THE NATURE OF A CORPORATION.—The nature of a corporation is perhaps best understood by an illustration. In the case of People's Pleasure Park Co. v. Rohleder, 109 Va. 439, the facts were as follows: There was a large tract of land divided up into a number of lots, and in each deed, when a lot was sold, there was a covenant providing that title to the real property should never vest in a person of African descent, or in a colored person. Later, after the lots had been sold, several of them were conveyed to a corporation composed exclusively of negroes. The corporation knew, when it purchased the tract of land, of this restriction in the deed, and the land was bought by it for the purpose of establishing an amusement park for colored people. Suit was brought in a court of equity to compel the cancellation of the deed to the corporation. Stated boldly, the decision of the Virginia court amounts to an assertion that a corporation has no color. In other words, the corporation is an entity separate and distinct from its members, and so, although all the stockholders in this corporation were colored, that did not make the corporation a colored person. Thus, if A, B, and C, as incorporators, organize the X Corporation, although they are the sole stockholders, there are four persons, A, B, C, and the X Corporation.

THE ENTITY THEORY.—It may be doubted if any court would carry the entity theory to the extent that it would allow an individual who was the owner of a piece of real estate, which he was not permitted by the deed to sell to negroes, to deliberately go to a prospective negro purchaser and say: "I cannot sell my property to you because of a restriction in the deed, but I will pay the necessary expenses, if you, with two of your friends, will form a corporation to take title to this property, in which corporation each of your friends will own one share and you the balance, thus retaining control yourself. I will then deed the property to the corporation and will thereby get around the covenant in my deed preventing a transfer to negroes." We must not allow the entity theory to work a manifest injustice, as was said in Erickson v. Revere Elevator Co., 110 Minn. 443: "Where the corporate form is used by individuals for the purpose of evading the law, or for the perpetration of fraud, the courts will not permit the legal entity to be interposed so as to defeat justice."

RESULTS OF THE ENTITY THEORY.—Flowing from the entity theory is the result that the property of a corporation is owned by the corporation and not by the individual members. Therefore, all conveyances of such property, whether it is real property or personal property, must be made by the corporation, and cannot be made by the members or shareholders as individuals. It also follows that all suits against or by the corporation must be brought against the corporation or by the corporation as an entity and not against the individual members. Again, a corporation may take property from one of its individual members, and it may make a contract with one of them, and it may sue them and be sued by them.

KINDS OF CORPORATIONS.—Corporations are divided into public, quasi-public, and private corporations. The private corporation is such as is created for private enterprises, such as manufacturing, banking, and trading corporations. Religious and eleemosynary corporations are also included in this classification. The public corporation is such as is created for the purposes of government, such as cities, towns, villages, and institutions founded by the State, and managed by it for governmental purposes. Quasi-public corporations are such as are engaged in a private business which is affected with a public interest, such as railroads, both steam and electric, gas companies, water companies, lighting companies, and the like. The public, and generally the quasi-public, corporations possess the right of eminent domain, that is, the right to take private property for public purposes upon payment of just compensation to the owner. It is the private corporation with which we are usually concerned in commercial law, and this chapter will be devoted largely to a discussion of that class.

THE CREATION OF A CORPORATION.—A corporation must be created by legislative authority. Formerly, a corporation was created by special act of the legislature, but in recent years the growth in the number of corporations, and also the political wire-pulling necessary to get an incorporation bill through a legislature, have resulted in the almost universal practice of having the legislature pass a general corporation act, and then without further reference to the legislature, any group of persons, of the requisite number, may become incorporated by complying with the provisions of such an act. The formation of corporations under the laws of most States is a simple process, requiring in general the preparation of an official document sometimes termed the "certificate of incorporation" or the "charter," which paper sets forth the facts which are required under the laws of the State wherein the corporation is to be formed. These laws, while not uniform, generally require a statement as to the name to be used by the corporation, the names of the proposed directors and incorporators, a statement of the general purposes or objects of the corporation, the location of its principal office and place of business, how long it is to last, the amount of its authorized capital, the par value of its stock, as well as a statement in regard to any preferred stock which may be contemplated. Other details are sometimes required under the various State laws. This official document must generally be signed or executed by those persons who are the incorporators of the corporation. As a rule, three or more incorporators are required, although in some States five is the minimum. This official document, after it has been duly executed, is usually to be filed in the office of the Secretary of State, and usually also in that of the county clerk of the county wherein its principal office is to be. This procedure, however, is subject to some variations and the statutes of the State involved must always be closely followed. As soon as the official document has been properly filed and the other necessary steps taken the incorporators hold the first meeting and effect an organization, after which time the corporation is generally in a position to transact business, although in some States it is provided in effect that corporations should not commence business until a certain share of the capital has been paid into the corporation in cash.

CITIZENSHIP OF A CORPORATION.—Although a corporation is a separate entity, entirely distinct and apart from its members, such separate entity is not a citizen in the sense in which we use the term ordinarily. At a general election a corporation has no right to vote. Again, Article 4 Section 2, of the United States Constitution, provides that "citizens of each State shall be entitled to all of the privileges and immunities of citizens in the several States." A corporation is not a citizen in this sense. Hence a State may keep all insurance companies, incorporated outside of its area, from doing business in that State by discriminating legislation against foreign insurance corporations. Insurance is not looked upon as interstate commerce, about which the individual States may not legislate, and as a corporation is not a citizen within the meaning of Article 4, Section 2, such insurance companies have no redress. In one sense, however, a corporation is looked upon as a citizen. Where a suit is between citizens of different States, and the amount involved is over the prescribed sum, either party may bring the action in the Federal courts, if he so desires, instead of in the State courts. In this sense, a corporation is to be regarded as if it were a citizen of the State in which it is created. If I live in New York and the American Tobacco Co. is incorporated in New Jersey, suit between us may be brought in the Federal courts on the ground of diversity of citizenship on the part of plaintiff and defendant.

