"At all events, it is no better for the State to leave its citizens at the mercy of the large corporations created by other less careful sovereignties, than to permit the organization of corporations adequate to the demands of modern business under its own laws, subject to its own more careful regulation and control. Under our State and Federal system it is practically impossible for any one State, by its own laws, to control foreign corporations, but so far as possible at present the committee has sought to subject them to the same safeguards of reasonable publicity and accurate returns, both as to organization and annual condition, as the State requires of its own corporations. The simple requirement of an annual excise tax, based on the capitalization of such foreign corporations, will serve to bring them under the control of this State, and the way will be open for their further regulation if desirable. This annual tax has been levied upon the same principle as the corresponding tax paid by home corporations. The State should impose no greater burden on foreign corporations than on its own, but should, so far as possible, subject them to its own laws.

"The committee would repeat its opinion that, so far as purely business corporations are concerned, and excluding insurance, financial, and public service corporations, the State cannot assume to act, directly or indirectly, as guarantor or sponsor for any organization under corporate form. It can and should require, for itself and for the use of all persons interested in the corporation, the fullest and most detailed information, consistent with practical business methods, as to the details of its organization, the powers and restrictions imposed upon its stockholders, and as to the property against which

stock is to be or has been issued.

"Capital stock may be paid for in cash or by property. If it is paid for in cash, it may be paid for in full or by instalments, and a machinery has been created for protecting the corporation against the failure of the subscribers to stock to pay the balance of their subscriptions. If stock is paid for by property, the incorporators and not the State are to pass upon its value. Before any stock, however, can be issued for property, a description of the property sufficient for purposes of identification, to the satisfaction of the Commissioner of Corporations, must be filed in the office of the Secretary of the Commonwealth. This document becomes a public record, and may be consulted by any one interested in the corporation. If the officers of a corporation make a return which is false and which is known to be false, they are liable to any one injured for actual damages. If a full and honest description is made of property against which stock is issued, a stockholder cannot complain because of his failure to inform

himself by personal examination or investigation of the value of the property in which he is, or contemplates becoming, an investor.

"The second principle upon which the committee has acted in its specific recommendations is this: that the State should permit the utmost freedom of self-regulation if it provides quick and effective machinery for the punishment of fraud, and gives to each stockholder the right to obtain the fullest information in regard to his own rights and privileges before and after he becomes the owner of stock."

The statutes of

§ 102. Payment of Capital Stock in Services. Alabama, Arkansas, California, Colorado, Delaware, Florida, Idaho, Kentucky, Maine, Missouri, Montana, North Dakota, South Carolina, South Dakota, Texas, Utah, Virginia, Washington, West Virginia, and Wisconsin expressly authorize the payment of stock in services. It sometimes becomes a question of importance to know just what is meant by "services" as used in this connection. Frequently attempts are made to issue stock to persons gratuitously for the use of their name in the promotion of the corporation under the theory that permission to use their name is a proper service rendered to the company, against which stock may be issued. The current of authority seems to be against this proposition.2

Still again, the constitutional provision which exists in many of the States declaring all fictitious increase of stock void militates against such lines of procedure.3

Oftentimes an attempt is made to issue stock to promoters of corporations under what is known as "promotion stock." The promoters are usually the incorporators, and as such are not entitled to gifts of stock.4 However, if in the promotion of the company services and time have been employed, the same may be recompensed to the extent of the just value of such services.

§ 103. Payment of Capital Stock in Property. In most of the Commonwealths statutes exist expressly authorizing the payment of capital stock of a corporation in property.5 Even in the absence

1 See Arapahoe, etc. Co. v. Stevens, 13 Fogg v. Blair, 139 U. S. 118; 35 Law Ed. Col. 534; 22 Pac. 823; Clevenger v. Moore (N. J.), 58 Atl. 88.

2 P. S. Bank v. Company, 105 Mich. 535; 63 N. W. 514; Christensen v. Eno, 106 N. Y. 97; 12 N. E. 648; Handley v. Stutz, 139 U. S. 417; 35 Law Ed. 227;

104.

3 See Hellerman v. Maier, 116 Cal. 416; 48 Pac. 377.

4 Brown v. F. S. H. Co., 119 Fed. 472.

5 See Part III. Table 10, page 580.

of such statute stock may doubtless be issued in the same manner, provided the purchase of such property is within the express or implied powers conferred by the charter and the property is of such a character as to be suitable for the specific purpose for which the corporation was formed.1 Some few of the States describe in considerable detail just what kinds or classes of property may be accepted by the corporation in exchange for its capital stock. The incorporation acts of Alabama, North Carolina, Virginia, West Virginia, and New Jersey are particularly full in this regard. In the absence of such provisions corporations under the restrictions stated above may accept in payment of their capital stock all kinds of real and personal property having some monetary value, such as mining lands, gas lands, patent rights, secret formulæ, trade-marks, and the good will of an established business.2

The payment of capital stock may be made in notes, bonds, or mortgages in the absence of any statutory or charter prohibition.3 But as to creditors, if the notes, bonds, or mortgages should turn out to be worthless, the parties accepting such stock might be compelled to pay the par value of such stock in money. So it has been held that stock of a corporation may be paid for in advertising, in a license to take minerals from lands, and in stock in other corporations.7

In other words, capital stock of a corporation may be issued against any property which the corporation is authorized to purchase, or which is necessary for its legitimate business.8

One of the most frequent questions with which an attorney has to deal in connection with the organization of a corporation has reference to devising some safe method whereby stock may be legally issued in the first instance as full paid and non-assessable, to be thereafter sold below par if necessary for the purpose of procuring a working capital for the company. The main thing

1 Liebke v. Knapp, 79 Mo. 22.

2 Loud v. Company, 153 U. S. 564; 141 S. Ct. 928; Carr v. La Fevre, 27 Pa. 417; American Tube & Iron Co. v. Company, 165 Pa. St. 489; 30 Atl. 940; Young v. Company, 65 Mich. 111; 31 N. W. 814; Washburn v. Company, 81 Fed. 17; Whitehill v. Jacobs, 75 Wis. 474; 44 N. W. 630; Bank v. Company, 32 W. Va. 37; 59 S. E. 243; Kelly v. Clark, 21 Mont. 319; 53 Pac. 959.

