stockholders in a constituent company who had voted for the consolidation but without notice of the fraud of corporate officers in connection therewith, the former must be primarily protected in their rights.16

Stockholders in a company which issues its fully paid up stock in consideration of the transfer to it of the property of another company cannot attack the validity of such stock on the ground that it was issued pursuant to an agreement to issue it to the president of the transferrer to be distributed among the stockholders, notwithstanding a statute prohibits the distribution of the corporate capital, or the property received in exchange for it, among the stockholders.17

§ 4780. Recovery by stockholder of stock delivered under illegal contract. Stock delivered under an illegal contract relating to a combination of corporations cannot be recovered back, after the transaction is declared illegal, by any stockholder in pari delicto.18

§ 4781. Rights of dissenting stockholders. This question is considered in a subsequent subdivision.19

§ 4782. Rights of consolidated company. Corporations formed by consolidation of other corporations are within the protection of, and subject to, the doctrine under which corporations and persons are held to be estopped, under certain circumstances, from denying corporate existence.20 The consolidated company which has succeeded to the property of the constituent companies or induced third persons to deal with it as a corporation is generally estopped to deny the validity of the consolidation.21 Where there is statutory authority

of the consolidation of certain other corporations, the consolidated company taking over the property of the absorbed companies, it will not be heard to deny the legality of the consolidation in an action against it to enforce the liability of one of the absorbed companies. "So long as the state chooses to recognize its validity by keeping silence," said the court, "it is a corporation de facto, though not de jure, and liable the same as any other corporation in its dealings with others." Shadford v. Detroit, Y. & A. A. R. R., 130 Mich. 300, 89 N. W. 960.

21 Chicago, S. F. & C. R. Co. v. Ashling, 160 Ill. 373, 43 N. E. 373; Racine & M. R. Co. v. Farmers' Loan & Trust Co., 49 Ill. 331, 95 Am. Dec. 595; Hamilton v. Clarion, M. & P. R. Co., 144 Pa. St. 34, 13 L. R. A. 779, 23 Atl. 53. Where a corporation is the result

A consolidated corporation is es

for a consolidation, the fact that the method of consolidation was not in compliance with the statutes, where all the officers and stockholders of both companies either participated in or afterwards ratified the plan adopted, does not authorize the consolidated company to set up the invalidity of the consolidation as a defense against creditors who extended credit on the faith of the consolidation.22

§ 4783. Rights of constituent companies. A constituent company which has participated in all the steps essential to the creation of a de facto corporation is estopped to deny the validity of the consolidation as against third persons.23 Thus, a corporation which has, in effect, consolidated with another is estopped to assert that the proceedings for consolidation were not in accordance with the terms of the statute, in an action against it to recover the amount of a judgment against the other corporation on the ground that there has been a consolidation.24 So the fact that a consolidation between two railroad companies or other corporations is ultra vires cannot be set up by them as a defense to escape liability on a contract made by them after the consolidation, and for which they have received the consideration, or to escape liability for torts committed by them in their operations under the consolidation agreement.25

In case of an unsuccessful attempt to legally consolidate, where thereafter the business is conducted as one, although with separate organizations, it has been held that the constituent companies should be regarded as partners.26

§ 4784. Collateral attack. The validity of a consolidation cannot be questioned in a collateral proceeding,27 unless there was no statu

topped to set up the invalidity of its consolidation as against the claim of a creditor of one of the constituent corporations. Green v. Michigan United Rys. Co., 159 Mich. 58, 123 N. W. 607, following Shadford v. Detroit, Y. & A. A. R. R., 130 Mich. 300, 89 N. W. 960.

Where corporations undertake to consolidate, the stockholders consenting, and, as a consolidated corporation, issue bonds secured by a mortgage, both the consolidated corporation and the stockholders are estopped, as against the holders of the bonds, to attack the consolidation

as invalid. Farmers' Loan & Trust Co. v. Toledo, A. A. & N. M. Ry. Co., 67 Fed. 49.

22 L. D. George Lumber Co., Inc. v. Daugherty, 214 Fed. 958.

23 Bradford v. Frankfort, St. L. & T. R. Co., 142 Ind. 383, 41 N. E. 819, 40 N. E. 741.

24 Chicago, S. F. & C. R. Co. v. Ashling, 160 Ill. 373, 43 N. E. 373. 25 Bissell v. Michigan Southern & N. I. R. Companies, 22 N. Y. 258. 26 Carton v. West Virginia Bridge & Construction Co., 183 Fed. 1009.

