Section 7: Partnerships and Stock Companies

1. A partnership (societas sive contractus societatis) is a relation based upon a contract by which two or more persons agree to carry on a business, trade, occupation or profession in common with a view to profit. The partners collectively are called a firm and carry on business under the firm name.¹

¹ Slater, A Manual of Moral Theology, Vol. I, p. 548.

a) For a partnership contract to be licit and valid, it is necessary, first of all, that the object or purpose for which it is entered into be lawful; second, that each partner should contribute his share to the capital invested; third, that, if actively engaged in the business, he should do his part in making it successful and, fourth, that he receive his part of the profits, or bear his share of the losses, according as the venture proves prosperous or the reverse.²

² St. Thomas, Summa Theol., 2a 2ae, qu. 78, art. 2, ad 5.—Cfr. P. J. Gury, S. J., Comp. Theol. Mor., Vol. I, n. 860: “Every partnership ought to be formed concerning a lawful and honorable matter and also for the common good of the contracting parties. Each partner ought to contribute to the partnership money or merchandise or industry or work. Thus it is according to every law. A partnership contract is a legitimate mode of conducting business. This is evident from the civil laws of all nations, from the universal usage of all peoples, and from natural law; for it is no less lawful for several persons jointly than for individuals to make profit from their own property, provided due equality is observed. The required conditions are: 1. That there be equality, that is, a division of profit in proportion to the property invested; 2. That the partnership be entered into for a definite time and that before then it not be lawful to reclaim one’s own; 3. That the risk to the principal belong to the owner, unless an agreement to the contrary has been made; 4. That each person bear the burden of losses and expenses which arise on account of the partnership; 5. That each person employ the same diligence in the partnership as in private business.”

Any losses caused to the firm by negligence or fraud on the part of any one of the partners, must be borne by the latter.

An illegal contract made by one partner will not bind the others, for all parties are supposed to know and obey the law, and an illegal bargain cannot be enforced.

A partnership contract expires at the end of the period stipulated therein, or by the destruction of the object for which it was made, or by the mutual consent of the partners, or by a unilateral declaration of one or more of them, or by the attainment of the purpose for which it was established, or when it is ascertained that its objects are impossible, or, finally, by the natural or civil death of one of the partners. The cessation of a partnership does not, however, end its outstanding obligations, which, on the contrary, must be fully satisfied if possible.

The death of a partner causes a dissolution of the partnership. Nor can executors or administrators succeed to his place; if they do so, they assume an unpleasant personal responsibility. To relieve them from this, some States have passed statutes permitting surviving partners to act together under the direction of the court having charge of the estate.³

³ Gury, op. cit., I, n. 861.—Bolles, Putnam’s Handy Law Book, pp. 198 sqq.

b) A species of partnership which formed a bone of contention among moralists for a long time, is that known as triple contract (contractus societatis triplex sive contractus trinus). It is defined by St. Alphonsus as a contract by which a man entrusts his money to a partner upon condition that, no matter how the undertaking may result, he receive back the entire sum invested, together with a certain profit, which is less than may reasonably be expected. In other words, it is a contract to which are joined two other contracts, one insuring against risk and the other assuring a profit. The whole agreement is based on the desire to make a small but assured profit.⁴ For instance, A enters into a partnership contract (societas) with B and contributes $1000 to the business on condition that he may demand his capital back at any time (assecuratio sortis). He agrees to be satisfied with six per cent. on his investment, even though the actual profits may be much larger (emptio lucri).⁵ This form of contract was attacked by Soto and some other theologians because they regarded it as “veiled usury” (*usura palliata). Since the mitigation of the Church’s attitude on interest-taking the contractus trinus can no longer be condemned, provided, of course, due proportion is observed between investment and profit.⁶ The contractus trinus differs from ordinary loan contracts only in this that it refers to a certain definite business and that the profit is attributable largely to the money invested.⁷

⁴ St. Alphonsus, Theol. Mor., l. III, n. 908 (ed. Gaudé, II, 310 sqq.): “A triple contract is a contract by which one who contributes money agrees with another partner that, whatever may happen, the whole sum shall be restored to him with a certain gain, yet a smaller gain than he could probably have hoped for; or it is a partnership contract to which two other contracts are joined, namely, insurance of the principal and insurance of the gain, or the sale of the hope of a greater gain for a smaller gain that is certain and insured.”

⁵ J. E. Pruner, Kath. Moraltheologie, Vol. II, 3rd ed., p. 146; IDEM, Lehre vom Recht, Vol. I, p. 462.

⁶ It is thus that we must interpret the prohibition contained in the “Detestabilis avaritiae” of Sixtus V (1586); cfr. Göpfert, Moraltheol., Vol. II, 7th ed., p. 179; P. Cleary, The Church and Usury, pp. 129 sqq.