8 Goodrich v. Reynolds, 31 Ill. 490; Stoddard v. Company, 44 Conn. 545. 4 Bouton v. Denent, 123 Ill. 142; 14 N. E. 62.

5 Liebke v. Knapp, 79 Mo. 22.

Shepard v. Drake, 61 Mo. Ap. 134. 7 East N. Y. J. R. Co. v. Lighthall, 36 How. Pr. 481.

8 Bruner v. Brown, 139 Ind. 600; 38 N. E. 318.

to be kept in mind in connection with the foregoing is to see that the stock is so issued that future purchasers thereof shall not be liable thereon either to the corporation or to creditors. This can be accomplished most satisfactorily in the following manner.

Have the corporation accept the proposition to issue its capital stock, either in whole or in part, against real or personal property to be thereafter duly conveyed or transferred to the corporation. Next the property so conveyed or transferred should be appraised at a valuation which will stand the test according to the character of the property so conveyed or transferred of either the good faith or the speculative value rules already referred to. The next step is for the party to whom such stock is issued to transfer such stock, either in whole or in part, back to the corporation under a trust agreement providing that the same shall be sold at such times and at such prices as to the board of directors of the corporation will seem advisable for the purpose of procuring the necessary working capital. Under such circumstances the stock so transferred, while originally issued at par, may be sold at the best price obtainable, and the purchasers will not incur liabil ity beyond the agreed price even to subsequent creditors. The same is true of stock that has been forfeited for non-payment of assessments.2

§ 104. Statement of True Value Rule. In connection with the appraisal of property taken by a corporation in exchange for its capital stock, the courts have established various rules with a view to laying down some satisfactory principle upon which such appraisal may be based in those cases where creditors seek to enforce as against the holders of such stock an alleged liability for unpaid stock subscriptions. The various rules here referred to may be enumerated as follows: "the true value rule," "the good faith rule," and "the speculative value rule." It is to the first of these that our attention will now be directed.

What is known as "the true value rule" is a natural outgrowth of the adoption by many of the courts of the trust fund doctrine enunciated by Judge Story in Wood v. Dummer.

1 Iron Co. et al. v. Hayes et al., 165 Pa. St. 489; 30 Atl. 936; Lake Sup. Iron Co. v. Drexel, 90 N. Y. 87; Davis Bros. v. Company, 101 Ala. 127; 8 So. 496; Alling v. Wenzel, 133 Ill. 264; 24 N. E. 551; M. & L. R. Ry. Co. v. Dow, 120 U. S. 287;

This may be

7 S. Ct. 482; Coleman v. Howe, 154 Ill. 458; 39 N. E. 725; Kimball v. Company, 69 N. H. 485; 45 Atl. 253.

2 Pullman v. Company, 73 Ill. Ap. 313; Otter v. Company, 50 Barb. 247.

8 3 Mason, 308; Fed. Cases, No. 17944.

stated as follows: That the courts will not treat anything in the shape of property accepted by the corporation in exchange for its capital stock as payment thereof except to the extent of the true value of the property received, wholly without regard to the presence of fraud or the absence of good faith in the transaction.1

Not only has the true value rule been adopted by many courts, irrespective of statute, but it has found legislative recognition as well. Thus the incorporation act of Alaska requires that such property shall be assessed at its true money value; that of Connecticut and Delaware, at its actual value; in Kentucky, at its market price; in North Dakota and South Carolina, at its true money value; in Tennessee and Utah, at its fair cash value, and Florida, at a just valuation. In Connecticut, Massachusetts, and North Dakota the necessity of making such appraisal according to the strict letter of the statute is very forcibly suggested by making the directors liable to all parties injured thereby in case they fail to make such appraisal as directed by the act. Statutory provisions which exist in so many of the States declaring all fictitious increase of stock void have been held by the courts. not to make the validity of an over-issue of stock dependent upon the inquiry whether the money or property received therefor was of equal value in the market with the stock so issued, or to restrict private corporations acting without the approval of their stockholders in the sale of their stock for money, property, or labor done upon such terms as they might deem proper, provided always that the transaction is a real one, based upon present consideration, having reference to legitimate corporate purposes, and is not merely a device to evade the law and accomplish that which is forbidden.2 § 105. Statement of Good Faith Rule. As has already been observed in a previous section,3 the trust fund theory of Justice Story no longer obtains in a majority of the States. With the absence of any general recognition by the courts of this doctrine, there necessarily followed the abrogation of the true value rule, which was based largely upon the trust fund doctrine. In its place has appeared in many jurisdictions what is known as the "good faith rule." The true value rule in its practical application was harsh and unconscionable, was wholly in the interest of

1 Shickle v. Watts, 94 Mo. 410; 7 Pac. 582; M. & L. R. Ry. Co. v. Dow, S. W. 274. 120 U. S. 287; 7 S. Ct. 482.

2 Smith v. Company, 115 Cal. 584; 47

8 Ante, § 101.