27 Toledo, St. L. & K. C. R. Co. v. Continental Trust Co., 95 Fed. 497;

tory authority for the consolidation,28 in which latter case there is not even a corporation de facto.29 Thus, the legality of the consolidation cannot ordinarily be attacked collaterally in suits by or against the consolidated company, but only in a direct proceeding by the state for that purpose, since so long as the state chooses to recognize its validity by keeping silence it is at least a corporation de facto and liable the same as any other corporation.30

IX. DE FACTO CONSOLIDATED CORPORATIONS

§ 4785. General rule. A consolidation, where authorized by statute, although such as to be voidable by direct attack, is generally valid as against collateral attack, on the theory of the existence of a de facto corporation,31 and ordinarily the invalidity cannot be urged by the consolidated corporation itself 32 or by third persons.33

§ 4786. Where there is no legislative authority for consolidationIn general. If there is no statutory or constitutional authority for a consolidation, it is generally held that there is not even a de facto consolidated corporation where two or more corporations attempt to consolidate,34 and the company formed can neither acquire rights nor incur liabilities as a consolidated company,35 unless by virtue of the doctrine of equitable estoppel.36 In such a case, however, they may acquire rights and incur liabilities in their original corporate capacity, by reason of their business and transactions as a consolidated company; 37 but it has been held that the constituent com

Phinizy v. Augusta & K. R. Co., 62 Fed. 678; Smith v. Cleveland, C., C. & St. L. R. Co., 170 Ind. 382, 81 N. E. 501; Chicago, K. & W. R. Co. v. Commissioners of Stafford County, 36 Kan. 121, 12 Pac. 593; Hamilton v. Clarion, M. & P. R. Co., 144 Pa. St. 34, 13 L. R. A. 779, 23 Atl. 53.

28 American Loan & Trust Co. v. Minnesota & N. W. R. Co., 157 III. 641, 42 N. E. 153.

29 See § 4786, infra.

30 Shadford v. Detroit, Y. & A. A. R. R., 130 Mich. 300, 89 N. W. 960.

31 See § 4788, infra.

32 See § 4782, supra.

33 See § 4777, supra.

34 American Loan & Trust Co. v. Minnesota & N. W. R. Co., 157 Ill.

641, 651, 42 N. E. 153, and see § 283, supra.

35 Brown V. Dibble's Estate, 65 Mich. 520, 32 N. W. 656; Tuttle v. Michigan Air Line R. Co., 35 Mich. 247; Mansfield, C. & L. M. R. Co. v. Drinker, 30 Mich. 124; Peninsular Ry. Co. v. Tharp, 28 Mich. 506; Mansfield, C. & L. M. R. Co. v. Stout, 26 Ohio St. 241; Mansfield, C. & L. M. R. Co. v. Brown, 26 Ohio St. 223. 36 See $4788, infra.

37 Where railroad companies undertake to consolidate without authority, and run their lines as a consolidated company, they cannot escape liability for injuries to passengers, loss of baggage, loss of or injury to goods carried, etc., on the ground

panies are not liable on nor bound by contracts made by the consolidated company where the consolidation was unauthorized, unless there is something to show that they made or authorized the contract.38

An ultra vires agreement to consolidate is void, and cannot be enforced by the courts at the suit of either party; and it can make no difference that it has been partly performed.39

§ 4787. Attempted consolidation as a dissolution. When corporations attempt to consolidate, but the attempted consolidation. is void, and one of them withdraws, there is no dissolution.40 Indeed, this is true, even though there may be no withdrawal.41 Where a turnpike corporation attempted a consolidation with another, and the consolidation was afterwards held by the courts to be illegal and void, it was held that the company did not cease to be a corporation, or forfeit its corporate property and franchises, because it did not, during the attempted consolidation, keep up its separate organization and separately exercise its corporate powers. 42

4.3

§ 4788. Where there is legislative authority for consolidation-In general. Whether a consolidated corporation, conceding it is not a de jure corporation, is a de facto corporation, is to be determined by the rules relating to de facto corporations in general 3 as stated in a preceding volume. If there is valid legislative authority for a consolidation, an attempt in good faith to consolidate under the statute, a colorable compliance with the statute, and exercise or assumption

that the consolidation agreement was ultra vires, and they may be sued jointly therefor. Bissell v. Michigan Southern & N. I. R. Companies, 22 N. Y. 258.

