Story Case

The Highland Steel Company was planning to erect a new plant near Chicago, on a tract of land formerly unused, and not very valuable. The directors knew that a town would grow up around the plant, so they invested the money of the company in options on the surrounding land for quite a distance, besides buying outright a sufficient quantity for the mill to be sufficient for twenty-five years' growth. Some of the options they disposed of at a large profit after the construction of the mill was begun, others, they took up for the company and improved with stores and business buildings. Some of the stores they operated, through agents of the company, others were leased. They also built a school for the children of their workmen, and hired the teachers. They had secured an option on the land of Carl Hengsturm at a very low figure, and, since this land was now in the very center of the growing town, they desired to take up the option. Hengsturm refused to complete the sale, maintaining that the whole scheme was beyond the power of the corporation, because it had nothing to do with the steel business. The directors answered that it had produced a great profit, upon which the manufacture of steel could be carried on, and that it was an inducement to the laborers in the works to have a town with stores and a school.

Do these advantages to the corporation show that it had the power to make the investments, as an incident to the construction of its plant?

Ruling Court Case. Hooper Vs. Jacksonville Railway And Navigation Co., Volume 160 United States Reports, Page 514

Mary J. Hooper and her husband, Henry H. Hooper, brought this action against the Jacksonville Railway and Navigation Co. to recover the rent due on a lease, for a term of two years, of land and a building known as the "San Diego Hotel.", The company made the defense that it had no power to make the lease of a hotel and that, since the plaintiffs knew it was a railroad company, they can not hold it upon a contract, which was a departure from the purposes of the corporation.

Mr. Justice Shiras delivered the opinion of the Court. He said: "Although the power of companies to contract is to be deemed restricted to the general purposes for which they are formed, yet there are many transactions which are incidental, or auxiliary, to its main business, or which may become useful in the care and management of the property which it holds. Courts may well be astute in dealing with the efforts of corporations to usurp powers not granted to them, or to stretch their lawful franchises against the interests of the public. But we think the present case falls within the principle, laid down in former cases, that where the transaction is suitable to promote the success of the corporation, and is undertaken, not as a distinct business, but in order to more profitably carry on the main business, then it will be upheld. "Where a railroad was engaged in operating a coal mine, it has been held that the test should be whether the real object of the mine was to supply the railroad with cheaper fuel, and dispose of the surplus in the market, or whether the principal object was to make a profit in the business of selling coal. If the latter, then the capital is being diverted in a way which the shareholders have not authorized, and the corporation is exercising powers not permitted to it by the state." It was decided, in this case, that it was a reasonable incident to the railroad business to conduct a hotel at its terminus. The absence of any town made it necessary, for the convenience of the passengers, to have some provision for their accommodation, and the location upon a beach, of a high-grade hotel, would enable the railroad to create traffic which it would not otherwise secure. Therefore, the lease was within the power of the railroad company, and it was bound to perform the covenants in it and to pay the rent. Judgment was given for the plaintiffs, Mary and Henry Hooper.

Ruling Law. Story Case Answer

When a corporation is given power to conduct a certain business, this means that it may do everything that is customarily, and in the common understanding, a part of that business. It is not necessary to say in a charter for a railroad company that it shall have power to hire engineers and conductors and brakemen, to buy a right-of-way, to lay a track, to erect signals, to order time tables and tickets from the printer, or to supply ice water in its cars. Those things are all included in the words "own and operate a railroad" Thus, the words, "to be a body corporate," mean that the company is given power to make contracts, to have a seal, to sue and be sued as an entity, to have by-laws and officers, and all the other incidents of corporate existence. It is always a question of the facts of the particular case, to determine the extent of the powers of a given corporation. The words of the general law, or of the charter, must read in their ordinary meaning, and the corporation can do whatever those words allow it to do and no more. It can not engage in any business which is not included in its charter or statutory powers, no matter how profitable.

It is no part of the steel business to develop a city, or to speculate in land. The contention of the company, in the Story Case, is incorrect. The company could provide for its own needs, and, if necessary, could house its workers, but it has no power to take the capital subscribed for one purpose and use it for another. .When it built stores, which other people would have built; when it opened a school, that the town would, otherwise, have started; when it bought land, merely to sell it at a profit, it was engaging in a distinct and unpermitted business. It is no answer, to say that the corporation is not injured, or that the workmen be benefited. The transactions are not usual, nor are they made necessary by any emergency. The Court will not aid in carrying them out, and Hengsturm is not required to complete his contract.