POWERS OF CORPORATIONS.—A corporation is unable to do anything beyond such powers as are granted it by law. As to the extent of the powers possessed by a corporation, we may conveniently divide corporate powers into those which are express and those which are implied. Express powers may be considered as including those which are mentioned in the official documents used or granted upon the beginning of the existence of the corporation. These official documents are spoken of as "charters" or "certificates of incorporation." Whatever term may be applied to them there is generally in such documents a statement of the general purposes or objects for which the corporation is formed; in other words, of the general business in which it is to engage. There is also a statement of the general powers of the corporation which is to engage in the business mentioned. The powers so mentioned in such official documents may be termed, as we have stated, express powers of the corporation. Needless to say, however, it is not usual or possible to attempt to indicate in any such official documents all the details of the operations of business. Therefore, it is necessary to imply that in addition to such express powers the corporation has power to do such acts as may be reasonably necessary or incidental to the carrying on of the business mentioned. Powers so implied, without words, are termed "implied powers." Therefore, the total powers of a corporation consist of the express powers, namely, such as are named in the official documents containing a statement of its purposes and the business in which it is to engage, and the powers which would be reasonably implied under the rule just mentioned, as necessary and incidental to the carrying out of the express powers. Such implied powers do not give the corporation any power to do acts which are not reasonably necessary and incidental in its regular business. To allow validity to acts not so reasonably necessary and incidental would be in reality allowing the corporation to engage in outside business, which, under its charter, it has no power to engage in. As an illustration of this let us assume that the X company was incorporated to build, run and operate a railroad between two towns named A and B. The official charter of the corporation may state further details of the corporation's powers or it may not. But, if such details are not stated, the corporation would, obviously, have as express powers, the power to build the road and to operate it between the towns mentioned. It would also have as implied powers the power to do any act reasonably necessary or incidental to the operation of a railroad, such for example as the purchase of rails, ties or other railroad supplies, the hiring of employees, erection of stations and the power also to give negotiable paper in payment for such supplies or the raising of money by mortgaging its property or otherwise where necessary to carry on its business. In other words, the corporation may be said to have as implied powers all the powers which an individual would reasonably and usually exercise if he were operating the railroad. However, the corporation would have no power, express or implied, to do any act not reasonably necessary to the railroad business, such, for example, as the purchase of a stock farm or the operation of a steamer line or a grocery store, or the leasing of its line. If the corporation, then, should make any contract with relation to engaging in these outside matters—the corporation having no power to engage in them—a valid contract could not arise and therefore the corporation could not be held liable thereon.

ULTRA VIRES ACTS.—Where a corporation attempts to do an act which is clearly beyond its express or implied powers, such act is generally termed an "ultra vires" act, and it may frequently consist in an attempted contract by a corporation. Hence we must consider with some care contracts of corporations which may be termed ultra vires. As the corporation lacks power it is generally said that the contract does not arise and hence neither the corporation nor the person with whom it attempted to contract would theoretically be bound thereon. Yet, in many States, a special rule has been adopted whereby a corporation may be held upon such contract in certain cases even though it had no power to make it. This may be termed the "doctrine of estoppel," and generally includes cases where the corporation has assumed to make a contract which was ultra vires or beyond its powers but which would appear to an outsider as incidental to the corporate business and therefore as within its corporate powers. In such circumstances, if the outsider with whom the corporation assumed to make the contract does in fact rely reasonably upon the corporate power to make it, having been deceived by appearances and having no warning that the corporation actually lacked power, and having paid over money or delivered goods or performed services or parted with other value under the contract, he may generally enforce the contract against the corporation. In other words, under such circumstances, the corporation is estopped or forbidden to evade its obligation by asserting the point that it had no power to make such contract. However, this is strictly limited to cases where the corporation appeared to have the power to make the contract and where the person dealing with it had no reason to suspect or doubt its power in that regard, and where the person dealing with the corporation had parted with some value of the kind mentioned, in his reliance that the contract was within the corporate powers of and therefore binding upon the corporation. Thus, where such person has done nothing toward carrying out his duty under the contract he would have no claim or right to enforce the same as a binding obligation of the corporation. Many courts also treat him somewhat differently and take the attitude that an outsider who has dealt with the corporation is entitled not to enforce the attempted contract, but is entitled only to recover from the corporation the reasonable value of such goods or service as it has voluntarily accepted from him.

DE FACTO AND DE JURE CORPORATIONS.—It sometimes happens that a group of persons may attempt to organize a corporation and fail to comply with all the provisions of the law in the State in which they attempt to organize. The question arises then: What have we? Of course, we do not have a full completed organization, which we would call a corporation de jure (by right of law). We may have what is called a corporation de facto (in fact). In order to constitute a corporation de facto, it is generally held that the following requisites must exist: There must be a valid law which authorizes the formation of such a corporation; a colorable attempt to organize under the provision of such law; and an assumption of corporate power, or, as is sometimes called, a user. If these facts exist, we then have a corporation de facto, and persons dealing with such a corporation are usually held to the same responsibilities as though it was an actual de jure corporation. The State, ordinarily, is the only person which can question the existence of such a body, and this is usually done in a suit by the attorney-general. If the parties have not even complied with the requisites of a de facto corporation, the authorities are divided as to what kind of an organization it is, although, perhaps, the best decisions would hold the parties liable as partners. They must have contemplated some kind of liability and failing to create even a corporation de facto, a partnership liability is all that is left, except individual liability, and that is apparently just what they did not intend.

PROMOTERS.—A promoter is a very common person in the modern industrial world. He is a person who brings about the organization of corporations, gets the people together who are interested in the enterprise, aids in procuring subscriptions, and takes general charge of all the matters incident to the formation of the corporation. In other ways, he is governed by the rules of agency and his position is that of a fiduciary. The majority of the courts hold that there is no liability on the part of the corporation to pay for his expenses and his services, in promoting the organization, unless the corporation as an organization expressly promises to pay or otherwise clearly recognizes the obligation. Because of the fiduciary relationship, which a promoter occupies, he is not permitted to make any secret profits at the expense of the corporation. If he secures property for $1,000,000, he may not turn it over to the corporation for $1,500,000 and pocket the profit himself. A corporation cannot be liable for the acts of a promoter before the corporation came into existence. It may, however, after coming into existence adopt the acts of the promoter and thereby render itself liable. If, knowing the terms of an agreement made by a promoter, the corporation takes advantage of the agreement or recognizes it, it thereby in effect itself becomes a party to the agreement. Unless the terms of a promoter's agreement expressly state the contrary, the promoter is personally liable upon it as a contractor.

