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4. The original resolution regarding the election of the board of directors and council of supervision.

5. The report made by the board of directors and council of supervision, and also by revisers in case revisers are appointed, on their examination into the steps taken in founding the company, together with all materials on which their reports are based. If revisers were called in to make a report, evidence must also be given that the revisers' report was sent to the body representing the business interests of the district which appointed the revisers. (See under L.)

6. If the business is one that requires the approval of the State, or in case shares for small amounts are issued, necessitating the approval of the State, the document conveying such approval must also be submitted.

Finally, the application for registry must contain the declaration that in case of noncash shares the contributions have been fully paid in and are in possession of the board of directors, and that in case of cash shares at least one-fourth of the face value has been paid in. (In case of shares issued for more than their face value the excess above the face value must be paid in, as well as one-fourth of the face value.) Members of the board of directors must sign their names, and these signatures are to be preserved by the court. The court preserves all the above documents, either in the original or in certified copies. (H. G. B., 195.)

(2) Shares must nominally have a face value of 1,000 marks ($250). In case of some particular local need, however, the Bundesrath may authorize companies whose business would promote the general welfare to issue shares at lower amounts, not less than 200 marks ($50), however. If the Empire or a single State or a local government corporation guarantees unconditionally a certain return on the shares of an undertaking, the same privilege may be accorded to it. In such cases shares must be issued in the name of the owner. Finally, shares may be issued by any company in amounts between 1,000 and 200 marks ($250 and $50), provided they are entered in the name of the owner and are made nonnegotiable without the consent of the company: (H. G. B., 180.) The negotiation of all shares issued in accordance with this last provision can only be accomplished by means of a declaration sworn to before a notary or judge. (H. G. B., 222; Abs. 4.) All shares made out in the name of the owner must be entered in the company's share book, with an exact statement of the name, residence, and business of the owner. Except in the case noted above they may be transferred without the consent of the company unless its charter and by-laws provide to the contrary. Such transfers are made by indorsement, subject to the regulations regarding stocks. (Arts. 11-13; art. 36, sentences 1-4; art. 74.) The above provisions hold also with regard to the transfer of preliminary stock certificates. (H. G. B., 222.) Notices of all transfers of owner shares or preliminary stock certificates must be entered in the company's share book, but the company is not obliged to examine into the validity of such transfers. In relation to the company only those are counted shareholders who are entered in the company's share book as such. (H. G. B., 223.)

(3) Shares are indivisible. If issued before fully paid up, they must be entered in the name of the owner. (H. G. B., 179.) Shares may not be issued for a less amount than their face value, but may be issued fo more if authority to do so is given in the by-laws. (H. G. B., 184.) Different classes of shares to which different rights are assigned, especially in regard to the distribution of profits or company property, may be issued if the by-laws of the company authorize it. (H. G. B., par. 185.) Évery special advantage granted to individual shareholders must be stated in the articles of incorporation, together with the name of the shareholders so favored. (H. G. B., 186.) Amounts realized from the sale of such special privileges go to the reserve fund unless it was previously determined to use them for extraordinary purposes or to cover extraordinary losses. (H. G. B., 262.) One-fourth of the face value of shares must be paid in before the company can be entered in the business registry. (H. G. B., 195.) See paragraph 1 above.

(4) Shareholders who do not pay installments on their shares when they fall due must pay interest on the installments due from that time till the payment is finally made. They may also be held liable for any damage arising from their delinquency. Further penalties may be imposed in accordance with the charter and by-laws. (H. G. B., 218.) Further, in cases of nonpayment, a term may be set of at least three months in length, and at the expiration of this term, and after notice has been formally given the delinquents three times, they may be declared to have forfeited their right to participate in the company and the payments they have already made upon their shares. (H. G. B., 219.) "The excluded shareholders nevertheless still remain liable for amounts remaining due, and after them recourse may be had to their legal predecessors. If a legal predecessor pays the amount due, he receives a newly made out record of shares. If payment can be obtained neither

from the shareholder nor from his legal predecessors, the share may be sold at its market price if it is quoted; if not, it may be sold at auction. (H. G. B., 220.)

(5) For votes regarding shares issued for other considerations than cash, see under B.

(6) An increase in the amount of capital by the issue of new shares is not allowaable before shares have been fully paid up, unless the delinquency is relatively small in comparison with the amount paid in. A resolution to so increase the amount of capital requires a vote of three-fourths of the capital present at the meeting to which it is submitted unless otherwise provided for in the company's charter and by-laws. Announcement must be made of the passage of such a resolution by the members of the board of directors and council of supervision collectively for entry in the business registry. Formalities regarding giving of notice to the court, publication, etc., must be observed as in the case of the original issue of stock. (See par. 1 above.) Each shareholder at the time the increase of capital is made must be permitted to subscribe for a number of the new shares in proportion to the amount of his former holding, unless the resolution for an increase provides to the contrary. (H. G. B., 278–287.)

