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"mind of the director or trustee is the forum in which he and his cestui
“que trust are urging their rival claims, and when his opposing litigant
"appeals from the judgment there pronounced that judgment must fall.
"It matters not that the contract seems a fair one. Fraud is too cunning
"and evasive for courts to establish a rule that invites its
presence
"nor is it proper for one of a board of directors to support his contract
"with his company upon the ground that he abstained from participating
"as director in the negotiation for and final adoption of the bargain by his
"co-directors, the very words in which he asserts his right declares the
"wrong; he ought to have participated, and in the interest of the stock
“holders, and if he did not, and they have thereby suffered loss, of which
"they shall be the judges, he must restore the rights he has obtained-he
"must hold against them no advantage that he has got through neglect
"of his duty toward them." (See also Guild, Ex'r, v. Parker, Rec'r
43 N. J. Law, 430; Elkins v. Camden & Atl. R. R. Co., 36 N. J. Eq., 467
at p. 470; Gardner v. Butler, 30 N. J. Eq., 702; Stroud v. Consumers
Water Co., 56 N. J. Law, 422, 427. See also Hickman v. Hickman Hose
Co., 13 N. J. L. J., 111.)

This rule, however, is for the benefit of the corporation, and as to others the contract is valid and enforceable. (Barnes v. Trenton Gas Light Co., 27 N. J. Eq., 33; Stratton v. Allen, 16 N. J. Eq., 229.) And so where the director of a bank, who was also a member of a firm, offered a note belonging to the firm to the bank, for discount, which was procured from the maker by fraud, of which he as a member of the firm had notice, it was held that the knowledge of the director was not constructive notice to the bank, such director not having acted with the board in making the discount and not having communicated his knowledge to any of the officers of the bank. He was regarded in the transaction as a stranger. (First Natl. Bank of Hightstown v. Christopher, 40 N. J. Law, 435.)

A director of two corporations which contract with each other is incapacitated to take part in settling the terms of the contract. (Met. Tel. Co. v. Dom. Tel. Co., 44 N. J. Eq., 568, 573.)

Where the corporation is insolvent the directors are trustees for the creditors. (See Section 64 and notes.)

By statute (P. L., 1895, p. 166, Section 64 of the Revision of 1896) corporations are prohibited from conveying or assigning any of their assets after they have become insolvent or suspended their ordinary business for want of funds to carry on the same. But even before the passage of this statute a board of directors of an insolvent company could not prefer one of its own members. "The weight of authority is in support of the whole“some rule that the directors of an insolvent corporation are trustees of "its funds for its creditors * * by no act of such director can he "obtain a position superior to that of the other creditors for whose benefit 'he holds the trust assets." (Montgomery v. Phillips, 53 N. J. Eq., 203, 217. Wilkinson v. Bauerle, 41 N. J. Eq., 635. Savage v. Miller, 56 N. J. Eq., 432.)

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"Equity regards the property of a corporation as a fund held in trust 'for the payment of its debts, and if other than bona fide creditors of the "corporation, or purchasers, possess themselves of it, they take it charged

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§ 12

with this trust, which a court of equity will enforce against them. "This is now a well-recognized rule of equity jurisprudence." (Natl. Trust Co. v. Miller, 33 N. J. Eq., 155, 163.)

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"The directors of an incorporated company cannot speculate with the funds or credit of the company, and appropriate to themselves the "profits of such speculations. They cannot, in making sales or purchases "for the company, take advantage of their position as directors, and "either directly or indirectly speculate upon the company. If they are "the only persons interested as stockholders, yet, if such speculations "impair the capital stock, and have a tendency to substitute a fictitious "for a real value, such transactions are opposed to the policy of their act of incorporation, and cannot, in any manner be countenanced by a 'court of equity." (Redmond v. Dickerson et al., 9 N. J. Eq., 507, 516.) Qualification of directors.-As to this point see note to Section 39. Annual elections.-"That provision of the charter, which declares "that annual meetings of the stockholders shall be held for the election "of directors, grants to the stockholders a highly important and valu"able right, which the directors can neither defeat nor impair * * * "The right, therefore, to change the day for the annual meeting is one "which, from its very nature, can alone be exercised by the stockholders. "No board of directors can, without the stockholders' consent, hold office "for a period longer than one year." (Elkins v. Camden & Atl. R. R. Co., 36 N. J. Eq., 467; Archer v. American Water Works Co., 50 N. J. Eq., 33.)