POWER OF THE STATE OVER A CORPORATION.—It must follow, that if a State creates a corporation, then it should have certain control over it. The United States Supreme Court has recognized the right of visitation as residing in the State. Visitation is, in law, the act of a superior or superintendent officer who visits a corporation to examine into its manner of conducting business and its observance of the laws. The visitation of National banks by the Comptroller of the Currency is a common example of the exercise of this authority. One of the most famous cases in the United States Supreme Court is the Dartmouth College case. In 1769, the King of England granted a charter to twelve people under the name of "The Trustees of Dartmouth College." They were authorized to conduct a college and they founded Dartmouth College in Hanover, New Hampshire. In 1816, the legislature in the State of New Hampshire undertook to amend the charter in many ways, among other things, increasing the number of trustees to twenty-one. A furious conflict ensued between the State and the trustees. The State finally brought suit to recover the corporate seal and records which were held by a Mr. Woodward, who held them under the amendatory act to which we have referred. The case is known as Dartmouth College v. Woodward, 4 Wheaton 518. The Dartmouth College trustees were represented by Daniel Webster, and this is one of his famous cases before the Supreme Court. He took the position that the charter granted by the King of England and afterwards recognized by the State of New Hampshire, was a contract between the State and the trustees. This being so, it was protected by the provision in the United States Constitution which provides that no State shall pass any law impairing the obligation of contracts. The United States Supreme Court upheld this position. The act of the legislature of New Hampshire was held invalid. We then found ourselves in the position of having States creating corporations and then not being able to control them. Whatever may be said in regard to the law as laid down by the United States Supreme Court, this situation was unfortunate. Shortly thereafter in the various State legislatures, a method to meet the situation was devised, and this is what was done: When a general corporation law is passed, the State inserts in it a clause to this effect: "The State hereby reserves the right to alter, amend, or repeal the charter of any corporation organized under this act." This, then, makes this clause a part of the contract when a new corporation is organized. It knows that it is subject to having its charter amended or repealed without its consent. The effects, therefore, of the Dartmouth College decision have been practically nullified by such clauses inserted in the various incorporation laws. Such incorporation acts do not relate to corporations organized before such act was passed. Under this method of procedure, the legislature today surely has an efficacious method of controlling the corporations which it creates.

LIABILITY FOR TORTS AND CRIMES.—A corporation is ordinarily liable, the same as an individual, for all torts committed by its agents in the scope of their authority. A corporation may even be liable for acts which are beyond its authority. For example, in the case of Hannon v. Siegel-Cooper Co., 167 N. Y. 244, it was held that the department store of the Siegel-Cooper Company, a corporation, was liable for mal-practice in dentistry. The charter of the company did not give the company the right to practice dentistry, but space in the store was rented to a dentist who conducted a dental parlor. Because of his negligent treatment of a patient, the court held that the corporation was liable for the negligent acts of its agent. Corporations may also be held liable for such torts as involve a mental element, like fraud and libel. A corporation may be criminally responsible for failure to perform a duty imposed upon it by law, and in many States there are statutes which make it a criminal offense for a corporation to do or fail to do certain acts. It is generally held, however, that a corporation cannot commit a crime which involves a mental operation, as for example, murder. Murder involves a mental operation; it is "killing with malice aforethought." Then again, it would be difficult to punish a corporation for the crime of murder, because under our State constitutions, the punishment for murder is either death or life imprisonment. Although a corporation is a separate person, there is no way to kill it or imprison it for life. You surely would not do so by inflicting this penalty on all the stockholders. It is generally provided, then, by statute that such crimes that a corporation can commit are to be punished either by a fine or by imprisonment of the directors.

SHERMAN ANTI-TRUST ACT.—On July 2, 1890, the Sherman Anti-Trust Act was passed by Congress. The first section of this act reads: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal. Every person who shall make any such contract, or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by a fine not exceeding $5,000, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court." The second section of this act reads: "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a misdemeanor, and on conviction thereof shall be punished by a fine not exceeding $5,000, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court."

It would be impossible, in a small amount of space, to call attention, except in a general way, to the importance of this act and the difficulty of understanding it, without carefully reading the various conflicting decisions of the United States Supreme Court handed down since the passage of the act. The act, being a Federal act, relates only to interstate commerce. That kind of business, conducted by corporations, which is intrastate, if controlled at all by similar legislation, would be by virtue of a State act. Perhaps the most famous of the Sherman Anti-Trust Act cases decided by the United States Supreme Court is that of the United States v. Standard Oil Co., 221 U. S. 1, where the majority opinion was written by the late Chief Justice White, and in which he enunciated the so-called "rule of reason" which brings the interpretation of that act very much in harmony with the rules of the common law in regard to illegal contracts and monopolies.

BY-LAWS.—A by-law is a permanent rule for the government of a corporation and its officers. The purpose of a by-law is to regulate and define the duties of the members of the corporation toward the corporation and between themselves. The power to make the by-laws is vested in the stockholders. There are certain qualifications which all by-laws must possess. They must be reasonable and not inconsistent with law or any rule of public policy. It would not be possible for a majority of the stockholders at a regular stockholders' meeting to pass by-laws which would deliberately deprive the minority stockholders of rights which belong to them. The by-laws are, of course, always subject to the provisions of the charter of the corporation, and if a corporation is authorized to operate a railroad, it could not, by passing a by-law, to the effect that it was deemed wise to enter into the steel manufacturing business, change the nature of the corporation in that manner.

STOCKHOLDERS' MEETING.—In order that the acts of the majority of stockholders shall be valid, they must be authorized at a regular stockholders' meeting. This must be held in the principal office of the company, and the notice required by the by-laws must be given to all of the stockholders. After this is done, the majority of the stockholders may transact business and bind the corporation. Of course, in a large corporation with a hundred thousand shareholders, as is the case with some of our bigger corporations like the United States Steel Corporation and the Pennsylvania Railroad, very few of the stockholders actually attend the meetings. The directors usually send out with the notice of the meeting, a proxy, and the stockholders who are not able to be present send in their proxy authorizing certain persons to vote for them. In this way, a majority of the stockholders are present at the meeting, either in person or by proxy. In certain cases stockholders may interfere with the action of directors in connection with the general management of a corporation, or may even oust the directors from their positions. These cases are extremely rare, since the power of directors is supreme as to all corporate matters as to which the statutes or by-laws do not provide for concurrence or other action by the stockholders. Where proof is offered, however, of fraud, violation of law or gross negligence of the directors whereby loss has been caused or is threatened, stockholders may in some cases obtain the ousting of directors. This sometimes results in placing a receiver in temporary charge of the corporation or in the holding of a special election of new directors. No complaint, however, will generally be entertained against directors merely because their judgment does not agree with that of the stockholders even if some action of the directors may not have resulted favorably to the corporation, provided such action was taken honestly and with all due care and regard to law. As an illustration, the directors of the X Company made a certain contract on behalf of the corporation whereby it was agreed with Y that property of the corporation should be transferred to the latter for much less than its evident actual value. This operation would usually indicate fraud on the part of the directors, or at least such gross negligence as would in many cases justify stockholders in asking a legal inquiry into the action of the directors, which would result, if sufficient facts were proved, in their removal and an injunction against the performance of the contract. However, if the value of the property were doubtful and the directors had used all due care and effort to ascertain its true value and to obtain the best available price, no complaint could usually be made although it should later develop that a better price might have been obtained.

