Story Case

John H. Longfellow, owner of the controlling interest in the Western Asphalt Company, made a personal agreement with the United Paving Company, not to submit any bids or proposals on prospective work in states north of the Ohio River and east of the Mississippi River. The attorney general, of the state in which the Western Asphalt Company was organized, learned of this agreement and brought suit against the company to take away its charter. This was done, in pursuance of a statute of the state which makes unlawful the contract of any local corporation made in restraint of trade.

The Western Asphalt Company contended that it had not made a contract, and was not liable for the acts of Longfellow, another individual. Is this a good defense?

Ruling Court Case. State Vs. Standard Oil Company, Volume 49 Ohio State Reports, Page 137; Volume 15 Lawyers' Reports Annotated, Page 145

All the stockholders of the Standard Oil Company of Ohio entered into an agreement with stockholders of other companies, by which they agreed to transfer their stock to trustees, who would have full control and power to vote on the stock and were to control all the companies for the common benefit. The State of Ohio instituted this proceeding against the company, asking the Court to give an order, called a writ of quo warranto, which would deprive the company of all its rights, as a corporation, as a punishment for this "voting trust agreement" and the monopoly it created. The corporation set up as its defense, that it was not responsible for the acts of its stockholders and should not lose its charter because of the contract they had made with reference to their individual interests.

Mr. Justice Marshall delivered the opinion of the Court: For most purposes, the law regards the corporation as an entity, separate from its members. But this means only that the law allows the members to act for certain purposes as a unit, not that the corporation has any vitality of its own, or can do acts not directed by the natural persons composing it. Thus, when the members, all acting together, made an agreement which could be carried out only by controlling the corporation and compelling it to do acts which are against the law of the state, the agreement, itself, is the act of the body or unit, for which the charter can be revoked. It is immaterial that they acted in form as individuals; in effect, they moved as one body. In this case, the agreement so made was an unlawful restraint of competition and the corporation could not be allowed to become the tool for carrying it out.

The Court did not think it necessary to deprive the company of its rights to be a corporation, as asked by the state, but gave a judgment declaring that it had no right to make nor to perform the agreement, and forbidding it to recognize any of the transfers of stock to the trustees or to register them on its books, to pay dividends to anyone holding stock under this agreement, or to allow the trustees to vote any of the stock in elections of directors. Judgment was against the defendant, the company, in these particulars.

Ruling Law. Story Case Answer

It is clear that a corporation is an artificial person, having liabilities distinct and separate from its members. Yet, for reasons of public policy, the Courts may say that the acts of the members are, in substance, the acts of the corporation, for which it is held responsible. This may occur where the legislature, for the purpose of protecting the public, has placed certain limitations upon a corporation which its members try to evade by personally transacting the forbidden acts. In the Story Case, the legislature, no doubt, intended to cover just such a contract as was executed by Longfellow. If this is not true, obviously the law is practically nugatory in power. The Court should hold the Western Asphalt Company accountable for the acts of Longfellow, and oust it of its charter.