise the right to control the corporation's affairs. This right has suggested many opportunities for the perpetration of fraud upon the minority stockholders, and the re- peated instances of such attempts which have come stockholders' rights and liabilities. 91 before the courts of last resort have developed a sys- tem of jurisprudence for the protection of the minority stockholder. Some of the familiar methods of attempting to take advantage of the minority stockholder is for the majority to vote large salaries to themselves, with- hold dividends, incorporate an auxiliary enterprise, and favor such undertaking at the expense of the parent company, and various other devices, which all tend to the same result, namely, the detriment of the minority stockholder. Majority stockholders, through directors who are their tools, often perpetrate such wrongs for their direct benefit. The dummy director is now an old de- vice in the law of corporations, and courts of equity are inclined to look behind all such devices to ascertain the real parties in interest. The language of the United States Supreme Court announces the modern rule in relation to this subject, to-wit: "When a number of stockholders combine to constitute themselves a majority in order to control the corporation as they see fit, they become for all practical purposes the corporation itself, and assume the trust relation occupied by the corporation toward its stockholders. " While courts of equity will interfere for the protec- tion of minority stockholders, they will not undertake 92 stockholders' eights and liabilities. to control the policy or business methods of the cor- poration, so long as they are conducted in good faith, although it may be seen that a wiser policy might be adopted, and the business more successfully conducted if other methods were pursued. It is in cases of fraud, or where some undue advantage is being taken of the minority stockholders, that courts will intervene and afford relief. It is not infrequent that stockholders undertake to make an agreement among themselves whereby cer- tain policies shall be carried out; that is, where cer- tain individuals shall be retained in office, and other- wise attempt to regulate the voting of stock, and in that way control the corporation. Another, and not unusual question, is that of limit- ing the sale of stock either to a class of persons, or to give one another the first opportunity and right to purchase stock which may be offered for sale. All of these objects are difficult to accomplish, for the reason that they are fundamentally against public policy. Any contract which amounts to an unreasonable restraint of trade is illegal — that is, where the contract attempts to perpetually or unreasonably deprive the stockholder of his right to sell or control stock, or his right to vote thereon; but an agreement to place stock in escrow for a reasonable time to accomplish a lawful purpose or to insure the right to purchase such STOCKHOLDERS ' RIGHTS AND LIABILITIES. 93 S'cock at a given price is legal. And a condition in- serted in the body of the stock certificate, regulating the transfer of such stock, either to a class of stock- holders, such as dealers in a given line of trade, or to existing members may be legal. In addition to the foregoing, any lawful object may be accomplished in the regulating of transfers of stock, but as before intimated, the terms employed in accom- plishing such objects must necessarily receive care- ful attention. A stockholder's right to vote upon his stock, either in person or by proxy, is necessarily an important one. In order that the minority stockholder may have repre- sentation in the directory, the laws of most States provide what is termed, "cumulative" voting; e. g. y where the number of directors is five, and the stock- holder votes his shares of stock under the cumulative system, he would have five votes for each share of stock held by him, which he could cast for one director, or divide them among the five, as he may choose. In case a stockholder cannot be present at the meet- ing of the stockholders of his corporation, he may appoint a 'proxy (to represent him), with full power to exercise all the rights of a stockholder ; a proper form of such proxy will be found in the Appendix.* Such proxies may be made for a single meeting or for a ♦Page 243, 94 BY-LAWS AND THEIR USES. given length of time, and until acted upon, they are subject to be revoked at the will of the stockholder. By-Laws ^ e importance of a proper code of and Their by-laws for the government of a cor- uses. poration cannot be overestimated. They are the internal law for the government of the cor- poration itself; the duties and powers of its officers emanate from them, and the rights of the stockholders are often curtailed or enlarged by their provisions. By-laws may not contravene any provision of the charter itself or the laws of the State under which it owes its existence, nor the common law, or be against public policy or the laws of the land, and they may not be inequitable or unjust or unreasonable in their nature. Aside from these limitations they may contain any rule or provisions that the framer may choose to in- corporate therein. It is always wise to include in the by-laws of a new company the well-settled rules of law of the State of its creation, governing its conduct for the guidance of the directors and officers. Frequently it is desired that the duties as well as the authority of each officer should be clearly and minutely defined in order that no conflict between such officers shall occur, and this is BY-LAWS AND THEIR USES. 95 always to be commended where such a course is prac- ticable or feasible, but in small companies it is unwise to burden and handicap the management with unneces- sary rules which would interfere with the conduct of the business itself. Every stockholder and officer is bound by the lawful provisions of the by-laws, and this whether they ever consented to their enactment or ever knew of their existence, but there is a different rule obtaining in regard to the public. The by-laws of a corporation should not affect strangers dealing with the corpora- tion, and the violation of a rule contained in the by-laws will not relieve the corporation from liability to third persons. At the same time, creditors may insist that the provisions of the by-laws shall be enforced, and, of course, the stockholders have the same right Forfeitures, fines and the like can only be enforced through and in accordance with the by-laws, unless there are statutory provisions therefor; and the ques- tion of a stockholder's right to vote may be — within certain lawful limits — regulated thereby. It is impossible to suggest an arbitrary or " stock' f form of by-laws, as the exigencies and peculiar con- ditions of each organization must be taken into account; but the form of by-laws given in the Appendix hereto,* will be found satisfactory, or to contain use- * See page 217. 96 BY-LAWS AND THEIB USES. fill suggestions in the preparation of such by-laws for any ordinary corporation, particularly where it is organized under the laws of Illinois. In the organization of companies under the laws of the various States, the by-laws should be drawn in conformity with such local laws, and invariably re- quire the utmost skill in their preparation. The right to make by-laws is primarily in the stock- holders of the corporation, unless that power is dele- gated to the directors, either by charter provision or statute law of the State where the corporation is created. The tendency of modern legislators is to delegate the power to the directors of the corpora- tion, and where the right to make by-laws is vested in the directors, either by statutes or by the stock- holders themselves, the directors also have the power to amend or repeal the same. The difference between the by-laws of a corpora- tion and its formal resolutions is chiefly the perma- nency of the former. While both are subject to amend- ment or repeal, unless the power to act upon the reso- lution is limited by the by-laws, it is subject at all times to the will of the directors or stockholders, as the case may be. For this reason, it is customary to make the question of compensation of officers a sub- ject of special resolution, and to have such resolution embody the amount of the compensation to be voted, BY-LAWS AND THEIR USES. 97 and to conclude with the phrase "subject to the fur- ther action of this Board." The purpose of this limitation is to make the compensation of an officer wholly subject to the will of the Board of Directors — that is, to leave the power and to facilitate the right to change such compensation as the circumstances may suggest. It is not infrequent that the directors and officers themselves violate or ignore important provisions of the by-laws. Where this has been done, it is well to ratify the acts done contrary to the provisions of the by-laws, where the same are not contrary to the in- terests of the corporation itself. Such ratification may be accomplished by proper resolution adopted by the Board of Directors in meeting assembled. It should be borne in mind that the by-laws of every corporation, as well as all important resolutions of the directors, should be accurately transcribed upon the Minute Book of the corporation, and preserved in this way.* In the case of large corporations it is not infrequent that the by-laws are printed and circu- lated among the members. ♦Under the law of some jurisdictions (South Dakota, for instance), by-laws are not operative until so recorded. 98 CORPORATE RECORDS AND BOOKS OF ACCOUNT, The books of account that are peculiar Corporate x Records and to corporations, and not in use by gen- Books of Ac- eral unincorporated concerns, are few. count. Tliey cons i s t generally of the Minute Book, Stock Certificate Book, Transfer Book and Stock Ledger. Aside from these, it is not unusual for the treasurer to have a Private Ledger in which to keep Controlling Accounts. Besides, it is customary for all modern business corporations to have a more strict and comprehensive System of Accounting, par- ticularly a complete Voucher System, by which an ac- curate and conclusive accounting can be furnished of all departments, and at any and all times, for the bene- fit and information of stockholders. The statutes of a few States of the Union require other corporate books to be kept, known as Books of Publicity, but they are the exception. Perhaps the book that is universally conceded to be first in importance among those peculiar to the cor- poration is its Minute Book— by which is meant the book wherein the acts and proceedings of the corpora- tion itself are recorded, and particularly the acts that require sanction or authority from the Board of Directors; and these include the Eecord of the Adop- tion, as well as a Transcript of the By-Laws and their Amendments. When the corporation is sufficiently large to justify CORPORATE RECORDS AND BOOKS OF ACCOUNT. 99 it, there should be two separate Minute Books, one for the stockholders, and the other for the Board of Di- rectors, in which to record the meetings and proceed- ings of each; and these books should be securely bound. The most approved and convenient plan of keeping the Minute Book of the corporation is to have a Certi- fied Copy of the Charter attached to the first page of this book, or to have the secretary copy the Charter verbatim at the beginning thereof. Then the minutes of the organization meetings should follow in their proper order and dates. The By-Laws should be recorded elsewhere in the . Minute Book, preferably at the back, leaving enough unused pages after their recording to insert any and all amendments that may be made to the By-Laws. After this the minutes of each succeeding meeting should be recorded as they occur, following, of course, the meetings to organize. It is not necessary that the minutes of meetings be I written up at or immediately following the meeting to be recorded, nor is it necessary that the minutes be in the handwriting of the secretary; but it is advisable that the minutes of every meeting should be promptly recorded in order that no errors or omissions may be made, and in every case they should be signed, at least, by the secretary. Care should invariably be taken to preserve all I 100 COEPOKATE EECOKDS AND BOOKS OF ACCOUNT. documents and writings coming into the hands of the secretary, such as proxies, original motions and reso- lutions that have been reduced to writing by the mem- ber offering the same. After such documentary rec- ords have been recorded they should be preserved for future reference or comparison. If the minutes of meetings are not taken in short- hand, there should be notes, at least, made of all im- portant transactions, and the minutes should then be written up from such notes. It is unquestionably advisable to approve the minutes of all meetings at the next succeeding regular meeting of the body, and this may be done by proper resolution after the same have been read; but the approval of the minutes of a regular or special meeting of a Board of Directors of a corporation cannot, in the absence of a special call being made therefor, be amended or approved at a subsequent special meeting of the same body, unless, of course, all directors are present, and the amendment or approval is unani- mously concurred in. Erasures should never be made to correct errors or omissions. The approved method is to draw a red line through any error that may have occurred and to insert the correction directly over the word or phrase corrected, and in this way errors may be corrected, CORPORATE RECORDS AND BOOKS OF ACCOUNT. 101 and the manner of accomplishing the same is explana- tory of all resolutions authorizing such corrections. In supplying omissions from minutes, unless the matter omitted is too voluminous, it should be inserted at, or near the point of omission in the record; but where a resolution or other complete transaction has been omitted, then it is advisable to make a separate entry thereof, either at the bottom of the page where the matter omitted should have been originally re- ! corded, or in any convenient place in the Minute Book, ] taking care to make a note of such omission in red ink I in the body of the minutes where the omission oc- i cur red, calling special attention to the omission and where the matter omitted may readily be found in the ( Minute Book. The Stock Ledger should show to whom the capital | stock was issued, and how it has been paid, and by | whom. This ledger can be made self -balancing by ; establishing a Controlling Account in the General 1 Ledger, entitled " Stock Ledger Balances/' and the bal- ance of which will show the standing of the Stock J Ledger without drawing off the individual accounts, the net balance of which should always be in agree- ment with that of the controlling account. It is the custom in most corporations for the secre- tary, treasurer or some confidential employe to keep a Private Ledger, provided with a lock in which are 102 COKPOKATE EECOEDS AND BOOKS OF ACCOUNT. kept the accounts which it is desired shall not be accessible to the regular employes. These are usually Capital Stock, Profit and Loss, Loans and Investments, Personal Drawing Accounts, Salaries, and any special Accounts of a Confidential Nature. A Controlling Ac- count is then opened in the General Ledger entitled, "Private Ledger,' ' to which the amount of the net debit or credit balance of these accounts is posted in one item at the close of each month. This provides the amount necessary to complete the General Trial Balance, and determine whether errors have been made in any of the other accounts, besides furnishing complete protection against the forcing of balances. In some companies, the controlling account in the General Ledger is dispensed with, the list of Balances drawn off by bookkeepers at close of the month being handed to a person keeping the Private Ledger, to which he then adds his Net Balance, and determines whether or not the general books are correct. In keeping the Stock Certificate Book of a corpora- tion, care should be taken to avoid real or apparent over-issue of stock. This may be accomplished by insisting upon a proper surrender and cancellation of all outstanding certificates at the time of a transfer, by observing and complying with the usual Blank Forms provided in every properly worded Stock Cer- tificate Book, and by making proper entries of all pay- EXAMINATION OF BOOKS AND RECORDS. 103 ments and transfers of stock this important branch of a corporation's accounting may be easily handled. Examina- ^ e i nves ting pnblic are now almost tion of Books universally demanding an Independent and Rec- Investigation and Eeport On the Condi- tion and Operative Eesults of a going business before seriously considering or taking any favorable action thereabout. Particularly is this so where financiers are directly or indirectly concerned. The cautious business man also demands such in- formation, and the seller, or party desiring financial assistance, is usually ready and willing to furnish such a report where his business is prosperous, or even solvent, and presents a reasonable business oppor- tunity. The great public, or quasi public corporations, pub- lish annually a report of this character for the benefit of their stockholders. The compilation and furnishing of this important information is often entrusted to audit companies, whose equipment for the preparation and supplying of such reports is a force of accountants. But the varying conditions and vitally important 104 EXAMINATION OF BOOKS AND BECOEDS. questions which are necessarily met in the compila- tion of such information brings the most important part of this service — viz., suggestions which will assist the client in accomplishing the results desired — out- side and beyond the scope and qualifications of the accountant. All these features are so closely allied to the work of the corporation lawyer, who is experi- enced in the science of organization and the conduct of transactions of this character, that a combination of the two undertakings necessarily proves of great advantage to the client. Hence, the larger corpora- tions are now almost universally examined under the supervision of legal counsel. In making an examination of corporate books and records, the Minute Book should invariably furnish evidence of the authority for all large transactions outside the regular course of business; and recourse is necessarily had to this book as a basis for an intelli- gent examination of the corporation's transactions. Besides, it is frequently advisable and necessary to determine whether the corporation is exceeding its authority and transacting business outside the scope of its Charter, and reference for this purpose is neces- sarily had to the Charter or Certificate of Incorpora- tion itself. Important contracts may necessarily have to be con- strued in order to ascertain their real import. Then, EXAMINATION OF BOOKS AND RECORDS. 