Story Case

In 1870, the state of Illinois adopted the following article as a part of its constitution: "No corporation shall be created by special law or its charter extended, changed or amended, except those for charitable, educational, penal or reformatory purposes; but the General Assembly shall provide by General Laws for the organization of all corporation hereafter to be created." The adoption of this provision was followed by a general incorporation act by the legislature.

Before this provision became effective, the state leg-islature granted a charter to Meredith Montague and two other men to conduct a trade school and publishing business. The first meeting of the corporation under this charter was not held until after the new constitutional provision became effective. Subsequently, it was contended that the corporation was unconstitutional, since the law under which it was organized was repealed prior to the acceptance of the charter. Montague and his associates maintained that (1) the charter was granted prior to the enactment of the new constitutional provision and (2) that their organization was one created for educational purposes. Are they correct?

Ruling Court Case. State Vs. Dawson, Volume 16 Indiana Reports, Page 40

In the year 1849, the Legislature of Indiana passed an act which gave to Dawson and other persons, the privilege of running a railroad from Fort Wayne to Jeffersonville and a charter for a corporation to be called the "Fort Wayne and Southern Railroad." In 1851, on the first of November, a new Constitution for the State of Indiana went into effect, one provision of which was: "Corporations shall not be created by special act, but may be formed under general laws." Seven months later, on June 2, 1852, the persons named as the incorporators of the "Fort Wayne and Southern Railroad" held their first meeting, elected officers and proceeded to transact business. This was the first time they had in any way acted upon the power to incorporate which the law had given them.

Shortly thereafter, the state brought this suit against the members, as individuals, charging that they were pretending to be a corporation when they were without authority from the state. It asserted that this was a corporation created by special act, within the class prohibited by the new constitution, and that this corporation did not come into existence until after the new constitution was in effect, namely, not until the meeting of June 2, 1852. Therefore, contended the state, the attempted organization was contrary to the constitution, and, being unlawful, could have no legal effect. The defendants, the members of the company, did not deny that no such corporation as they claimed to have could be created in 1852, but maintained that this company was not created at that date, but that it was created in 1849, at the time the charter was passed. If that were so, it would follow, that since the corporation was already in existence prior to the new constitution, it would not be affected by a prohibition against the future creation of corporations.

The opinion of the Court, delivered by Mr. Justice Perkins, held that this was a corporation "created by special act" within the constitutional provisions, because there was a grant of a charter for a single company, to certain persons by name, as distinguished from grants of charters, generally, to any and all persons who make application and conform to certain requirements. The only question, then, was as to the time of the "creation" in this case. As to this, the Court said that the law did not create the corporations, but that it was merely an offer to the incorporators. Like an offer to buy and sell, this was incomplete until acceptance. The franchise and the privilege were not effective until they had been taken up by those to whom they were extended. Therefore, the "Fort Wayne and Southern Railroad" had never been incorporated before June 2, 1852. But, like other offers, this offer of a franchise might be withdrawn before acceptance, and, if withdrawn, cannot be made binding upon the one making the offer by any subsequent acceptance. The adoption of a constitution saying, "Corporations shall not be created by special act," was held to be a revocation by the state of all unaccepted offers of special charters. Therefore, the charter to the "Fort "Wayne and Southern Railroad" was withdrawn in 1851, before its acceptance, and the subsequent attempts to accept it were ineffective and no corporation could come into existence. The creation of a corporation under a special act occurs, not at the time of the passage of the act, nor by virtue of its passage, but by virtue of, and at the time of the lawful organization of the company under the act.

Judgment was, therefore, given for the state.

Ruling Law. Story Case Answer

As we have stated before, a corporation cannot be created without the authority of the state or of the United States. Persons cannot come together and form a corporation, as they may form a partnership. Charters may be granted by special acts, or they may be acquired under a general incorporating law. Under the first method, persons wishing to incorporate, procured the legislature to pass a special act, offering to the incorporators (promoters) a charter for a corporation, upon such terms as seemed fitting to the legislature. This offer was then accepted or rejected by the promoters, as they chose. If accepted, the corporation came into existence then, or at such a time as designated by the legislature. In most states, the legislatures are forbidden, by their state constitutions, to grant special charters. The system of granting special charters led to glaring and corrupt abuses. Improper persuasion and bribery were used by promoters in influencing state legislatures to grant special privileges and franchises by special charters, which ignored the public interest. This mode of creating corporations is no longer used to any extent.

The Ruling Court Case indicates that there must be an acceptance of a charter to constitute a corporate body. The state cannot compel persons to become a corporation without their duly manifested assent. Therefore, in the Story Case, Montague and his friends are barred from acting as a corporation, since the state, by constitutional provision, repealed the charter before it was accepted. The second contention made by Montague was of no force and need not be discussed here.