Wible, David A.

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NOTES AND COMMENTS 71does not impair his right of recovery for such breach." A minority ofcases except railroads and public highways, and, as to them, hold thatknowledge on the part of the grantee of the right of way will estop himfrom asserting its existence.' However, as to private easements andrights of way over land, it is well settled that even when the granteehas knowledge of their existence at the time of conveyance, the grantoris not relieved from liability.' The instant case follows this accepteddoctrine and its decision is in conformity with all jurisdictions.R.W.C.CORPORATIONSCORPORATIONS DE FACTO UNDER THE OHIO ACT-LIABILITY OF INCORPORATORSOne of the significant changes made in the General CorporationAct by the 1939 legislative session is to be found in section 8623-117of the Ohio General Code,' which made the filing of articles of incor-poration with the secretary of state and certification by the latter,conclusive evidence (except as against the state) of incorporation underthe Ohio laws. Previous to the amendment, a copy of the articles filedand certified was prima facie evidence of incorporation. 2 Since 1852Ohio has had a provision declaring that a corporate body comes intoexistence upon the filing of the articles of incorporation.' At first blush,reading these two sections together, it appears that little difficulty wouldbe encountered in protecting incorporators against personal liability fromcollateral attack where the only step toward incorporation has been thefiling of the articles. But at what point in the steps of incorporation thecourt will recognize de facto existence as a protection for incorporatorsfrom personal liability for the transaction of business is as yet a matterfor conjecture.'Jone, v. Hodgkis, 233 Ky. 491, 26 S.W. (2d) i 9 (193o); Ballard v. Burrows,51 I..a Sx, go N.W. 74 (1879)i Long v. Moler, 5 Ohio St. 271 (i85S); New YorkCoal Co. v. Graham, zz6 Pa. 348, 75 Atl. 657 (1go).'Patterson v. Jones, 23S Ky. 838, 32 S.W. (znd) 408 (1930); Memmert v.McKeen, ix Pa. 315, 4 At. 542 (S886)i Ireton v. Thomas, 84 Kan. 70, 13 Pac. 3o6(1911).'Erickson v. Whitescarver, 57 Col. 409, 142 Pac. 413 (1914); Helton v. Asher,135 Ky. 751, 123 SAV. 285 (i9o9); Newsmeyer v. Roush, z Idaho io6, i2o Pac. 464(1912).S1i8 Ohio Laws 47, sec. I.'Ohio Rev. Stat. (uS8o), sec. 32385 Ohio G.C. sec. 8629; now, Ohio G.C. sec.:6z = 17.3S. & C. see. 2735 Ohio Rev. Stat. (uSSo), sec. 3239; Ohio G.C. sec. 8627; now,Ohio G.C. ec. 8623-7.72 LAW JOURNAL -DECEMBER, 1940A study of the early Ohio cases shows a marked conflict in theattitude of the courts toward the commencement of corporate existence.One line of cases held that the corporate body came into being upon thefiling of the articles,4 with one case recognizing at that point a de factocorporation with the power to convey land without assumption ofpersonal liability.5 The other line of cases required further steps towardincorporation as a requisite for corporate existence.6 Because of theconflict in the Ohio decisions, the Circuit Court of Appeals in Kardo v.AYdams7 attempted to harmonize them by attributing the declaration oflaw in a case to the facts before the court. The court distinguished theholdings in State v. Insurance Co. and Cemetary A4ssociation v. TractionCo. as being too broad for the points actually involved and decided.'The Federal Court said that under the Ohio statute then operative,the filing of articles of incorporation followed by the transaction of cor-porate business created a de facto corporation, although the furtherprovisions with respect to the issuance of stock and the election ofdirectors had not been lawfully complied with."0 Two Ohio cases1'have since quoted with favor the decision in the Kardo case althoughneither court was presented with a fact situation warranting the adoptionof the above statement in its entirety from the Kardo case. In theGarwood casel"a there had been, in addition to the filing of the articles,an election of officers and directors and subscription to the stock. The'Ashtabula & New Lisbon R.R. Co. v. Smith, z5 Ohio St. 328 (1864); Society ofPerun v. Cleveland, 4-3 Ohio St. 481, 3 N.E. 357 (x88S).GIn Society of Perun v. Cleveland, 43 Ohio St. 481, 3 N.E. 357 (S885), citedsupra note 4, the court recognized a de facto corporation upon the filing of the articlesfor the purposes of acquiring and conveying property, holding the members immune frompersonal liability where the attack was collateral."Powers v. Hazelton & Letonia Ry. Co., 33 Ohio St. 429 (1878)5 State ex rel. v.Insurance Co., 49 Ohio St. 440, 31 N.E. 658, 34 Am. St. Rep. 573, 16 L.R.A. 611(1892); Queen City Telephone Co. v. City of Cincinnati, 73 Ohio St. 64, 76 N.E. 5o5,50 W. L. B. 430, 3 Ohio L. Rep. 465, 5 Ohio C.C. (N.S.) 411, 17 Ohio C.D. 385, x5 OhioDec. (N.P.) 43, 2 Ohio N.P. (N.S.) 55, 49 W.L.B. 177 (19o5); Parkside CemeteryAssn. v. Cleveland, B. & G-L. Traction Co., 93 Ohio St. x61, s z N.E. S96, 6o W.L.B.464 (1gs). In syllabus z of the latter case the court declared that the statutory