The right to vote stock is an incident to stock ownership, and was recognized at common law as a property right.1

In some few of the States, statutes exist limiting the right of stockholders to own more than a certain percentage of the total stock of the corporation.2

Sometimes the incorporators are appointed commissioners to take stock subscriptions. It has been held that the failure of such commissioners to take the oath of office as required by statute, will not render the subscriptions void. Where authority to open books of subscription is given by statute to the incorporators, this authority may be exclusive, so that subscriptions cannot lawfully be received by others. Such subscriptions, however, may of course be ratified by proper parties.*

Ordinarily the election of officers is by statute devolved upon. the board of directors. However, in some few of the States certain officers are required to be elected by the stockholders.

§ 89. Adoption of By-Laws. A by-law is in effect a continuing rule of action for the government of the corporation, its members and officers.5 The purpose of a by-law is to regulate and define the duties of the stockholders between themselves and the conduct of the officers and the management of the corporate affairs.6

All corporations have the implied power to make by-laws for the government of the corporation and the management of its affairs. Unless otherwise provided by statute, the by-laws must be adopted by the incorporators at their organization meeting or else by the stockholders at a meeting duly called for that purpose.

Some few of the States, among them being South Dakota, North Dakota, and Oklahoma, permit incorporators to adopt by-laws, whether they are subscribers for the capital stock of the proposed corporation or not. Statutory provisions exist in several of the

1 Commonwealth v. Dalzell, 152 Pa. St. 217; 25 Atl. 535.

2 Mack v. Company, 90 Ala. 396; 8 So. 150; Commonwealth v. Detwiller, 131 Pa. St. 614; 18 Atl. 990. On right of corporation to vote its own shares see McNeely v. Woodruff, 13 N. J. L. 352; Ex parte Holmes, 5 Cowen (N. Y.), 426; on right of corporations to vote shares in another corporation see Davis v. Company, 77 Md. 35; 25 Atl. 982.

states, expressly permitting provision to be made, if desired, for the adoption of by-laws by the directors. In the absence of any such statutory authority, by-laws adopted by the directors are not binding unless subsequently ratified by the stockholders. On the other hand, if the directors are vested by statute with exclusive power to pass by-laws, those passed by the stockholders are not valid.2

The adoption of by-laws is a constituent act, and for this reason they must be adopted within the State by whose laws the corporation was created, if action of stockholders is necessary to their adoption. In the absence of statutory power or charter provision, by-laws can be altered or repealed by the stockholders alone.1

In the absence of statutory prohibition, the power to amend or alter by-laws may be delegated by the stockholders to the directors. In general by-laws must be adopted in conformity to the charter and be reasonable and proper.5

The by-laws of a private corporation will be interpreted by the courts as interpreted by the corporation."

The reasonableness of a by-law is a question of law and not of fact.7

8

In drawing by-laws the following rules should govern: they should be made certain; they must be directed to all within the sphere of their operation; they must operate equally upon all to whom applied; 10 they must be lawful as against members possessing rights, and must be reasonable.11

Sometimes the statute requires by-laws to be adopted within thirty days after incorporation and copied into a book of by-laws.12 Such statutes are clearly directory and not mandatory.

1 Carroll v. Bank, 8 Mo. Ap. 253. 2 In re Klaus, 67 Wis. 40; 29 N. W. 582; People v. Company, 82 Ill. 457; S. S. Ass'n v. Company, 25 Mo. Ap. 642.

3 In re Klaus, 67 Wis. 40; 29 N. W. 582; Mitchell v. Company, 40 N. Y. Sup. Court, 413.

4 M. G. R. Company v. Wysong, 51 Ind. 12.

5 See Kent v. Company, 78 N. Y. 182; Bergman v. Association, 29 Minn. 275; 13 N. W. 120; Commons v. Company, 12 Pa. St. 318; People v. Chicago Board of Trade, 45 Ill. 118.

