corporation exists, the courts have held that certain essential facts must be found, and these are commonly known as the tests of legal incorporation.

Grant from State, and Acceptance. The first of these essentials is the existence of a grant or offer on the part of the State under which a corporation may be organized; or, as some cases have expressed it, a legislative grant is necessary. This is essential because a corporation exercises powers and capacities different from those of a natural person or any other form of association or natural persons other than a corporation. The powers enjoyed by corporations are very frequently those which cannot, because of the nature of things, be possessed or exercised by natural persons, as, for example, the capacity of immortality. Not only must there exist a legislative grant on the part of the State, under which corporations may be organized, but there must also be an acceptance of this grant by those desirous of organizing a corporation. This acceptance is usually evidenced by the execution of the articles of incorporation, the organization of the corporation and the transaction of business by it in its corporate capacity. This essential or test of a legal corporation is necessary because of the contract relation existing between the members of the corporation and the State. The State cannot compel natural persons to organize a corporation or undertake the business of conducting one. In this respect the principle is totally unlike that which applies to the public corporation. In the organization of public corporations, the State ean arbitrarily force upon the people of a particular locality a form of organization or a local government having for its purpose the assumption and exercise of governmental powers and functions. No acceptance by the persons to be affected is necessary. A private corporation, however, is, in its nature, radically different from that of a public corporation. It is organized for totally different purposes and results. The public corporation, from the standpoint of the persons affected, is an involuntary organization. The private corporation is the result of a purely voluntary act

by those desirous of organizing it. If no acceptance, therefore, of the grant or offer of the State to organize a private corporation, by those constituting the alleged corporation, can be shown, one of the essential tests has failed, and that particular body of men will not be regarded as a legal corporation.

Agreement between Members. Because of the contract relation which exists not only between the State and the corporation, the State and the members of the corporation, and also between the members of the corporation, or as among themselves, it is necessary that there be an agreement or understanding between those organizing a corporation that this is the nature of their act. If one of the incorporators understands that the instrument he is signing is a conveyance of real property instead of articles of incorporation, the meeting of the minds necessary to the making of a legal contract is wanting, and another of the tests of a legal incorporation has failed.

Compliance with Statutory Provisions. There must also be a substantial compliance with statutory requirements in order that a legal corporation may exist. "A substantial compliance with all the terms of a general incorporation law is prerequisite to the right of forming a corporation under it." It is necessary that the required number of incorporators sign the articles of incorporation. The law authorizing the incorporation of corporations may contain provisions mandatory or merely directory in their nature. These terms are self-explanatory. The principle of law in respect to mandatory provisions is that not only must there be a substantial but even a strict compliance, and this is especially true where certain conditions precedent to legal incorporation, as they are termed, are required by the statutes. A strict compliance with the provisions of the law which are merely directory in their character is not necessary, and there may be a variance or an immaterial irregularity in following them which will not affect the legality of the corporation. These irregularities or informalities afford, as a rule, no basis for an attack upon the

legality of the corporation by third persons. The State alone can take advantage of them if it so desires, and even the State may be barred from such proceedings by lapse of time. The signing of the initials instead of the full Christian name to the articles of incorporation; the statement that "said corporate stock shall consist of five hundred shares at one hundred dollars per share" when the statute required that the certificate of incorporation "shall state the amount of capital stock"; the statement that the corporation shall exist "at least forty years" when the statute provided that the certificate should state "the term of existence not to exceed forty years,' 99 are illustrations of irregularities which will not affect the legality of the organization.

The statutes may, however, contain provisions which are intended to be conditions precedent to incorporation, for example, the execution of the articles of incorporation. These are usually regarded as mandatory and must be strictly complied with before a legal corporation can exist. The intent of the law in this respect must be gathered from its language, and no general rule can be stated which will enable one to determine what are intended to be conditions precedent and, therefore, mandatory as to compliance with them, and what are regarded as general provisions of the law or those which are merely directory, and in respect to which a strict compliance is not necessary.

§ 10. The Doctrine of Collateral Attack. Since it is the State which alone creates the corporation, and not third persons who may have dealings with it, the doctrine of collateral attack, as it is termed, is universally followed by the courts. The presumption of law is that the corporation has been legally and regularly organized and that it is a legal incorporation. All that is necessary, therefore, except in direct proceedings by the State in which the main question or issue is the legality of the corporate existence, is that the corporation establish its character as a de facto corporation, or one existing in fact, although possibly not in law. All that is necessary to be shown is that there is

a valid law under which such a corporation might have been organized; an attempt in good faith to incorporate under the law; a colorable compliance only with the provisions of the law, and an exercise of corporate powers in a corporate capacity. The subject of de facto corporations will be considered later.

1

§ 11. Corporations as "Citizens" or "Persons". In an early case in the United States Supreme Court, Bank of Augusta v. Earle, it was decided, and the doctrine has never been denied, that a corporation, for the purpose of jurisdiction, was a citizen of the State under the laws of which it was created. The stockholders are arbitrarily held to be citizens of that State, and the fact of their diverse citizenship, therefore, will not affect the citizenship of the corporation. Even where a corporation doing business in several States has been organized under the laws of the different States by the same name, the rule is not changed. This principle is nearly axiomatic, as the laws of the different States can have no extra-territorial effect. When the term "citizen of the United States" or "citizen" is used in the Federal Constitution, it has been held that a corporation is not a citizen; but in the fifth and fourteenth amendments, where the term "person" is used in connection with several prohibitions against the States having for their object the protection of personal and property rights, the courts have held that corporations are persons within the meaning of the term as there used, and that they, therefore, come within the protecting provisions of these amendments, that no State can pass any law depriving any person of property without due process of law, nor deny to any person within its jurisdiction the equal protection of the law.

Corporations, as a rule, are deemed persons within the meaning of State statutes when the circumstances in which they are placed are identical with those of natural persons who are included within the operation of the statutes.

1 Bank of Augusta v. Earle, 13 Peters (U. S.) 519.

CHAPTER III

PROMOTION OF CORPORATIONS

§ 12. Definition of Promoter. It is difficult to give an exact definition of the word promoter, as the relation which is indicated by the word depends upon the character of the acts done in each particular instance. The law imposes serious responsibilities upon those who engage in the organization and promotion of corporations and holds them substantially to the position of a trustee for the benefit of all those who may be directly involved in the undertaking. The term has been defined as "one of accepted use commonly employed to designate persons who take some part in procuring the promotion of a corporation by inducing others to join it, and who, in so doing, assume such a position that a relation of fiduciary nature between these and the corporation is created." From this definition and from the nature of the question it will be readily seen, as already suggested, that the relation is one depending upon the character of the acts done.

§ 13. Fiduciary Position of Promoters and Secret Profits. Since the law has well established the fiduciary or trust position of a promoter to the corporation and others directly interested in it or its organization, it necessarily follows that promoters cannot take personal advantage of their transactions or acts done in connection with the organization of the corporation to its detriment or to the detriment of its members, and this rule is especially applicable where those who are entitled to act for the corporation have no knowledge or information in respect to the profits, commissions, or other advantages which may be derived by the promoters from their transactions in promoting the corporation. If any agreements or contracts, by which the promoters receive special advantages or