formalities to be observed by it in the execution of its contracts. A by-law of this character, it has been held, is not binding upon one who, with no knowledge of its existence, enters into contractual relations with the corporation, and where the officer or agent with whom he is dealing is apparently clothed with full power to bind the corporation. If the third person has knowledge of by-laws limiting the authority of the corporate officers or agents to act, he is clearly bound by this actual knowledge. The courts also hold that third persons dealing with the corporation are bound by the limitations upon its powers contained in the charter of the corporation, though sometimes this rule has been doubted where the charter is a special act of which even a court will not take judicial notice, but which must be specially pleaded. One dealing with a corporation through its agents may rightfully assume that it is acting within its powers and with due observance of the formalities and steps required by its by-laws and its charter, unless the contract itself or the manner of making it is clearly and unmistakably in excess of its corporate powers. Statutory provisions establishing formalities to be observed by corporations in the making of contracts must be observed either strictly or substantially, as the provisions of the law are held to be either mandatory or directory in their character. The authority of corporate officers and agents will be considered in a subsequent chapter.

Ratification and Estoppel. A contract entered into by a corporation in an irregular or informal manner, or one made by a corporate agent in excess of his apparent authority, may subsequently become binding upon the corporation through the doctrine of ratification. This principle will be applied where the corporation subsequently is informed of the existence of the contract and takes no steps to disaffirm it; where, without its recognition, it takes no steps to disaffirm the contract, or where it formally adopts the contract, makes it its own or accepts its benefits. "Authority in the agent of a corporation may be inferred

from the conduct of its officers or from their knowledge or neglect to make objections as well as in the case of individuals.''16

In the case of irregular, informal, and even unauthorized contracts, the parties may be bound through the doctrine of estoppel. This principle is applied sometimes in those cases where it was represented and assumed by the contracting parties that the capacity to make the contract existed and that its execution was regular and formal, and that all of the provisions of the charter or of the by-laws had been complied with as required. A definition of estoppel was given in a leading case,17 and may be useful at this time. Lord Denman, in that case, said:

"Where one by his words or his conduct wilfully causes another to believe in the existence of a certain state of things and induces him to act on that belief so as to alter his own previous position, the former is concluded from averring against the latter a different state of things as existing at the same time."

Contracts Void as Against Public Policy. All persons, artificial equally with natural, are forbidden to enter into contracts which the sound policy of the law considers detrimental or injurious to the public interests. This principle applies particularly to corporations of a quasi-public character, and arises from the nature of the privileges or franchises given them by the State. The established principles of the common law may stamp certain contracts with this character, and absolute prohibitions may, in other cases, render them illegal as well as ultra vires. Corporate contracts may not only be ultra vires, or in excess of their corporate powers, but also illegal for the reasons stated above. A lobbying contract would clearly be illegal as well as ultra vires, because involving the use of improper means to influence or prevent legislation. Contracts which effect an unreasonable restraint of trade or tend to create

16 Sherman v. Fitch, 98 Mass. 59.

17 Pickard v. Sears, 6 Ad. and El. 469.

a monopoly and prevent competition, whether in violation of well recognized principles of common law, or contrary to the express provisions of some statute, are also illegal and not merely ultra vires. Traffic contracts between common carriers, pooling arrangements, contracts securing to a firm exclusive and lower rates, may be illegal because contrary to law. The Interstate Commerce Act and the Sherman Anti-Trust Act, with their various amendments as passed by the Federal Congress, prohibit corporations as well as individuals from making contracts of the character suggested, and are illustrative of this class of statutory regulations.