Where a railroad company has made an ineffectual attempt to consolidate, it is liable for an injury to a passenger caused by the negligence of persons operating the road by virtue of the attempted consolidation. Latham v. Boston, H. Tunnel & W. Ry. Co., 38 Hun (N. Y.) 265.

38 American Loan & Trust Co. v. Minnesota & N. W. R. Co., 157 Ill. 641, 654, 42 N. E. 153.

39 Greenville Compress & Warehouse Co. v. Planters' Compress & Ware

VII Priv. Corp.-69

house Co., 70 Miss. 669, 35 Am. St. Rep. 681, 13 So. 879.

40 Chevra Bnai Israel Aushe Yanove und Motal v. Chevra Bikur Cholim Aushe Rodof Sholem, 24 N. Y. Misc. 189, 52 N. Y. Supp. 712.

41 American Loan & Trust Co. v. Minnesota & N. W. R. Co., 157 Ill. 641, 651, 42 N. E. 153. And see Topeka Paper Co. v. Oklahoma Pub. Co., 7 Okla. 220, 54 Pac. 455.

45

47

of powers as a consolidated corporation, the new or consolidated corporation is a corporation de facto, and, as a general rule, its corporate existence can only be attacked by the state, and in a direct proceeding. There is a de facto consolidated corporation where there is an attempt in good faith to consolidate, under a valid law authorizing such a consolidation, although there may have been a failure to give the notice to stockholders, or to file the certificate of consolidation, as required by the statute. So if there is a valid law for the consolidation of corporations, and a bona fide attempt to consolidate under the law, there is at least a de facto consolidated corporation, although the corporations were not such as could be consolidated, and hence the consolidation cannot be collaterally attacked.48 The fact that a constituent domestic corporation was ineligible to enter into a consolidation with a foreign corporation because it did not have any road constructed and operating, does not preclude a de facto consolidated corporation where there was a law authorizing the consolidation and also a bona fide attempt to consolidate thereunder and an actual exercise of corporate functions.49 But

45 Continental Trust Co. v. Toledo, St. L. & K. C. R. Co., 82 Fed. 642; Farmers' Loan & Trust Co. v. Toledo, A. A. & N. M. Ry. Co., 67 Fed. 49; Chicago, K. & W. R. Co. v. Commissioners of Stafford County, 36 Kan. 121, 12 Pac. 593; Swartwout v. Michigan Air Line R. Co., 24 Mich. 389; Bell v. Pennsylvania, S. & N. E. R. Co. (N. J. Eq.), 10 Atl. 741; Terhune v. Midland R. Co., 38 N. J. Eq. 423.

If the proceedings to consolidate are irregular, a de facto corporation is the usual result. Alabama Fidelity Mortgage & Bond Co. v. Dubberly, Ala. 73 So. 911, and see other cases cited in § 302, note 70, supra. 46 See § 274, supra.

A bill to annul a consolidation made by several railroad companies, and to have a mortgage executed by the consolidated company on the aggregate property declared void, on the ground that one of the roads taken into the consolidation had no legal existence, cannot be maintained by stockholders of such corporations, but

proceedings must be instituted, if at all, by the state through its attorney general. Bell v. Pennsylvania, S. & N. E. R. R. (N. J. Eq.), 10 Atl. 741.

Where several railroad companies were consolidated under lawful authority, it was held that a court of equity had no jurisdiction, upon the application of a bondholder or stockholder in one of the original companies, to put an end to the consolidated company, upon the alleged ground that it had its origin in a fraudulent design, and was created to answer a fraudulent purpose, nor upon the ground that the proceedings for consolidation were defective. Terhune v. Midland R. Co. of New Jersey, 38 N. J. Eq. 423.

47 See § 302, note 74, supra. 48 Toledo, St. L. & K. C. R. Co. v. Continental Trust Co., 95 Fed. 497, 509; Continental Trust Co. v. Toledo, St. L. & K. C. R. Co., 82 Fed. 642; Chicago & W. I. R. Co. v. Heidenreich, 254 Ill. 231, 235, Ann. Cas. 1913 C 266, 98 N. E. 567.

49 Cleveland, C., C. & St. L. R. Co.