same sense, at least, apply to corporate taxation, which the State has the undoubted right to impose in return for the unusual rights which it confers upon corporations, as distinguished from individuals or unincorporated aggregations of individuals.

These suggestions, so far as they have been made, apply to domestic business corporations. The taxation of foreign corporations presents other difficulties, which could probably be met upon some similar line of accurate computation.

The elements, then, of a correct basis for the taxation of domestic business corporations, to which I have invited your consideration, may be briefly summarized as follows:

I. Real property owned by corporations shall be locally assessed and taxed, the same as the real property of individuals.

2.

Personal property of corporations, permanently located in a given civil division of the State, shall be locally taxed, the same as the personal property of individuals.

3. Transient personal property of corporations shall be taxed by the central taxing power of the State as a whole.

4. The State shall receive, as a tax, a small percentage of the excess of the actual net profits earned by corporations over and above a fixed percentage to be first retained by the corporation.

5. In determining the actual net profits of a corporation and their percentages, such profits shall be determined as they are in any other commercial business, irrespective of the capital stock of the company, and their percentage shall be based upon their relation to the fair market value of all the tangible property assets of the corporation, such profits and value to be annually determined.

6. A fixed average of profits for periods of five or ten years shall be secured to the corporation by the State

refunding to such corporations any excess that it may have received during such periods above such average.

The President:

I now have the pleasure of introducing to you Prof. Charles F. Bostwick, of the University Law School, New York city, who will read a paper on "Corporate Finance in Law."

CORPORATE FINANCE IN LAW.

The title given this paper is of too comprehensive import, since I intend to speak only of the financiering of corporations at the time of their organization, and of such consequences of the commonly adopted methods as may seem interesting to the public.

Various fields of activity have from time to time been explored to suddenly acquire riches, and at one time operations in Wall Street were considered to be the most opportune field. But, of late, the vast fortunes have been made, not by dealing in the stocks and securities of existing corporations, but by transforming companies into trusts, and then the unloading on the "outsiders" by the "insiders of the securities thus obtained. The "insiders" are those who know to a penny the real value of the transferred property; the "outsiders' are those who know only onehalf, or nothing, of the real value of the transferred property, but who are assured by the "insiders" that the intangible property-incapable of exact valuation is worth enough to make the investment profitable. These "outsiders" are commonly called the "public."

Even the trust companies have caught this fever and have been perverted into promoting companies. The underwriting of industrial securities and the furnishing of new enterprises with money needed for their development has caused the downfall of more than one prominent trust company within a few weeks.

In days gone by, corporations were formed with an authorized capital, which was about equal to the real or supposed value of the tangible property; and the good-will, or earning power, was not taken largely into account. course, an exception to this, and a proper exception, was that of railroads.

Of

The investor in ordinary corporate securities did not rely for security on the probable success of the borrower in business, any more than an individual lender to-day relies on the profitableness of the profession or trade in which the mortgagor is engaged.

This was not true of railroads. The investors and creditors of a railroad company still depend, and always have depended for much of their security, not alone upon property considered as such, but upon the business for which the company was organized. As a matter of fact, the whole property of a railway company, considered simply as real estate and rolling stock, is worth but a fraction of the amount for which it is mortgaged, to say nothing of its preferred and common stock issues.

The law, requiring that stockholders should be liable when all the stock, issued and outstanding, has not been paid for, made corporators careful to see that the property taken over was worth approximately the value of the stock issued, but, as the law developed and progressed, and, as it became patent that they could issue, with safety, stocks for good-will, immediate advantage was taken by corporate financiers of this circumstance. In nearly all the States of the Union it is provided that stock must be issued either for money or for property (and, in some instances, services) until to-day we find the law pretty much as follows:

In New York, no corporation may issue either stock or bonds, except for money, labor done, or for property, and

no stock may be issued for less than its par value, nor bonds, for less than their fair market value. The law is settled that to charge a holder of stock, issued for the purchase of property, individually, for the debts of the company, it is not enough to prove that the property has been purchased at an over-valuation, through a mere mistake or error of judgment on the part of the directors, but it must be shown that the purchase was in bad faith and to evade the statute. The transaction may be impeached for fraud, but not for error of judgment or mistaken views of the value of the property, inasmuch as good faith and the exercise of an honest judgment is all that is required. A deliberate and advised over-valuation of the property thus purchased is a fraud upon the law and a violation of the condition upon which the exemption of stockholders from liability, under the provisions of the statute, is made to depend. It is equally true that the fraud is consummated by the issue of stock as full paid, which has not been fully paid for in value by the property for which it is issued, and it does not depend upon any fraudulent intention, other than that which is evidenced by the act of knowingly issuing stock for property to an amount in excess of its value. The courts have held that all that is necessary is to prove two facts; first, that the stock issued exceed in amount the value of the property in exchange for which it was issued, and, second, that the directors deliberately, and with knowledge of the real value of the property, over-valued it and paid in stock for it, an amount which they knew was in excess of its actual value. Of course, the value must be determined, in any action in which the question arises, upon such evidence as may be given, having respect to the circumstances and the nature of the property, and scienter. Guilty action of the directors may be proved either directly, or inferred from circumstances.

The real question, therefore, in each case is, whether the property was taken at a higher valuation for a fraudulent purpose, with the intention of evading the provisions of the statute.

Whether the form the transaction takes is a mere sham, intended as a violation of the statute, is, in all cases, a question of fact for the determination of the jury; such is the condition of the law in the State of New York.

In New Jersey the law is said, by high authority, to be quite the same as in New York— but in my judgment, it is not exactly the same. In New Jersey a company may purchase property and issue stock to the amount of the value thereof, in payment therefor, and, in the absence of actual fraud in the transaction, the judgment of the directors, as to the value of the property purchased, shall be conclusive. The precise meaning of the words "the judgment of the board of directors, in the absence of fraud, shall be conclusive," has not yet been passed upon by the courts, certainly not in a case where there has been a simple mistake or error of judgment and no actual fraud, and where the discrepancy has not been so great as to amount to a legal fraud ipso facto.

Delaware has copied the provision of the New Jersey statute, and provides that where stock is issued for labor done or personal property, real estate or leases thereof, in the absence of fraud in the transaction, the judgment of directors, as to the value, shall be conclusive, but, by its Constitution, it is also provided that neither labor nor property shall be received in payment of stock at a greater price than the actual value at the time the labor was done or property delivered or title acquired.

Thus, it will be seen that if good-will can be fairly appraised by the board of directors, as worth a given sum and they are honest in their belief, in New York and New