CHAPTER XXII. ACTIONS BETWEEN THE CORPORATION AND ITS MEMBERS. § 541. Distinction between corporate entity and membership. 542. Rights of the legal entity must be preserved. 543. The corporation protected from agreements made prior to incorporation. 547. When cognizance of members will be taken at law. 548. Kinds of corporate interests. 551. Increase of capital to represent acquisition of additional property and franchises. 552. Unauthorized issue of preferred stock. 553. Action by purchaser of illegally issued shares.-Laches. 558. Compliance with statutory requirements. 559. Only substantial compliance required. 560. Invalid assessment not susceptible of ratification. 561. Notice of calls. 566. When objects of enterprise abandoned or impracticable. 567. Capital can only be demanded to carry on the corporate enterprise. 568. Contracts of membership cannot be cancelled by mutual consent. 569. Shares issued fraudulently or through mistake may be cancelled. 570. Diminution of capital stock under statutory authority. 571. Release by unanimous consent. 572. Wrongs of others will not release. 573. Avoidance of contracts for fraud. 574. Must have been the inducement for the contract. 575. False representations must have been made by party having at least apparent authority to make them. § 576. Fraud in exchange for consolidated stock. § 577. Must proceed with diligence to avoid contract. 579. Conflicting claims to stock.-Interpleader. 580. Fraudulent transfers. 581. Diligence required on part of corporation. 582. Laches of owner releasing corporation from liability. 583. The doctrine that a receiver cannot release subscriptions. 584. Subscriptions no more sacred than other assets after insolvency. 586. When an injunction lies. 587. The prime requisites of a valid forfeiture. 588. Fraudulent abuse of the right to forfeit. 589. How rights to dividends may be enforced. 590. Setting off indebtedness against dividends. 591. Remedies between the cestui que trust and the trustee in a "trust." 592. Extent and nature of liability. 541. Distinction between corporate entity and membership. In considering the rights and equities of shareholders, as a basis of proceeding against the corporation, it is important to understand the difference between the legal entity called the corporation itself, and the collective interests of the members composing the tangible body corporate. Again, it is necessary to segregate the individual interest of each shareholder from the aggregate interest of all the shareholders, in order to clearly understand the manner in which courts of equity proceed in protecting these interests. Courts of law refuse to recognize the interests of members as distinct from the fictitious institution by which they are collectively known. The individual corporators are not looked upon as in any sense parties to any obligations assumed by the corporation, or as capable of holding a contractual or other relation of any kind with third parties, except in the aggregate and in the corporate name. 1 An action at law cannot be maintained by one member of a joint-stock company against another member for the use of his proportional part of its property. Whitehouse v. Sprague (Me.), 7 A. 17. See Harkness v. Manhattan R. Co., N. Y. Supr. Ct. 174. 54 on the For this reason, the law seldom affords adequate remedies to shareholders. Courts of equity, contrary, whenever necessary to the attainment of justice, will not only view the corporation as an association of persons mutually interested in a common enterprise, but will often look beyond the aggregate to determine individual rights and relations, and having done so, will furnish reparatory or preventive remedies as the case may require. Equity views the relations of the members both to the corporation and to each other, while at law these relations are of little importance. Again, the corporate entity is referred to and its distinct function recognized and asserted in equity as at law, whenever necessary to ascertain and give effect to the rights and equities of the real parties in interest. It is, of course, unimportant as regards rights and remedies, whether the stockholder be an individual, or another private or a municipal corporation.1 But individual members of municipal corporations cannot sue in its name, they not having sufficient interest therein to give them a standing in court.2 § 542. Rights of the legal entity must be preserved. Though realities, rather than fictions, receive most favorable consideration in the administration of equity, yet the rights and relations of the legal entity can often be preserved only by giving full effect to its legal status and technical definition. Except where it becomes 1 County of Morgan v. Allen, 103 U. S. 498; Morgan County v. Thomas, 76 Ill. 120; Shipley v. City of Terre Haute, 74 Ind. 297; Gray v. The State, 82 Ind. 567; Kreiger v. Shelby R. R. Co. (Ky.), 25 Am. & Eng. Cas. 528; 1 Dan. Neg. Instr., sec. 436; Murray v. Charleston, 96 U. S. 432. See also, Robinson v. B'k of Darien, 18 Ga. 65; Curran v. The State, 15 How. 304; U. S. v. Planters' Bank, 9 Wheat. 