105 there may be other legal objections to the manner of issuing and payment of stock which would suggest themselves only to one versed in the law, and which, if discovered, might change the entire aspect of af- fairs. Therefore, a proper investigation of all these matters should invariably be made in advance of the Audit, whenever it is desirable to have an Earnings Statement to interest outside capital, or for reorgan- ization purposes. The orderly course of an independent examination of corporate books and records is to first examine the Articles or Certificate of Incorporation. This will show the date of organization, the purposes for which the company was organized, the amount of authorized capital stock, and who is liable for its payment. The Minutes of the Stockholders' and Directors' Meetings should then be taken up. This record will show the manner of incorporating, the consideration for which stock has been issued, how the original assets were acquired, authority for all extraordinary expenditures, the remuneration of officers, the au- thority for all dividends paid, and the warrant for the making of important and unusual contracts that may be entered into outside the general course of busi- ness. The Stock Certificate Book and Transfer Journal are then examined and checked against the Stock 106 EXAMINATION OF BOOKS AND EECOKDS. Ledger to determine tlie amount of tlie capital stock outstanding, and the owners thereof, as well as to guard against any over-issue of stock. The Trial Balances of the initial and terminating dates of the Audit contemplated are next examined and verified with the Books of Account. When the Bal- ance Sheets of either or both dates are given they should be carefully examined, particular attention be- ing given to the closing entries. In all examinations, the verification of the Cash Accounts is of controlling importance. While the investigation may not be conducted with the special object of detecting fraud or shortages, all necessary precautions are to be taken to guard against the pos- sibility of such irregularities being passed over. The count of Cash on Hand is taken at the inception of the Audit, and a detailed list made of all Cash, Cash Tickets, Vouchers and Checks, Money Orders, etc, on hand. A Certified Statement from the Bank should then be obtained. After this is done, the Bank State- ment and Canceled Checks are examined, and recon- ciliation made with the Bank Balance as shown by the company's Cash Book. In cases where the date of the examination is sub- sequent to the closing date of the audit, all entries, footings, and bank deposits must be verified for the intervening period. The cash items are then worked EXAMINATION" OF BOOKS AND BECOKDS. 107 back by adding to the balance the disbursements, and deducting the receipts, which should give the correct balance as at closing date of audit. The footings of the Cash Book, general and sub- sidiary, for the entire period are checked. The dis- bursements are verified by the Vouchers supporting payments both as to payees and amounts. On the receipts side, the cash sales are checked from the records, and all discounts and allowances verified. The remittances are checked against the Ledger accounts, and the total receipts of each day against the bank deposits. The footing of all books of original entry must be checked and postings to General Ledger verified. If the General Ledger contains controlling accounts with subsidiary ledgers, these must be in perfect agreement. Where differences are found to exist they must be located and corrected. If no controlling ac- counts are kept, they must be constructed, and the balances of subsidiary ledgers verified in the aggre- gate. All cash items and column footings must be checked from General Ledger into Cash Book and afterward reviewed to see that all this class of items are cleared on the receipt side of the Cash Book. The postings from all other books of original entry are checked into the General Ledger. Footings of all 108 EXAMINATION OF BOOKS AND KECOBDS. accounts in the General Ledger, open and closed, mnst be checked for the entire period and balances verified. Sales Books are footed and charges verified by com- parison with Original Orders and Shipping Receipts. Returns and Allowances are compared with Customers ' Correspondence, Entries in Eeturn Goods Journal and Stock-Keeper's Records. Journal entries are verified by supporting Vouchers, which must all show proper signatures of approval and authorization. Voucher Record is verified by "comparison with Original Invoices. All Unpaid Vouchers are listed, the balance showing the amount outstanding, which should be in agreement with Accounts Payable in General Ledger. Pay Rolls must be verified as to extensions and foot- ings, and be signed by some person in authority. Analyses are made of Profits and Loss and such Capital and Expense accounts as may be deemed neces- sary to show the results of operations of business. Adjusting Journal entries are made for such errors and omissions as have been developed in the course of the examination. In the verification and valuation of Assets and Lia- bilities, the Title Deeds to all real estate should be examined and compared with book value of property, EXAMINATION OF BOOKS AND RECORDS. 109 as well as verification with amount actually paid. Proper charge for any depreciation should be made. The Plant and Machinery Account should be verified by actual examination and comparison with Original Invoices. Care should be taken to see that no items which should properly be classed as Eepairs and Main- tenance are charged to Additions and Betterments. Depreciation may be charged off at close of each fiscal period, the percentage being such as to finally reduce the cost of the plant to its residual value at the date when it is estimated it will have to be replaced. Or, another method is, to provide for the depreciation of a plant by crediting out of the net profits for the year — a certain fixed percentage of the cost of the plant and machinery to an account called "Beserve for Depreciation." This maintains, at all times, a charge on the Ledger equal to the actual cost, and is believed by many to be a better plan than charging, each year an arbitrary amount on account of depre- ciation. It would be possible to ascertain the exact cost of the plant by going back over the books for the period and ascertaining how much had been charged each year; but by keeping this account in the manner last suggested, the actual cost is known and the depre- ciation is provided for. Patents, Franchises, Leaseholds, etc., are subject to such annual depreciation; and the conservative plan 110 EXAMINATION OF BOOKS AND RECORDS. is to charge off a sufficient amount each year, so as to extinguish their value at the time of expiration of such rights. Inventories should be signed by the parties taking them, and verified by the accountant as to extensions and footings. Prices must be cost or market, which- ever lowest. Groods on Consignment must be stated separately. All Bonds, Stocks and other securities must be verified by actual examination and valued at cost or market, whichever lowest. Accounts Receivable must be examined and Delin- quent Accounts listed. A reserve for these must be created in the Liabilities, and set up on the Balance Sheet. Notes Eeceivable On Hand are checked with Note Register and verified by actual examination. Notes Discounted, but not matured, are verified by Certifi- cate with Itemized List from Bank, for which a Con- tingent Liability is set up on Balance Sheet. Notes Payable are checked against Note Register, and if deemed necessary, verified by communication with holders. Notes Paid are verified by examination of Cancelled Notes. Notes Payable, unmatured, on which the company are indorsers, must be set up as a Contingent Liability. Reserves for discounts and all unexpired charges and unmatured obligations must be provided. EXAMINATION OF BOOKS AND RECORDS. Ill Adjusting Journal entries must be made to set back in surplus such bad debts or other charges as properly belong to periods previous to the one under review. Following is a list of exhibits and schedules which should be prepared in order to furnish a mobile devices, and a thousand more. Many a great manufacturing business has been built up on some simple invention or improvement which cheapened the I productions of some article of common use. In fact, the most fruitful field for the rank and file of the 162 PATENTS AND THEIR COMMERCIAL VALUE. army of inventors has been among the simpler, almost trifling, inventions, and improvements on other in- ventions. The inventors of a shoe-button, a safety-pin, a hook- and-eye, the " roaming toy," a dime savings bank, etc., made quick and easy fortunes. Notwithstanding the great number of patents issued, it seems as if the field for new ones grows wider the more the patents increase. Each new de- velopment seems to create new wants and the need of new devices. Inventions known as "novelties," and improvements on articles in every day use are con- stantly in demand. Contrary to the prevailing notion among many lay- men, the fact that an article has been "patented" is no conclusive assurance that an exclusive right "to manufacture and use" such an article is thereby secured to the owner. "While it is true that the issu- ing of letters patent on an invention is prima facie evidence of its patentability, still it is not conclusive evidence. In investigating the questions in hand, the statutory requisites to patentability first require consideration. In order that they may be understood, the law on the subject will be here given, namely: "Any person who has invented or discovered any new and useful art, machine, manufacture, or compo- PATENTS AND THEIR COMMERCIAL VALUE. 163 sition of matter, or any new and useful improvements thereof, not known or used by others in this country before his invention or discovery thereof, and not patented or described in any printed publication in this or any foreign country before his invention or discovery thereof, for more than two years prior to his application, and not in public use or on sale in this country for more than two years prior to his appli- cation, unless the same is proved to have been aban- doned may, upon payment of the fees required by law, and other due proceedings had, obtain a patent therefor." It is apparent that utility is one of the chief consid- erations upon which the Government grants its ex- clusive right to use and produce an invention ; and this important requisite to patentability largely determines its commercial worth as well. As already appears, the invention must be "new and useful," as well as useful, but manifestly the fact that the invention is new would not render it of any value in the business world unless it was useful as well; therefore, in ar- riving at the commercial value of a patented invention utility is the first feature to consider. The essential features that determine the commer- cial value of a patented invention, and the order in which they may be investigated, are : First, the utility, i. e., the usefulness — intrinsic novelty and the probable 164 PATENTS AND THEIE COMMERCIAL VALUE. demand; second, the cost of production, L e., the man- ufacturing possibilities and means of producing the invention ; third, the legal novelty — patentability, i. e., the construction and validity of the specifications and claims, as well as the protection afforded thereby ; and, fourth, the title of the patentee or alleged owner of the invention. As to the utility and manufacturing merits and cost of an article, these are questions for the experienced business man and skilled mechanic, and they are of first importance in determining the commercial value of an invention. Perhaps the simplest method of determining the legal novelty, i. e., patentability of an invention, and the one primarily useful, is to see if it contains either or both of the following elements : First, if the article produced is as good in quality, and (as a result of the invention) such article can be produced at a cheaper rate than similar articles already on the market; or, if it is better in quality and can be produced at the same rate as other articles, or both combined; and Second, as to the device or method of production, if the object in view or manner of obtaining the same be new, and the device or product be useful, then it may be considered a patentable invention and subject to such protection. The law protects simplicity and economy of con- PATENTS AND THEIR COMMERCIAL. VALUE. 165 struction, and the fact that the invention does not appear to be a great one will not prevent its being con- sidered as a new and useful invention. The substitu- tion of different kinds of power for the accomplish- ment of a common end is not a subject of patent ; the mere assemblying of a number of old devices or forms for the accomplishment of a well-known result is not patentable; the omission of an element from a device so that the same result may be obtained by a less num- ber of operations or devices is patentable; the com- bination of known elements for the production of a new result is patentable; the accomplishing of a greater result or utility from the same quality of ma- terial may be patentable, etc. The fact that a resourceful patent attorney may have obtained letters patent on a device that did not in reality contain patentable requisites may be disclosed for the first time upon the trial of a suit for infringement. An illustration of this fact is found in a recent case decided by the Supreme Court of the United States, involving the validity of patents issued upon "sectional bookcases," where two rival manufact- urers sought to establish their respective rights to the 1 exclusive use of these now popular office and house- hold articles, with the result that the Supreme Court held the patents to be void for lack of patentability. Another practical subject for consideration relates 166 PATENTS AND THEIR COMMERCIAL VALUE. to questions of conveyance. The titles to patented inventions may be investigated in a similar maimer to those of real estate, for the reason that the Govern- ment has a complete recording system, wherein all conveyances, licenses, etc., are (or should be) re- corded ; and an abstract of title may be had, by appli cation to the Commissioner of Patents, and the pay- ment of the necessary charges therefor, which depends entirely upon the number of transfers that have been recorded, and such an abstract of title is necessary to determine and show the title to any patented inven- tion. The subject of transfer of letters patent may be di- vided into three classes : First, the assignment of the whole or an undivided interest in an invention before letters patent have been issued;* second, an assign- ment of the whole, or an undivided interest, in an invention after letters patent have been issued,! and third, a license or other conveyance, not amounting to an absolute sale of the whole or any part of the inven- tion itself. An invention is susceptible of being conveyed prior to the issuing of letters patent thereon ; and as between the parties to such a contract the same is binding, whether the patent ever issued or not; and should the patent issue, such contract has the same force and * See form in Appendix, page 227 t See form in Appendix, pages 229-231. PATENTS AND THEIR COMMERCIAL, VALUE. 167 effect as an assignment after issue. In fact, it is not unusual for such assignment to contain authority and instruction to the Commissioner of Patents to issue the patent to the assignee. As to the conveyance of a patented invention after letters patent have issued, this is comparatively a simple matter, requiring only that the person who is the owner of such patented inventions shall execute a formal conveyance of the same. The only important observation that need be made on the subject of actual conveyance is as to the propriety of an inventor or owner of letters patent conveying an undivided inter- est (i. e., a one-half or one-third interest) in the same; for such an act may destroy the value of the monopoly on the invention. It has been demonstrated and decided that the owner of an undivided interest in an invention has all the rights of the exclusive owner so far as to manufacture, vend and sell the de- vice in question; and besides, it is essential that in prosecuting or defending an infringement suit the owners of the entire interest must join in order to maintain or defend such a suit; and this may be im- possible after the conveyance of a part has been made. In relation to contracts which purport to be licenses or "shop rights' ' for the exclusive or territorial right to manufacture or sell a patented invention, the word- 168 PATENTS AND THEIR COMMERCIAL VALUE. ing of such contracts may amount to a transfer of the entire interest of the inventor, instead of a license or contract, unless care is exercised in the preparation of such an instrument. In general, any wording that amounts to the sole and exclusive right and monopoly of manufacturing or selling the device is a transfer of the entire interest therein. A simple test of the question as to whether a license in reality amounts to a conveyance is if the grant vests the entire interest in the invention or transfers the monopoly therein, it is an assignment ; on the other hand, if it leaves in the assignor any part of the exclu- sive monopoly granted under the patent, then the con- veyance is a license. It is always a question of con- struction of the language used, and it is necessary that great care should be exercised in the wording of the instrument intended as a license. The soliciting of patents is essentially a specialty in the practice of Patent Law, and the commercial value of a patent depends (in a marked degree) upon the care, skill and ablity of its solicitor. Much criticism has been made upon our patent laws on account of the opportunity which is accorded thereby to deprive the public of the benefit of new and useful inventions during the lifetime of the patent. An investigation of the patent records at Washington discloses the fact that many important improvements PATENTS AND THEIR COMMERCIAL VALUE. 169 on existing devices now in common use have been made, and that they have been purchased by leading manufacturers in the line of business to which the invention pertains; that instead of "bringing out" such inventions, and giving the public the benefit of their improvements, they are " shelved' ' so to speak. The explanation for this evidently lies in the fact that one of the most expensive departments of every manufacturer is the "experimental department " and the great expense attached to the making of constant changes in a given product, besides the "confusion" which would be produced thereby. At the same time these "business reasons" do not satisfy or interest the public, who have granted the patent protection to the inventor as a reward bestowed for his invention and a stimulus to future efforts. One of the manifold benefits to be derived by adopt- ing the corporate system inures to the inventor when, as is frequently the case, he is without sufficient means to develop and market his invention. As has been hereinbefore intimated, he may not assign an un- divided interest in his invention without risking the monopoly or exclusive right to manufacture, vend and sell the same, and this may occur as well by a co- partnership arrangement for its control as by separate assignment; hence the almost universal adoption of 170 PATENTS AND THEIE COMMEKOIAL VALUE. the corporate plan under all such and similar circum- stances. An inventor may form a corporation under the laws of any State, and assign his invention to such cor- poration without endangering the rights secured to him under the letters patent from the Federal Govern- ment. As in every other case, it behooves him to pro- tect his rights in the corporation by retaining control or a sufficient interest in the same to insure protec- tion. The corporation becomes the sole owner of the invention by such an assignment as above suggested, and through its elasticity for adaption to particular needs, any legal purpose may be accomplished, either through the making of a contract with the inventor or the issuance of its capital stock for the reasonable fair commercial value of the invention. And while the courts have held that there is no presumption of value to a patented invention, yet it may be safely said that such a value may be placed upon the inven- tion as its particular merits and the extent of the pro- tection afforded by the patent grant will warrant, and this may be determined by the rules referred to herein, and others which will present themselves in every case, and the reasonable value of such invention to the cor- po ration, if fairly arrived at, will govern. It has been the almost universal experience of those attempting to deal with inventors (as a class) that MINING ENTEBPBISES. 