8 Goddard v. Merchants' Exchange, 9 Mo. Ap. 290.

9 Ex parte Frank, 52 Cal. 606.

10 People v. Society, 25 Barb. (N. Y.) 7.

11 Com. ". Worcester, 3 Pick. 461; King v. Union, 170 Ill. 135; 48 N. E. 677. On failure to post by-laws, see Langon v. Company, 49 Ia. 317.

12 See Hall v. Crandall, 29 Cal. 567; Clapman v. Doray, 89 Cal. 52; 26 Pac. 605.

directors is inherent in all private corporations irrespective of statute.1

The election of directors in connection with the organization of a corporation ordinarily follows the adoption of by-laws. After the organization the election of directors is usually had at the annual meeting of the corporation. In giving the notice of such annual meeting it is customary to specify in the notice that a board of directors is to be chosen.2

In choosing the directors it is incumbent upon the incorporators or stockholders, as the case may be, to observe the provisions of the statutes relative to the number of directors to be chosen and their qualifications as to stock-holdings, residence, and citizenship if any such are prescribed by statute. In the absence of such statutes as exist in many of the States authorizing the dividing of directors into classes, so that only a certain portion of the board are elected annually, the full board must be elected each year. In the absence of statute making the ownership of stock a qualification for holding the office of director such ownership is not necessary. Even where the statute requires that directors shall be stockholders, it is not necessary that they shall become such before their election if they become stockholders before entering upon the duties of their office. In the election of directors by the incorporators it is sufficient in order to qualify him that a director be a subscriber for stock, though no certificate has in fact been issued. Where ownership of stock is necessary to qualify one as a director, the prevailing rule seems to be that the moment a director ceases to be a stockholder, he ceases to be a director de jure (but not de facto) without proceedings having first been taken to remove him.6

Where a director is required to take an oath of office before entering upon the discharge of his duties, his failure to take such an oath will not prevent him from becoming a director de facto." Any person who can be a business agent for another can, if possessed of statutory qualifications, become a director.8 Ordinarily

1 Hurlbut v. Marshall, 62 Wis. 590; 22 N. W. 852.

2 Merritt v. Ferris, 22 Ill. 303. 3 Wright v. Company, 117 Mass. 226. 4 Greenough v. Company, 64 Fed. 22. 5 McComb v. Association, 10 N. Y. Sup. 552; Beckett v. Houston, 32 Ind. 393.

Dispatch Light Packet v. Company, 12 N. H. 205; Wright v. Company, 52 N. J. Eq. 352; Howe v. Scarborough (Ala.), 35 So. 113.

7 Simpson v. Garland, 76 Me. 203.

• People v. Webster, 10 Wend. (N. Y.) 554.

it is not necessary that resignations of directors be accepted in order to become effective.1

Persons owning a majority of stock have a right to elect directors. It is a fundamental principle in corporation law that a majority of stockholders shall control the policy and regulate the business affairs of the corporation, and to this each stockholder impliedly agrees when he acquires stock in the corporation.3 However, in order to insure minority representation on the board, cumulative voting for directors is permitted in a large number of the States. Where such right to cumulate votes is mandatory such right cannot be taken away by by-law."

The fact that a corporation begins business with an insufficient number of directors does not invalidate debts contracted by them, nor deprive it of its corporate rights and privileges unless some action is taken by the State to that end. Failure to elect a board of directors annually does not work dissolution. The old board will hold over by implication of law. This is a rule not only established by statute in a large number of the States, but is a well established rule of corporation law in the absence of such statutes. In the election of directors a majority vote of all present is sufficient, provided a majority of the stock is represented at the meeting. Vacancies in the board of directors cannot be filled by the remaining directors, but must be filled by the stockholders, unless such power is expressly granted by statute.10 Even where the right to fill vacancies is given to the remaining directors it is probably true that there must be present at the meeting a majority of the whole number of directors prescribed by the charter, and that such vacancy be filled by a majority vote thereof.11

Unless regulated by statute or by-laws, the board of directors may fix any place within the domiciliary State at which annual

1 Pres., etc. of Manhattan Co. v. Kaldenberg, 165 N. Y. 1; 58 N. E. 790; Briggs v. Spaulding, 141 U. S. 155.

2 Faulds v. Yates, 57 Ill. 416.

3 Wheeler v. Company, 143 Ill. 197; 32 N. E. 420.

Tomlin v. Bank, 52 Mo. Ap. 430; Wright v. Company, 67 Cal. 532; 8 Pac.