FOREIGN CORPORATIONS.—A foreign corporation is one which is organized under the laws of some foreign country or some other State. Foreign corporations are not necessarily confined to doing business in their own State; they may enter other States. As for example, a company organized in New Jersey may enter the State of New York and do business. If, however, the New Jersey corporation comes to New York and makes a regular practice of doing business, it must comply with the provisions of the corporation law of New York, and secure a license to do business in New York. It is not uncommon to enforce this provision in an indirect method by providing that if a foreign corporation does not take out this license, it shall not be allowed to sue in the courts of the State where it is doing business.

MANAGEMENT OF CORPORATIONS.—The management of any corporation rests directly with the board of directors and they may be considered as the agents of the corporation to direct its business affairs. The directors, however, are subject in their action to any limitation upon their power which may have been included in the charter or certificate of incorporation or which may have been adopted in the by-laws. The directors are also subject to any provisions in the statutes of the State, which frequently provide that they shall not take certain important actions, such as the mortgaging of corporate property, etc., without special procedure involving a meeting and vote of the stockholders. Where, however, the directors' authority is not limited by the statutes or the charter or by-laws, they may be considered as having full power to manage the affairs of the corporation. In connection with that power they may elect a president and other corporate officers and may appoint any other agents or employees at their discretion. They may also define the powers to be exercised by the president and the other officers and employees. This would give them power to limit the authority of the president or any other officer. However, where a person deals with the president or any other officer of a corporation in behalf of the corporation, he may usually rely reasonably upon the president or other officer having similar power to that generally possessed by such an officer, and in many cases the corporation would be held bound by the acts of such officer even though he actually violated some limits placed upon him by the directors. This may be illustrated by assuming that the X Company was in the business of manufacturing furniture, and A, the president thereof, had made a contract with B, an outsider, for the purchase from the latter of certain wood to be used in the corporate business. As a matter of fact, however, A, the president, had no power to make such contract, since the directors had passed a resolution forbidding him to purchase any raw materials without first having the proposed purchase approved by the board of directors. Therefore, A, as a matter of fact, would have no power to make the contract with B, on behalf of the corporation. Yet, B had not in any way been warned of this limitation upon A's power, and as the purchase of materials would be a usual one for the president or executive head of such a corporation to make, B might reasonably assume that A had power to make the contract. Therefore, B would be able to hold the corporation to the contract under the principle of apparent authority, considered in connection with the law of agency. Naturally, in turn, the directors would have a claim against the president for any loss sustained, as he had not only violated his duty but had also disobeyed and disregarded explicit instructions. The by-laws of a corporation are generally adopted by the stockholders and provide for all matters relating to the corporate management which are not provided for in the charter or certificate of incorporation. Such by-laws are binding upon all persons who know of them, or reasonably should know of them, provided they are not in violation of law and are reasonable. It is the general rule that meetings called to adopt new by-laws or to alter previous by-laws should be announced in some special way so that all interested parties may receive due notice and thus have an opportunity to arrange to be present and vote on the matters to be taken up at such meeting.

ELECTION OF DIRECTORS.—The directors of a corporation are elected by the stockholders and the election generally takes place at the regular annual meeting of stockholders of the corporation. Either the entire board of directors is elected at that time for the ensuing year, or a portion of them. In this connection it is provided by the statutes of many States that at least a certain proportion of the total number of directors shall be elected annually. The method of electing such directors at the annual meeting is usually provided for by the statutes of the various States, but it is commonly the rule that each stockholder shall have one vote for each share of stock owned by him, although in some States they also allow what is termed "cumulative voting." This method of voting generally allows each stockholder to have as many votes as he owns shares of stock multiplied by the number of directors to be elected at the meeting and he may cast all of his votes for one or more of the candidates. In other words if five directors are to be elected he may concentrate all his votes upon one or more of the candidates and is not compelled to vote for each one. This cumulative voting is authorized for the purpose of allowing the minority stockholders to concentrate their votes upon one or two of the candidates and thus have some representation upon the board of directors. As an illustration of this, let us assume that the X Company had an authorized capital stock of $100,000, composed of 1,000 shares at the par value of $100 per share, and that all these 1,000 shares are issued and fully paid up. Let us further assume that six individuals each own 100 shares of stock and act in unison, thereby constituting a majority, the other 400 shares of stock being held by the minority stockholders. Each stockholder would usually have one vote for each share of stock owned by him, and therefore, if five directors were to be elected under the usual method of voting, those individuals composing the majority of the stockholders would succeed in casting a majority of votes for each of the five directors. This would leave the minority without representation upon the board. If, however, cumulative voting were used, the minority having a total of 2,000 votes (400 multiplied by 5, the number of directors to be elected) could concentrate 2,000 votes upon one or two of their candidates and this would probably insure the election of such candidates to the board, thus giving the minority representation. In the case of a non-stock or membership corporation, each member has simply one vote for directors or for other purposes. It may be noted that the directors themselves, in their meetings, have also one vote each and this is entirely independent of the amount of stock which they may own in the corporation. It should also be noted that the directors in their meetings may not vote by proxy, but sometimes the members of a membership corporation may vote in this way. Voting by proxy is a usual practice in stock corporations. A proxy is merely a power of attorney or agency given in writing by one stockholder whereby he authorizes another person as his proxy to vote, at a corporate meeting, his shares of stock in his place. A proxy should be in writing and in a form in accordance with the statutes of the State involved, and is often, but not necessarily, under seal. A stockholder who has given a proxy may revoke it whenever he chooses and this would prevent the holder of the proxy from voting on it. This would be entirely independent of whether the person giving the proxy had by revoking it violated his contract with the person to whom it was given. That contract would be only a private matter between them.

