This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
A private corporation is in fact a number of natural persons acting together for certain purposes under a definite organization and endowed by law with certain attributes different from those of a partnership, a voluntary association, or any other union of natural persons. The most characteristic of its attributes are the so-called perpetual succession, which means that the death or withdrawal of one or all of the natural persons does not necessarily dissolve the corporate organization, and the right to contract, sue and the like as a person.1
By the fiction of the law a corporation is an artificial person, distinct from the natural persons that in reality compose it, and possessed of certain limited powers.2 Thus a change in stockholders of a corporation has no effect upon pre-existing liability of a corporation.3 So directors who have taken property as security for a corporation may convey it to the corporation by public sale, free from the equity of redemption of the creditor.3 So where the same persons own all the stock of two corporations the contract of one is not the contract of the other.5 The existence of the corporation apart from its stockholders is a legal fiction.6 Thus where A transferred his business to a corporation in which he owned practically all the stock it was held to be substantially a transfer to himself,7 and a corporation organized without capital or assets to cover a real partnership was treated as not existing.8 This contradiction between fact and theory is the cause of the undoubted confusion that now exists in the law of corporations. The courts vacillate between a desire to effect justice by treating contracts and other transactions of a corporation as they would those of a partnership or other association of individuals as far as rights of creditors are concerned, and a desire, in conformity to precedent, to treat them as those of an artificial person of limited powers, distinct from its stockholders. This confusion as to the legal effect of contracts of corporations is increased by additional causes. First, rules which properly apply to public corporations which exercise governmental powers affecting the whole public have been extended to private corporations. Second, rules which properly determine the extent of corporate power as between the state and the corporation in a direct proceeding to oust the corporation from unlawful exercise of franchises, have been extended to determine the validity of contracts entered into voluntarily between the corporation and private individuals. Third, rules which properly determine the rights of stockholders who actively dissent from the management of the corporation to invoke the action of courts of equity to restrain the directors from exceeding their authority, have been extended so as to determine the validity of contracts entered into by a corporation without objection from its stockholders, and often with their active assent; and these rules have been so applied as to render invalid contracts which the stockholders might not. have been able to prevent the directors from making of incorporation, together with the general laws applicable to a corporation, which determine its corporate powers.2 A corporation cannot by its articles of association assume a greater power than that given in the general statute,3 though such addition does not invalidate the powers authorized by statute.4 Since the charter of a corporation is given by the state, the members of a corporation cannot alter or increase the powers of the corporation as the members of a partnership can alter or increase the powers of the partnership. This distinction results in many of the practical differences between the contracts of partnerships and those of corporations.
1 Home Fire Ins. Co. v. Barber, - Neb. -; 60 L. R. A. 927; 93 N. W. 1024.
2 Blackstone calls corporations "artificial persons, who may maintain a perpetual succession, and enjoy a kind of legal immortality." Black. Com. I, 467. Marshall, C. J., said that a corporation is "an artificial being, invisible, intangible and immortal, and existing only in contemplation of the law." Dartmouth College v. Woodward, 4 Wheat. (U. S.) 518, 636. Substantially similar definitions are common. Nashua, etc., R. R. Co. v.
Lowell, etc., R. R. Co., 136 U. S. 356; Baltimore, etc., R. R. Co. v. Church, 108 U. S. 317; Bank v. Earle, 13 Pet. (U. S.) 519; Smith v. Hurd, 12 Metc. (Mass.) 371; 46 Am. Dec. 690; Landers v. Church, 114 N. Y. 626; 21 N. E. 420; Rudd v. Robinson, 126 N. Y. 113; 22 Am. St. Rep. 816; 12 L. R. A. 473; 26 N. E. 1046; Weyeth, etc., Co. v. James, etc., Co., 15 Utah 110; 47 Pac. 604; State v. Ry. Co., 45 Wis. 579.
3 Andres v. Morgan, 62 O. S. 236; 78 Am. St. Rep. 712; 56 N. E. 87&.
4 Copsey v. Bank, 133 Cal. 659; 85 Am. St. Rep. 238; 66 Pac. 7.
As to contracts between a corporation and its officers, see Sec. 181.
5 Way Cross, etc., R. R. Co. v. R. R. Co., 109 Ga. 827; 35 S. E. 275.
6 "The general proposition that a corporation is to be regarded as a legal entity, existing separate and apart from the natural persons composing it, is not disputed; but that the statement is a mere fiction, existing only in idea, is well understood." "Now so long as a proper use is made of the fiction, that a corporation is an entity apart from its shareholders, it is harmless, and, because convenient, should not be called in question; but where it is urged to an end subversive of its policy, or such is the issue, the fiction must be ignored." State v. Standard Oil Co., 49 O. S. 137, 177; 34 Am. St. Rep. 541; 15 L. R. A. 145; 30 N. E. 279. "Modern decisions are tending to a disregard of the mental conception that a corporation is an entity separate from its corporators, as in many instances it is simply a 'stumbling block' in the way of doing justice between real persons." Andres v. Morgan, 62 O. S. 236, 245; 78 Am. St. Rep. 712; 56 N. E. 875. And see People v. Refining Co., 121 N. Y. 582; 18 Am. St. Rep. 843; 9 L. R. A. 33; 24 N. E. 834.
7 "His identity as owner of the property was no more changed by his conveyance to the company than it would have been by taking off one coat and putting on another. He was as much the substantial owner of the property after the conveyance as before." Bank v. Tre-bein, 59 O. S. 316, 325; 52 N. E. 834; (citing Hibernia Ins. Co. v. Transportation Co.. 13 Fed. 516; Kellogg v. Bank, 58 Kan. 43; 62 Am. St. Rep. 596; 48 Pac. 587; Terhune v. Bank, 45 N. J. Eq. 344; 19 Atl. 377; Bennett v. Minott, 28 Or. 339; 39 Pac. 997; 44 Pac. 288; Montgomery, etc., Co. v. Drenelt, 133 Pa. St. 585; 19 Am. St. Rep. 663; 19 Atl. 428).
8 Christian, etc., Co. v. Lumber Co., 121 Ala. 340; 25 So. 566.