171 they greatly exaggerate the real commercial value of their inventions; and this undoubtedly is due to the application and devotion which has been bestowed to create the invention in the first instance, or the lack of experience in marketing or the development of new improvements in existing devices. Mining The vast amount of capital neces- Enterprises. sarily involved in acquiring, equipping, developing and conducting mining enterprises makes this one of the most favorable objects for corporate organization ; and while many of the principles hereto- fore announced as relating to this form of existence generally apply with equal force to mining enterprises, still there are important questions which should be considered separately, as peculiarly applicable to such undertakings. That there is such a legal and practical distinction between mining corporations and those organized for commercial and other undertakings has been recog- nized by courts of review. In considering the nature of mining as distinguished from commercial corpora- tions, or corporations created for the conduct of com- mercial enterprises generally one court said: 4 1 Mining corporations are zui generis. They are 172 MINING ENTERPRISES. organized and carried on upon principles wholly dif- ferent from banking, railroad, insurance and ordinary commercial corporations having a subscribed capital stock." And to some degree, at least, the rules relating to organizing the different kinds of mining corporations differ, particularly in the mode of financing. The plans that would be applicable to a corporation formed for the mining of precious metals would not ordinarily be appropriate for a corporation created for the oper- ation of coal properties, or the development of a marble or stone industry. The reason for this lies largely in the character of the undertaking. In the case first named its specula- tive character is to be taken into consideration, and the plans of financing applicable to mining enterprises of a speculative character differ widely from those commonly adopted for the promotion of those which are less so. Specialization in the professions and business alike is now universal, and this fact is emphasized in the subject under consideration. An operator in the copper, lead or zinc field would not, as a rule, be equipped to operate a coal mine, and vice versa. And a miner of the precious metals could not adopt the same methods used by him, and which are acquired by MINING ENTERPRISES. 173 experience and training in that special department of mining, to either of the other classes named. The geologist and mining engineer also specialize, as do the manufacturers and dealers in mining equip- ment and supplies ; and the advantages of specializing in this field, as in all others, are now well recognized by all familiar with the subject. The owner of a valu- able mining property which had met with disaster would now no more employ a mining engineer who was not a specialist in that particular class of min- ing than the same individual would call a general medical practitioner to perform a major surgical operation upon himself. In the discussion of the subject in hand no attempt will be made to detail the history of that class of min- ing corporations which have been organized for ques- tionable or fraudulent purposes — such as the acquir- ing of capital to pay salaries, and to provide a means for their promoters to get hold of stock certificates in order that they might get money from the inex- perienced investors, the chief concern of those organiz- ing such companies being to successfully avoid criminal prosecution for their transactions. At the same time no extended discussion will be attempted of the innumerable plans and devices which have been heretofore adopted to finance and promote speculative mining enterprises, particularly those devoted exclu- 174 MINING ENTEKPEISES. sively to the mining of precious metals. It will be sufficient for the purposes of this volume to state that the manner of organization of such a corporation must be governed by the circumstances, and the laws of the State where the particular corporation is created, and to refer to some of the practical and distinguishing features generally. The important questions of procedure which arise for consideration in the organization of and which are peculiar in a mining corporation are first the cap- italization (and this involves the necessities of the in- corporators and questions of finance) ; the next is undoubtedly the purpose of the corporation which is to conduct such an enterprise; and the third is the domicile, or the selection of a State for its creation. It is customary (and undoubtedly the custom will continue) to capitalize corporations that are organized to mine precious metals at an arbitrary amount, with- out regard to the value of the property which it is to own and operate; then to convey the mining claims to the corporation for all, or a large proportion of the capital stock, and to then donate back into the treas- ury all, or so much of the capital stock as is to be sold for development purposes; and this might be con- sidered the established custom, and one which is free from legal objections. Particularly is this true when such mining corporations are created under the laws MINING ENTERPEISES. 175 of a State where the mining of precious metals is the principal industry, for in all such States special laws have been enacted to encourage the development of the State's mining resources, and the speculative nature of the undertaking is there recognized and the value placed upon the mining claims or other properties by directors of domestic corporations are conclusive. In regard to the less speculative mining enterprises, such as coal, copper, lead, zinc and stone, their cap- italization should receive more conservative treatment, and they may be considered as more nearly approach- ing the commercial corporation in regard to their formation. An example of "high finance " in the con- solidation of coal properties has been already shown, and the general principles therein exemplified will illustrate the possibilities of creating questionable securities by grossly-inflated valuation of the proper- ties consolidated. It may be conceded that the latitude permissible in the valuation of properties of this character is greater than in the ordinary industrial undertaking, and that the "good-faith" rule, herein- before referred to, is all that is required; that is, the exercise of good faith and the absence of fraud in the valuation of such mining properties will constitute a safe rule, both as to liability of directors or upon the capital stock issued in payment for such properties. It is of practical importance that the capitalization 176 MINING ENTERPRISES. of a mining corporation should be fixed with due regard for its ultimate object. If no further prop- erties are to be acquired than the one in contemplation at the time of organization, the amount of capitali- zation should be governed by the value of the mineral rights or land, and the necessary working capital ; and with a proper foundation the capital stock of such a corporation can be increased to meet any future expan- sion that may be deemed advantageous. But where a corporation is to be formed to acquire two or more developed mines, or with that ultimate object in view, the question is more difficult of solution, and no gen- eral rule can be announced that would meet the re- quirements of any but particular cases, or be of prac- tical value in so doing ; and it might be added that this is one of the numerous conditions which confronts the organizers of large corporations generally, and noth- ing but an intimate knowledge of the subject, and actual experience in its application, can qualify such organizers to properly meet and dispose of many of the important practical questions which invariably arise. The creation of bonds which are secured by the prop- erty of the mining corporation, is frequently desirable, for the purpose of raising working capital as well as for the protection of those interested in the enterprise; and the use of such bonds have frequently been the means by which a worthy and enterprising operator MINING ENTERPRISES. 177 has ultimately acquired the ownership of valuable mining property. The sale of such bonds among financial institutions is often difficult, for the reason that the property upon which they are secured usually lies at a distance, and the value of such property is based largely upon its continued operation and development ; and unless this is assured, such bonds are not considered as desirable security, and experience has often demonstrated that when such bonds are sold in the open market at all, it has been at a great sacrifice. However, with proper management and with the property in a developed stage, the issuance of such bonds is not only advan- tageous but their sale to private investors or local financiers may be effected much more readily than stock, and without unreasonable sacrifice. The purposes or objects of mining corporations are of importance for all the reasons heretofore given under another and appropriate heading, as well as for the following, which are in a measure peculiar to min- ing corporations : As before stated, it is a well-settled principle of law in every jurisdiction that a corpora- tion cannot exceed the powers conferred upon it by its charter, and such powers are derived by and through the wording of the purposes or objects set forth in the application for such charter. Where it is the intention of the incorporators to do 178 MINING ENTEEPEISES. more than actually operate a mine, such as to conduct a general store, to erect and maintain dwelling-houses for employes, to construct and operate electric or other power plants, tramways, etc., in connection with the mining enterprise, it is, of course, necessary that these powers should be conferred upon the corporation through its charter. In many States there are limitations placed upon corporations owning real estate, and in such States care must be exercised not to violate such laws ; for it has been held that even though the charter is granted for purposes that are prohibited by the general act under which such corporations are created, the unlaw- ful acts may be shown to defeat the corporation when- ever it attempts to enforce such illegal objects. In legal phraseology, corporations may, under such cir- cumstances, be "attacked collaterally. ' ' The following may be considered as an approved form for the wording of the objects or purposes of a mining corporation organized under the laws of the State of Illinois for the purpose of mining coal : "To mine, buy, sell and deal in coal and its by-prod- ucts; to acquire by purchase, lease or other lawful means, coal lands and properties necessary and con- venient for the construction, successful operation and maintenance of coal mines and their equipment; and to do and perform any and all lawful things incidental MINING ENTERPRISES. 175* and necessary to the successful operation of coa? mines, and the production and sale of coal." It might be appropriate to add that the implied powers incident to corporate existence need not be stated in the charter. In many States the charter enumerates, in detail, such implied powers, while such powers are left to implication in other States, and in the last named States the wording of the purposes or objects may be limited simply to the principal objects I contemplated. In relation to the domicile or State selected for the creation of a mining corporation, the observations hereinbefore made on the subject are applicable alike to such corporations; and except for the advantages to be derived by a trial in the Federal courts of pos- sible litigation for personal injuries (as well as other cases) such corporations should be created under the laws of the State where their physical operations are to be conducted. The laws of such States are invariably j more favorable to such corporations, and particularly j to their financing, and the actual executive head of the ] enterprise, or business office, may be, and usually is at a distance from the property operated, and often in another State. The law relating to the transfer of real estate gen- erally is equally applicable to the construction of con- veyances and contracts relating to mining rights; but 180 MINING ENTERPRISES. there are some practical and legal questions which will be briefly alluded to, as being particularly important in the organization and promotion of mining enter- prises. It is now well-settled law in the United States that the owner of the surface of land is also the owner of everything beneath it to the center of the earth. A few States have express statutes declaring that all minerals underlying lands owned by citizens of foreign countries belong to the State; and the rights of the Government to minerals underlying public lands and those rights derived through what is known as the "Apex law" are the important exceptions to the gen- eral rule above stated. In the wording of conveyances, the significance of the word " minerals " is important, as it has been held that this word is sufficiently comprehensive to include not only gold, silver, iron, coal, etc. (when in workable quantities) but it also includes oil, natural gas and stone. Hence, the use of such phrases as "mineral substances," "coal and other minerals," "lead, zinc and other minerals," etc., may have important signifi- cance in such conveyancing. Another important feature is the right of surface owners with relation to the minerals named. Of course, as regards coal, iron and other base metals, the minerals are co-extensive with the surface. In the case of gas and oil this is not so. An operator with only MINING ENTERPRISES. 181 sufficient surface to accommodate his plant may reduce to possession as much oil or natural gas as though he owned any given amount of surface; then the Apex law, so generally recognized in all mining states, give similar rights to the owners of land or mining claims, i. e. to follow all veins, loads and ledges wheresoever they may lead and to appropriate all minerals to be derived therefrom throughout their entire depth, from the top or apex, where such apex lies inside of the lines or boundary of such land or claims. It is not uncommon for extensive mining develop- ment to be done under a royalty lease, and without regard to consequences of adverse decision by courts, in possible litigation resulting from future disagree- ment regarding its terms ; and without taking into con- sideration the future possible necessities of the min- ing corporation. It is equally as common a practice to include in such royalty leases a provision of for- feiture in case of a breach by the operator, whereby all improvements and development work (which in- cludes the shaft, etc.) will revert to the lessor, or owner of the land. The wisdom of purchasing in fee at least a sufficient amount of land upon which the mine is to be sunk and the plant located, cannot be i doubted; and the advantages thereby acquired should be apparent to all interested in such an undertaking. The principal investment of a mining corporation is I made in sinking its shaft and the construction of its 182 MINING ENTEEPRISES. mine generally, and without the precaution above sug- gested an almost total loss can occur through some informality or defect made in the royalty lease under which such development has been made. It is customary to take an option on the tract of coal or other mineral lands in advance of their pur- chase, in order that prospecting may be done to ascer- tain the extent and quality of the mineral before pay- ing for the same. In the Appendix hereto will be found an approved form of option agreement for this purpose.* This form supposes payment in cash for mineral lands or minerals. A form for the same pur- pose, where the payments are to be made in cash, and stock of the corporation to be formed for the develop- ment of the property, is also there inserted.f The plan last suggested has a double advantage to the operator, one in reducing the cash investment in the minerals or mining rights, and the other in the securing of local interest and the co-operation of their owners. Frequently it is deemed advisable or necessary to deposit a deed or place the title papers to mineral lands in escrow pending the prospecting which it is deemed necessary to do to establish the value and extent of the mineral rights so conveyed, or for va- rious other reasons or purposes which may arise. In such event the following form (with such modifications * Tage 233. f Page 238. [This form or plan with modifications to suit conditions, has been used by tlio author in a number of important cases where the principal capital required was to be obtained from outside sources then beyond the reach of his client.] MINING ENTERPRISES. 183 as the particular circumstances may require) will serve as a guide and suggestion for the purpose named : Escrow Agreement. (To be written on envelope or other enclosure con- taining deed, lease or contract.) The enclosed deed (lease or contract) of is hereby placed in the possession and keeping of , in escrow, upon the follow- ing terms and conditions, viz : If shall place or cause to be placed to the credit of , in the Bank of on or before 191.—, the sum of Dollars, then and in that event, the said is hereby authorized, empowered and directed to deliver the enclosed deed (lease or contract) to , or to whom he may in writing order. In case the said shall not so place, or cause to be placed to the credit of said in said Bank, the said sum of Dollars, on or before 191...., then in that event the said is hereby authorized and directed to return the enclosed deed (lease or contract) to the said or to whomsoever he may designate in writing. [Seal.] [Seal.] , 191 184 MINING ENTERPRISES. The preparation of conveyances, and all mining con- tracts (as well as the doing of all things pertaining to the formation, and bringing into legal existence of mining corporations, where the rights of the individ- uals are to be conserved and protected) must neces- sarily receive the careful attention of those versed in the law, as well as the financial and practical needs of such undertakings generally ; and incidentally it might be said that there are no places in business affairs where the application of the well-known maxims, "what is worth doing at all, is worth doing well, and all good work must be paid for" and "a man who offers his services at a specially low rate generally puts them at their true value" — are exemplified as in the performance of services by the legal profession of this character. They may properly be termed ' ' con- structive services," as the results of such work are productive not only of substantial benefits to the em- ployer but to the investing public and community at large as well, and the evolution in business methods to the present high state of perfection is largely due to their efforts. APPENDIX Frank's "Science of Organization" etc. TABLE OF CONTENTS APPENDIX PAGE Explanation 189 General contract between incorporators to form a corporation. . 197 Special contract between incorporators to organize a corpora- tion for the purpose of purchasing and enlarging a busi- ness . . * 201 Reorganization certificate, 206 Appraisal of property , 208 Resolution ratifying commissioners' acts, etc 209 Receipt by commissioners for advance payments pending or- ganization, with assignment thereof 211-213 Installment certificate and assignment thereof 214-216 General By-Laws 217 Assignment of invention before letters patent issue 227 Assignment of undivided interest in patent 229 Assignment of entire interest in patent 231 Coal option with deferred payments 238 Coal option with stock and cash plan 238 Stockholders' proxy 243 Rules governing the listing of stocks and bonds on the Chi- cago Stock Exchange 245 Synopsis of the corporation laws of New Jersey, Delaware, Maine and South Dakota 247 Act regulating the admission of foreign corporations to do business in Illinois. ., r>.