VOTING TRUSTS.—The proxy principle is involved in what are termed "voting trusts." These arrangements involve the placing by a number of stockholders of their stock in the hands of certain persons, giving to the latter the right to vote on the stock; in other words, it is a concentration of the stock of a number of persons in the hands of one or a few persons. The latter are termed "voting trustees." It is necessary to consult the statutes of the various States with regard to the legality of such voting trusts, but they are generally permitted, with the restriction, however, that the agreement under which the stock is deposited with the voting trustee or trustees must be in writing and that any stockholder may have the right to deposit his stock with such trustee or trustees and become a party to the voting trust. The statutes also frequently limit the time during which such a voting trust may continue.

ISSUE OF STOCK.—The stock of a corporation is in theory issued for an amount of money or property equal to the par value of the stock. In practice, however, in many States there is no limitation on the valuation which the promoters of a corporation may put upon the property or rights which are transferred to the corporation. The stock is regarded as fully paid in if property transferred to it is transferred as having the assumed value of the corporation's capital, however little the property may actually be worth. In other States, however, an official must approve the valuation put upon property transferred as payment for stock, and in such States it may be assumed that the assets of a corporation when it begins business represent at least approximately the amount of its capital stock; even in such States, however, there is no difficulty in promoting a corporation which shall have a large capital though its property is of slight value. All that is necessary is to incorporate under the laws of another State which allows greater freedom. Corporations organized in one State are in general allowed to do business in other States; so that a corporation which is intended to carry on business in New York, may be incorporated in another State, where it is not expected to do business.

PROCEDURE IN ISSUING BONDS.—It is sometimes difficult for the investor fully to appreciate the vast amount of detail work involved in the bringing out of a new bond issue. Before the investment banker underwrites the issue, or makes his purchase from the corporation—before the bonds are offered to the public—there is always a painstaking and minute investigation of the new security from many different viewpoints, made by and in behalf of the banker. The investor can never know from the banker's printed circular, descriptive of the issue, the great amount of original work which underlies it and of which it is a meager reflection. The circular is a summary of the banker's investigation; it contains the salient features of the issue and of the issuing corporation, reduced to terms that are intelligible to the average layman. It is a statement of the principal facts which led the banker to make an investigation of the business and upon which investigation he bases his recommendation of the security offered by him to his clients.

WHAT IS A BOND?—This can be explained best by comparing it with a real estate bond and mortgage, the nature of which has already been discussed. When money is loaned on real estate, the mortgagor, or the one who borrows, executes two papers in favor of the mortgagee, or the lender. The first is either a promissory note or a bond. The bond is a sealed writing whereby the borrower binds himself, his heirs, administrators or executors, or assigns, to pay the lender a given sum of money at a specified time, together with interest. The second paper given as security for the note or bond, is a mortgage, which conveys the title to the property to the lender, with the provision, however, that if the borrower satisfies the conditions imposed in the bond—that is, the payment of a certain sum of money at a given time, together with interest as agreed—this conveyance (mortgage) is to be held null and void.

WHAT IS A CORPORATION INDENTURE?—The indenture is a more lengthy instrument than the bond, and, as will be noted, it is called an "indenture" and not a "mortgage." The mortgage strictly is only that portion of the indenture whereby the property is conveyed or deeded to the mortgagee, with the provision that the deed so given is to be held null and void in the event that the conditions named in the bond are faithfully carried out. The indenture is broader than the mortgage; it contains provisions other than those bearing directly on the mortgage. An indenture is a sealed agreement between two or more parties and any number of provisions may be inserted in it, in addition to the mortgage clauses, as may be deemed necessary or desirable. It is always possible for the individual to obtain a loan secured by a lien on his property, provided the security is good and considered ample. If, however, his property was of so great value that he desired to obtain a loan of several millions of dollars, he would find it difficult, or even impossible, to find any one person willing to lend him so large an amount. If, however, the borrower could find a number of persons who could and would jointly contribute enough money to equal the amount of the loan, he could divide this total amount into equal parts and each lender could have such a proportionate interest as might be desired. This, then, is the case with large corporations, which are legalized persons. Owing to the fact that the holders of the bonds have only a fractional interest in the loan and therefore in any property that may be pledged to secure it, it is impossible to create separate mortgages in favor of the individual bondholders on any particular part of the property. No portion of the property can be specifically designated—the interests of the bondholders are in common. For this reason and others, corporations are obliged to create what is known as a Mortgage Deed of Trust—making the mortgage to secure the many bonds in favor of some responsible individual or trust company, who holds it on behalf of the various bondholders in accordance with the definite terms of the trust, and who is therefore known as the Trustee. The indenture of the corporation must in addition to covering the mortgage, contain other related and necessary covenants, especially as to the trust that must be created. As there are so many covenants or provisions necessary in order to fully protect all interests concerned, the corporation indenture becomes bulky, but its form in substance is not very different from that of the bond and mortgage of the individual, which we have already analyzed, and which for this reason it is well for us to keep in mind as we follow the corporation indenture.

ANALYSIS OF INDENTURES.—The indenture, or agreement, must of necessity be made between certain parties, the mortgagor or the corporation and the mortgagee, in this case the Trustee who holds the security given in trust for the various bondholders. It is, therefore, proper that we recite at the very beginning of the indenture the parties in interest, giving their legal residence, or as in the case of corporations the names of the States wherein they are incorporated. It is quite essential that we know in what State a corporation was incorporated, as its rights and privileges are determined by the statutes of the State which created it and by the charter which has been granted to it. What are our reasons for creating the indenture? The very first premise is that the corporation is legally able to borrow money by law. If it did not have this right we could proceed no further. To borrow money and mortgage or pledge property as security therefor is a common law right of corporations, but the amount which may be borrowed is sometimes limited by State statutes. In the event that the corporation desired to borrow in excess of the limitation, additional capital stock is sometimes authorized thereby creating a larger basis for borrowing. If this premise is not incorporated, its omission does not affect the status of the indenture, but it is generally placed, as many other premises are, in the indenture, for the sake of logic, and to show that the matter has been considered, and that the fact is admitted by the parties to the indenture. The purpose for which the bonds are to be issued is sometimes duly set forth, as for instance, to refund certain maturing obligations, to construct a certain extension, to build new terminals, etc. While the purpose may not always be mentioned in the indenture, nevertheless it must accord with the charter of the corporation and the laws of the State. The company cannot exceed the powers that have been granted to it. We next want to know whether the authority to borrow money and issue bonds therefor has been obtained in lawful manner. Provisions covering the manner of securing this authority will be found in the by-laws of the corporation, and the counsel must examine this matter carefully in order to see whether all legal formalities have been strictly observed and whether the resolutions are in proper order. There are certain essential facts that must be stated in the bonds themselves and which are elaborated in the covenants of the indenture. These facts are embodied in the resolutions of the Board of Directors and of the stockholders and are, therefore, incorporated in the premises of the indenture. These facts include the total amount of bonds authorized, title, denomination, form, date of issue and maturity, rate of interest and where payable. In order that there may be uniformity in the wording and form of the bonds, so that no one holder will perchance receive an undue advantage over any other bondholder, the form of the bond, its coupons and trustee's certificate must be duly set forth in the indenture.