Chancellor Green, in Hilles v. Parrish, 14 N. J. Eq., 380, declared that any action by the directors of a corporation, which was designed to retain themselves in office, and thus perpetuate their control over the affairs of the corporation, against the will of the holders of a majority of the stock, was illegal and void, and that the injured stockholders, in such a case, were entitled to relief by injunction.

Classification of directors.

The classification provided for by the statute is twofold:

I. Classification by terms, the effect of which is to continue the directors in office for a longer term than one year and to cause the board to rotate in classes, so that in no one year can the personnel of the entire board be changed.

2. Classification by stock, by which one class of stock elects a certain number of directors to the exclusion of the others. Thus it is possible to place the control of the company, to the extent of electing a majority of the directors, in any class of the stockholders, whether that class be a majority or a minority of the whole stock.

A prerequisite of this under the statute is that there shall be more than one class of stock: thus, if one-third of the stock be preferred, as against two-thirds of the common, it would be lawful and not uncommon to provide that a majority of the directors shall be elected by the preferred stock. Either classification may be used without the other, or both may be combined. The following clause is from the charter of a well-known company:

"There shall be seven directors of the company, divided into two "classes in respect to the time for which they shall severally hold office.

"The first class, composed of four members, shall be chosen "exclusively by the holders of the preferred stock for the time being, "and shall hold their offices for the term of two years, and until the "election of their successors, and the second class, composed of three "members, shall be chosen exclusively by the holders of the general or "common stock for the time being, and shall hold their offices for the "term of one year, and until the election of their successors. The suc"cessors of the directors of said two classes respectively shall be chosen "by the holders of the preferred stock and by the holders of the general "or common stock as aforesaid, so that four of the directors shall at all "times be chosen by the holders of the preferred stock and three of the "directors by the holders of the general or common stock."

Executive committee.-The power of directors of a corporation to delegate their authority to committees, in the absence of express power of delegation contained in the certificate of incorporation, is not yet fully settled in this State. The general rule is, that directors may not delegate authority in matters committed to their discretion and judgment.

It would seem from the case of the Metropolitan Telephone Co. v. Domestic Telegraph Co. (44 N. J. Eq., 568) that the courts are inclined to relax the rigor of the general rule and to recognize the power of directors to delegate current and ordinary business to a committee. That is now not an uncommon practice among business corporations.

"

It was held in New York (Hoyt v. Thompson's Exr., 19 N. Y., 207) that a board of twenty-three directors may delegate to a 'quorum of any "five of their number authority to transact all ordinary business." (See also Olcott v. Tioga R. R. Co., 27 N. Y., 558; Sheridan Elec. Light Co. v. Bank, 127 N. Y., 522.)

To provide in the certificate of incorporation for the executive committee and its powers, the following clause may be used, pursuant to the provisions of Section 8, subdivision VII.:

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"The board of directors may, by resolution passed by a majority of "the whole board, designate two or more of their number to constitute an "executive committee, which committee shall for the time being, to the "extent provided in said resolution or in the by-laws of said company, "have and exercise the powers of the board of directors in the manage"ment of the business and affairs of the company, and may have power "to authorize the seal of the company to be affixed to all papers which may require it."

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Provision is sometimes made in the by-laws for an executive committee. The following is from the by-laws of a well-known corporation:

"There shall be an executive committee of three directors, appointed "by the board, who shall meet at regular periods, or on notice to all by "any of their own number; they shall advise with and aid the officers of "the company in all matters concerning its interests and the management "of its business, and generally perform such duties and exercise such powers as may be directed or delegated by the board of directors, from "time to time, and they shall have authority to exercise all the powers of "the board at any time a quorum may fail to attend any regular or "special meeting thereof."

13. Officers.

Every corporation organized under this act shall have a president, secretary and treasurer, who shall be chosen either by the

§ 13

§ 13 directors or stockholders, as the by-laws may direct, and shall hold their offices until others are chosen and qualified in their stead; the president shall be chosen from among the directors; the secretary shall be sworn to the faithful discharge of his duty, and shall record all the votes of the corporation and directors in a book to be kept for that purpose, and perform such other duties as shall be assigned to him; the treasurer shall give bond in such sum, and with such surety or sureties, as shall be required by the by-laws, for the faithful discharge of his duty.

P. L. 1846, p. 66; P. L. 1849, p. 302; Act of 1875, § 18.

Powers of officers.-The powers of the officers of a corporation over its business and property are strictly those of agents-powers either conferred by the charter, by-laws or delegated to them by the directors or managers. (Fifth Ward Savings Bank v. First Natl. Bank, 48 N. J. Law, 513, 525; Stokes v. N. J. Pottery Co., 46 N. J. Law, 237.)

