CASES ON

PRIVATE CORPORATIONS

CHAPTER I.

THE LEGAL CONCEPTION OF A CORPORATION.

Section 1.-The corporate entity theory-its scope and limits.

Co. Lit. 250 a. "Bodies politike, &c. This is a body to take in succession, framed (as to that capacity) by policie, and thereupon it is called here by Littleton a body politike; and it is also called a corporation, or a body incorporate, because the persons are made into a body, and are of capacity to take and grant, &c. ** * Every body politike, or corporate is either ecclesiasticall or lay. * * And again it is either sole, or aggregate of many. And this body politike, or corporate, aggregate of many, is by the civilians called collegium or universitas.

*

1 Bl. Com., 467-8. "But as all personal rights die with the person, and, as the necessary forms of investing a series of individuals, one after another, with the same identical rights, would be very inconvenient, if not impracticable; it has been found necessary, when it is for the advantage of the public to have any particular rights kept on foot and continued, to constitute artificial persons, who may maintain a perpetual succession, and enjoy a kind of legal immortality.

"These artificial persons are called bodies politic, bodies corporate, (corpora corporata), or corporations: of which there is a great variety subsisting, for the advancement of religion, of learning, and of commerce; in order to preserve entire and forever those rights and immunities, which, if they were granted only to those individuals of which the body corporate is composed, would upon their death be utterly lost and extinct. * * * When they are consolidated and united into a corporation, they and their successors are then considered as one person in law: as one person, they have one will, which is collected from the sense of the majority of individuals: * * * The privileges and immunities, the estates and possession, of the corporation, when once vested in them, will be forever vested, without any new conveyance to new succession; for all the individual members that have existed from the foundation to the present time, or that shall ever hereafter exist, are but one

1

person in law, a person that never dies: in like manner as the river Thames is still the same river, though the parts which compose it are changing every instant.'

ERICKSON v. REVERE ELEVATOR CO.

1910. 110 Minn. 443, 126 N. W. 130.

ACTION in the district court for Redwood county to recover $3,161.45, which plaintiff had been compelled to pay upon a promissory note which he had signed as surety for defendant. The substance of the complaint and of the defense is given in the opinion. From an order, Olsen, J., sustaining plaintiff's demurrer to the defense set up in the answer on the ground it did not state facts sufficient to constitute a defense, and sustaining plaintiff's demurrer to the counterclaim on the ground it did not state facts sufficient to constitute a counterclaim, defendant appealed. Affirmed.

O'BRIEN, J.-According to the complaint, on September 14, 1903, defendant delivered to Minnesota Grain Company its promissory note for $6,000, payable on or before one year from date. Plaintiff signed the note as a surety, and on March 11, 1909, was compelled to pay a balance of $3,161.45, remaining unpaid, and brought this action to recover that amount. Defendant served an answer containing general and special denials, and alleging as a separate defense that on May 21, 1907, N. H. Dahl, A. O. Anderson, C. O. Nichols, E. L. Nelson, and the plaintiff were owners of the entire capital stock of defendant, and on said date, through N. H. Dahl, their duly constituted agent, sold their entire holdings to Charles Gamble, Martha Anderson, A. G. Anderson, F. J. Sheffield, and K. E. Mo for $7,500, upon a statement representing and warranting "that the said corporation was free from debts and every and all obligations," and "that there were no liens, encumbrances, or indebtedness of any kind against said corporation or any of its said property." In reliance upon the representations those named purchased and still own all the stock. Therefore it is claimed the plaintiff is estopped. The same allegations are reasserted for damages as a counterclaim or setoff. Plaintiff demurred to the allegations of affirmative defense. This appeal is from an order sustaining the demurrer.

There can be no doubt that, if the allegations of the answer are true, there must be some procedure by which the stockholders, who are the beneficial owners of the defendant corporation and its property, can be protected. But we do not think this demurrer can be overruled without violating the fundamental principles underlying the creation and legal status of corporations. It is true that where the corporate form is used by individuals for the purpose of evading the law, or for the perpetration of fraud, the court will not permit the legal entity to be interposed so as to defeat justice. The necessity for this rule is becoming more apparent each day, not only in

the maintenance of private rights, but for the preservation of public rights in the regulation and necessary control of large corporations. State v. Creamery Package Mnfg. Co., supra, page 415, 126 N. W. 126, and cases cited. But in ordinary business transactions, and for the purpose of determining the respective rights, responsibilities, and powers of corporations, its officers, stockholders, and those dealing with them, it is necessary that the distinction between the corporation, as a legal entity, and its members, be strictly maintained.