require-ments dealing with subscriptions of stock, paid in capital, notification of stock subscription,and election of directors were all mandatory and therefore conditions precedent to incor-poration.231 Fed. 95o, 2zz Fed. 967 (1916)."The Insurance case, cited supra note 6, turned upon the question of whether theInsurance Company was "doing business" in Ohio and not upon its corporate existence.The exercising of the right of eminent domain was the question involved in the Cemeterycase, cited supra note 6, and as this right has been consistently denied until further stepstoward incorporation have been taken, the case should not stand for lack of corporateexistence upon filing of the articles.0Ohio G.C. sec. 8627.io Kardo v. Adams, 231 Fed. 95o, at page 963.' Garwood et al. v. The Great Western Oil Co., i Ohio App. 96 (i919); Henneganv. Nunner et al., z5 Ohio N.P. (N.S.) z5 (i9z4)."aSupra note ii.NOTES AND COMMENTS 73court held that the failure to certify in writing to the secretary of statewhen ten per cent of the capital stock was paid as required by Ohio G.C.sec. 8633, then operative, did not make the members of the corporationliable as individuals or partners, but that a de facto corporation existed.In the Hennegan case"' a de facto corporation was declared to exist eventhough the only steps taken by the incorporators were the filing of thearticles, their subscription to the stock, and investment of their property.This decision is in line with many cases in other states holding theincorporators and subscribers to the stock immune from personal liabilityafter the filing of the articles and subscription to the stock.'" Thus by1927, when the former corporation act was superseded by the GeneralCorporation Act of 1927,'^ the Ohio decisions offered a fair degree ofcertainty. It could then be said that a corporation came into existencefor the purposes of further organization of the corporation upon thefiling of the articles, 4 but not for the purpose of exercising the rightof eminent domain.' 5 And at least one court had recognized a de factocorporation upon the filing of the articles and subscription to the capitalstock."It was not until 193 1, in the case of Beck v. Stimmel," that an Ohiocourt had an opportunity to apply the de facto doctrine where the onlystep toward incorporation was the filing of the articles of incorporation.Although it recognized corporate existence upon the filing of articles,the court held the incorporators liable as joint enterprisers or partners fornegligence in the maintenance of an unlighted and unguarded elevatorshaft. In saying that "the incorporators have no authority to carry onbusiness in the corporate name until the corporation is legally com-pleted,"'" the court has in effect outlawed the de facto defense by makingsections 8623-I1 and 8623-13 of the Ohio General Code, which relateto the election of directors and payment of capital,' 9 mandatory conditionsprecedent to the right to transact business. It would appear that Sectionn0b'upra note ii.'See 5o A.L.R. 103o. The Garwood case, cited supra II, contains a good statement.,f the de facto doctrine in the syllabus: "A de facto corporation exists where there hasbeen an attempt to incorporate a corporation which the law authorizes to be formed, thealsociate3 are acting in good faith, and there has been a user of powers which such acorporation would possess.L3 iI2 Ohio Laws 9." The Glass Coating Co. v. Clark, xiS Ohio St. io, x6o N.E. 460 (i9z8).' Powers v. Hazelton & Letonia Ry. Co., cited supra, note 6 Queen City TelephoneCo. v. City of Cincinnati, cited supra, note 6; Parkside Cemetery Assn. v. Cleveland,B. & G-L. Traction Co., cited supra, note 6.', Hennegan v. Nunner, cited supra, note I I."7Beck v. Stimmel, 39 Ohio App. 5IO, 177 N.E. 920, 35 Ohio L. Rep. i88, 1o OhioL. Ab,. 729, 27 Ohio N.P. (N.S.) 454 (1935).1>Id. at 553.' Oso G.C. sec. 86Z3-1I provides: "When subscriptions have been received in anamount at least equal to the capital stated in the articles as that with which the corpora-74 LAW JOURNAL - DECEMBER, 19408623-7 was interpreted by the court to mean that filing brought incorporate existence for the purpose of further organization of the cor-poration but not for the transaction of business. But unless Sections8623-II and 8623-I 3 are considered mandatory, corporate existencefor the transaction of business is recognized upon compliance with Section8623-7; and the statements in the Kardo, Henne5gan, and Garwoodcases were to the effect that compliance with all of these sections wasnot a condition precedent to the transaction of business. Although Section8623-13 states that a corporation shall not commence business untilpayment of the stated capital, this section is less of a mandatory naturewhen read with Section 8623-121, which imposes statutory liabilityon the directors for business transacted before stated capital is paid in. 0The latter section is clear in insuring the validity of transactions duringthis period. It is suggested that the court might, by analogy, haveimposed the statutory liability under Section 8623-121 upon the