CHAPTER LI

BY-LAWS1

$345. Definition

By-laws are the more permanent rules of corporate action as distinguished from motions and resolutions, which usually apply only to particular occasions and special matters.

A corporation is controlled: (1) by the corporation laws of the state in which it is domiciled, (2) by the provisions of its charter, and (3) by its by-laws, these three ranking in the order given as to authority. Hence any by-law that does not accord with the statutes of the state and also with the provisions of the charter of the particular corporation is void.

By-laws are enacted by the stockholders and by them alone, unless, by statute, by charter provision, or by action of the stockholders themselves, such power has been delegated entirely or in part to the directors of the corporation.

By-laws limiting the power of officers to make contracts will not be effective against one who contracts with the corporation without knowledge of those by-laws. The officers, though, would make themselves liable to the corporation for any damage resulting from their breach of duty.

§ 346. Adoption

A corporation is not compelled to adopt by-laws. Its operation without them would, however, be practically impossible.

A reasonably complete set of by-laws is usually adopted by the stockholders at their first meeting, and these by-laws

1 For form of by-laws, see Chapter CVI, Form 55.

are added to, amended, or repealed from time to time thereafter as may be necessary.

By-laws should be carefully drawn, properly adopted, and accurately recorded in the minute book of the corporation. They should provide fully for all the important details of corporate procedure, such as the issuance and transfer of stock, the meetings of the stockholders and directors, the election of directors and officers, the respective duties and responsibilities devolving upon these, and the care and management of the corporate property and finance. They should also include the more important provisions of the charter and of the statute law as far as applicable. This is done in order to provide a convenient and accessible memorandum of these provisions. Without this they might be overlooked or forgotten.

$347. Amendment

The by-laws usually prescribe the method of their own repeal or amendment. Unless otherwise provided by statute, charter, or by proper provision in the by-laws themselves, these by-laws may always be repealed or amended, either in whole or in part, by a majority vote of a quorum of stockholders at any regular meeting, or at any special meeting duly called for that purpose. The directors have no power to repeal or amend by-laws under any circumstances unless such power is expressly given them by the laws of the state of incorporation, by the charter of the corporation, or by its by-laws.

$348. Enforcement

Direct penalties for the violation or non-observance of by-laws are sometimes provided. These usually take the form of fines. Such penalties are, as a rule, unsatisfactory and very difficult of enforcement. The smaller infractions are usually passed over, or recurrence is prevented by the substitution of

more reliable officials at the next election. The more serious violations bring their own penalties in the legal liabilities and entanglements that necessarily follow. Corporate action taken in disregard of by-law provisions is, for that reason, not only illegal but may at times involve the directors and officers concerned in personal liabilities.

2.

REVIEW QUESTIONS

What are by-laws? How do by-laws rank as compared with other corporate regulations? Are by-laws binding on people who do business with corporations? Give reasons for answer. Who adopt or amend by-laws in your state? If a corporation adopted a set of by-laws which provided that any amendment required a two-thirds vote, would a subsequent amendment by a majority be good? Give reason for answer.

3. How are by-laws enforced?

CHAPTER LII

STOCK1

$349. Capital Stock

The capitalization or capital stock of a corporation is the amount of stock as fixed by its charter which the corporation is empowered to issue. This amount can be changed only by amendment of the charter. This capital stock is regarded as divided into equal shares, termed "shares of stock." When by purchase or otherwise a person acquires an interest in the capital stock, he becomes a stockholder in the corporation, and his interest is expressed in these shares of stock.

The par or face value of shares of stock is fixed by the charter of the particular corporation, and, unless expressly limited by statute, may be placed at any amount desired by the incorporators. This par value can be changed only by charter amendment. One hundred dollars is the most common par value of shares. The number of shares owned by any individual gives an accurate measure of his interest in the corporation. For instance, if a man owns ten shares of the par value of $100 each in a corporation with a capitalization of $10,000, all of which is issued, he owns a total stock interest of one-tenth of the entire outstanding capital stock, and therefore has an undivided one-tenth interest in the entire corporate property and business.

The par value and the actual value of a share of stock may be very different. A hundred-dollar share of stock in a prosperous corporation will frequently be worth several times

1 For form of subscription list, stock certificate, and assignment of stock certificate, see Chapter CVI, Forms 53, 57.

that amount, while in an unsuccessful corporation it may be worth little or nothing. In either case the par value remains the same.

$350. Stock Certificates

Stock certificates are issued as a convenient evidence of the stockholders' interests in a corporation, and every stockholder whose stock is paid for has a right to such a certificate. These certificates state the number of shares owned, their par value, and usually any other material facts affecting the stock in question, as, for instance, that it is full-paid, or that it is preferred stock. These certificates of stock are signed by the president and the secretary, or the president and the treasurer of the corporation and are sealed with the corporate seal. When properly issued, they are conclusive evidence of the ownership of the stock represented by them.

The stock certificate, as already stated, is merely the evidence of ownership of stock and is not the stock itself. The stock of a corporation usually exists before stock certificates are issued at all, and may be bought and sold by proper entries on the corporate books.

Old stockholders have a right to purchase new stock pro rata before it may be offered to outside investors. However, a price may be fixed, not less than par, and if the stockholders are given an opportunity to take stock at that price in proportion to their holdings, and the offer is not accepted, the right is lost, and the stock may be sold to others, at the advanced price. In some cases subscription scrip that can be sold to others is issued to stockholders in proportion to their holdings.

Each share of stock usually entitles the owner of record to one vote in all proceedings of the stockholders, whether assembled in annual or special meeting. In most states, by proper charter provision the voting power of stock may be restricted, or stock may be issued without voting power. Pre