Story Case

The Michigan Lumber Company was a corporation organized under the laws of the state of Michigan. The corporation was engaged in the business of sawing timber into lumber and selling it. The stockholders elected a board of directors, who were authorized by the corporate charter to conduct the business. After it had continued for several years, the directors, in a regular meeting, agreed and so voted, that the corporation should dissolve. The directors, there upon, made ready to effect the dissolution. The stockholders objected to the dissolution and brought a bill to have the directors restrained from the plan. The directors contended that they had the power to conduct the business, and this carried with it the power to settle affairs and to dissolve the corporation. What should the decision of the Court be under the foregoing circumstances?

Ruling Court Case. Allerton Vs. The Chicago City Railway Company, Volume 18 Wallace Reports, United States, Page 233

The Chicago City Railway was incorporated by the state of Illinois in 1859; it was authorized to construct, maintain and operate a street railway in the streets of the city of Chicago. The directors of the company, without consulting the stockholders or calling a meeting of them, resolved to increase the capital stock of the company from $1,250,000 to $1,500,000. Allerton, who was a stockholder in the company objected to this increase; the directors did not consider his objections; Allerton, thereupon, filed this bill, asking that they be enjoined from making the proposed increase in the capital stock of the corporation.

Allerton based his objection upon certain laws which had been passed, which forbade a corporation to increase its stock without the consent of the shareholders. In behalf of the corporation, it was contended that these laws had no application, because they were passed after the corporation was organized.

Mr. Justice Bradley made the following observations:

"Without attempting to decide the constitutional question, or to give a construction to the act of the legislature, we are satisfied that the decree must be affirmed on the broad ground that a change so organic and fundamental as that of increasing the capital stock of a corporation beyond the limit fixed by the charter cannot be made by the directors alone, unless expressly authorized thereto. The general power to perform all corporate acts refers to the ordinary business transactions of the corporation, and does not extend to a reconstruction of the body itself, or to an enlargement of its capital stock."

The Court decided that the directors should be enjoined from proceeding to increase the capital stock of the corporation.

Ruling Law. Story Case Answer

In a business corporation, the managing power is vested in a group of men, elected by the stockholders, who are known as, and constitute the board of directors. The charter of a corporation generally states that all power shall be vested in this board of trustees. This confers upon the board the power to conduct the business in the usual way, but it does not confer upon them the power to dissolve the business, without the consent of the stockholders. In the Story Case, therefore, the attempt of the directors to dissolve the corporation in the manner indicated was wholly unauthorized and illegal. This grant of power in the charter does not give the board the right to change the name of the corporation, to change its location, to increase or decrease its capital stock, to increase or decrease the number of directors. In short, the directors cannot make any fundamental change in the corporation, but they must conduct the business in the usual way, or in the way in which they find it.