904; State v. Holladay, 72 Mo. 499; Marshall v. Western, etc., R. R. Co., 92 N. C. 322. 2 People v. Coon, 25 Cal. 635. See also Robinson v. Bidwell, 22 Cal. 379. necessary for the protection of the interests of individual members, the convenient administration of justice requires that those interests should be disregarded, and the collective entity alone considered. § 543. The corporation protected from agreements made prior to incorporation.-Courts of equity cannot, any more than courts of law, disregard the rights of the corporate entity in an effort to administer ulterior justice, respecting transactions occurring between the individual corporators prior to and independent of corporate organization. The court in such cases applies the principle that the corporation is not to be affected by the personal rights, obligations and transactions of its stockholders, whether such rights accrued or obligations are incurred before or subsequent to incorporation.1 § 544. But the corporators are personally liable.—Where, however, associates combine together to create a paper corporation to cover a partnership or joint venture, and where the stockholders are "partners in intention," and have resorted to the form of a corporate organization to free themselves from liability on obligations which had attached to them individually, previous to incorporation, with respect to the business they propose to carry on in the corporate name and character, courts of equity will disregard and look beyond the fiction of the corporate entity and hold the corporators to a discharge of the liabilities resting on them.2 See also, 1 M. & H. Hardw. Co. v. Towers Hardw. Co., 87 Ala. 206; 6 So. 41. Wilbur v. N. Y. Elec. & Constr. Co., 12 N. Y. S. 456; Morrison v. Gold Mt. G. M. Co., 52 Cal. 309; Carmody v. Power, 60 Mich. 26; 26 N. W. 801; Hawkins v. Mansfield G. M. Co., Ib. 515; Gent v. M. & Mut. Ins. Co., 107 Ill. 658; Caledonian R. Co. v. Helensburgh, 2 Macg. 391; Penn. Mut. Co. v. Hapgood, 141 Mass. 145; 7 N. E. 22. 2 Plaintiff, having sold certain goods to defendants as a copartnership, is entitled to join and several judgment against them individually therefore, though And it is held that this may be done although some of the shareholders had not originally incurred the obligation sought to be enforced, provided they had notice of it before entering the corporation, and had participated in the effort to avoid it.1 § 545. Legal status and rights will be respected.—It must always be borne in mind, however, that courts of equity will adhere to the well-established principles of law, as well where they affect the contractual rights and relations, as where they concern titles to property. name. To illustrate, it would lead to endless confusion and uncertainty in titles to property if part or even all the members of a corporation could, by uniting in their individual names, in a conveyance, convey a title to any portion of its real estate. Therefore, no valid sale to or purchase by a corporation can be made except in its And although every share in a corporation belong to one individual, a conveyance by him, in his individual name, would not affect the legal title, which would still remain vested in the corporation. The equities which might be created between the parties would in no way concern or affect the right of the corporate entity.2 they were afterwards incorporated. Anderson v. Ft. Worth Base-Ball Ass'n (Tex.), 14 S. W. 1016. 1 Davis, etc., W. W. Co. v. Davis, etc., W. Co., 20 Fed. Rep. 700; Beal v. Chase, 31 Mich. 490, 495, 532. In the last case the corporation had been formed for the purpose of violating a contract not to engage in a certain business. All the corporation were held to have participated in this purpose. The business was to be conducted by the corporation in connection with the promissor, or in his individual capacity. He had an interest in it, both individually and as the principal shareholder of the company, and the court enjoined the corporation not generally but from carrying on the business with or for the individual contracting party. 2 Baldwin v. Canfield, 26 Minn. 43; 1 N. W. 261; Bundy v. Iron Co., 38 O. St. 300; Frank v. Dunkhair, 76 Mo. 508; Button v. Hoffman, 61 Wis. 20; 20 N. 667; Durant v. Kennett, L. R. 5 C. P. 262; Murphy v. Hanrahan, 50 Wis. 485; 7 N. 436. But a mortgage given by the sole owner of the stock in a corporation |