(7) Similar provisions together with others safeguarding the interests of the company's creditors regulate reductions in the amount of capital. (H. G. B., 288–291.)

B.—METHODS OF PROMOTING— LIABILITY OF PROMOTERS.

(8) Promoters (Gründer) of a company are those who draw up its articles of incorporation or make other than cash contributions to its capital. The nature of such contributions, the persons making them, and the number of shares issued as compensation therefor must be published in the company's articles of incorporation. The same rule holds regarding special privileges granted to individual stockholders. All expenses incurred in the founding of the company must appear separately from the above items in the articles of incorporation. (H. G. B., 186, 187.)

(9) If the promoters take out all the shares of the company it is considered constituted (ready to begin business). (See under A.) If not, a declaration listing the remaining shares must be issued before the company can be finally constituted. This list must contain information regarding the company, its promoters, number and classes of shares, etc. Promoters are liable to the company for neglect or violation of this provision, if in spite of such neglect or violation the company has been entered in the business register. (H. G. B., 129.) They are also jointly responsible for all damages arising from misstatements and errors in making out the preliminary documents of the company (see under A), for damages willfully caused by them in issuing shares for other than a cash consideration, and in granting special rights to individual shareholders. Third parties knowingly aiding promoters in acts damaging to the company are also liable to it. (H. G. B., 202.) Persons making public statements regarding the shares of a company before its entrance in the business registry or within 2 years thereafter, with the purpose of bringing them into circulation, are jointly responsible with the persons mentioned in the preceding sentence for any damage arising to the company from misstatements or omissions made by promoters in the preliminary papers, or for any damages caused by them in issuing shares for other considerations than cash, or in granting special privileges to individual shareholders. (H. G. B., 203.) Claims for damages of the above description expire by limitation in five years.

(10) Certain provisions from the law on exchanges (Börsengesetz, secs. 38, 39, 43– 47) also bear upon the liability of promoters. Shares of a joint stock company may not be admitted to exchange until a year after it has been entered in the business registry and not before the publication of its first annual balance sheet and profit and loss account. Notice must be given on exchange regarding the admission of the shares of such companies at least 6 days before their admission. Before permission is given admitting the stock to the exchange a prospectus must be published containing all statements essential for judging the value of the paper. It must also state how many shares are to be put upon the market, how many will not be put in circulation for the time being, and how long they will be kept out of the market. Bonds guaranteed fully by the Empire or by a single State do not need such a prospectus. Persons making such a prospectus are liable to owners of shares purchased on the basis of statements contained in it for all damage arising from misstatements or omissions in the prospectus.

(11) Promoters of a company who knowingly make false statements with the purpose of securing the entry of the company in the business registry (see A) are punishable with imprisonment and fine not to exceed 20,000 marks ($5,000), and may be deprived of their civil rights (bürgerliche Ehrenrechte.) If extenuating circumstances are shown, the fine only may be imposed. (H. G. B., 313.)

C.-LIABILITIES OF STOCKHOLDERS.

(12) Stockholders are not personally responsible for the obligations of the company. (H. G. B., 178.) Their liability for payments on capital is limited to the nominal value of their shares, unless a higher price than their face value has been fixed upon for the issue of shares, in which case their liability is limited to the price so fixed. (H. G. B., 211.) In addition to money payments, other periodical duties may be imposed upon stockholders by the company's charter and by-laws in case the transfer of the right of participation in the company (Antheilsrechte) depends upon the consent of the company. " (H. G. B., 212, 216, 276.)

(13) Shareholders can not demand the return of payments made by them. So long as the company exists they have claim only upon its net profits. (H. G. B., 213.) The method of proceeding against delinquent shareholders has been described in A 4. If a share is held in common by several persons, they may exercise the right conferred upon them by the share only through a common representative. They are jointly liable for the obligations which the share carries with it. (H. G. B., 225.)

(13a) Shareholders are, however, responsible for the company's engagements to the extent that they accept payments from the company contrary to the provisions of the commercial code. (H. G. B., 217; see, also, under G 25b, 26). Claims for recovery on this basis expire by limitation in 5 years.

D.-DUTIES AND RESPONSIBILITIES OF DIRECTORS.