LIMITATION OF POWERS OF DIRECTORS.—There are various matters wherein directors of any corporation do not usually have power to act on behalf of the corporation without special authorization. Such matters include the amendment of the corporate charter (thereby changing the purposes of the corporation), the change of the name of the corporation, the increase or decrease of authorized capital stock, the sale of the total corporate assets and franchise, the consolidation of the corporation where permitted by statute, and the giving of mortgages upon the corporate property. This last point is especially important since the validity of a corporate mortgage as security for a loan of money depends upon whether the mortgage was authorized and given in all respects pursuant to statute of the State involved. As these corporate mortgages not only are given as security for a single loan of money but also furnish security often for very large amounts of bonds, the matter of the authority of the directors and the validity of the mortgage becomes of great importance. Therefore the statutes of the State involved must be followed closely as to the procedure in connection with the giving of a mortgage. It may be stated, however, with regard to this matter and the other special matters mentioned, the statutes generally provide that some form of authorization should be obtained from the stockholders, generally through their vote at a special meeting called for that purpose, of which proper notification and announcement have been given; that some form of certificate as to the proceedings at such meeting be made and filed by the secretary and treasurer or other designated officer of the corporation; that it should also be filed in the office of the county clerk of the county involved and in the office of the Secretary of State; and that some notification of the act in question be also given to the directors as well as the stockholders. It is, of course, impossible to take up the details as to such matters, the only safe course to pursue being to follow with extreme care the statutes of the State wherein such action is to be taken. From the foregoing, however, the general purpose and effect of prevailing law may be seen.

DIVIDENDS ON STOCK.—Dividends on the stock of corporations are declared by the directors, who have power to use their discretion as to the amount to be disbursed in this way. The statutes are, however, very explicit in prohibiting the declaration of any dividends except out of the surplus profits of the business conducted by the corporation. With respect to dividends properly declared, the declaration of the directors generally provides that they shall be paid to all stockholders registered upon the books of the company at a specified date in the future. Hence, if a stockholder should sell or otherwise transfer his stock, after that date to another person, the latter, while becoming the owner of the stock, would not be entitled to the dividend when paid. It would be payable to the former stockholder, although he might, pursuant to the agreement made with the person to whom he sold the stock, turn over to the latter the amount of the dividend.

CUMULATIVE DIVIDENDS.—It frequently happens that a corporation does not earn any dividends in a particular year. The question arises, is the holder of a 7% preferred stock in a position to demand that the dividend be paid the following year. Suppose the corporation earns nothing in 1921 and earns 14% in 1922. The holder of one share of a non-cumulative preferred stock would receive the usual 7% dividend only in 1922. If the stock were cumulative he would receive 14%. In other words the unearned dividends accumulate and become a charge which the corporation must pay when sufficient is earned in prosperous years before the holders of common stock are entitled to receive any dividend. Usually the stock certificate and the articles of incorporation specify whether stock is cumulative or non-cumulative. If they do not, then reference to the law of the State where the company is incorporated, is necessary to decide such a question.

LIABILITY OF OFFICERS AND DIRECTORS TO THE CORPORATION.—Whether a corporation becomes liable by virtue of action taken by its officers or directors depends upon principles of agency applied to the law of corporations. These principles have already been stated. Whether the directors or officers are themselves personally liable is another matter. Conceivably they may be liable either to their employer (the corporation) or to creditors of the corporation. They are not directly liable to the shareholders as such. Any injury or wrong they may indirectly do to shareholders is directly done to the corporation, the shareholders being injured only because the corporation in which he is interested is injured. Shareholders may, however, institute proceedings against directors or officers if, as not infrequently happens, the corporation itself, being controlled by the wrongdoers, fails to take proceedings. The shareholders in such a case, however, demand redress for the corporation, not for themselves; and whatever may be recovered, is recovered for the benefit of the corporation. The duty of the directors and officers of the corporation is analogous to the duty of any agent to his principal. That is, each officer or director must exercise reasonable diligence in the performance of his work and must observe fidelity to his principal. The application of these principles to particular fact is not always easy, but the principles themselves are plain. Especially the degree of care which directors are bound to use presents a troublesome question of fact. In a small business it may be the duty of a director to take active control of the policy of the company and supervise with some minuteness each business operation. Such direction is impossible where a great railroad or industrial corporation is concerned. In such a case directors necessarily derive their information from subordinate agents and cannot investigate facts for themselves. Directors are not liable for mistakes of judgment if they use reasonable care; if, however, they wilfully do an act which they know is not authorized by the charter or by-laws of the corporation, they will be liable for the consequences. Directors who are cognizant of wrongs committed by their co-directors and fail to take available measures to prevent the wrongs, become liable themselves. Directors may terminate their liability for future acts by resigning, but resignation will not destroy liability for acts already done even though the resulting damage does not happen until after resignation. The corporation requires that a director or other officer shall not act on behalf of the corporation in a matter in which he has a personal interest at variance with that of the corporation. Should matters of this sort arise, as they often do, the interested officer or director should not take part in the decision of the question, and may render himself liable if he does so.

LIABILITY OF OFFICERS TO CREDITORS.—So long as a corporation is solvent, creditors of the corporation have no reason or right to seek redress from any one but the corporation itself. Creditors of an insolvent corporation, however, may enjoin action by the company's officers which is unauthorized or likely to prove detrimental to the assets of the corporation. If the officers knowingly misapply the assets of an insolvent corporation they are personally liable to the creditors for the injury caused thereby. They are liable sometimes by statute, but also even apart from statute, for false statements of the condition of the corporation in reliance upon which credit is given the corporation. Like other agents, the officers of a corporation impliedly warrant to persons with whom they deal their authority to do the acts which they undertake; and if authority is lacking, they are liable personally. The only qualification of this principle is that if the facts from which authority, or lack of it, may be determined, are known to the person dealing with them, they are not liable; that is, they do not warrant the correctness of an inference of authority from known facts.