The note sued upon was not a debt of the original stockholders, but of the corporation. The sale of the stock was not a corporate act, but that of the individual stockholders. A stockholder in his individual capacity, or any number of stockholders, cannot bind the corporation in its corporate capacity, except under the extraordinary circumstances already referred to. The sale of the stock, therefore, in no manner affected the liability of the corporation upon the note, and the corporation itself, considered as a distinct entity, cannot avail itself of the rights of its present stockholders possessed by them as individuals. Gallagher v. Germania Brewing Co., 53 Minn. 214, 54 N. W. 1115. Notwithstanding this, a stockholder has a direct and real interest in the property of the corporation, and may, when the corporation will not or cannot fully protect its property, be recognized as a proper party to prosecute or defend an action involving primarily the corporation's rights. Baldwin v. Canfield, 26 Minn. 43, 1 N. W. 261, 276.

The difficulty here is that the corporation is attempting to assert a defense which is personal to the individual stockholders, who are not parties to the action, and who are at liberty at any time to dispose of their stock holdings, a transaction which would not transfer to the purchaser the rights relied upon in the answer. If we had before us a demand upon the part of the individual stockholders to be allowed to intervene and protect their interests in this action, it would be a different question, and one upon which we express no opinion. Becker v. Northway, 44 Minn. 61, 46 N. W. 210, 20 Am. St. 543.

Order affirmed.1

1 "Whenever a corporation makes a contract, it is the contract of the legal entity; of the artificial being created by the charter; and not the contract of the individual members." Taney, C. J., in Bank of Augusta v. Earle (1839) 13 Pet. (U. S.) 519, 587, 10 L. ed. 274. Si quid universitati debetur singulis non debetur, nec quod debet universitas singuli debent. Digest 111, 4 lex. 721. See also Moore &c. Hardware Co. v. Towers Hardware Co. (1888) 87 Ala. 206, 6 So. 41; Sellers v. Greer (1898) 172 Ill. 549, 50 N. E. 246; Gallagher v. Germania Brewing Co. (1893) 53 Minn. 214, 54 N. W. 1115; Gay v. Hudson River Electric Power Co. (1911) 187 Fed. 12.

It is generally held that a promise by a stockholder to pay a corporate debt is in every sense a promise to pay the debt of another, since a corporation is in law a different person from any of its members. Temple v. Bush (1903) 76 Conn. 41, 55 Atl. 557; Rogers v. Waters (1829) 2 Gill & J. (Md.) 64; Home Nat. Bank v. Waterman (1890) 134 Ill. 461, 29 N. E. 503; Hanson v. Donkersley (1877) 37 Mich. 184, 186; Searight &c. Co. v. Payne (1874) 2 Tenn. Ch. 175.

BLIGH v. BRENT.

1837. 2 Y. & C. Ex. 268.2

ALDERSON, B., delivered the judgment of the court: This was a bill praying in substance that the defendant Margaret Brent, widow and executrix of Timothy Brent, deceased, may account for certain shares of the Chelsea Waterworks, and that it may be declared by the court that the plaintiff as his heir at law became entitled to those shares, and that the other defendants, the governor and company of the Chelsea Waterworks, may be directed to insert in their transferbooks the plaintiff's name as proprietor thereof. There is no dispute as to the facts, and the only question for the court was, whether these shares were part of the real or personal estate of the testator. If the former, the plaintiff as heir at law is entitled to the decree he prays, because the will is attested by only two witnesses; and if the latter, his bill must be dismissed.

*

* *

The company of the Chelsea Waterworks was originally constituted under the provisions of the statute 8 Geo. I, 1723. By that act, certain persons named therein were constituted commissioners, undertakers, and trustees for carrying into effect the works then projected, and for afterwards maintaining them. For that purpose his Majesty was, by a subsequent clause, empowered to incorporate them, by the name of the Governor and Company of the Chelsea Waterworks. And they were to have the power of purchasing lands not exceeding £1,000 per annum, and to sell and dispose thereof at their pleasure, and to do all necessary works, and to be subject to such rules, qualifications, and appointments as his Majesty should think reasonable to be inserted in the charter; and might also be empowered to make by-laws from time to time for the good government of the corporation.

In pursuance of this power a charter of incorporation was granted almost immediately afterwards by George I. That charter followed the directions of the statute, and gave the corporation power to purchase lands, etc., so as they did not exceed in value £1,000 per annum, and also estates for life or lives, and for years, and goods and chattels of what nature or value soever, for the better carrying on and effecting the purposes of the company, not exceeding the value of the joint stock of the corporation thereinafter mentioned and limited, and to be taken and computed as part thereof.

The twenty-third section empowered the corporation by subscription to raise a joint stock, not exceeding £40,000, and to manage the same from time to time, and to receive the benefit and advantage of the same to the use of them the said Governor and Company and their successors, according to such shares and proportions as they or any of them have or shall have therein. And then it provided that every person subscribing and contributing any sum or sums of money should, by virtue thereof, become members of the said cor

2 The facts are sufficiently stated in the opinion.—Eds.