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(14) The board of directors of a company may be composed of one or more per

The manner of their election or appointment is not prescribed by the commercial code. Whatever method the company may decide upon must, however, be stated in the articles of incorporation. (See A.) Any member of the board of directors may be recalled at any time, without prejudice, however, to his claims for compensation according to contract. (H. G. B., 231.) All changes in the personnel of the board of directors, or in the powers of its members, must be announced for entry in the business registry. (H. G. B., 234.) (15) The company is represented, judicially and otherwise, by the board of direct

(H. G. B., 231.) Unless otherwise provided for in the company's charter and by-laws the board of directors call the general meetings of the company, not only at the regular times but whenever the interests of the company demand it. (H. G. B., 253.) It is further the duty of the board of directors to transmit to the business registry a publicly certified copy of the minutes of all such meetings immediately after they have been held. (H. G. B., 259.). In its relations to the company the board of directors is bound to observe the limitations of its powers fixed in the company's charter and by-laws or by resolutions of the general meeting. Such limitations, however, may not be set up as against third parties. (H. G. B., 235.) The board of directors must see that the necessary books of the company are kept, and must make out balance sheets, prepare reports, etc. (H. G. B., 239, 259.)

(16) For declarations of purpose or valid action, and especially for signature on behalf of the company, the collective action of the members of the board of directors is necessary, unless otherwise provided for in the charter and by-laws. The board may, however, appoint individual members to take charge of certain business transactions or certain kinds of business transactions. If a resolution of the company is necessary for such action it is sufficient if it be given in the case of a single member of the board. If each member of the board of directors does not according to the company's charter and by-laws have the right to represent it independently, the members of the board may decide that when a number of them do not take action together one of them may be qualified to act in connection with a procurator representing the company. (H. G. B., 234.) But, unless so authorized by the charter and by-laws or by resolution of the general meeting, the board of directors may appoint a procurator only with the consent of the council of supervision. This limitation may not, however, be set up against third parties. (H. G. B., 238.)

(17) It is the special duty of the first board of directors, as well as of the first council of supervision, to examine into the transactions accompanying the foundation of the company. (H. G. B., 192; see also L below.) Its duties in reference to the registration of the company have already been touched upon. (See under A above.)

(18) If a yearly or an intermediate balance sheet shows the loss of half the share capital the board of directors must call a general meeting immediately and inform it of the fact. Whenever the yearly or an intermediate balance sheet shows that the property of the company does not cover its debts (insolvency) the board of directors must move the opening of bankruptcy proceedings. (H. G. B.,

240.)

(19) In the performance of their duties members of the board of directors must exercise ordinary business prudence. Directors who violate their duties are jointly liable to the company for damages arising therefrom. They are especially liable for damages if, contrary to the provisions of the commercial code

(a) Payments made by shareholders are refunded. (6) Profits or interest are paid to shareholders.

(C) Shares or preliminary certificates of stock of the company are purchased, withdrawn, or accepted as security.

(d) Shares are issued before they are fully paid in, or if the price of issue is fixed higher than the face value of the shares, in case they are issued before the price is fully paid.

(e) The property of the company is divided, or the original capital is partly refunded.

(f) Payments are made after insolvency has occurred or become manifest.

In the above special cases the directors are also liable to the creditors of the company so far as the latter are unable to recover from the company. As against creditors this liability is removed neither by a disclaimer on the part of the company nor on the ground that the transaction was undertaken upon a resolution of the general meeting.

All claims mentioned in the paragraph expire by limitation in 5 years. (H. G. B., 241.)

(20) Fines in contempt, not exceeding 300 marks' ($75) in each instance, may be imposed by the court of the district in which the company is located upon members of the board of directors for failing to call a general meeting when one-half of the share capital of the company is lost; for failing to make out at the proper times such accounts, statements, and reports as are required by law; for failing to publish such statements in the papers as according to law must be so published, or for refusing to allow properly qualified persons to examine the books and papers of the company. (H. G. B., 14, 195, 319.)

(21) Directors purposely acting to the disadvantage of the company are punishable by imprisonment and fine not to exceed 20,000, marks ($5,000). The loss of civil rights may also be inflicted upon them. The same penalties apply to directors who knowingly make false statements in any of the papers submitted to secure the entrance of the company in the business registry or to secure the entrance of an announcement of increase of capital stock. (See A 1, 6 above.) For untruthfully presenting or concealing the condition of the company in their statements or in reports to the general meeting, directors are liable to a punishment of imprisonment for one year and to a fine of 20,000 marks. Loss of civil rights may be added as a further penalty. The same penalties, with the exception of the loss of civil rights, apply to directors who issue shares before payments have been made upon them as prescribed by law, or in smaller denominations than the law allows, or before the company has been entered in the business registry. (See A 1, 2 above.) Directors are liable to imprisonment for not more than 3 months and fine not exceeding 5,000 marks ($1,250) in case the company remains longer than 3 months without a council of supervision, or in case the directors fail to move the opening of bankruptcy proceedings as soon as the company becomes insolvent. If in any of the above cases extenuating circumstances are shown, the fine alone may be inflicted. (H. G. B., 312–315.)