§ 63. Power to Raise Money. The raising of money is generally recognized as one of the chief objects for which private corporations are formed. The use of capital is indispensable in most cases to the conduct of their business and the exercise of their powers. Two methods are ordinarily employed by a corporation to accomplish this purpose; first, by the issue of its capital stock; and, second, by loan either secured or unsecured. In the case of stock corporations, the charter provides the maximum limit of its capital stock, and if the entire amount has not already been subscribed and paid in, or if the corporation has been duly authorized to increase its capital stock, it may issue new shares and dispose of them for this purpose. It is through the issue of its original capital stock that its first funds are secured for the transaction of its corporate business and the payment of its creditors. The shares of stock are generally sold to shareholders at their par value.

The other method employed by corporations to secure funds for carrying on their corporate business, is through the making of loans, either secured or unsecured. In the absence of express restrictions in its charter, a private corporation may borrow money, the same as a natural person, whenever the nature of its business demands or authorizes it; but it is clear that it cannot do so if the act is unauthorized or if the purpose for which it is organized does not require it. It is common for the State to require

that in articles of incorporation the maximum amount of corporate indebtedness shall be stated. If a provision to this effect exists, the corporation is limited clearly in the maximum indebtedness which it can incur through the borrowing of moneys and whether the loan is secured or unsecured. The necessity for security depends, necessarily, upon the credit of the corporation, the amount of capital invested or employed in the transaction of and the volume of its business. In many instances, a corporation is required to give security for moneys borrowed, which usually consists of a mortgage or pledge upon specific property, or generally upon its entire corporate property and franchises. A private corporation, not of a quasi-public character, ordinarily is not restricted in the extent to which it can mortgage its property and franchises for the purpose of securing a loan. The courts hold, however, that in respect to quasi-public corporations, and especially railway companies, that the corporate power to mortgage the property and the franchises is not an implied one, but must be expressly granted. This principle is based upon the reason that corporations of this character are engaged not only in the carrying on of their business upon private capital and in the capacity of a private corporation, but are also required to perform, because of the nature of their enterprise, certain duties to the public at large. The business of a railroad corporation or common carrier is the transportation of freight and passengers. Because of the nature of this business, they are subject to a greater degree of control and regulation by the State, and it is also regarded as against public policy that they should, by any act of theirs, impair or destroy their ability to perform their public duties. Through the mortgaging of their franchises and property, the courts have held that this result may be attained. The power to mortgage the corporate franchises and property of a quasi-public corporation must be expressly granted.

§ 64. Power as to Own Stock. By Purchase. The authorities are conflicting upon the question of the power

of a private corporation to acquire and hold its own stock. There are two well-established lines of decisions, one holding that in the absence of statutory limitations the corporation can acquire, by purchase or otherwise, shares of its own stock, and hold them as a corporate asset. But these decisions further hold that this cannot be done where the effect of such a transaction is to perpetrate a fraud upon or affect the rights of corporate creditors. The other line of cases hold that, independent of statutory provisions, a private corporation cannot so acquire and hold its own stock, the reason being that a transaction of this kind works a fraud upon and substantially affects the rights of the corporate creditors.18

By Increase and Decrease. The amount of capital stock of a stock corporation is fixed by the articles of incorporation, and it is well settled that this can neither be increased nor diminished without legislative authority. The power to increase or decrease its stock must be expressly given, and it must be exercised by the stockholders of the corporation, for it is considered one of the extraordinary or fundamental powers of a corporation. Where the capital stock of a corporation is increased, the rule of law generally obtains that the stockholders are entitled to their pro rata or proportionate part of the increase at the price fixed for which the stock is to be sold.

Many of the States provide a liability of shareholders, in addition to or in excess of their common law obligations, namely, the par value of their stock. After the reduction of the capital stock of a corporation where an additional stockholders' liability is attached by constitutional or statutory provision, this is not diminished through the reduction. Creditors whose claims have accrued prior to the reduction of the capital stock can look for a payment if the corporate property is insufficient to the original liability of the stockholders. Those whose claims have been created subsequent to the reduction can only enforce a 18 Clapp v. Peterson, 124 Ill. 26; Coppin v. Greenless Co., 38 O. St. 275.