Story Case

Certain persons associated themselves together for the purpose of organizing a corporation to engage in mining and manufacturing. The law of the state, under which the corporation was effected, required the performance of the following conditions: One-half of the capital stock must be subscribed for; articles of association, stating the name of the corporation, its capital stock, the business to be done, and the names and residences of those interested, must be published weekly for a month, and then filed with the secretary of state. Mr. J. L. Jenkins agreed to take fifty shares in the corporation, and entered his name on the subscription list for that number. Several months later, the officers of the organization made demand upon him for payment. He refused to pay, on the ground that a corporation de jure had not been formed. He showed that the officers of the organization had failed to publish the articles of association as required by law, and that, therefore, no corporation de jure, had been formed. He contended that he promised to subscribe, only in case a corporation de jure was formed, and that he could not be compelled to pay for the subscribed stock, under any other circumstances. What should be the decision of the Court under the foregoing circumstances?

Ruling Court Case. Richmond Street Railroad Company Vs. Reed, Volume 50 Indiana Reports, Page 342

The Richmond Street Railroad Company sued the defendant, Reed, upon his promise to subscribe for stock in the corporation to be formed. He maintained as his defense that the corporation had not yet been legally formed. The Indiana statutes require that the articles of incorporation be signed by the subscribers to the company, and that they state, among other things, the number of directors to manage the affairs of the company and their names. Reed showed here that the articles of the incorporation stated neither the number nor the names of the directors.

The Court, in an opinion by Mr. Justice Downey, held that the defense was good in law. A subscriber to a corporation has a right to demand that the company to which his money is contributed have a charter, the validity of which should not be open to attack. In other words, his promise is to take stock in a de jure corporation only.

In an earlier Indiana case, the articles had fixed the number of directors but had failed to state their names. They were elected by the stockholders at the same meeting at which the articles were signed, and the Court held that this election was sufficient from the point of view of the subscribers, in place of the naming in the articles. But the Court in this case refused to extend that principle. The defendant, Reed, had not been present at the election of the directors, and had not waived his right to insist that the articles state their names, or at least the number. This requirement was not merely directory, but was so essential to the interests of the parties that it was mandatory upon the corporation to comply with it. Failing this, the charter was not sufficient de jure, and Reed's subscription could not be collected. Judgment was given for the defendant.

Ruling Law. Story Case Answer

When a prospective stockholder subscribes to the stock of a corporation, it is upon the implied condition that he shall not be liable to pay for the same until a corporation de jure has been brought into existence. He agrees to become a member of a de jure corporation, unassailable by the state, and not a de facto corporation which may be dissolved at the pleasure of the state. Until a de jure corporation has been formed, therefore, he cannot be compelled to pay for stock subscribed for. In the Story Case, because of the failure of the incorporators to comply with the law, only a de facto corporation was formed, and Mr. Jenkins cannot be held upon his stock subscriptions.