LIABILITY OF BANK OFFICERS.—The principles governing the liability of bank directors and other officers of a bank are the same as those which govern similar questions regarding other corporations. The bank laws, however, impose certain duties and penalties which affect the application of general principles. It may be worth while to enumerate briefly some of the duties of different bank officers, a violation of which renders them personally liable. As to directors it has been said that "It is not necessary to show directly that the directors actually had their attention called to the mismanagement of the affairs of the bank, or to the misconduct of subordinate officers. It is sufficient to show that the evidence of the management or misconduct were such that it must have been brought to their knowledge unless they were grossly negligent or wilfully careless in the discharge of their duties." They are liable for the consequences not only of their own fraud but of their ultra vires acts. They are liable for approving the discount of notes known to be worthless or of so doubtful value as to be obviously unsafe. If guilty of negligence in failing to discover that such paper was worthless they may also be liable. They are guilty of negligence and may thereby render themselves liable if they wholly neglect to ascertain the condition of the bank from its books, though a thorough examination of the books of a bank, especially of one transacting a large business, cannot be expected of every director; and the law would require no more than would be demanded by the standard of reasonableness.

THE PRESIDENT.—The duties of the president, and consequently his liabilities, must be determined by general law, the charter of the particular institution, its by-laws, and by general business usage. Thus, if the usage exists for the president to draw and sign checks in the absence of the cashier, the president will have authority so to act. He has authority to conduct the litigation of the bank; he may employ counsel. He may generally indorse negotiable paper of the bank. On the other hand, he will be personally liable if he permits improper loans or over-drafts; if he fails to give proper instructions to inferior officers; if it is his duty to require a bond from an inferior officer, and he fails to do so; and, generally, if he commits a breach of duty to the corporation which causes damage. He has no power to execute deeds of real estate without authority of the directors and, generally, an instrument which must be executed under the seal of the bank must be authorized by the board. The discount of negotiable paper also is a duty of the directors.

THE CASHIER.—The Supreme Court of Maine has thus expressed the functions of the cashier of a bank: "A cashier, it is well known, is allowed to present himself to the public as habitually accustomed to make payment for its bills or notes payable to other persons; to make payment for bills and notes discounted by the directors; to receive payment for bills of exchange, notes, and other debts due to the bank; to receive money on deposit and to pay the same to the order of the depositors. He is presented as having the custody of its books, bills of exchange, notes, and other evidences of debt due to it, and, indeed, of all its movable property; as making entry in its books and as keeping its accounts and a record of its proceedings. In many banks these duties are performed in part by tellers, clerks, or assistants, but generally, it is believed, under his superintendence, and he might at any time assume the performance of them and perform them, if able to do so, without such assistance. His true position appears to be that of a general agent for the performance of his official and accustomed duties. While acting within the scope of this authority he would bind the bank, although he might violate his private instructions." He must exercise proper oversight over subordinate officers; he must use reasonable care and skill. He may become liable personally for failure to observe instructions as to a special deposit; for the improper sale of stock held as security for a loan; for improperly making loans, for failure to give essential information to the directors; for failing to exercise proper oversight over inferior officers or agents, as well as in the more obvious case where he has taken advantage of his position to commit intentional fraud upon the bank.

BLUE SKY LAWS.—The term "blue sky" has become very familiar to the corporation lawyer in the last few years. The so-called "blue sky" legislation is a well meaning, if partly futile, attempt to meet an existing evil in connection with the sale of corporate securities. We shall find later that five elements are necessary to constitute the action of fraud or deceit: (1) a false representation of a material fact; (2) made with knowledge of its falsity; (3) with intent that it be acted upon; (4) that it be acted upon; (5) damage follows. The courts have almost universally held that a mere statement of opinion does not give rise to a cause of action for fraud, whereas a mistatement of fact does. Hence if I state to you when selling you 100 shares of the Bonanza Gold Mining Corporation that the company has never paid less than 20% in dividends during the last five years and you purchase the stock relying on this misrepresentation of fact (the situation actually being the company has never paid a dividend) you would have a cause of action in deceit against me. If, however, I had simply said in selling you the stock that the outlook for the company was the brightest in its history, that the president had told me that dividends of 30% a year were assured indefinitely and that this stock was by far the best bargain which had been on the market in over a year, although I know when I made such statements that there was little or nothing to substantiate them, nevertheless, I would not be liable in deceit. My statements were merely matters of opinion or what we call "seller's talk" or "puffing one's wares."

THE FINANCIAL PROSPECTUS.—If you will examine the average financial prospectus of a new stock being offered for sale to the public, you will find that when most of the high sounding terms and flattering statements are analyzed carefully that they will fall in this second class of non-actionable statements. There are few statements of fact but many glowing statements in the nature of "seller's talk." We all know, however, that enormous quantities of worthless stock are sold each year by this method. When business conditions are good it sometimes seems as if the wilder the scheme the easier it is to find a gullible public ready to purchase such securities. To prevent the perpetration of such frauds on the public is the object of the so-called "blue sky" legislation.

THE LAW ANALYZED.—The first "blue sky" law was passed in Kansas in 1911. The evil sought to be remedied was so prevalent that the idea spread rapidly and now similar legislation, of one type or another, has been enacted in a majority of the States. Some of the acts are crude, some have been held unconstitutional, and many are difficult of enforcement. Recently, however, more care has been taken in drafting such legislation, and many of the earlier laws will undoubtedly be amended to conform with this later legislation. We may take the Illinois statute of 1919 as a good sample of a drastic yet fairly workable Act. The law may be briefly considered from three standpoints: (1) the persons affected; (2) the securities affected; (3) the penalties provided for violation of its provisions.

AS TO THE PERSONS AFFECTED.—Generally any person offering any securities, and any seller's agent or broker, the issuer, or any agent or director of the issuer, or any owner or dealer, is covered by the Act. Illinois fiscal corporations such as banks, trust companies, insurance companies, building and loan associations and the like are practically exempt from the provisions of the Illinois securities law.