E.-RESTRICTIONS UPON DIRECTORS IN DEALING IN STOCKS AND OTHERWISE.

(22) Directors may neither engage in business nor undertake transactions on their own account or for others in the same branch in which the company is engaged; nor may they become personally responsible partners in other businesses. Consent to do these things may, however, be given by the organ of the company which has the right to elect the board of directors. In case directors undertake them without such consent, the company may claim damages, or it may instead require directors to turn over to it transactions undertaken on their own account. In the case of transactions undertaken for others without permission, the company may require the director to turn over to it the compensation received for so doing, or his claim for such compensation. The claims of the company in the above cases expire by limitation 3 months from the time the other members of the board of directors and the council of supervision learn of the violation of these regulations on the part of a director. They expire by limitation without regard to such knowledge 5 years after the violations occur. (H. G. B., 236.)

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1 These fines in contempt (Ordnungsstrafen) may presumably be remitted in case the director at fault does as the court orders him. The law says directors may be held to their duties by such fines.

IC-VOL XVIII-01-17

(23) A stock company shall, in the ordinary course of business, neither purchase its own shares and preliminary stock certificates nor accept them as security unless it is given power to do so.

The withdrawal of shares from circulation (Einziehung, Amortisation) can only take place when provided for in the company's charter and by-laws. Such provisions must be contained in the articles of incorporation, or in an amendment thereto passed before the shares were listed. The withdrawal must be accomplished by way of purchase, and the shares to be withdrawn are to be determined by lot or the giving of warning, or in similar ways. Purchases of this sort may be made only out of the available profits of the company, as shown by the yearly balance sheet. (H. G. B., 226, 227.) For provisions regarding reduction in the amount of capital of a company, see under A 6, 7 above.

G.-REGULATIONS REGARDING STOCKS AND DIVIDENDS

(24) Within the first three months, or if the company's charter and by-laws permit it, within the first six months of the business year, the board of directors must prepare the balance sheet and profit and loss account for the preceding year, and also a report showing the amount of property held and condition of the company. It must submit this report to the council of supervision and afterwards to the general meeting, together with such remarks as the council of supervision may make thereon. (H. G. B., 260.) In preparing the balance sheet the following provisions apply:

(a) The imperial money standard must be used.

(b). All items of property are to be estimated according to their value at the time for which the balance sheet is made.

(c) Doubtful claims are to be estimated according to their probable value; uncollectable claims are to be written off the books. (H. G. B., 40.) 1

(d) Valuable papers and goods which have an exchange or market price may be estimated no nigher than at the exchange or market price at the time for which the balance sheet is made out, but if in the case of goods this price exceeds the cost of production they must be estimated no higher than such cost of production.

(e) Other items of property are not to be estimated higher than the cost of production.

(f) The plants of the company (Anlagen) and other articles of property not destined to be sold, but rather to be permanently employed in carrying on its business, may be estimated at the cost of production without regard to a lower (present) value, provided an amount equal to depreciation is deducted, or a corresponding sum for repairs is put in account.

(9) Costs of establishment (Einrichtung) and administration may not be entered as assets on the balance sheet.

(h) The amount of share capital and of all funds provided for reserve or reproduction purposes are to be entered under liabilities.

(i) The profit and loss shown by the comparison of all assets and liabilities must be given separately at the close of the balance sheet. (H. G. B., 261.)

(25) Deductions are made from the yearly profits for special purposes, as follows:

(a) Reserve fund. A reserve fund must be created to cover Iosses shown by the balance sheet. To this fund are to be credited:

(1) At least one-twentieth part of the yearly profits until the reserve fund so accumulated is equal to one-tenth part of the share capital, or to a larger part than onetenth if so provided in the company's charter and by-laws.

(2) The amount of excess over the face value of shares realized at the time the company is founded, or whenever the amount of its share capital is increased by the issue of shares at a higher than their face value.

(3) The amount of additional payments realized from shareholders in return for the guarantee of special privileges on their shares, provided that it has not been previously determined to apply such payments to extraordinary purposes or to cover extraordinary losses. (H. G. B., 262.)

(6) Special allowances. For the performance of periodical duties to which stockholders are bound according to the company's charter and by-laws, compensation not exceeding the value of such services may be paid whether or not a net profit is shown by the yearly balance sheet. H. G. B., 216; see C 12 above.)

(c) Interest. During the period necessary for the preparation of the business for full activity, interest at a fixed rate may be guaranteed the shareholders. A definite time limit must, however, be set in the charter and by-laws at which such interest

1 The first three provisions are general, applying to balance sheets in all kinds of business. The remaining provisions apply specially to stock companies.

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