⁷ Göpfert, ibid. Cfr. A. Lehmkuhl, S. J., Theol. Mor., Vol. I, p. 749.

2. There are various kinds of societies or associations based upon partnership contracts, more or less clearly differentiated by their objects and their mode of organization.

a) A partnership consisting of a number of persons associated for mutual gain (societas quaestuaria), without a specific agreement as to the manner in which the expected profits are to be made, may be of two kinds: (α) one in which all the partners have an equal investment and a claim to an equal share in the profits, or (β) one in which the shares invested, and consequently the division of the profits, are unequal.

b) Partnerships or associations in which all the members contribute capital only, or in which some of the members contribute their labor in lieu of capital. The former may be either limited or unlimited, public or anonymous, according as each partner is liable for the debts of the association with the whole of his fortune or not. The latter are commonly known as c) Stock companies or corporations (associationes anonymae) because in them the capital invested is represented by shares (stocks), held by different persons, each of whom is liable for the debts of the corporation only in proportion to the amount of his shares. Under the natural law a company of this kind can only be formed with an express declaration that the liability of its share-holders is limited, in order that all those who enter into business relations with it may be aware of the risk involved.

α) Stock companies have their advantages as well as their disadvantages and dangers. The detachment of capital from personal responsibility is morally dangerous and may be permitted only in consideration of the fact that unlimited liability might easily involve serious disadvantages to many. Then there is the danger that the capital invested in a stock company, in view of the very slight influence exercised upon the management by the individual share-holders, will be improperly administered and that the company’s real aim is often obscured by a selfish desire for profits. Stock companies, furthermore, easily lend themselves to fraudulent practices, in which inexperienced or credulous investors may be robbed of their money. We need only remind our readers of the vast sums lost in this country of late years through stock companies organized to exploit real or fictitious oil wells. Stock companies are also used by capitalistic manipulators on the grain and stock exchanges. Finally, they are apt to be employed by large manufacturers and merchants as means to ruin smaller competitors and thus further the proletarization of large numbers of hitherto independent business men.⁸

⁸ V. Cathrein, S. J., Moralphilosophie, Vol. II, 4th ed., pp. 372 sq.; Göpfert, Moraltheol., Vol. II, 7th ed., pp. 180 sq.

Stock companies, says a recent writer, enable all who have a little money to take part in risky and fraudulent business ventures; they make it easy for dishonest speculators to exploit the credulity of the public; with their numerous, easily transferable and fluctuating shares they furnish a convenient and welcome means of betting, and have thereby prepared the way for excessive stock gambling. These disadvantages began to appear as early as the seventeenth century, that is, at the very start of the new development, and since then the history of stock gambling is intimately bound up with the history of stock companies.⁹

⁹ Handwörterbuch der Staatswissenschaften, 2nd ed., Jena 1901, Vol. I, pp. 181 sqq.

It should be noted, however, that the dividends paid by all the stock companies of a particular country during a definite period are not nearly as high as Socialist writers allege.¹⁰

¹⁰ Ibid., pp. 198 sq., 210 sqq.

β) Against these disadvantages stock companies have some advantages, which should not be overlooked. Thus they have played an indispensable rôle in the development of railroads, canals, tunnels, mines, and other important means of modern economic development. Hence it may safely be said that if the disadvantages and dan- gers that spring from their very nature are minimized by rational limitations and supervision on the part of the public authorities, stock companies may be useful factors in our economic life. Fr. Cathrein thinks that they are indispensable until men will discover a new form of association which offers all the advantages of limited liability without its disadvantages.¹¹

¹¹ Moralphilosophie, Vol. II, 5th ed., p. 384.

d) A corporation is a moral entity, a fictitious person with rights of its own, distinct from the rights of the physical persons who compose it. More specifically, in modern commercial life it is “an artificial person created by law, consisting of one or more natural persons united in one body under such grants as secure a succession of members without changing the identity of the body and empowered to transact business of some designated form or nature like a natural person.” The State, of course, has the right to exercise control over such societies, and they are subject to all just laws which it may make in their regard.¹²

¹² Slater, A Manual of Moral Theol., Vol. I, p. 352.

The statutes regulating corporations are so numerous and complicated that a whole class of lawyers devotes itself entirely to their study and application. These attorneys, known as “corporation lawyers,” are often hired chiefly for the purpose of aiding their clients in evading the law.¹³ One of the worst features connected with stock com- panies and corporations is the practice of stock-watering. By this term is meant overcapitalization in excess of the proper valuation of a business. It is mostly practiced by businesses that are not subject to normal competition. What is the measure of overcapitalization? According to Dr. Ryan, when the face value of its securities is greater than the money put into the business plus the subsequent enhancement in the value of its land. In brief, the proper measure of capitalization is cost—either the original cost, or the present cost of reproducing the business.