«o«*««*o«*««oe«*. = «... 260 Table showing earnings on stocks and bonds ..«. •••«•••• 265 (187) EXPLANATION There is of necessity a discrepancy between what is recorded and what is to be desired in any work that undertakes to generalize on a subject so extensive as that of business organization; and here as in the law the exact question "at issue' ' is rarely discussed or settled by precedent. But the general rules and modes of procedure herein announced, together with the il- lustrations that follow, will be sufficient to enable the resourceful individual to avail himself of, not only the plans discussed, but suggest others that will meet his particular needs. Throughout the text reference has been made, to various illustrations given in this department of the book, and when considered in conjunction with the text on the subjects referred to, they may be ade- quately explained to enable the reader to appreciate their application; but there are other uses and pur- poses to which such illustrations may be adapted, that require further comment which has been reserved for this particular discussion. There are many general forms published and now available to all that simply illustrate arbitrary methods of conducting corporate affairs; but such forms, are as a rule, simply the author's personal methods of (189) 190 APPENDIX. accomplishing a given purpose, which might be done in a great variety of ways, and which would be equally effective and proper; hence no attempt will be made to encumber this volume with miscellaneous forms, but only those which may be of special value as practical illustrations. It is rarely ever safe for the layman to undertake the use of forms in any event, for the most important questions (which would only occur to one versed in the law) may thereby be overlooked; a careful ex- amination however, of forms and illustrations in con- nection with discussions on a given subject of this character, is of value, principally to enable the reader to arrive at a clear and proper understanding of what may be done in a given case or under other conditions that may arise. The illustrations that follow are what may be termed unusual, inasmuch as they are not of the stereotyped variety so commonly published as "forms". General Contract Between Incorporators to Form a Corporation. This illustrates an aproved method of taking the initial step in forming a corporation under the laws of any state. With such a contract the incorporators have settled all preliminary questions and their relative rights and obligations, both to one another and to the corporation itself; besides it places in the hands of the attorney who is to organize the cor- poration, all the data and authority which he will re- quire, at least preliminary to the application for charter. The use of this contract, while not essential or APPENDIX. 191 necessary, (particularly in the smaller organizations) cannot but be of advantage where a large number of incorporators are to participate, or where it is desirable that the parties should bind themselves in advance of actual subscription to the capital stock. Should special plans of financing be desirable, that fact would materially change the phraseology in regard to the character of stock, etc., and necessarily require the attention of legal counsel; but for the usual and ordinary case, this illustration may readily be adapted and prove a well devised plan to facilitate the organi- zation of business corporations generally. Special Contract Between Incorporators for the Purpose of Purchasing and Enlarging a Business. This illustration is susceptible to almost unlimited adaptation. The elasticity of the corporate form, as hereinbefore explained, has suggested — and the same ivill continue to further develop — means of adjusting the rights of owners of property and investors, which enable both to accomplish almost any desired result. The illustration here shows a case where the owner of a manufacturing plant, and individuals with capital join forces in a corporation which is to own and operate the business formerly owned by such in- dividual. By this method it will be seen that the owner of the supposed business is materially benefited by the transaction, and the individuals furnishing the capital may be adequately protected in their invest- ments. It will be readily suggested to the most casual reader that this plan may also be utilized in effecting the sale 192 APPENDIX. of a business either immediately or after the corpora- tion is organized and under operation. Such sale can be made by the transfer of stock of the former owner of the plant ; and under ordinary circumstances, his stock (received for the plant) should be of greater value than the plant in his hands before organization. Besides, a sale should be more readily effected after organization than before. Here, we also see a practical illustration of the op- portunity to capitalize and reduce to a substantial property right, the good-will and trade name of the business, all of which would be of little or no money value unless protected in this way. What has already been said on the subject of cor- porate financing, will enable the reader to apply the various suggestions offered to meet the requirements of any condition arising in the practical use of this illustration, where a going business is to be purchased or taken over by a corporation when formed for that purpose. Reorganization Certificate. The use of this in- strument is referred to in the text as applicable in a reorganization of an existing corporation where reasons exist for the same. The signing of such a certificate in duplicate and the surrender of the stock certificates held by the stockholder, places in the hands of the trustee selected, ample authority to proceed with such reorganization along the lines agreed upon and set forth in the reorganization certificate, and such terms may be whatever the particular circum- APPENDIX. 193 stances demand or the individuals interested may impose. This method has proven to be advantageous (from the reorganizer's standpoint at least) in a number of important cases. One of the chief obstacles in the way of the reorganization of a corporation, where a large number of stockholders exist, is the fact that a few minority stockholders may greatly hinder or prevent the accomplishment of such an object and involve the corporation in expensive litigation should an attempt be made by the officers, or those in control to force a reorganization; in adopting the method sug- gested, the reorganization may be placed in the hands of a disinterested person, and neither the stockholders nor the corporation become involved in the attempt; and besides, this method enables the reorganizers to negotiate and treat with each stockholder separately, and to prevent undue advantage being taken by any signer of this certificate after the same is executed. Here, as in the illustration last referred to, many additional terms and conditions may be added to meet ithe requirements of any case, such as the issuance of (preferred or other special stock or bonds, and the relinquishing of the rights of the holders of stock for jsuch special stock or bonds, or the making of a trust jcompany the trustee for the stockholders or corpora- tion as the case may be; and the depositing of stock with such trust company in exchange for special Trustee Certificates or receipts is a common practice, iparticularly among large corporations, where a sale of the entire assets to another corporation in exchange i 194 APPENDIX. for its stock is to be effected, or a change in the financial plans are desired. "Where the owner of a business desires to ultimately dispose of his interest therein, or in case the re- organizers of a business desire to provide for the payment of the purchase money of the tangible assets of a business reorganized, without encumbering the same by a mortgage to secure a bond issue, it has often proven advantageous within the experience of the author to provide for special stock, such as is referred to in the text, as being preferred as to dividends and assets, or to create still another species, i. e. a special obligation in the nature of stock, whereby the corporation obligates itself to pay a certain dividend each year on such shares (out of the profits) and not to exceed a certain specified dividend on the other stock of the corporation, then any surplus re- maining after the payment of such dividends must be paid to the holders of such special certificates from year to year, until the same have been retired. In the hypothetical case given in the reorganization certificate above referred to, the corporation to be re- organized is supposed to be a foreign corporation, and one of the principal objects to be attained is a reduction of its capitalization and otherwise placed upon a sane working basis. Appraisal of Property. This form may be utilized and adopted by either a Board of Directors in their official capacity, or by disinterested persons in ap- praising property, and form the basis of a resolution APPENDIX. 195 for purchasing an established business or property for the use of a corporation. Where such appraisal has been made in detail, that is, where an itemized schedule of the property ap- praised is made, this should be attached and referred to, in the appropriate part of the narrative, in relation : to the subject matter of the appraisal. Appraisal companies usually have approved forms j for setting up and classifying assets, that make the form referred to here, applicable as a summary and I convenient as a basis for the resolution following. Resolution Ratifying Commissioners ' Acts, Etc. I This resolution is sufficient for the use of Directors 5 (when ratifying the acts of the commissioners appointed , by the Secretary of State in advance of complete or- ganization, as in Illinois) or where property has been taken and the purchase price has been paid in whole or part with stock of the corporation, and the amount agreed upon credited on the stock subcription accounts of the owners of the property conveyed. Installment Certificate and Assignment. Such a certificate as is here suggested is frequently issued by mining corporations, or those interested in disposing of a portion of the capital stock after the corporation is formed. Its issuance will prevent stockholders offering for sale or disposing of their stock, pending the period reserved for the sale of the stock remaining in the Treasury of the corporation. General By-Laws. Where the by-laws of a corpora- tion or the permanent features thereof are made a part of the charter, the form here suggested, with 196 APPENDIX. such, modifications and conditions as the incorporators may desire, can be adopted by the stockholders; but where the adoption of by-laws is left to the Board of Directors of the corporation after they are elected, (as in Illinois) such by-laws should be presented to the Board, and formally adopted by it at the first meeting after the Certificate of Complete Organization or charter, has been filed for record in the proper recording office of the state creating the corporation. Innumerable additions or changes may be made to meet the requirements of incorporators; but the form here suggested with such modifications as will fit the particular case, is adequate for the needs of the or- dinary business corporation. The importance of by-laws has already been given in the text. So far as their legal necessity is con- cerned, their primary function is to control and authorize the time and method of calling and holding meetings; without them great inconvenience may re- sult and expense be necessary to give the actual notice which the law requires, where there are no provisions made for otherwise serving such notice by the corpora- tion, through its by-laws ot by statute. The remaining forms and illustrations are given for the convenience and ready use of incorporators; in- dividual reference to them is deemed unnecessary and impracticable within the limitations of this volume. GENERAL CONTRACT TO FORM A CORPORATION This Agreement made this first day of November, A. D., 1909, by and between the undersigned, John Brown, William Burbank, Edward Cunningham and Eaymond Williams, all of the City of Chicago and State of Illinois. Witnesseth, That in consideration of the mutual undertakings and agreements of the parties hereto, as hereinafter set forth, and in further consideration of the sum of one dollar by each of the said parties to the other in hand paid (at the time of the execution hereof), the receipt of which is hereby severally acknowledged, the said parties to this contract hereby agree by and among themselves and with each other as follows, to-wit : First, That a corporation shall be formed by us un- der the laws of Illinois substantially as follows : (a) The name thereof to be the Perfect Automobile Company. (b) The capital stock of said corporation to be One Hundred Thousand ($100,000.00) Dollars, divided into one thousand (1,000) shares of One Hundred ($100.00) Dollars each, said stock to be all Common Stock of uniform character and usual form. (c) The purpose of said corporation to be sub- (197) 198 APPENDIX. stantially for the manufacture and sale of automobiles and their parts. (d) Said corporation shall have a Board of Directors consisting of five in number, who shall all be stock- holders of record at the time of their election. (e) The officers of said corporation shall be a President, Vice-President, Secretary, Treasurer and General Manager. (f ) The location of the principal office to be at Chi- cago. (g) The duration of said corporation to be 99 years. Second, We hereby agree with each other, and the one with the other, that we will take the number of shares of the capital stock of said corporation set op- posite our respective names hereunto subscribed, and will pay to the commissioners duly appointed by the Secretary of State of Illinois in that behalf, fifty (50%) per cent, of the par value of the said shares so subscribed by us respectively at the time of holding the first meeting of the said subscribers to elect a Board of Directors for said corporation; and we further agree to pay the balance of our said subscrip- tions whenever called upon so to do by the Board of Directors of said corporation, after the same shall be formed. Third, We further nominate, constitute and appoint, ( ) as our (attorney or) agent, and the agent (or attorney) of the said corporation so to be formed, to create or cause to be created the said cor- poration in accordance with the laws of Illinois and this APPENDIX. 199 agreement, and to do and perform all things necessary to bring said corporation into legal existence; and we further authorize and empower our said agent (or attorney) to draw on the funds in the hands of the legally constituted officers or agents of said corpora- tion, for the necessary expenses attending said incor- poration, and we further agree that any and all con- tracts which our said (attorney or) agent may make in such matter shall be binding upon said corporation and also upon us jointly and severally. In Witness Whekeof, we, the undersigned, hereby severally bind ourselves, our heirs, executors and ad- ministrators. NAME ADDKESS SHAKES AMOUNT SPECIAL CONTRACT TO FORM A CORPORATION This Agreement made and entered into this first day of December A. D., 1909, by and between John Brown, party of the first part, and "William Burbank, Edward Cnnningham, Frank Smith and Eaymond Will- iams, parties of the second part, all residents of the City of Chicago in the State of Illinois : Witnesseth, That Whereas, the said party of the first part is the owner of and now operating under his own name, the manufacturing plant and business located at 279 Michigan Avenue in the City of Chicago, said business consisting of special tools and machinery for the manufacture of automobiles and their parts, and also a stock of raw material for the conduct of said business, as well as various new and second hand machines particularly enumerated and set forth in the inventory attached hereto marked " Exhibit A"; And Whereas, the said parties of the second part are desirous of becoming interested in and identified with said business on substantially the following terms and conditions: Now, Therefore, it is Hereby Agreed : That in con- sideration of the mutual undertakings and agreements of the parties hereto, as hereinafter set forth, and in further consideration of the sum of One Dollar by each (201) 202 APPENDIX. of the said parties to the other in hand paid (at the time of the execution hereof), the receipt of which is hereby severally acknowledged, the said parties of this contract hereby agree by and among themselves and with each other as follows, to-wit : First, that a corporation shall at once be formed by us under the laws of Illinois substantially as follows : (a) The name thereof to be The Perfect Automobile Company. (b) The capital stock of the said corporation to be Two Hundred Thousand ($200,000.00) Dollars, divided into Two Thousand (2000) shares of one hundred ($100.00) Dollars each, said stock to be all common stock of uniform character and usual form. (c) The purpose of said corporation to be sub- stantially for the manufacture, purchase and sale of automobiles and their parts. (d) Said corporation shall have a Board of Directors consisting of five in number, who shall all be stock- holders of record at the time of their election. (e) The officers of said corporation shall be a Pres- ident, Vice-President, Secretary, Treasurer and General Manager. (f ) The location of the principal office to be at Chi- cago. (g) The duration of said corporation to be 99 years. Second, the parties hereto agree to subscribe, take and pay for the said shares of stock in the following proportion and manner, namely : said party of the first part shall subscribe for shares of said capital stock; the balance of said shares of stock shall be sub- APPENDIX. 203 scribed for by the said parties of the second part as follows: said Burbank shares, said Cunningham shares, said Smith shares, and said "Will- iams shares. Third, the said parties of the second part severally agree to pay nnto the Commissioners appointed by the Secretary of State of Illinois, for the benefit of said proposed corporation, fifty (50%) per cent of the par value of said shares of stock so subscribed for by them at the time and whenever the said commissioners shall convene and hold the first meeting of the subscribers of said capital stock, and they further agree to pay the balance remaining due and unpaid upon said shares so subscribed for by them in cash into the Treasury of said corporation, as soon as they may be called upon so to do by the Board of Directors of said Corporation when formed. Fourth, as soon as said corporation shall be fully organized the said party of the first part hereby agrees to convey, by good and sufficient instrument of con- veyance a clear and perfect title to said manufacturing plant and business as enumerated and set forth in the inventory attached hereto as Exhibit "A", aforesaid, and to accept in payment therefor ( ) shares of the capital stock of said corporation at its par value, namely ( ) Dollars, and the balance of said purchase money for said manufacturing plant and as- sets amounting to Dollars, in cash ; the same to be paid upon the tendering of a good and legal convey- ance of said plant and assets by the said party of the first part, to said corporation when formed. 