THE ILLINOIS ACT.—The Illinois act covers the following securities:

Section 3. For the purposes of this Act securities are divided into four classes as follows:

(1) Securities, the inherent qualities of which assure their sale and disposition without the perpetration of fraud, which shall be known as securities in Class "A";

(2) Securities, the inherent qualities of which, or in the nature of one or both parties to the sale thereof, assure their sale and disposition without the perpetration of fraud, which shall be known as securities in Class "B";

(3) Securities based on established income, which shall be known as securities in Class "C";

(4) Securities based on prospective income, which shall be known as securities in Class "D";

Section 4. Securities in Class "A" shall comprise securities:

(1) Issued by a government or governmental agency, or by anybody having power of taxation of assessment;

(2) Issued by any National or State bank or trust company, building and loan association of this State, or insurance company organized or under the supervision of the Department of Trade and Commerce of this State;

(3) Issued by any corporation operating any public utility in any State wherein there is or was at the time of issuance thereof in effect any law regulating such utilities and the issue of securities by such corporation;

(4) Appearing in any list of securities dealt in on the New York, Chicago, Boston, Baltimore, Philadelphia, Pittsburgh, Cleveland or Detroit Stock Exchange, respectively, pursuant to official authorization by such exchanges, respectively, and securities senior to any securities so appearing;

(5) Whereof current prices shall have been quoted from time to time for not less than one year next preceding the offering for sale thereof, in tabulated market reports published as news items, and not as advertising, in a daily newspaper of general circulation, published in this or in an adjoining State, including the State of Michigan, not including any trade paper or any paper circulating chiefly among the members of any trade or profession;

(6) Issued by any corporation organized not for pecuniary profit or organized exclusively for educational, benevolent, fraternal, charitable or reformatory purposes;

(7) Being notes or bonds secured by mortgage lien upon real estate or leasehold in any State or territory of the United States or in the Dominion of Canada, when the mortgage is a first mortgage on real estate, and when in case it is not a first mortgage lien or is on a leasehold, the mortgage and notes or bonds secured thereby (not including interest notes or coupons) shall each bear a legend in red characters not less than one-half inch in height, indicating (1) that the mortgage is on a leasehold, if that be the case, and (2) that the mortgage is a junior mortgage, if that be the case;

(8) Being a note secured by first mortgage upon tangible or physical property, when such mortgage is assigned with such securities to the purchaser;

(9) Evidencing indebtedness due under any contract made in pursuance to the provisions of any statute of any State of the United States providing for the acquisition of personal property under conditional sale contract;

(10) Being negotiable promissory notes given for full value and for the sole purpose of evidencing or extending the time of payment of the price of goods, wares or merchandise purchased by the issuer of such notes in the ordinary course of business, and commercial paper or other evidence of indebtedness running not more than twelve months from the date of issue;

(11) Being subscriptions for the capital stock under any license issued to commissioners to incorporate a company under the laws of this State where no commission or other remuneration paid for the sale or disposition of such securities;

Securities in Class "A" and the sales thereof shall not be subject to the provisions of this Act.

Section 5. Securities in Class "B" shall comprise securities:

(1) Sold by the owner for the owner's account exclusively when not made in the course of continued and repeated transactions of a similar nature;

(2) Increased capital stock of a corporation sold or distributed by it among its stockholders without the payment of any commission or expense to solicitors, agents or brokers in connection with the distribution thereof;

(3) Sold by or to any bank, trust company, or insurance company or association organized under any law of this State or of the United States, or doing business in this State under the supervision of the Department of Trade and Commerce; or of the auditor of Public Accounts; or by or to any building and loan association organized and doing business under the laws of this State, or any public sinking fund trustees; or to any corporation or dealer or broker in securities;

(4) Sold or offered for sale at any judicial, executor's or administrator's sale, or at any sale by a receiver or trustee in insolvency or bankruptcy, or at a public sale or auction held at an advertised time and place;

Securities in Class "B," when disposed of by the persons and in the manner provided by this section, shall not be subject to the provisions of this Act.

Section 6. Securities in Class "C" shall comprise the following:

Those issued by a person, corporation, firm, trust, partnership or association owning a property, business or industry, which has been in continuous operation not less than two years and which has shown net profits, exclusive of all prior charges, as follows:

(1) In the case of interest-bearing securities not less than one and one-half times the annual interest charge upon all outstanding interest-bearing obligations;

(2) In the case of preferred stock not less than one and one-half times the annual dividend on such preferred stock;

(3) In the case of common stock not less than 3% per annum upon such common stock.

Section 7. Securities in Class "C" may be disposed of, sold or offered for sale upon compliance with the following conditions, and not otherwise:

A statement shall be filed in the office of the Secretary of State:

(1) Describing the evidence of indebtedness, preferred stock or common stock intended to be offered or sold;

(2) Stating the law under which and the time when the issuer was organized;

(3) Giving a detailed statement of the assets and liabilities of such issuer and income of profit and loss statement, and giving an analysis of surplus account;

(4) Giving the names and addresses of its principal officers and of its directors or trustees;

(5) Giving pertinent facts, data and information establishing that the securities to be offered are securities in Class "C."

Such statement shall be verified by the oath of not less than two credible persons having knowledge of the facts. Not less than twenty-five copies of such statement, wholly printed or wholly typewritten, shall at the time of filing the original statement be filed with the Secretary of State. The printed or typewritten copies so filed shall bear at the top in bold faced type the expression:

"Securities in Class 'C' under Illinois Securities Law," followed by the expression, also in bold-faced type:

"This statement is prepared by parties interested in the sale of securities herein mentioned. Neither the State of Illinois, nor any officer of the State, assumes any responsibility for any statement contained herein nor recommends any of the securities described below."

Section 8. All securities other than those falling within Class "A," "B" and "C," respectively, shall be known as securities in Class "D."

Section 9 gives the requisites of the statement required to be filed with the Secretary of State before securities of Class "D" may be sold. Such statement is even more complete than that required in Section 7.

SALES AND CONTRACTS VOID.—Every sale or contract in violation of the act is void, and the fines vary from not less than $100 to not more than $25,000, and the imprisonment from six months to five years. Although there is great need for a Federal incorporation act there is even greater need for a Federal blue sky law. With different acts in the different States, the Illinois act being simply an example, even the most careful business man may unwittingly find himself in a position where he has violated one of these laws with their severe penalties.