Stokes v. N. J. Pottery Co., 46 N. J. Law, 237, held that the president is the chief executive officer, and by virtue of his office has authority to perform all acts of an ordinary nature which, by usage or necessity, are incident to his office, and may bind the corporation by contracts in the usual course of business.

Where an officer is clothed with apparent authority, although not inherent in his office, the general doctrine of agency applies, and the corporation may be liable for his acts. The authority of the officer does not depend so much on his title, or on the theoretical nature of his office, as on the duties he is in the habit of performing. (Fifth Ward Savings Bank v. First Natl. Bank, 48 N. J. Law, 513, 525; Taylor on Corporations, Sections 202, 236, 244; see also Blake v. Domestic Mfg. Co., 38 Atl. Rep., 241.)

Where a corporation repudiates unauthorized contract of officer it must put other party in statu quo. (Trenton Passenger Ry. Co. v. Wilson, 40 Atl. Rep., 597.)

As to acts of an extraordinary nature, an officer must have express authority from the board of directors. He cannot confess judgment against the company. (Stokes v. N. J. Pottery Co., 46 N. J. Law, 237.)

Nor has he power to execute a cognovit. (Raub v. Blairstown Creamery Ass'n, 56 N. J. Law, 262.) The president and cashier of a bank, as such, have no inherent power to execute, in the name and behalf of the corporation, a mortgage or conveyance of real estate. (Leggett v. N. J. Mfg. & Bkg Co., 1 N. J. Eq., 541.)

As to when the corporation is charged with notice from its agent's knowledge, see Willard v. Denise, 50 N. J. Eq., 482; Bank v. Christopher, 40 N. J. Eq., 435; Canada Mfg. Co. v. Woodbridge, 58 N. J. Law, 134.

De facto officers.-Lord Ellenborough's definition (King v. Bedford Level, 6 East., 350, 368) of a de facto officer as "one who has the reputation of being the officer he assumes to be, and yet is not a good officer in point of law," is followed in Mechanics' National Bank v. Burnett Mfg. Co., 32 N. J. Eq., 236.

The acts of a de facto officer of a corporation are valid-so far, at least, § 13 as they create rights in favor of third persons. (Hackensack Water Co. v. De Kay, 36 N. J. Eq.,548.)

Mr. Taylor comments on the above cases containing the rule in New Jersey as follows:

"If a body of men acting as a corporation permits certain persons to "act openly as corporate officers, or if it is permitted by the directors, "assuming them to have had the power to appoint the officer in question, "the corporation will not, to the detriment of persons who in good faith "have acted on the assumption that the persons acting as officers were the "officers they assumed to be, be permitted to impeach the validity of their "acts and contracts on the ground that such persons were not legally cor"porate officers." (Taylor on Corporations, Section 189.)

Contracts signed by officers.

tracts is: The

by

The proper way to sign corporate con-
Company,

President (or other officer as the case may be), and not merely the name of the officer followed by his official title. Such titles are sometimes held to be mere words of description. In New York where a bank discounted for a third party a negotiable promissory note reading "We promise to pay," etc., and signed by the individual names of the parties, with the addition of the words "President" and "Secretary," it was held to be the note of the individuals signing and not the note of the New Jersey company.

The Court held that nothing short of notice, express or implied, brought home to the bank at the time of discounting it that the note was issued as the note of the corporation of which the signers were officers, and was not intended to bind the signers personally, could defeat, on the ground that it was a corporate obligation, the remedy of the bank against the individuals signing. Not only was the note in that case signed by the defendants with the addition of the words "President" and "Secretary," but the name of une company was printed across the end of the note. (First Natl. Bank v. Wallis, 150 N. Y., 455.)

In this State, however, the Court of Errors and Appeals held the rule to be that such a note is prima facie the note of the individual and not of the corporation, but that parol evidence may be introduced to show whether it really was the personal note of the officer or was the note of the corporation. (Kean v. Davis, 21 N. J. Law, 683; Reeve v. 1st Natl. Bk., 54 N. J. Law, 208; see also Dayton v. Warne, 43 N. J. Law, 659; Sheldon v. Dunlap, 16 N. J. Law, 245; Den v. Hay, 21 N. J. Law, 174; Brown ads. Combs, 29 N. J. Law, 36; Simanton v. Vliet, 61 N. J. Law, 595; Shotwell v. M'Kown, 5 N. J. Law, 973.)

Secretary. It is the duty of the secretary to keep the minute book of the company. The minutes of a corporation need not be entered up in the handwriting of the secretary; it is sufficient if they are entered under his direction and approved by him. (Wells v. Rahway White Rubber Co., 19 N. J. Eq., 402.)

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