204 APPENDIX. Fifth, it is agreed between the parties hereto that said parties shall constitute the first Board of Directors of said corporation, and that in consideration of the experience and former connection with the said business by the said party of the first part, that he shall be the General Manager of the same and receive a salary from said corporation for his services in that be- half amounting to Dollars per annum, payable in equal monthly installments of Dollars per month, and that a contract shall be made between the said corporation and the said party of the first part whereby his said services as General Manager shall be so secured and continued for a period of two (2) years from and after the incorporation of said com- pany as aforesaid ; that as said General Manager said party of the first part shall employ all labor and pur- chase all material and supplies necessary for the con- duct of said business, and have general supervision of the mechanical department thereof subject to the control of the Board of Directors ; and that said party of the first part shall devote his entire time, attention and best endeavors to the business of said corporation for and during the period aforesaid. Sixth, it is understood and agreed that the said party of the first part shall assume and pay all outstanding obligations of every kind and nature existing at the time of the sale and conveyance of said manufacturing plant as aforesaid, and that he is to retain only the current book accounts and monies due the said business at the time of said conveyance aforesaid; that all other kinds of property and property rights APPENDIX. 205 now owned and enjoyed by said business, including its good-will, shall be legally conveyed and inure to the said corporation when formed, and that he shall warrant and defend the title to said business and as- sets against all claims whatsoever. Seventh, we further nominate, constitute and ap- point , as our (attorney or) agent, and the agent (or attorney) of the said corporation so to be formed, to create or cause to be created the said corporation in accordance with the laws of Illinois and this agreement, and to do and perform all things necessary to bring said corporation into legal existence ; and we further authorize and empower our said agent (or at- torney) to draw on the funds in the hands of the legally constituted officers or agents of said corporation, for the necessary expenses attending said incorporation, and we further agree that any and all contracts which our said (attorney or) agent may make in such matter shall be binding upon said corporation and also upon us jointly and severally. This contkact shall be binding upon the heirs, exec- utors, administrators, successors and assigns of the respective parties hereto. In witness whekeof the parties hereto have here- unto set their hands and seals the day and year first above written. 206 APPENDIX. Keorgastization Cektificates. This is to Certify That Bichard Eoe of Chicago, Illinois (hereinafter designated as the transferor), has transferred and delivered to William Smith (here- inafter designated as the transferee), Certificate No. 23 for 1,000 shares of the capital stock of The Doe Electrical Mfg. Co., for the purposes and upon the conditions following, viz.: First. That the transfer above named is made to enable the said transferee to effect a reorganization of the said company, by reincorporating the same under the laws of the State of Illinois; said Illinois corporation to be known by the same or similar name as the present organization, and to have a capital stock of $125,000 ; that the new corporation, when formed, shall have $10,000 in cash paid in its treasury, after all obligations of the present company are dis- charged; and also to have in its treasury $15,000 — face value — of its capital stock for sale, at par; that said corporation, when reorganized by said trans- feree, shall possess and own by transfer from the Board of Directors of the present corporation all the assets thereof. Second. That the said transferee agrees to de- liver, and the said transferor agrees to receive, in lieu of said stock certificate, a new certificate in the said reorganized company, for 50 shares of its capi- tal stock at the par value of $10.00 per share, fully paid and non-assessable. Third. It is further understood that this agree- ment is made, and the said reorganization is contem- plated, for the purpose of discharging the obligations of the said The Doe Electrical Mfg. Co., and to preserve its assets for the benefit of all its stock- APPENDIX. 207 holders, equally, and that to accomplish said objects the said transferee is hereby vested with all the powers and rights of ownership, in and to the said stock so transferred, and with full power to consum- mate said reorganization in accordance herewith. Fourth. It is further agreed that the said trans- feree shall perfect said reorganization, as soon as may be after all the outstanding; stock in the present corporation is transferred and surrendered under the terms of this certificate; that upon his failure or ina- bility so to do, within a reasonable time, he shall re- deliver and transfer said certificate to the said trans- feror. In Testimony Whereof, the said parties hereto, have hereunto set their hands, and affixed their seals, at Chi- cago, Illinois, this 4th day of May, A. D. 1907. Eichard Boe, [Seal.] William Smith, [Seal.] 208 appendix. Form of Appraisal, of Property, to be Accepted by a Corporation in Payment for Stock. Chicago, Illinois, May 12th, 1907. We, the undersigned commissioners,* (heretofore, on the 29th day of April, 1907, appointed by the Sec- retary of State of Illinois), having carefully examined, investigated and valued the plant, machinery, assets and good will of the business, heretofore owned and controlled by The Doe Electrical Mfg. Co., of 333 Plymouth Avenue, in the City of Chicago, do appraise said assets of said business as follows: Machinery, tools, lathes, presses, etc., etc., as per inventory attached hereto, marked Exhibit "A" .... $64,900.00 Stock of finished and unfinished product and merchandise, as per inventory at- tached hereto, marked Exhibit "B'\. 25,400.00 Office outfit and fixtures as per inven- tory attached hereto, marked Exhibit "C" 1,200.00 Good will and intangible rights as per as- signments and conveyances hereto at- tached, marked Exhibits "D," "E" and "F" 8,500.00 Total appraised value $100,000.00 Eespectfully submitted, William Johnson, ) Commissioners Henby Smith, V {qt Board of Directors)# Henry Jones, J ♦By here substituting the word Directors, in place of the word Commis- sioners the form may also be utilized by them. APPENDIX. 209 Resolution Ratifying Commissioners' Acts in Ap- praising and Accepting Assets to be Turned in to a Corporation, in Exchange for Stock, upon a Re- organization. Whereas, This company was organized for the purpose of engaging in the manufacture and sale of electrical appliances and supplies, and particularly to acquire, own and operate the business heretofore owned and conducted by The Doe Electrical Mfg. Co., at 333 Plymouth Avenue, in the City of Chicago, and Whereas, It appearing to the Board of Direct- ors of this company that the commissioners, hereto- fore on to-wit : the 9th day of May, 1907, appointed by the Secretary of State of Illinois to open books of subscription to the capital stock of this company, did in accordance with their authority and duty in the premises on to-wit: the 21st day of May, 1907, ap- praise and take over, as such commissioners and trus- tees for this company, the plant, business and assets of The Doe Electrical Mfg. Co., and are now holding the same as such commissioners and trustees subject to the action of this Board; and, Whereas, It further appears, from the minutes and proceedings of said commissioners, recorded in the minute book of this company, that said plant and assets were duly appraised and valued at the sum of I One Hundred Thousand ($100,000) Dollars, and that the said appraisal and valuation were carefully and properly made, and the valuation placed thereon is, in the judgment of this Board, fair and reasonable; and, Whereas, Said property and assets have been re-appraised by this Board, and valued at said sum 210 APPENDIX. of One Hundred Thousand ($100,000) Dollars, and it is the concensus of opinion of this Board that the ac- quiring of said property is essential to the best inter- ests of this company, in order that it may become im- mediately a going and paying concern. Therefore, be it Resolved, That this company do purchase of the said, The Doe Electrical Mfg. Co., through said commissioners,* the said goods, chat- tels and property mentioned and set forth in the minutes and proceedings of the said commissioners herein recorded, and set forth in the bill of sale ac- companying said transfer to them, from said, The Doe Electrical Mfg. Co., and that the action of said commissioners in the premises be and the same is in all respects, hereby ratified, confirmed and adopted; and that the President and Secretary of this company be, and they are hereby authorized, em- powered and directed to issue on behalf of this com- pany, ten thousand (10,000) shares of its capital stock at par, to the several stockholders of The Doe Elec- trical Mfg. Co., as their rights appear by the terms of said sale, and in accordance with the resolution of the Board of Directors of said, The Doe Electrical Mfg. Co., conveying said property to said commis- sioners, in payment for said goods, chattels, and property, and the Treasurer of this company is also hereby authorized and directed to credit the said sum of One Hundred Thousand ($100,000) Dollars upon the subscription of William Smith to the capital stock of this compa ny heretofore made by him. * Or Directors. APPENDIX. 211 Receipt to be issued by the Commissioners in Illinois ( ob by a Trustee in Any State) fob Payment on Account of Stock Subscription, in Advance op Complete Organization. No J No No. of shares . I I Shares. The John Doe Electric Co., Chicago. I* This certifies, that of... , I being an original subscriber for shares of the capital stock J of The John Doe Electric Co. | (a corporation in process of or- | ganization under the laws of the Name I State of Illinois), at its par value | of $10.00 per share, has paid to | us, as commissioners, duly ap- | pointed by the Secretary of State | of Illinois (and also trustees), I for said corporation, the sum of [ dollars, to apply on ■ account of said subscription, in accordance with its terms, the same being $ of the total I amount thereof. .This receipt is issued on be- 212 APPENDIX. Amount, $ Installment, Date, .190. half of said The John Doe Elec- teic Co., and upon the condition that as soon as the said corpora- tion is fully organized, that said payment hereby acknowledged will be credited on the said sub- scription, and that upon the sur- render of this receipt by the owner thereof, and the payment of the balance due upon said sub- scription, according to its terms, a regular and duly executed stock certificate of said corporation will be issued to the said subscriber or his assignee. Dated at Chicago, His., this day of A. D., 190... I Commissioners (or Trustees). appendix, 213 Assignment of the Foregoing Commissionebs' Be- ceipt and the sljbscbiption undeb which the Same is Issued. For Value Received hereby sell, assign and transfer unto all my rights, title and in- terest in and to the subscription heretofore made by me to shares of the capital stock of The John Doe Electric Co., together with the payment made thereon, as evidenced by the within Commis- sioners' receipt. This assignment and transfer is made upon and in accordance with the terms and conditions of my said subscription, and I do hereby authorize and instruct the duly authorized officers of said corporation to issue the stock subscribed for by me, to the order of my said assignee upon compliance with all the conditions of my said subscription and the due surrender of this certificate. Dated at this day of .... A. D. 190 [Seal.] Witness, 214 APPENDIX. Installment Certificate, for Use of a Corporation when Selling Stock to be Paid For in Install- ments. No...., Shares. Name, Rec'd on Acc't. $ No. . Shares The John Doe Electric Co., Chicago. $. This certifies that , a subscriber for. Shares of the Capital Stock of The John Doe Electric Co., at its par value of $10.00 per share, has this day paid into the treas- ury of said corporation to be ap- plied on account of said subscrip- tion, the sum of $ ,same being an installment of $ per share. It is mutually agreed between the holder hereof, and The John Doe Electric Co., that the issu- ance of said shares of stock is subject to the conditions of the said subscription, and that the regular stock certificates of said corporation are not to be issued thereunder, until the first day of June, A. D., 1908 ; and that upon the payment of the remaining in- stallments of said subscription in APPENDIX. 215 1 accordance with its terms, and the due surrender of this certifi- i cate, such regular stock certifi- cate will, upon said first day of June, 1908, be duly issued to the 7 said subscriber or his assignee. Dated at Chicago, 111., this I day of , 1907. Treasurer. [Corporate Seal..] Attest : Secretary. 216 APPENDIX. Assignment of the Foregoing Installment Certif- icate, and the Subscription Under Which the Same is Issued. For Value Eeceived hereby sell, assign and transfer unto all my rights, title and interest in and to the subscription heretofore made by me to shares of the capital stock of The John Doe Electric Co., together with the payment made thereon, as evidenced by the within installment certificate. This assignment and transfer is made upon, and in accordance with, the terms and conditions of my said subscription, and is subject to the conditions thereof; and I do hereby authorize and instruct the duly author- ized officers of said corporation to issue the stock sub- scribed for by me, to the order of my said assignee on the first day of June, A. D. 1908, upon com- pliance with all the conditions of my said subscription and the due surrender of this certificate. Dated at this day of A. D. 190. . [Seal.] Witness APPENDIX. 217 BY-LAWS OF THE JOHN DOE ELECTRIC CO. Aktiole I. BOAKD OF DIEECTOES. Sec. 1. The Board of Directors of this Company shall consist of five (5) stockholders, who shall hold their respective offices for one (1) year, and until their successors are elected. Aeticle II. OFFICEES. Sec. 1. The officers of this company shall consist of a President, a Vice President, a Secretary and a Treasurer, and such other officers and agents as shall, from time to time, be deemed necessary by the Board of Directors. Sec. 2. Such officers shall hold their respective offices for the period of one (1) year following their election, and until their successors are elected, and with salary, if any, as shall be provided by the directors. Sec. 3. Any officer may be removed by the Board of Directors, when, in their judgment, the interests of the company so requires. 218 APPENDIX. Article III. STO CKHOLDERS 9 MEETINGS. Sec. 1. The annual meeting of the Stockholders of this company shall be held at its principal office in Chicago on the second Tuesday of May of each year at the hour of three o'clock p. m. Sec. 2. A notice of such meeting, giving the day and the hour thereof, shall be signed by the secretary, and mailed to each stockholder of record as the stock- holder's address appears on the books of the com- pany, or so far as the same are known to the secre- tary, at least ten (10) days before said meeting day. Sec. 3. Any business may be transacted at such an- nual meeting without specifying the same in the notice therefor. Sec. 4. The president, or any two (2) members of the Board of Directors, may call special meetings of the stockholders of this company, which shall be held at the general office of the company in Chicago, or at such other place, in the City of Chicago, and at such hours, as the president or such directors may deter- mine; and a notice, briefly stating the subjects which will come before such special meeting, shall be mailed to each stockholder at his last known address, at least five (5) days before the time for holding said meetings. Akticle IV. MEETINGS OP BOARD OF DIRECTORS. Sec. 1. The regular annual meeting of the Board of Directors of this company shall be held on the second _ r Tuesday of May, at the office of the company in Chicago, immediately after the annual stockholders' meeting. Sec. 2. Three (3) of the Board of Directors shall constitute a quorum for the transaction of any business at any meeting. Sec. 3. The president of this company may call special meetings of the Board of Directors whenever he may deem it necessary so to do. Sec. 4. The secretary shall, upon the request of the president, mail postpaid to the address of each di- rector, so far as the same appears on the company's books, a notice of all special directors' meetings and shall specify briefly therein, the subjects that will come before the meeting, at least five (5) days before such meeting day. Sec, 5. No business shall be transacted at any special directors' meeting, except that specified in the notice or call therefor. Article V. ORDER OF BUSINESS AT ALL MEETINGS. Sec. 1. The order of business at all meetings of the Board of Directors and Stockholders, shall be as follows : First— Eoll call. Second — Beading minutes of last meeting. Third — Considering communications to the Board or Stockholders. 220 APPENDIX. Fourth — Beports of officers to the Board or Stock- holders. Fifth — Unfinished business. Sixth — Original resolutions and new business. Article VI. THE PRESIDENT. Sec. 1. The president shall preside over all meet- ings of the Board of Directors and Stockholders, at which he may .be present. Sec. 2. In the absence of the president at any di- rectors' meetings, the vice president shall be the acting president for such meetings. Sec. 3. In case the office of treasurer and that of president of this company shall be filled by different persons, then all notes and bonds, or other evidences of indebtedness, shall be countersigned by the presi- dent. Sec. 4. The fact that a director presides as presi- dent or chairman of any meeting of the Board of Di- rectors, or stockholders, shall not prevent his voting, the same as though he were not president or chairman. Article VII. vice president. Sec. 1. The vice president of the company shall take an active part in the conduct of the business, and his duties and responsibilities shall be determined, from time to time, by the Board of Directors. I APPENDIX. 221 Sec. 2. In the absence of the president at any di- rectors ' meetings, or in his absence from the city for any protracted period, the vice president shall be the acting president. Akticle VIII. THE SECRETARY. Sec. 1. The secretary of the company shall attend all meetings of the stockholders and directors when practicable ; in his absence a secretary pro tern, or act- ing secretary shall be appointed. Sec. 2. The secretary shall keep a correct record of the proceedings of the Board of Directors and of the stockholders in the corporate record book of the company, and he shall perform such other duties, from time to time, as the Board of Directors may designate by resolution. Sec. 3. The secretary shall countersign all checks drawn upon the funds of this company. Article IX. THE TREASURER. Sec. 1. The treasurer shall keep the moneys of the company in such bank, or banks, as may be designated by the Board of Directors; the deposit account shall be kept in the name of the corporation. Sec. 2. He shall sign all checks, drafts, notes, or other evidences of indebtedness, for and on behalf of the company, and have full charge of its financial 222 APPENDIX. affairs, subject, however, to the direction of the Board of Directors. Sec. 3. All checks drawn by the treasurer shall be countersigned by the secretary before they are issued. Sec. 4. The treasurer shall take an active part in the conduct of the business, and his duties and respon- sibilities shall be determined, from time to time, by the Board of Directors. Article X. ANNUAL, REPORTS. Sec. 1. It shall be the duty of all officers of the cor- poration to make full and complete written reports to the Board of Directors annually, on the second Tues- day of May in each year, of all matters pertaining to their respective offices, and the board may require any officer of the corporation, at any time, to make such reports, touching the business of his office, as they shall deem necessary. Article XL CHECKS, DRAFTS, MORTGAGES AND BONDS. Sec. 1. All checks and drafts shall be signed in the company's name by the treasurer, and countersigned by the secretary. Sec. 2. In case the office of treasurer and that of president of this company shall be filled by different persons, then all notes, bonds or other evidences of in- debtedness, shall be countersigned by the president, be- fore they are issued. APPENDIX. 