incor-porators instead of holding them liable as partners. The failure of thecourt to mention Section 8623-121 in its decision may indicate that itbelieved this section limited in its application to directors. Assumingthis to be true, it is suggested that Sections 8623-13 and 8623-121, byimposing statutory liability upon the directors, do not deny the defenseof de facto existence to incorporators and subscribers to the stock in aproper case. There is frequently informal corporate action by the incor-porators before a board is chosen. The holding in the Beck case is madethe more confused by the court's failure to make reference to a singlecase.It is doubtful that the amendment to Section 8623-117, making thefiling conclusive evidence of incorporation when attacked collaterally,wif have any effect on the holding of the Beck case. That court wouldprobably have made the same decision under the amended statute,inasmuch as corporate existence was recognized for some purposes inits decision. If we assume that the effect of the amendment is to changetion will begin business, the incorporators or a majority of them shall give ten days noticeby mail to shareholders unless such notice be waived by the shareholders, to meet at suchtime and place as the notice designates for the purpose of adopting regulations, electinga board of directors and transacting any other business. The shareholders shall meet atthe time and place designated, and adopt a code of regulations and elect a board ofdirectors."OHso G.C. sec. 86Z3-3 reads: "No corporation shall commence business until theamount of capital with which it will commence business has been paid in."' Oiso G.C. sec. 86z3-1zx reads: "If any corporation shall commence businessbefore there has been paid in the amount of capital specified in its articles as the amountof capital with which it will begin business, no corporate transaction shall be invalidatedthereby, but the directors participating therein shall be jointly and severally liable forthe debts of the corporation up to an amount not exceeding in the aggregate the amountof capital so specified in the articles until the amount of capital so specified has beenpaid in."NOTES AND COMMENTS 75the law as found in the Beck case, it must eliminate all collateralattacks after the filing of the articles (with the exception of those directedagainst the directors under 8623-121). This would render obsolete thede facto doctrine as a defense to personal liability. It is not improbablethat the cases in the future may follow any one of four different ap-proaches to this problem. (I) The Beck case may govern, the courtrecognizing corporate existence for the purposes of further organizationof the company such as accepting subscriptions and electing directors, butrequiring compliance with Section 8623-I1 and/or Section 8623-13before granting immunity from personal liability to incorporators. (2)The court may turn to the statement in the Kardo case, recognizing ade facto corporation with its corresponding right to transact businessin an informal manner upon the filing of the articles of incorporation.(3) The court may treat incorporators as directors by applying, byanalogy, the statutory liability found in Section 8623-121. (4) Thecourt may interpret Section 8623-117 as prohibiting collateral attackagainst incorporators after the filing of the articles, thereby making ade facto defense unnecessary.D. A. W.CORPORATIONS - RECORDS -RIGHTS OF SHAREHOLDER TOINSPECT AND TO COMPEL THEIR PRODUCTIONWITHIN THE STATEI. DOMESTIC CORPORATIONSOne Cornell, a stockholder of the Nestle Le Mur Company, an Ohiocorporation, wanted to inspect the corporation's books and records. Hisrequest to inspect the books was granted by the corporation and he wastold he could go to the New York office of the corporation at anyreasonable time to do so. But the corporation refused to disrupt itsbusiness organization by bringing the books into Ohio as he had re-quested.Cornell filed a petition asking for a mandatory injunction requiringthe Nestle Le Mur Company to bring all its records to Ohio for hisexamination. Upon trial the prayer for an injunction was granted.The defendant appealed.' The court held that while it possessed thepower to compel an Ohio corporation to bring its books of account andrecords into the state for purposes of examination by a stockholder,' the'Cornell v. Nestle Le Mur Co., Ohio App. i, 29 N.E. (2d) 16z (194o)."ld. at 4. The court relied on the case of Frank v. Nat'l Rubber Mach. Co., zzOhio L. Abs. S3 (1936), as establishing its power to compel production of the booksof account and records. While that case decided only that the corporation had not shownthat plaintiff stockholder's request for inspection was unreasonable or for an improperpurpose, the assumption of this court that it did have authority to compel production

Corporations De Facto Under the Ohio Act -- Liability of Incorporators

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Corporations De Facto Under the Ohio Act -- Liability of Incorporators

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