Story Case

The Union Insurance Company was incorporated under the laws of the state of Massachusetts. The general incorporating laws required the holders of the corporate stock to pay fifty per cent of their subscription within sixty days after the first meeting of the company. A quo warranto proceeding was brought by the state, contesting the right of the Union Insurance Company to exist as a corporaton, on the ground that more than sixty days had passed since the first meeting of the company, and yet, the required amount of capital had not been paid. Under these circumstances, what should the decision of the Court be?

Ruling Court Case. People Vs. Montecito Water Company, Volume 97 California Reports, Page 276

The attorney general of California brought an action in the name of the people to queston the right of the Montecito Water Company to be a corporation. The state statute required that the incorporators sign and acknowledge the articles of) incorporation. In this case, all five of the incorporators had signed the articles, but only four had acknowledged them. It was urged that this defect was not substantial, but that the requirements had been sufficiently met so that the charter was valid even against direct attack by the state.

The opinion of the Court was delivered by Mr. Justice Temple. The Court agreed that substantial compliance was all that was necessary, but pointed out that the total failure to meet a requirement could not be compared with meeting it in a somewhat irregular way. Here the Court said: "As this is an express condition, precedent to a valid incorporation, it is not of consequence to the Court whether it be a wise or necessary requirement or not. If the acknowledgement can be dispensed with, as to one, why not as to two or three, or all?"

Since incorporation is a grant of a privilege from the state, the state is entitled to preserve the value of that privilege. Under a general law, the franchise may be acquired only if the conditions named by the law are complied with. Since that had not been done here, it was adjudged that the Montecito Water Company be ousted of all rights to be a corporation. Judgment was given for the state.

Ruling Law. Story Case Answer

In providing for the creation of a corporation, the state stipulates certain terms and conditions which must be complied with by those who would incorporate. If compliance with such terms and conditions is made absolutely necessary, they are known as mandatory provisions or requirements. Unless these terms and conditions are strictly satisfied, no corporation in law will result from the efforts of the incorporators. However, if a colorable effort to comply has been made, a corporation de facto, or a corporation in fact, will be the result. Such an organization may claim all the rights and privileges of a corporation de jure, or corporation in law, so long as the state does not interfere. The state may always institute quo warranto, - by what right, - proceedings against such a corporation to determine by what right it exercises the right and privileges of a corporation; and if it is found that all mandatory requirements have not been complied with, the organization may be dissolved. In the Story Case, the organization was required to show that one-half of its stock subscription had been paid in within sixty days after the first meeting. Failing to show that this requirement had been satisfied, the state had the right to oust it from the exercise of its corporate privileges.