223 Sec. 3. In case of the issuing of any mortgages or bonds on the plant or property of the company, it shall not be necessary to the validity thereof; that authority be obtained from the stockholders ; the directors of the company shall have full power, right and authority to pledge the plant and assets of the company to raise necessary working funds therefor ; or to secure any ex- isting debts. Akticle XII. CERTIFICATES OF STOCK. Sec. 1. All certificates of stock shall be signed by the president and secretary, and attested by the seal of the company. Sec* 2. Capital stock shall be transferable only on the books of the corporation, upon return and delivery of the certificate so transferred, duly endorsed; the secretary shall cancel the same and issue a new certi- ficate or certificates to the assignee. Sec. 3. No person shall be entitled to vote at any meeting of the stockholders, unless his ownership of stock shall appear on the books of the company on the first day of the month preceding the time of such meeting, except in case of executors or administrators. Sec. 4. Any stockholder may vote by proxy, duly authorized in writing and presented and filed with the secretary. Sec. 5. In case of loss or destruction of stock cer- tificates by the owners thereof, new certificates may only be issued upon such terms and conditions as the Board of Directors may impose. 224 APPENDIX. Article XHL SALARIES. Sec. 1. No salaries of any kind shall be paid to or claimed by any officer of this company, (as such) unless the amount of such salary is fixed and provided for by order or resolution of the Board of Directors, adopted prior to the performance of the services in question and recorded in the minute book of the company. Article XIV. VACANCIES. Sec. 1. Vacancies in any of the offices, or in the Board of Directors may be filled, by the directors of this Company for the unexpired term, at any regular or special meeting of the Board. Sec. 2. In the absence or disability of any officer or agent, the directors may, if they see fit, appoint in his stead an acting officer or agent who shall perform the duties of his office, during such absence or disa- bility, under the directions of, and to be governed by the Board of Directors. Article XV. ADDRESSES. ,Sec. 1. It shall be the duty of each stockholder, officer and director to inform the secretary of his post- office address, and of any change in the same; and it shall be the duty of the secretary to keep a book of such addresses. APPENDIX. 225 Sec. 2. Notices, mailed post paid, to the addresses so given shall be deemed sufficient notice for any and all purposes. Article XVI. DIVIDENDS. Sec. 1. Dividends may be declared from the profits of the company, at such times, and in such amounts, as the Board of Directors shall, from time to time, deem proper. Article XVII. CORPORATE SEAL. Sec, 1. It shall be the duty of the Board of Direc- tors, at their first meeting, to adopt a corporate seal for the corporation; and to affix an impression of the same upon the record book of the corporation opposite this article. Article XVIII. AMENDMENTS. Sec. 1. These by-laws, or any of them, may be altered, amended, or repealed at any regular or spe- cial meeting of the Board of Directors, and at such meetings new by-laws may be added; provided thirty (30) clays written or printed notice shall be given to all stockholders of any such intended alteration, amend- ment or repeal. 226 APPENDIX. Adopted, this 16th day of May, 1907. John Doe, Bichakd Eoe, William Smith, Henky Bkown, James Johnson", Attest : Henky Jones, Secretary. APPENDIX. 227 Fosm op Assignment of Invention Before Patent. (From "Rules of Practice," U. S. Pateut Office.) W a: Whekeas, I, John Jones, of Chicago, in the County of Cook, and State of Illinois, have invented a certain new and useful improvement in electric engines, for which I am about to make (or have heretofore on the . .day of A. D. 190 made) pplication for Letters Patent of the United States;* And Whekeas, "William Smith of Chicago, County of Cook, State of Illinois, is desirous of acquiring an interest in the said invention and in the Letters Patent to be obtained therefor; Now, Thekefoke, To all whom it may concern, be it known that, for and in consideration of Five Thousand Dollars, to me in hand paid, the receipt of which is hereby acknowledged, I, the said John Jones, have sold, assigned and transferred, and by these presents do sell, assign and transfer unto the said William Smith the full and exclusive right to the said invention, as fully set forth and described in the specification pre- pared and executed by me on the 5th day of March, 1907, preparatory to obtaining Letters Patent of the United States therefor ; and I do hereby authorize and request the Commissioner of Patents to issue the said Letters Patent to the said William Smith, as the as- signee of my entire right, title and interest in and to the same, for the sole use and behoof of the said William Smith and his legal representatives. ♦If application for Letters Patent have been made, give number of ap- plication, as well as date. 228 APPENDIX. In Testimony Whereof, I have hereunto set my hand, and affixed my seal, this 25th day of June, 1907, John Jones. [Seal.] Iii the presence of Harry Williams. APPENDIX. 229 Form of Assignment of Undivided Interest in Let- ters Patent. (From "Bules of Practice," U. S. Patent Office.) Whereas, I, John Jones, of Chicago, County of Cook, and State of Illinois, did obtain Letters Patent of the United States, for an improvement in electric engines, which Letters Patent are numbered * * * and bear date the 30th day of June, in the year 1907 ; and whereas William Smith, of Chicago, County of Cook, and State of Illinois, is desirous of acquiring an interest in the same : Now, Therefore, To all whom it may concern, be it known that, for and in consideration of the sum of One Thousand ($1,000) Dollars, to me in hand paid, the receipt of which is hereby acknowledged, I, the said John Jones, have sold, assigned and transferred, and by these presents do sell, assign and transfer unto the said William Smith the undivided one-half part of the whole right, title, and interest in and to the said in- vention, and in and to the Letters Patent therefor aforesaid; the said undivided one-half part to be held and enjoyed by the said William Smith for his own use and behoof, and for the use and behoof of his legal representatives, to the full end of the term for which said Letters Patent are or may be granted, as fully and entirely as the same would have been held and en- joyed by me had this assignment and sale not been made. In Testimony Whereof, I have hereunto set my : 1230 APPENDIX. hand, and affixed my seal, at Chicago, in the County of Cook, and State of Illinois, this 6th day of July, A. D. 1907. John Jones. [Seal.] In presence of Hakry Williams. appendix. 231 Fokm of Assignment of Entire Interest in Patent. (From "Bules of Practice," U. S. Patent Office.) Whereas, John Jones, of Chicago, in the County of Cook, and State of Illinois, did obtain Letters Patent, of the United States, for an improvement in electric engines, which Letters Patent are numbered * * * and bear date the 30th day of June, in the year 1907 ; And, Whereas, I am now the sole owner of said patent, and of all rights under the same ; and, whereas, The John Doe Electric Co. (a corporation of Illi- nois), of Chicago, County of Cook, State of Illinois, is desirous of acquiring the entire interest in the same: Now, Therefore, To all whom it may concern, be it known that, for and in consideration of the sum of ten thousand dollars, to me in hand paid, the receipt of which is hereby acknowledged, I, the said John Jones, have sold, assigned and transferred, and by these pres- ents, do sell, assign and transfer, unto the said, The John Doe Electric Co., the whole right, title and in- terest in and to the said improvements in Electric En- gines and in and to the Letters Patent therefor afore- said ; The same to be held and enjoyed by the said The John Doe Electric Co., for its own use and behoof, and for the use and behoof of its legal representatives, to the full end of the term for which said Letters Patent are or may be granted, as fully and entirely as 1232 APPENDIX. the same would have been held and enjoyed by me had this assignment and sale not been made. In Testimony Whebeof, I have hereunto set my hand and affixed my seal, at Chicago, in the County of Cook, and State of Illinois, this 18th day of May A. D. 1907. John Jones. [Seal.] Signed, sealed and delivered in presence of William Smith. appendix. 233 Form op Coal. Option, With Deferred Payments: This agreement, Made and entered into this day of 190 , between of County, , party of the first part, and of , party of the second part : Witnesseth, That the party of the first part in con- sideration of one dollar ($1.00) and other good and valuable considerations to in hand paid by the said party of the second part, the receipt of which is hereby acknowledged, does hereby grant and sell unto said party of the second part, his heirs or assigns, the exclusive right, or option, for the period of months from the date hereof, to pur- chase at the price and upon the terms hereinafter stated, all the coal and mineral lying and being under the surface of the following described real estate situ- ate in County, to-wit: the said above described real estate containing acres of land, more or less. Said party of the second part hereby agrees that he will, within 30 days after like options are obtained on at least 1,000 acres of coal near or adjacent to said premises above described, begin drilling, and then 234 APPENDIX. cause to be put down upon or in the neighborhood of the above described real estate, one or more drillholes for the purpose of ascertaining and testing the amount and quality of coal that may be found in said vicinity; and, that as soon as said drilling shall be completed, and it is thereby demonstrated to the satis- faction of the said party of the second part, that coal of sufficient thickness and quality underlies said above described premises, then and in that event, said party of the second part hereby agrees to pay for said coal above described at the price hereinafter mentioned, in the following manner, to-wit: First — to pay to the party of the first part one quarter of the purchase price in cash; Second — to give to the said party of the first part his promissory note for one quarter of the purchase price of said coal ; Third — to give to the said party of the first part his promissory note for one- half, or the balance, of the purchase money, said notes to be payable to the order of said party of the first part on or before one and two years, respectively, after the date thereof, with interest at the rate of 6% per annum, and the same to be secured by a mortgage in the usual form upon said coal and premises above described. And the party of the first part hereby agrees at or before the expiration of months from the date hereof, to convey to the said party of the second part, his heirs, legal representatives or assigns, by a good and sufficient warranty deed accompanied by a merchantable abstract, brought down to date, at and for the price of dollars per acre, to be paid by said party of the second part in the manner herein- before mentioned, all the coal and mineral lying under APPENDIX. 235 said above described premises, together with, the right to mine, dig and remove the same therefrom, and together with the right to use all entries under said premises for the purpose of hauling, mining and removing coal from any other lands near or adjacent to the above described premises. And under the continuance of this option the party of the first part hereby grants to the party of the second part the right of ingress and egress over said prem- ises for the purpose of prospecting and drilling for coal on said premises, and the right to erect such structure or structures as are necessarily incident to the carrying out of said work, and hereby releases said party of the second part from all claims for damages which may arise upon account of said drilling and prospecting, except damage to growing crops (if any), for which said second party agrees to pay a just com- pensation. Said party of the first part further agrees to sell to said party of the second part, his heirs, or assigns, at any time within one year after the purchase of said coal as aforesaid, such portion of the surface of said premises as may be desired for the erection of tipples, buildings, power houses, railroad tracks and switches and other improvements for the mining, removal and transportation of said coal (not to exceed 30 acres, however) at the price of dollars per acre, and to convey the title to said surface to said party of the second part, his heirs, legal representatives or assigns, by a good and sufficient wakkastty deed, accompanied by a merchantable abstract therefor. It is further agreed that no shaft shall be sunk or railroad built within five hundred (500) feet of any 236 APPENDIX. important building now standing upon said premises and owned by the party of the first part, except by special contract hereafter secured. Said first party further agrees that if said party of the second part shall be drilling and testing said prem- ises or premises adjacent thereto at the time of the expiration of this option, to then extend the time thereof for a period of sixty days from the date of the expiration hereof. In witness whereof, we herein bind ourselves, our heirs, legal representatives and assigns, and have affixed our hands and seals the day and year first above written. [Seal.] [Seal.] [Seal.] [Seal.] State op , ) >ss. County of , ) I, a Notary Public in and for said county, in the state aforesaid, do hereby certify That personally known to me to be the same person whose name subscribed to the foregoing instrument, appeared before me this day in person, and acknowledged that he signed, sealed and delivered the said instrument as free and voluntary act, for the uses and purposes therein APPENDIX. 237 set forth, including the release and waiver of the right of homestead. Given under my hand and notarial seal, this day of... A. D. 190 Notary Public. 238 APPENDIX. Form of Coal Option, Payments To Be Made, Either in Whole or Part, with Stock of the Corporation To Be Formed for the Development of the Field Optioned : This agreement, Made and entered into this day of 190 , between of County, , party of the first part, and of , party of the second part: Witnesseth, That the party of the first part in con- sideration of one dollar ($1.00) and other good and valuable considerations to in hand paid by the said party of the second part, the receipt of which is hereby acknowledged, does hereby give, grant, sell and convey nnto said party of the second part, his heirs, or assigns, the exclusive right, privilege, or option, for the period of ..months from the date hereof, to purchase all the coal and mineral lying and being under the surface of the following described real estate situate in County, , to-wit : (said above described real estate containing acres of land, more or less) at and for the price of $ per acre, to be paid as follows, viz : dollars in cash, and the balance of said pur- APPENDIX. 239 chase money to be paid in Cumulative 7% Preferred stock of the Mining Corporation which shall be formed for the purpose of taking over said coal above described, and the balance of the field of at least 1,000 acres lying near or adjacent to said coal, and for the mining and removal of the same. It being understood and agreed that said corporation above referred to, shall be organ- ized under the laws of and have a capital stock of $200,000.00, the same to be equally divided into Cumulative 7% Preferred and Common stock, said preferred stock to have all the rights and privileges of the common stock. Said party of the second part hereby agrees, that he will, within 30 days after options are obtained on at least 1,000 acres of coal near or adjacent to the prem- ises above described, begin drilling, and then cause to be put down upon or in the neighborhood of the above described real estate, one or more drill holes for the purpose of ascertaining and testing the amount and quality of coal that may be found in said vicinity; and that as soon as said drilling shall be completed, and it is thereby demonstrated to the satisfaction of the said party of the second part, that coal of sufficient thick- ness and quality underlies said above described prem- ises, then and in that event, said party of the second part agrees to pay for said coal above described at the price and in the manner above set forth. And the party of the first part further agrees at or before the expiration of months from the date hereof to convey unto the party of the second part, his heirs, legal representatives, or assigns, by good and sufficient warranty deed, accompanied by a merchantable abstract, brought down to date, at and 240 APPENDIX. for the price of dollars per acre, to be paid by said party of the second part in the manner herein- before mentioned, all the coal and mineral lying under said premises, together with the right to mine, dig and remove the same therefrom, together with the right to use all entries under said premises for the purpose of hauling, mining and removing coal from other lands near or adjacent to the above described premises. And under the continuance of this option the party of the first part hereby grants to the party of the sec- ond part, the right of ingress and egress over said premises for the purpose of prospecting and drilling for coal on said premises, and the right to erect such structure or structures as are necessarily incident to the carrying out of said work, and hereby releases said party of the second part from all claims for damages which may arise upon account of said drillings and prospecting, except damage to growing crops (if any), for which said second party agrees to pay a just com- pensation. Said party of the first part further agrees to sell to said party of the second part, his heirs, or assigns, at any time within one year after the purchase of said coal as aforesaid, such portion of the surface of said premises as may be desired for the erection of tipples, buildings, power houses, railroad tracks and switches and other improvements for the mining, removal and transportation of said coal (not to exceed 30 acres, however), at the price of dollars per acre, and to convey the title to said surface to the party of the second part, his heirs, legal representatives or as- signs, by a good and sufficient waeeanty deed, accom- panied by a merchantable abstract APPENDIX. 