¹³ For a useful summary of the statutes regarding corporations in this country see Putnam’s Handy Law Book for the Layman, pp. 71–101.

“Stock-watering can become an instrument of unjust gains in two ways: first, through fraud inflicted upon some of the investors; second, through the imposition of exorbitant prices upon the consumers. . . . If stock is sold in excess of the earning power of the concern, those stockholders who fail to obtain the ordinary rate of interest on their money are unjustly treated in so far as they have been deceived. And those officers or members of the corporation who have profited by the deception of and injury to these stockholders, are the recipients of unjust gains.”¹⁴ The consumer also is often injured by stock-watering. “The presence of a large quantity of fictitious capital whose owners are calling for dividends, sometimes constitutes a special force impelling the imposition of higher prices and charges. . . . The U. S. Industrial Commission found that, as regards railroads, ‘in the long run excessive capitalization tends to keep rates high; conservative capitalization tends to make rates low.’ . . . When prices or charges are made high enough to provide returns on fictitious capital, the consumer is treated unjustly. . . . The consumers may justly be required to pay for the use and benefit of actual pro- ductive goods; but it is not just that they should be compelled to pay for the supposed use of a capital that has no concrete reality. The stockholders of the monopolistic corporation which imposes upon the consumers exorbitant prices or charges through the instrumentality of inflated capitalization, can become guilty of this injustice in two ways: by promoting the improper capitalization, and by getting dividends on stock for which they have not given a fair equivalent. As a rule the greater part of such guilt and responsibility rests upon certain special and powerful groups among the stockholders.”¹⁵

¹⁴ J. A. Ryan, Distributive Justice, p. 281.

¹⁵ Distributive Justice, pp. 282 sqq.

Nevertheless, Dr. Ryan, whom we have quoted, does not think that the State is obliged to protect, or even justified in protecting, the innocent victims of stock-watering: first, because it is impossible to distinguish the “innocent” holders from those who were fully acquainted with the questionable and speculative nature of the stock at the time it came into their possession; second, because the civil law has never formally recognized any such claim on the part of the innocent investors nor any such obligation on the part of itself; third, because the innocent investors are not the only persons whose rights are involved; the main injury falls upon the consumers.” But the State may and should intervene to secure fair charges for the consumers, basing them upon the capital actually invested in public utility corporations (for it is they that are mostly concerned) and used in the business of public service.¹⁶

¹⁶ Ibid., pp. 286 sqq.

In some States, e. g., Massachusetts, there are anti-stock-watering laws, which bind at least public service corporations, and there is a legal limit to the amount payable in dividends, usually eight per cent. Assuming that such laws are just, Fr. Slater says: “It may be that a larger percentage than is allowed by law to be paid in dividends would be the fruit of extortion and unjust dealing on the part of the corporation, and if this be so, the shareholders will have no right to the excess which is the fruit of injustice. Such excess is due to those who were wronged and from whom it was extorted, and it must be restored to them. Moreover, if the limit in the amount of the dividends allowed by law was accepted by the corporation and formed part of the conditions of incorporation, it must of course be adhered to like all other contracts lawfully entered into. If, however, the above expedients [such as paying the stockholders so-called stock dividends consisting of an outright bonus or new shares of stock; retirement of bonds in favor of stocks, etc.]¹⁷ are not productive of injustice or hardship to the public or to individuals, whether belonging to the corporation or not, but are merely illegal, the question for the moralist will be: What is the obligatory force of the laws which prohibit them? This will chiefly depend upon the intention of the legislator, and as modern legislators as a rule have no intention of making their rules for the individual conscience, we shall be safe in saying that they do not bind under pain of sin.”¹⁸

¹⁷ On such expedients see W. Z. Ripley, Trusts, Pools, and Corporations, N. Y. 1905, pp. 139 sqq.

¹⁸ T. Slater, S. J., Questions of Moral Theology, N. Y. 1915, pp. 170 sqq.

READINGS.—Sporer-Bierbaum, Theol. Mor., Vol. II, 2nd ed., pp. 863 sqq.—St. Alphonsus, Theol. Mor., l. III, n. 904–910 (ed. Gaudé, II, 305 sqq.).—V. Cathrein, S. J., Moralphilosophie, Vol. II, 5th ed., pp. 383 sqq.—Theo. Meyer, Instit. Juris Naturalis, Vol. II, pp. 234–239.—J. Schwane, Die theol. Lehre über die Verträge, pp. 167 sqq.—J. E. Pruner, Lehre vom Recht, Vol. I, pp. 455 sqq.—H. Noldin, S. J., Summa Theol. Mor., Vol. II, pp. 627.— J. A. Ryan, Distributive Justice, N. Y. 1916, pp. 279–290.—T. Slater, S. J., Questions of Moral Theology, N. Y. 1915, Chapter X: “The Moral Aspects of Commercial Stock-watering,” pp. 159–175.