70.

7 Hunter v. Company, 26 La. Ann. 13. 8 Chamberlain v. D. S. Works, 103 Mich. 124; 61 N. W. 532; Moses v. Tompkins, 84 Ala. 613; 4 So. 763.

Eggleston v. Doolittle, 33 Conn. 402. 10 Moses v. Tompkins, 84 Ala. 613; 4 So. 763; Kearney v. Andrews, 10 N. J. Eq. 70.

11 Moses. Tompkins, 84 Ala. 613; 4 Fargason v. Company, 78 Miss. 65; So. 763; Nathan v. Tompkins, 82 Ala.

27 So. 877.

437; 2 So. 747.

meetings for the election of directors may be held.1 Where there are mandatory provisions in the charter, statute, or by-laws as to place of holding annual meetings these must be followed.2 Where the certificate of incorporation is required to fix the number of directors, such number cannot be changed except by amendment thereof.3

In connection with the general subject of election of directors the question not infrequently arises as to the validity of the so-called "voting trusts" now becoming so common in this country. The prevailing and it is believed the true rule on this subject is set forth in Clowes v. Miller, where it was held that in the absence of any improper motive such trusts are valid. It is, in the absence of such improper motives, merely a convenient method of voting by proxy.

It

In the absence of statute, charter provision, or valid by-law to the contrary, holders of preferred stock have the same rights in the election of directors as belong to the holders of common stock. has been held that stockholders may in voting for directors change their vote while the election is in progress. Mandamus is the proper remedy to compel canvassing of votes at election of directors to determine whether or not such election was valid.8

In some of the States there are certain statutory officers known as "Inspectors of Election," who must be chosen preliminary to the election of the board of directors. These inspectors should be chosen in the mode provided in the by-laws. Inspectors have no power, express or implied, to pass upon the eligibility of directors.10 The failure to have the inspectors sworn before acting as such will not invalidate an election. In the absence of statutory provision

1 Corbett v. Woodward, 5 Saw. 403; Commonwealth v. Smith, 45 Pa. St. 59; Pratt v. Company, 35 Conn. 365; Duke v. Taylor, 37 Fla. 64; 19 Sou. 172; Hilles v. Parish, 14 N. J. Eq. 380; Arms v. Conant, 36 Vt. 744; Hodgson v. Company, 46 Minn. 454; 49 N. W. 197.

2 McDaniel v. Company, 22 Vt. 274. * See Matter of Griffin Iron Co., 63 N. J. L. 168; 41 Atl. 931.

460 N. J. Eq. 179; 47 Atl. 345.

5 See also Faulds v. Yates, 57 Ill. 416; Moses v. Scott, 84 Ala. 608; 4 So. 742; O. & M. Ry. Co. v. State, 49 O. St. 668; 32 N. E. 933; Mobile, etc. Ry. Co. v. Nicholas, 98 Ala. 92; 12 So. 723.

6 Mackintosh v. R. R. Co., 32 Fed. 350; 54 Fed. 582; Lockhart v. Van Alstyne, 31 Mich. 76; Miller v. Ratterman, 47 O. St. 141; 24 N. E. 496.

7 State v. McGains, 64 Mo. Ap. 225. 8 State v. McGains, 64 Mo. Ap. 225.

In re Excelsior Fire Ins. Co., 16 Abb. Pr. 8; People v. Company, 55 Barb. 344; In re Lighthall Mfg. Co., 47 Hun, 258; State v. Merchant, 37 O. St. 251; Commonwealth v. Woelper, 3 S. & R. (Pa.) 29. 10 In re St. Lawrence Steamboat Co., 44 N. J. L. 529.

11 In re M. & H. Ry. Co., 19 Wend. (N. Y.) 135.