241 It is further agreed that no shaft shall be sunk or railroad built within five hundred (500) feet of any important building now standing upon said premises and owned by the party of the first part, except by special contract hereafter secured. Said first party further agrees that if said party of the second part shall be drilling and testing said prem- ises or premises adjacent thereto at the time of the expiration of this option, to then extend the time thereof for a period of sixty days from the date of the expiration hereof. In witness whereof, we herein bind ourselves, our, heirs, legal representatives and assigns, and have affixed our hands and seals the day and year first above written. [Seal.] [Seal.] [Seal.] [Seal.] State of , ) County of , f I, a Notary Public in and for said county, in the state aforesaid, do hereby certify That personally known to me to be the same person whose name subscribed to the foregoing instrument, appeared before me this day, in person, and acknowledged that he signed, sealed 242 APPENDIX. and delivered the said instrument as free and voluntary act, for the uses and purposes therein set forth, including the release and waiver of the right of homestead. Given under my hand and notarial seal, this day of.— A. D. 190 Notary Public. APPENDIX. 243 Stockholder's Proxy. Know All Men By These Presents : That the undersigned being the owner of record of Fifty shares of the capital stock of The John Doe Elec- tric Co., of Chicago, do hereby make, constitute and ap- point Eichard Eoe, of Chicago, my true and lawful attorney for me and in my name, place and stead, to attend the annual meeting of the stockholders of said corporation to be held at 333 Plymouth Ave., in the City of Chicago, on the fifth day of May, A. D. 1908, or at any adjournment thereof, and to represent me, and for me and in my name and stead to vote at said meet- ing upon the said shares of stock standing in my name, upon any and all questions that may be presented thereat, and in the transaction of any other business which may come before said meeting, or any adjourn- ment thereof, as fully as I could do if personally present at the doing thereof, and I hereby ratify and confirm all that my said attorney may do by virtue hereof. 1st Witness Whereof, I have hereunto set my hand and seal this first day of May, 1908. William Smith. [Seal.] Witness, Henry James. APPENDIX. 245 RULES GOVERNING THE LISTING OF STOCKS AND BONDS ON THE CHICAGO STOCK EXCHANGE. "Article XIX." "APPLICATION TO PLACE STOCKS, ETC., ON THE LIST." "Sec. 1. All applications for placing securities on the regular list shall be made to the Committee on Stock List in writing, and signed by the parties desir- ing to have the securities listed." "Sec. 2. If a stock, the application must state the amount of authorized capital, which in every case must not be less than $200,000, the par value of shares, the number of shares issued, whether dividend pay- ing, and if so, time and place of dividend, the address of the transfer office or offices, the amount of funded or floating debt, etc., all of which must be certified to by the officers with the seal of the company attached." "Sec. 3. If a bond or loan, the application must state the amount authorized, which in every case must not be less than $200,000, the amount outstanding, when due, percentage of interest, when and where payable, whether taxable, whether guaranteed, and by whom, name of trustee, if any, etc." 246 APPENDIX. "Sec. 4. If the Stock List Committee approve the application, they shall report to the Governing Com- mittee for final action.' ' "Sec. 5. A charge of one hundred dollars will be made in all cases for listing either stock or bonds, to be paid to the secretary of the Exchange before the se- curity shall be placed upon the official list of the Ex- change. " "Sec. 6. All applications for placing securities on the unlisted list shall be made in writing by a member of the Exchange, and after approval by the Stock List Committee, shall be submitted to the Governing Com- mittee, and if approved by the latter committee shall be placed upon said list without charge." "Article XX." "begistry of stocks." "The Exchange will not call or deal in any active speculative stock of any company, a registry of whose stock is not kept in some responsible bank or trust company, or other satisfactory agency, and which shall not give public notice at the time of establishing such registry of the number of shares so entrusted to be registered, and which shall not give at least thirty days' notice through the newspapers, and in writing to the President of the Exchange, of any intended in- crease of the number of shares, either direct or through the issue of convertible bonds, and which shall not at the same time, give notice of the object for which such issue of stocks or bonds is to be made." APPENDIX. 247 SYNOPSIS OF THE CORPORATION LAWS of the States of New Jersey, Delaware, Maine and South Dakota* New Jersey. Business Corporations Incorporators: Powers: Stock: May be formed under a general act for all lawful purposes except banking and kindred purposes, operation of rail- ways, telephone and telegraph com- panies, etc. Three or more persons are required to apply, and they may all be non-resi- dents. Business corporations may purchase, hold, sell and otherwise dispose of shares of stock and other securities of other corporations. They may own, hold, mortgage and otherwise deal with real property, transact business without the state and exercise all of the common law powers incident to corporate existence generally. Two or more kinds of stock may be created and voting power may be with- held from holders of special stock but the preferred stock shall not exceed two- thirds of the capital stock paid in, and 248 APPENDIX. Stockholders' Liabilities: Stockholders' Meetings Directors: there are restrictions as to dividends and the redemption of preferred stock. Stock may be paid in installments, except $1,000, the minimum with which a cor- poration can begin business; upon the payment of such installments of the capital stock, the law provides that the officers must sign and file with the de- partment of state, a certificate showing the amount of the capital paid in and how ; that is, whether it has been paid in property or money. There is no liability except in the amount of the unpaid portion on stock held. Payments may be made in cash or by the transfer of appropriate prop- erty or stock or securities of other sim- ilar corporations, and the judgment of the directors as to the value of the prop- erty conveyed is, in the absence of ac- tual fraud, conclusive. Must be held within the state and at the principal or registered office of the corporation. Stockholders may vote by proxy. There must be at least three directors in every business corporation and one of them must be an actual resident of the state. They may be elected by cumu- APPENDIX. 249 Directors' Meetings Books: Reports Fees for Incorporating : lative voting if the same is provided in the certificate of incorporation. Direct- ors must be stockholders at the time of their election and they may be classified so that their term of office may expire at different times if the same is provided in the certificate of incorporation. May be held outside of the state if authority therefor is contained in the by-laws or certificate of incorporation. If the by-laws or certificate of incor- poration so provide the corporate books may be kept outside the state except the stock and transfer books and these shall remain at the principal office of the cor- poration in the state, and be open to the inspection of stockholders at all reason- able times. Showing that the corporation is com- plying with the laws of the state giving the location of the principal office and the name of the representative in charge as well as the officers thereof and other similar information must be filed an- nually. There must be paid to the Secretary of State at the time of incorporating, not less than twenty-five dollars, i. e., for any corporation whose authorized 250 APPENDIX. Franchise Tax Business Corporations Incorporators : Powers: capital does not exceed one hundred and twenty-five thousand dollars, and twenty- cents per thousand for each additional one thousand dollars of capital autho- rized. One (1/10) tenth of one (1) per centum on all capital stock issued and outstand- ing up to and including $3,000,000, and one (1/20) twentieth of one per centum on all amounts in excess of $3,000,000 and up to $5,000,000 must be paid an- nually. Delawake. May be formed under a general act for all lawful purposes. Not less than three persons are neces- sary to apply for incorporation and there are no residental requirements in the Act. Business corporations may be formed to conduct business in any foreign state or territory; to purchase, hold and guarantee stocks and bonds of other corporations. They may have offices outside the state and purchase, mort- gage, sell or otherwise deal with real property. They may issue stock for services or property and in the ab- APPENDIX. 251 Stock: Stockholders' Liabilities : Stockholders* Meetings: Directors: sence of actual fraud the valuation placed thereon by the directors is con- clusive. The usual common law powers may also be enjoyed by all business cor- porations. Business corporations may create through their charter two or more kinds of stock and provide for cumulative divi- dends or to retire preferred stock out of the profits. Voting may be done by proxy, and if provided in the certificate of incorporation cumulative voting may be adopted. There is a provision in the law that stock that has been transferred on the books of the corporation within twenty days preceding the election can- not be voted. Incorporators may limit the liability of stockholders in the certificate of in- corporation to the extent of the unpaid portion of the capital stock. At least $1,000 of the capital stock must be sub- scribed for before the corporation be- gins business. If the by-laws so provide the stock- holders' meetings may be held outside the state. The number of directors must consist of three or more natural persons and 252 APPENDIX. Directors' Meetings Books: Reports: Fees for Incorporating : one of them must be a resident of Dela- ware. Every director is required to hold at least three shares of stock. They have a number of statutory liabilities, among them being for failure to file an- nual reports. May be held outside the state if the by-laws so provide. There is no provision of the law re- quiring corporate books to be kept within the state, except the stock ledger or a duplicate thereof, which must be kept at the principal office within the state, in charge of the duly authorized agent of the company, and be open to inspec- tion by the stockholders at all reason- able times. Annual reports are required which shall state the location of the company's office within the state and the name of the agent in charge, upon whom service of process can be had, also the addresses of the officers, etc. ; besides any director or stockholder may require the filing of a complete statement showing the stock issued and how the same has been paid for. For each $1,000 of the total capital stock authorized $ .10 Franchise Tax: Business Corporations APPENDIX. 253 For each $1,000 of the total capital stock authorized above $2,000,- 000 05 In no case less than 10.00 Other fees (estimated) 5.00 For authorized capital stock of $25,- 000.00 or less a tax of $5.00 is imposed. Where such authorized capital stock exceeds $25,000.00 and not over $100,- 000.00 the tax is $10.00 per annum. Where such authorized capital stock exceeds $100,000 and not more than $300,000.00 the tax is $20.00 per annum. Where such authorized capital stock exceeds $300,000 but not more than $500,000.00 the tax is $25.00 per annum. Where such authorized capital stock exceeds $500,000 but not more than $1,000,000.00 the tax is $50.00. Where the authorized capital stock exceeds one million dollars the tax is $25 for each additional million or frac- tion thereof. Maine. May be formed under a general law for any lawful purpose, except to oper- ate a bank or trust company, insurance business, or to operate (in this state). 254 APPENDIX. Incorporators: Powers: Stock: Stockholders' Liabilities: railway, gas, electric and telephone com- panies, etc. Three or more natural persons are re- quired, each of which must be a sub- scriber to at least one share of the cap- ital stock of such proposed corporation, but there are no residential require- ments in the law. Business corporations may acquire and hold stock or other securities in other corporations; may conduct busi- ness in any state or country and exercise all the common law powers enjoyed by corporations generally. Two or more kinds of stock may be created; the mode of voting the same (under certain statutory restrictions) as well as any other desired condition or preference may be incorporated in the by-laws or enacted by the stockholders. Stockholders are only liable for the unpaid portion of stock held by them, and such stock may be paid for by the transfer of property or services rend- ered; and stock so issued may be made fully paid for and non assessable in the absence of actual fraud in the valuation of property conveyed or services per- formed. APPENDIX. 255 Stockholders' Meetings : Directors: Directors' Meetings: Books: Reports: To organize as well as all subsequent meetings of the stockholders must be held within the state. Stockholders may vote by proxy, and the manner of so do- ing may be determined by the by-laws. At least three directors are necessary, and they should be stockholders; but they may not be residents of the State of Maine. Each director must be a stockholder. If the by-laws so provide, Directors' meetings may be held without the state. There are no statutory requirements in relation to where the corporate books shall be kept except as to the corporate minute book and record and stock regis- ter. These are to be kept within the state and to be open for the inspection of stockholders at all reasonable times and remain in the possession of the clerk of the corporation. Annual reports are required giving the names of the officers and directors of the corporation as well as the clerk and location of the office within the state, also the amount of the capital stock. 256 APPENDIX. Fees for Incorporating : Franchise Tax: About twenty-five dollars for state fees and for recording certificates, etc., for all corporations with capitalization of ten thousand dollars or less ; and fifty dollars when the same exceeds ten thou- sand dollars, and up to and including five hundred thousand dollars; and ten dollars for each hundred thousand dol- lars in excess of five hundred thousand dollars; besides there are several other fees provided by statute for recording, etc., amounting to some twenty dollars. There is an annual franchise tax, as follows (Laws of 1907). " Every corporation incorporated un- der the laws of the state, except such as are excepted by section Twenty- six of chapter forty-seven, shall pay an annual franchise tax of five dollars, provided the authorized capital of said corpora- tion does not exceed fifty thousand dol- lars, of ten dollars, provided said au- thorized capital exceeds fifty thousand dollars, and does not exceed two hundred thousand dollars; of fifty dollars, pro- vided said authorized capital exceeds two hundred thousand, and does not ex- ceed five hundred thousand dollars; of seventy-five dollars, provided said au- thorized capital exceeds five hundred thousand dollars, and does not exceed one million dollars ; and the further sum of fifty dollars a year for each one mil- I APPENDIX. 257 lion dollars, or any part thereof, in ex- cess of one million dollars." Business Corporations Incorporators : Powers: Stock: Stockholders' Liabilities : South Dakota. May be formed for any lawful pur- pose. Three or more persons are required to obtain incorporation and one-third of such incorporators must be residents of this state. Each incorporator must be a subscriber of stock to the extent of one share. To transact its business in any state or foreign country, (by providing for the same in the certificate of incorporation) and possess all common law powers in- cident to corporate bodies generally that are necessary to the exercise of the pow- ers specially conferred. Two or more kinds of stock may be created and the same may be issued in exchange for property or services. Cumulative voting in the election of di- rectors is provided for in the Constitu- tion of the State. There is no liability on capital stock beyond the unpaid portion of the par value thereof, except for labor claims, and stock may be paid for in money, 258 APPENDIX. Stockholders' Meetings Directors: Directors' Meetings Books: services or property; the valuation placed thereon by the Board of Direct- ors in good faith (and recorded in the minutes of the corporation) is conclu- sive. May be held outside the state if the articles of incorporation so provide. In all elections of directors the cumulative method of voting may be adopted. At least three and not more than eleven directors may be created, one of which shall be a resident of the state. Each director must be a stockholder in the corporation. Directors have a stat- utory liability in declaring illegal divi- dends and other unlawful acts enumer- ated in the Statute. May be held outside the state at the office named in the articles of incorpora- tion. The president of the company must also be a director. The law requires that a book of by- laws as well as the minutes of all stock- holders' and directors' meetings and stock and transfer books, shall be kept; and they must be open to the inspection of creditors as well as stockholders and directors of the corporation. But the APPENDIX. 259 law does not require that any of these books (except the book of By-laws) shall be kept within the state. Reports: Annual reports showing the amount of capital stock paid in, as well as the indebtedness of the corporation and other matters ordinarily private to cor- porations, must be published, and such reports must be verified. Stockholders representing 20% of the capital stock may also require a written statement of the condition of the corporation to be furnished at any time. Fees for Authorized capital stock of $ 25,000 or less $ 10.00 Incorporating: Over $25,000 and not exceeding 100,000 15.00 Over $100,000 and not exceeding 500,000 20.00 Over $500,000 and not exceeding 1,000,000 30.00 Over $1,000,000 and not exceeding .... 1,500,000 40.00 Over $1,500,000 and not exceeding .... 2,000,000 50.00 Over $2,000,000 and not exceeding .... 2.500,000 60.00 Over $2,500,000 and not exceeding .... 3,000,000 70.00 Over $3,000,000 and not exceeding .... 3,500,000 80.00 Over $3,500,000 and not exceeding .... 4,000,000 90.00 Over $4,000,000 and not exceeding .... 4,500,000 100.00 Over $4,500,000 and not exceeding .... 5,000,000 110.00 Over $5,000,000 150.00 For appointment of resident Agent.... 5.00 For certified copies 25c per folio of 100 words and $1.00 for certificate. Franchise rp„ . There are no annual franchise or other fees. Note : As the corporation laws of the various states are constantly- undergoing changes, it will be necessary to refer to the laws in force at the time of inquiry, in order that accurate information may be obtained. 260 APPENDIX. FOEEIGN CoKPOKATIONS. "An Act entitled 'An act to regulate the admission of foreign corporations for profit, to do business in the State of Illinois. ' (Approved May 18, 1905; in force July 1, 1905. )" i ' Section 1. Be it enacted by the People of the State of Illinois represented in the General Assembly : That before any foreign corporation for profit shall be per- mitted or allowed to transact any business or exercise any of its corporate powers in the State of Illinois, other than insurance companies, building and loan com- panies and surety companies, they shall be required to comply with the provisions of this act and shall be subject to all of the regulations prescribed herein, as well as all other regulations, limitations and restric- tions applying to corporations of like character organ- ized under the laws of this state.' ' "Sec. 2. When any corporation organized under the laws of any foreign state or country, for the transac- tion of business for profit, desires admission into the State of Illinois, for the purpose of transacting busi- ness or exercising its corporate powers or franchise it shall make application to the Secretary of State, signed and sworn to by the president and secretary, stating what business such corporation proposes to pursue under its charter, the amount of capital stock of such corporation, whether it is transacting or it is intended that it shall transact business in any other state or country, the proportion of its business in- tended to be carried on in the State of Illinois, the amount paid in upon its capital stock, what property and assets and an estimate of the value thereof, will be employed in the business of said corporation in the State of Illinois; if any of its capital subscribed has not been paid in what disposition is to be made thereof, APPENDIX. 