CHAPTER VI.

THE STRUCTURE OF A BODY CORPORATE AND THE FUNCTIONS PERFORMED BY ITS PARTS.

§ 44. Scope of the chapter. Having considered questions of existence and general powers, the next step is to investigate the structure of the corporate body; to see how its functions are performed and how the granted powers are exercised. It must first be noted that there are diversities of structure resulting from the different ways in which the corporate franchise may be vested. In the case of a stock company, for example, there is no difficulty in telling who constitute the corporation; here the franchise is vested in the shareholders for the time being and they are the members of the corporate body. In corporations having no capital stock there are variations. Sometimes the franchise is limited to the charter members and their successors; and these may be selected by co-optation,—as in the case of a so-called close corporation; or elected periodically by persons who are not members of the corporate body, as in the case of incorporated religious societies.1 Again, the right to be a corporation may be conferred upon the incorporators and their future associates,-in which case the latter, upon

1 See Annotations, Code (1911) Art. 23, sec. 339.

election, become members of the corporate body. In the following discussion, a stock corporation is taken as the type and where necessary, the variations are noted.

§ 45. Agency. From inherent necessity, an artificial person can manifest its will only by the act of some natural person; and the binding force of every act done in its name must depend upon the authority of this natural agent. Assuming, then, the existence of the corporation and its capacity to engage in the particular transaction, who are the natural persons authorized to speak or act for it? The guiding principles are these:

First. The shareholders, when duly assembled in corporate meeting, are the primary agents of the corporation, but they do not directly administer its affairs. They elect a board of directors or managers, to which the administrative powers are delegated; and they establish by-laws for the government of this board.

Second. The directors or managers, as the name may be, when duly assembled in board meeting, are the administrative agents of the corporation, that is to say, they direct its policy and, directly or by delegation, exercise its ordinary powers. But they cannot exercise its extraordinary or constituent powers, those which relate to fundamental acts and organic changes. These are usually reserved to the corporation at large by the creating statute;1 but where the statute is silent, the result is the same.

In R. R. Co. v. Allerton, 85 U. S. 233, the directors, without consulting the shareholders, passed a resolution to increase the capital stock, and the appellee, a shareholder, filed his bill for an injunction. The charter of the company

1 Code (1911) Art. 23, sec. 10.

provided that its capital stock might be increased at the pleasure of the corporation, and that all of its corporate powers should be vested in the board of directors. The court said. that by its true construction, the charter did not vest in the directors such a fundamental power as that claimed by them. And in Bank v. Weinhard, 192 U. S. 243, it was held that the question of levying an assessment upon the stockholders of a national bank for the purpose of restoring its capital and avoiding liquidation, was a question for the stockholders and not for the directors to decide. So long, however, as the directors are in office and are acting within the scope of their authority, their control is absolute and beyond interference on the part of the members; all that the latter can do, if dissatisfied, is to wait for the next election.1

Third. The directors2 choose the officers of the corporation and, mediately or immediately, engage its employees and servants. An officer differs from an employee in that he is a member of the organization, occupying some recognized office; a director technically, is an officer, but differs in that, merely as such and apart from the board, he is not an agent for any purpose. The board may and usually does confer executive powers upon one or more directors; but these are derivative and not inherent in the director as such.*

1 In Maryland there is a statutory provision, whereby a majority of all the members, or a majority in interest of the shareholders, may upon short notice, call an extraordinary meeting and remove and replace any president, director or directors. Code (1911) Art. 23, sec. 16.

2 Code (1911) Art. 23, sec. 9.

3 Bank v. Ridgely, 1 H. & G. 432.

As to executive committees, see Bank v. Trust Co., 102 Md. 635, and Code (1911), Art. 23, sec. 10.

Fourth. Except in the case of public corporations,1 the law of agency, with its doctrines of implied powers, ratification and estoppel, runs through the whole subject of corporate action. An officer or customary agent must be taken, as regards third parties, to have all the powers usually incident to his position. An unauthorized act of the president may be made good by the ratification, express or im-, plied, of the board of directors; an invalid act of the board may be one that a majority of the members can ratify; an act beyond the powers of the majority may be one that a larger number can authorize and therefore ratify. But an act beyond the powers of the corporation itself, cannot be made good by any amount of ratification.

Fifth. It is said above that the members are agents of the corporation only when assembled in corporate meeting and the directors only when acting as a board. This is the rule, and it is based upon the principle that the minority are always entitled to notice, consultation and deliberation. In some cases, however, the courts have upheld as corporate acts, transactions which the directors and members have approved outside of corporate or board meetings; and the principle of estoppel has been extended to acts beyond the powers of the directors, on the ground that the members had failed to disavow them in due time. The decisions are conflicting. In De La Vergne Co. v. German Savings Institution, 175 U. S. 40, a contract had been executed in the name of a corporation by its president, all the shareholders joining, whereby it was agreed to transfer to the appellant the corporate assets then in the hands of a trustee, to whom they had been assigned for the benefit of creditors. The appellant agreed to take the assets subject to the debts and

1 Mayor v. Musgrave, 48 Md. 289.