261 the names of the president, secretary and directors of said corporation and their residences, where its prin- cipal office in Illinois will be located and the name and address of some attorney in fact, upon whom service can be had in all suits commenced in this state and, if required by the Secretary of State, the names and residences of all stockholders in said corporation as shown by its records, and such corporation shall file with the Secretary of State, copy of its charter or articles of incorporation, or in case such corporation is incorporated merely by a certificate then a copy of its certificate of incorporation duly certified and authenticated by the officer who issued the original, or by the recorder or registrar of the office in which said original charter, articles or certificates may have been recorded. ' ' "The Secretary of State shall have power to pre- scribe the form of such application and may, in addition thereto, propound such interrogatory or inter- rogatories to the applicants respecting the character of the business in which said corporation proposes to engage, the amount of its capital stock, the proportion of its business that it is intended shall be carried on in this state, and the proportion and location of its business in other states or countries, and such inter- rogatories shall be answered under oath and the inter- rogatories and answers thereto shall be filed with said application and with the certified copy of its charter and shall be and operate as a limitation upon the powers of said corporation to transact business in the State of Illinois." "The Secretary of State, upon the admission of such foreign corporation to do business in the State of Illinois, shall issue a certified copy of all papers, in- cluding certified copy of the charter of said corpora- 262 APPENDIX. tion, and shall state, in a certificate of authority to do business issued by him, the powers and object of said corporation which may be exercised in this state, not in conflict with the law or public policy of this state, and no corporation shall, by the certificate of the Sec- retary of State, be authorized to transact any business in this state for the transaction of which a corporation cannot be organized under the laws of this state, and no foreign corporation shall exercise any powers in this state not authorized by the provisions of its charter. " "Sec. 3. Every foreign corporation admitted to do business in the State of Illinois under the provisions of this act shall constantly keep on file in the office of the Secretary of State an affidavit of the president and secretary, showing the location of its principal business office in the State of Illinois, and the name and address of some person who may be found in this State, for the purpose of accepting service upon said corporation, in all suits that may be commenced against it, and as often as said corporation shall change the location of its office, or its attorney for receiving and accepting service, a new affidavit shall be filed to take the place of all such affidavits previously filed by the officers of said corporation. Such corporation when admitted to do business in the State of Illinois, under this act shall be required to make such reports from time to time as are required to be made by similar cor- porations organized under the laws of this state and all regulations now in force or hereafter imposed upon domestic corporations, shall be alike observed and complied with by all foreign corporations doing busi- ness in this state." "No foreign corporation admitted to do business in this state under the provisions of this act shall hold any real estate except such as may be necessary for APPENDIX. 263 the proper carrying on of its legitimate business, nor be permitted to mortgage, pledge or encumber its real or personal property situated in this state to the injury or exclusion of any citizen or corporation of this state who is creditor of such foreign corporation and no mortgage by any foreign corporation, except railroad and telegraph companies, given to secure any debt created in any other state shall take effect as against any citizen or corporation of this state until all of its liabilities due any person or corporation of this state at the time of recording such mortgage, shall have been fully paid and extinguished. Before any foreign cor- poration shall be authorized to do business in this state it shall be required to pay into the office of the Secretary of State upon the proportion of its stock represented by its property and business in Illinois, fees equal to those required of similar corporations formed within and under the laws of this state.' 9 * * * "Sec. 5. At any time the Secretary of State may, in his discretion, prepare and propound to the president, secretary, any director or manager of any corporation doing business in this state under the provisions of this act, such interrogatories respecting the character of business being transacted by it, the lo- cation of its business, the names and residences of its directors and officers, and the amount of capital paid in, as well as what disposition has been made of capital stock subscribed for or authorized and not paid in, and such interrogatories shall be answered under oath by the officer or director to whom propounded, within five days after receipt thereof, and upon the failure or refusal of such officer or director to fully answer such interrogatories and file the same, with his answers, in the office of the Secretary of State, within ten days after receiving the same, the Secretary of State may revoke the authority of such corporation to do business 264 APPENDIX. in this state, by filing with the certified copy of the charter of snch corporation a certificate of revocation, and by the publication thereof for one issue in some newspaper of general circulation in the State of Illinois, and thereafter such corporation shall not exer- cise any of its corporate powers or franchises in the State of Illinois. When such interrogatories shall have been answered and filed with the answers thereto, in the office of the Secretary of State, if thereby any violation of the law, or of the charter of said corpora- tion, or any excess of its powers and authority to do business in this state is disclosed, a copy thereof, with such information, shall be immediately transmitted to the Attorney General of this state for his action." "Sec. 6. Every foreign corporation amenable to the provisions of this act, which shall neglect or fail to comply with any of the provisions of the same as herein provided, shall be subject to a penalty of not less than one thousand dollars ($1,000) nor exceeding ten thousand dollars ($10,000), to be recovered before any court of competent jurisdiction, and it is hereby made the duty of the Secretary of State, as he may be advised, or may ascertain that any corporation is doing business in contravention of this act, to report such fact to the Attorney General of this state, and it shall be his duty and the duty of the state's attorney of the proper county to bring such actions at law as shall be necessary for the recovery of the penalties im- posed hereby, and in addition to such penalty , if after this act shall take effect any foreign corporation shall fail to comply herewith, no suit may be maintained either at law or in equity upon any claim, legal or equitable, whether arising out of contract or tort in any court in this state." * * * * * * APPENDIX. 265 Eaknings on Stocks and Bonds. This table gives the approximate earnings on Stocks and Bonds. As an illustration, a 5% stock selling at 90, yields 5.56%. By look- ing down the 5% column to 90 this will be shown, etc. Selling Price 1% 2% 3% 4% 5% 6% 10 10% 20% 30% 40% 50% 60% 12% 8. 16. 24. 32. 40. 48. 15 6.67 13.33 20. 26.67 33.33 40. 17% 5.71 11.43 17.14 22.86 28.57 34.28 20 '5. 10. 15. 20. 25. 30. 22% 4.44 8.89 13.33 17.78 22.22 26.67 25 4. 8. 12. 16. 20. 24. 27% 3.64 7.27 10.91 14.55 18.18 21.82 30 3.33 6 67 10. 13.33 16.67 20. 32% 3.08 6.15 9.23 12.31 15.39 18.46 35 2.86 5.71 8.57 11.43 14.29 17.14 37% 2.67 5 33 8. 10.67 13.33 16. 40 2.5 5 7.5 10. 12.5 15. 42% 2.35 4.70 7.06 9.41 11.76 14.12 45 2.22 4.44 6.67 8.89 11.11 13.33 47% 2.11 4.21 6.32 8.42 10.53 12.63 50 2. 4 6. 8. 10. 12. 52% 1.90 3.81 5.71 7.62 9.52 11.43 55 1.82 3.63 5.45 7.27 9.09 10.91 57% 1.74 3.48 5.22 6.96 8.70 10.43 60 1.67 3.33 5. 6.67 8.33 10. 62% 1.6 3.2 4.8 6.4 8. 9.6 65 1.54 3.08 4.62 6.15 7.69 9.23 67% 1.48 2.96 4.44 5.93 7.41 8.89 70 1.43 2.S6 4.29 5.71 7.14 8.57 72% 1.38 2.76 4.14 5.52 6.90 8.27 75 1.33 2.67 4. 5.33 6.67 8. 77% 1.29 2.58 3.87 5.16 6.45 7.74 80 1.25 2.5 3.75 5. 6.25 7.5 82% 1.21 2.42 3.64 4.85 6.06 7.27 85 1.18 2.35 3.53 4.71 5.88 7.06 87% 1.14 2.29 3.43 4.57 5.71 6.S6 90 1.11 2.22 3.33 4.44 5.56 6.67 92% 1.08 2.16 3.24 4.32 5.41 6.49 95 1.05 2.11 3.16 4.21 5.26 6.32 97% 1.03 2.05 3.08 4.10 5.13 6.15 100 1. 2. 3. 4. 5. 6. 105 .95 1.90 2.86 3.81 4.76 5.71 110 .91 1.82 2.73 3.64 4.55 5.45 115 .87 1.74 2.61 3.48 4.35 5.22 120 .83 1.67 2.5 3.33 4.17 5. 125 .8 1.6 2.4 3.2 4. 4.8 130 .77 1.54 2.31 3.08 3.85 4.62 135 .74 1.48 2.22 2.96 3.70 4.44 140 .71 1.43 2.14 2.86 3.57 4.29 145 .69 1.38 2.07 2.76 3.45 4.14 150 .67 1.33 2. 2.67 3.33 4. 155 .65 1.29 1.94 2.58 3.23 3.87 160 .63 1.25 1.87 2.5 3.12 3.75 165 .61 1.21 1.82 2.42 3.03 3.64 170 .59 1.18 1.76 2.35 2.94 3.53 175 .57 1.14 1.71 2.29 2.86 3.43 180 .56 1.11 1.67 2.22 2.78 3.33 185 .54 1.08 1.62 2.16 2.70 3.24 190 .53 1.05 1.58 2.11 2.63 3.16 195 .51 1.03 1.54 2.05 2.56 3.08 200 .5 1. 1.5 2. 2.5 3. 7% 70% 56. 46.67 40. 35. 31.11 28. 25.45 23.33 21.54 20. 18.67 17.5 16.47 15.56 14.74 14. 13.33 12.72 12.17 11.67 11.2 10.77 10.37 10. 9.65 9.33 9.03 8.75 8.48 8.24 8. 7.78 7.57 7.37 7.18 6.67 6.36 6.09 5.83 5.6 5.38 5.19 5. 4.83 4.67 4.52 4.37 4.24 4.12 4. 3.89 3.78 3.68 3.59 3.5 8% 9% 10% 80% 90% 100% 64. 72. 80. 53.33 60. 66.67 45.71 51.43 57.14 40. 45. 50. 35.56 40. 44.44 32. 36. 40. 29.09 32.73 36.36 26.67 30. 33.33 24.62 27.69 30.77 22.86 25.71 28.57 21.33 24. 26.67 20. 22.5 25. 18.82 21.18 23.53 17.78 20. 22.22 16.84 18.95 21.05 16. IS. 20. 15.24 17.14 19.05 14.55 16.36 18.18 13.91 15.65 17.39 13.33 15. 16.67 12.8 14.4 16. 12.31 13. S5 15.38 11.85 13.33 14. SI 11.43 12.86 14.29 11.03 12.41 13.79 10.67 12. 13.33 10.32 11.61 12.90 10. 11.25 12.5 9.70 10.91 12.12 9.41 10.59 11.76 9.14 10.29 11.43 8.89 10. 11.11 8.65 9.73 10.81 8.42 9.47 10.53 8.21 9.23 10.26 8. 9. 10. 7.62 8.57 9.52 7.27 8.18 9.09 6.96 7.83 8.70 6.67 7.5 8.33 6.4 7.2 8. 6.15 6.92 7.69 5.93 6.67 7.41 5.71 6.43 7.14 5.52 6.21 6.90 5.33 6. 6.67 5.16 5.81 6.45 5. 5.62 6.25 4.85 5.45 6.06 4.71 5.29 5.88 4.57 5.14 5.71 4.44 5. 5.56 4.32 4.86 5.41 4.21 4.74 5.26 4.10 4.62 5.13 4. 4.5 5. 12% 120% 96. SO. 68.57 60. 53.33 48. 42.64 40. 36 . 92 34.29 32. 30. 28.23 26.67 25.26 24. 22.86 21.82 20.87 20. 19.02 18.46 17.78 17.14 16.55 16. 15.48 15. 14.54 14.12 13.71 13.33 12.97 12.63 12.31 12. 11.43 10.91 10.43 10. 9.6 9.23 8.89 8.57 8.28 8. 7.74 7.5 7.27 7.06 6.S5 6.67 6.49 6.32 6.15 6. INDEX Feank's "Science of Organization" etc. INDEX A PAGE ACCOIfNTS, Books of . 98 Examination of 103 How to Audk 103 ADVANTAGES OP INCORPORATING 21 AGREEMENTS, Between Majority Stockholders 92 Legality of 92 ALTERATION OF RECORDS, ETC 100 AMOUNT OF CAPITALIZATION 27, 51 APPRAISAL OF PROPERTY 34 Illustration 202 APPROVAL OF MINUTES OF MEETINGS 100 ASSIGNMENT, Of Commissioners' Receipt or Subscription 213 Of Installment Certificate 214 Of Patent 166, 229-231 Of Stock 92 AUDIT OF ACCOUNTS AND RECORDS 103 How to Accomplish 103 B BONDS (See Capital, Bonds and Stocks) 43 Convertible Into Stock 50 Capital Obtained by Issue of 176-193 Sale of 177 Underwriting 150 (269) 270 INDEX. PAGE BONUS, Stock as 63 BOOKS, Corporate Books 98, 103 Inspection of 86 Minute Book 98 BUSINESS-BUILDING 19 BUSINESS CORPORATIONS, Distinguished From Mining * 171 BY-LAWS AND THEIR USES 94-195 Adoption 96 Illustration 217 C CAPITAL, BONDS AND STOCKS, Defined and Distinguished 43 CAPITALIZATION OP CORPORATIONS 51 Mode of 51 Mining Corporations 174 Good Will as Basis 158 CAPITAL, RAISING ADDITIONAL 35-60-69-193 CAPITAL STOCK 43 CERTIFICATE OF INCORPORATION, Filing 32 CERTIFICATE OF STOCK, Assignment of 48 Common Stock 46 Negotiability of 48 Preferred Stock 46 CHARTER (See Certificate of Incorporation.) CHECKS, Protection in Issuing 222 INDEX. 271 PAGE CLASSIFICATION, Of Directors 31 Of Stock 43-193 COMMISSIONERS, Receipt, Form of 211 COMMON ERROR, A 19 COMMON STOCK (See Capital, Bonds and Stocks) 43 CONSOLIDATION OF CORPORATIONS, Discussion on. . . , 124 CONSOLIDATION OF ENTERPRISES 124 How Accomplished 127 CORPORATION, AND ITS ADVANTAGES 21 CORPORATE FINANCING 43 CORPORATE MANAGEMENT 79 CORPORATE RECORDS AND BOOKS OF ACCOUNT 98 CORPORATION, Defined 21 How Organized 24 Where to Organize 36 Advantages of 21 Books 98 Formation of 24 Mining Corporations 171 COUNSEL, Necessity of 35, 176, 183, 190 CONTRACTS, For Underwriting Stocks and Bonds 150 To Form a Corporation 190, 191, 197, 201 CUMULATIVE DIVIDENDS, Defined 46 CUMULATIVE VOTING, Explained 93 272 INDEX. D PAGE DEBTS, Directors' Liability for 80 Officers' Liability for 83 Stockholders' Liability for 86 DEEDS, Preparation of 183 Placed in Escrow 182 DELAWARE, Synopsis of Corporation Laws 250 DEPRECIATION, See Accounting, etc 109 DIRECTORS AND OFFICERS— THEIR DUTIES AND LIA- BILITIES 79 DISSOLUTION OF CORPORATION 128 DIVIDENDS (See Capital, Bonds and Stocks) 43 Liability for Unlawful Payment 80, 86, 91, 117 Table of 265 DURATION, Of Corporate Existence 27 E EARNINGS, Capitalization Regulated by 53, 159 Table of 263 ELECTIONS, Directors and Officers 31 ERROR, A COMMON 19 EXAMINATION OF BOOKS AND RECORDS 112 How Accomplished 103 EXCHANGE OF PROPERTY FOR STOCK, Plan Illustrated 191, 194, 206, 209 INDEX. 273 p PAGE FEES FOR INCORPORATING, Delaware 250 Maine 253 New Jersey 247 South Dakota 257 FINANCING ENTERPRISES 43, 60, 137, 191, 194 FOREIGN CORPORATIONS, Law Regulating 37 e. g. Illinois 260 FORMATION OF A CORPORATION, How to Accomplish 24 FORMS (See Explanation of) 189 Appraisal of Property >. . 208 Assignment of Invention 227 Assignment of Patent 231 Assignment of Undivided Interest in Patent 229 Assignment of Installment Certificate 216 By-Laws 217 Commissioners' Receipt 211 Contracts, Genl. and Special 197, 201 Commissioners' Receipt, Assignment of 213 Escrow Agreement 183 Installment Certificate 214 Option Contract (Cash Plan) 233 Option Contract (Stock Plan) 238 Proxy to vote 243 Purpose for Coal Company 178 Reorganization Certificate 206 Resolution, Ratifying, etc 209 FULLY PAID STOCK (See Capital, Bonds and Stocks) 43 274 INDEX. G PAGE GOOD WILL, Good Will — Trademarks and Trade Names 154 How Preserved 22, 72, 154 How Valued 159 GUARANTEED STOCK, Discussed 43, 152 H HOW TO ORGANIZE A CORPORATION 24, 171, 195 e. g. Illinois 24 I ILLUSTRATIONS (See Explanation of) 189 Appraisal of Property 208 Assignment of Invention 227 Assignment of Patent 231 Assignment of Undivided Interest in Patent 229 Assignment of Installment Certificate 216 By-Laws 217 Contracts, Genl. and Special 197, 201 Commissioners' Receipt 211 Assignment of Commissioners' Receipt 213 Escrow Agreement 183 Installment Certificate 214 Option Contract (Cash Plan) 233 Option Contract (Stock Plan) 238 Proxy to vote 243 Purpose for Coal Company 178 Reorganization, how Accomplished 191, 192, 206 Reorganization, Mistakes in 122 Resolution, Ratifying, etc 209 INDEX. 275 PAGE INCREASE OP CAPITAL STOCK, When Advisable 60 INSPECTION OF CORPORATE BOOKS, Stockholders, Right to 112 INSTALLMENT, Assignment of Rights 216 Certificate 214 Selling Stock on 58 ISSUANCE OP STOCK FOR PROPERTY 69, 129, 158 Inventory 73, 194 L. LEADING INCORPORATING STATES 36 LEASE (See Conveyance) 180 LEGAL ENTITY— CORPORATION IS 21, 24 LIABILITY, Of Directors and Officers 79 Of Stockholders 86 LIQUIDATION (See Dissolution) 127 LISTING OF STOCKS AND BONDS 60 e. g. Chicago Stock Exchange Rules 245 LOCATION 64, 121, 179 M MAINE, Synopsis of Corporation Laws 253 MAJORITY STOCKHOLDERS 90 Rights of 91 MEETINGS, Records of '. 29, 99 To Organize Corporation 28 MINING ENTERPRISES 171 Distinguished 171 276 INDEX. PAGE MINORITY STOCKHOLDERS, Rights of . . .91, 92 MINUTES, Amendment of 101 Approval of 100 Book of 98 MORTGAGE, Security for Bonds 49, 176 N NAME 26 Preservation of 24, 192 Trade Name 154 NEW JERSEY, Synopsis of Corporation Laws 247 NOTICE, Of First Meeting, in Illinois 28 Waiver of 28, 29 What Constitutes, to Corporation 80 NUMBER OF DIRECTORS 31 O OFFICE IN OTHER STATES (See Foreign Corporation). OFFICERS, Liabilities for Salaries Paid, When, etc 84 Necessary 33 Powers of 79 OPTIONS, Forms of 233, 238 Purpose of 181 OVER-ISSUED STOCK, Defined 45 INDEX. 277 PAGE OVER-VALUATION OP PROPERTY, Liability Therefrom 70, 87, 144, 173 P PAR VALUE, Stock Should Be Issued At 89 PARTNERSHIP (See Advantages of Incorporating) 21 PATENTS (See Patents and Their Commercial Value) 160 ASSIGNMENT, Of Invention Before Patent 227 Of Undivided Interest 229 Of Whole, After Patent Issues 231 DEPRECIATING "BOOK VALUE" OF ASSETS 103 PATENTABILITY, What Constitutes 164 U. S. Statute Defining Requisites 162 PAYMENT FOR STOCK IN PROPERTY (See Over-Valuation of Property). POWERS, How Derived 27, 177 PREFERRED STOCK, Dividends on 47 Right to Issue 47 Terms and Conditions of 46 PROMOTERS, Contracts (See Promotion Contracts) 143 Defined and Discussed 137 PROMOTION CONTRACTS, Observations on 143 PROMOTION OF ENTERPRISES 137 PROXY— Right to Appoint 93 Form of 243 PURPOSES 27, 177 278 INDEX. R PAGE RAISING OF ADDITIONAL CAPITAL 35, 60, 191, 194 RATIFICATION, Of Acts of Officers, etc 97 RECEIPTS, Of Commissioners and Trustees 211 RECORDING, By-Laws 97 Certificates of Incorporation 32 Minutes 99 REORGANIZATION— Possible Advantages Therefrom 115 REORGANIZATION CERTIFICATE, Illustration and Explanation 192, 206 REPORTS, Annual 128 Resolution Ratifying Commissioners, etc 195, 209 RESOLUTION, In Accepting Property, etc 209 Ratifying Acts of Commissioners, etc 209 RIGHTS OF STOCKHOLDERS, Discussion on 86 S SALARIES, Of Directors and Officers 83 SALE, Of Business 23, 72, 117, 191, 194 Of Bonds 60, 150, 194 Of Stock 60, 150, 194 SECRETARY, (Custodian of Books and Records) Necessity of 82 SHARES (See Capital, Bonds and Stocks). INDEX. 279 PAGE SOUTH DAKOTA, Synopsis of Corporation Laws 257 STOCK, Classification and Definition of (See Capital, Bonds and Stocks). Listing 60, 194 Underwriting 150 STOCKHOLDERS' RIGHTS AND LIABILITIES, Discussion on 86 STOCK-JOBBING 129 SUBSCRIBER, To Capital Stock — Liability of 87 Subscription 28, 150, 190, 201 T TABLE, Of Earnings of Stocks and Bonds 265 TRADEMARKS 155 TRADE NAME, Value of 71, 159 TRANSFERRING AN ESTABLISHED BUSINESS TO A COR- PORATION 69-76 TREASURER, Necessity of 82 U UNDERWRITING, Contracts Relating to 151 Stocks and Bonds 150 280 INDEX. PAGE VALUATION OF PROPERTY, Abuse of 71, 87 A Safe Rule in 71 Good Will 159 Mining Property Distinguished 174 VOTING, Cumulative 93 Proxies . , 93 W WATERED STOCK, Defined 45 WHERE TO ORGANIZE, Subject Discussed 36 ** J7 50 \* , ^. % ''"^ ^ ^ N 0o x. W "*/- £ ■** "3*. '^ ^z- .^ -^ w ^ "^ % £ ■*«, . I (