Sidebilder
PDF
ePub

respect was created, either by the state or by the amendment attempted to be made by two-thirds of the stockholders. What the Legislature attempted to do was to confer the power upon two-thirds of the stockholders to amend the articles in any particular (restricted only so as not to create a personal or individual liability of the stockholders nor alter the alleged purposes of the corporation, nor diminish the capital stock below a certain amount), even to the extent of changing the very contract existing among the stockholders themselves and by which their reciprocal rights became vested and defined; and what two-thirds of the stockholders did by way of amendment was the making of such a change. What they did was not an alteration or modification of their relation to the state or the doing of something for its benefit, but was an attempt to compel contributions of additional capital to the corporation for the benefit of the corporation itself, and for mere corporate purposes. When the Legislature by law declares that corporators of existing corporations shall individually be liable to creditors for future debts, or their stock shall be liable therefor, or their liability shall be proportional to the extent of stock held by them, such legislation is something which does not affect some mere relation existing among the stockholders themselves, but directly affects their relation to the state, and directly relates to the immunity which the state itself had theretofore granted to the corporators. Such alteration creates a right in favor of creditors which could be enforced by them against the corporators. Of course, with such an alteration of the contract, and with such inceased burdens imposed upon the corporators, they would not be compelled to continue the corporate existence, but they would have the right to dissolve the corporation and to have its assets distributed. Whether a majority of the stockholders could accept such an amendment or alteration, though it relates alone to the contract existing between the stockholders and the state, so as to bind a dissenting minority, we need not here consider. The authorities generally are to the effect that a majority of the stockholders are not authorized to to accept a fundamental amendment of a charter and proceed, but unanimous consent of the stockholders is necessary. They somewhat differ as to what amendments are regarded as fundamental, and what merely governmental and administrative. But authorizing the levying of assessments to obtain involuntary contributions of additional capital merely for corporate benefit and purposes is something which only affects the relation of the stockholders among themselves, and alone affects their agreement with respect to contributions of capital to the corporation. Such an amendment, therefore, stands upon a different footing. The one, where a statutory liability for the future

debts and obligations of the corporation is imposed upon the corporators, pertains to the contract existing between them and the state, which is within the power of the Legislature to alter or amend, and the other relates only to the contract existing among the corporators themselves, which the state may not materially alter or modify.

We have not been cited to any cases where the specific question before us was directly involved, except the cases of Enterprise Ditch Co. v. Moffit, 58 Neb. 642, 79 N. W. 560, 45 L. R. A. 647, 76 Am. St. Rep. 122, and Gardner v. Hope Ins. Co.. 9 R. I. 194, 11 Am. Rep. 238. In the Nebraska case, under a constitutional provision reserving to the state the right to alter from time to time and to repeal all laws relating to corporations. it was held that "the fully paid-up stock of a corporation is the personal property of the owner, and the articles of incorporation and laws of the state are elemental of the contract existing between the corporation and the owner of stock, and may not be so amended by Legislative enactment as to make the paid-up stock subject to an assessment or general or specific assessments, and forfeitable, or subject to summary sale by the corporation, for the nonpayment of such assessment." To do so, the court says, "would involve too violent an invasion of property and contract rights." This case is cited by Mr. Cook in his work on Corporations (5th Ed.), at section 497, where he approvingly states the rule, announced in that case, that "a statute which authorizes an additional assessment upon existing paid-up stock is unconstitutional." In the Rhode Island case the court seems to hold a contrary doctrine, though in that case it is not made to appear that the full-paid capital stock was made nonassessable by the original articles of incorporation, and in that respect the case may be distinguishable from the Nebraska case and the case at bar. But, conceding that the holding of the Rhode Island court is contrary to that of the Nebraska court, we think the latter is more in the line with the general principles of law as stated by the text-writers.

In the discussion of the question it has been said by counsel that the rule announced by the Nebraska court deprives the majority of the management of the corporate property and of the control of mere administrative policies, and prevents the Legislature from making needful legislation with respect thereto. We do not think so. The doctrine announced is no infringement of the exercise of such powers. Independently of the reserved power and of the legislative enactment, a majority of a corporation may determine the management of the corporate property, administer the affairs of the corporation, and control the conduct of its business. The amendment was not essential to the proper exercise of such powers. When counsel for respondent in effect concede, as they do, that

the action taken by the majority was unauthorized, but for the legislative enactment of 1903, they in effect concede that the action taken by such stockholders was something more than the exercise of mere administrative functions; and it is quite clear that the action so taken was not administrative. It was not confined to the management of the corporation, or of its property, or to the administration of its affairs; but it extended to the management of the private affairs and property of the corporators. It amounted to a compulsion of contributions for corporate purposes, and to an invasion of the agreement which the stockholders had made among themselves that no further or additional contribution should be exacted beyond the full-paid capital stock, and a fundamental change of their contract in that respect. The amount of capital which the corporators were willing and had agreed to contribute and risk in the enterprise was fundamentally as important under their contract as was the stipulation with reference to the nature of the business to be carried on by the corporation. It cannot be said that changing the nature of the corporation or the character of its business is fundamental and cannot be accomplished without the consent of all the stockholders; but another and equally important stipulation in the articles of incorporation relating to the contributions of capital for corporate purposes to be exacted from the corporate members is nonessential and nonfundamental. It must be conceded that the full-paid capital stock became the private property of the stockholder. As between himself, the corporation, and his cocorporators, he paid the full consideration therefor, and paid all that was agreed by him to be paid. To now say that the Legislature, in face of such an agreement as was here made by the corporators, may authorize a majority to compel a dissenting minority to buy it over again, not only once, but as many times as they may, in good faith, determine, by the enforcement of additional contributions of capital for mere corporate purposes, and to make a sale of their stock, resulting in a forfeiture of all their rights and equities in and to the assets of the corporation, if the unwilling members do not see fit to yield to such compulsion, is conferring a power which gives to the majority the absolute dominion over the private property of the stockholders, permits a disturbance of vested rights, and the impairment of contract obligations, within the protection of the federal Constitution.

A further argument is made by counsel that if a corporation becomes indebted when it has no funds in its treasury to discharge the indebtedness, and if the levy of an assessment such as was here attempted is not permissible, the whole of the corporate property may be sold on execution sale, and that by reason of such involuntary alienation the unwilling members, as well as all other mem

bers, are forced to part with all their holdings and equities. The argument points to matters of mere utility, not to the rights of the stockholders. Whether an execution sale of the corporate property in satisfaction of corporate debts may or may not produce a more serious result than enforcing contributions from the corporate members is beside the question. Every stockholder has a vested equity in and to the assets of the corporation. The value of his equity is dependent upon the value of corporate assets and the extent of corporate liabilities. Dependent upon such facts, the value of his equity may be much or little. But, whatever it may be, his right to participate in the distribution of the assets, when the corporate property has been sold on execution, is not disturbed, nor is he compelled to personally contribute to the payment of the corporate debts. So, if a corporation becomes insolvent, it may go into liquidation; but the individual members and stockholders are not bound to pay such indebtedness, except out of the assets. In such case a new corporation may be formed, by contribution of new capital, for the purpose of taking over the assets of the insolvent corporation and paying its debts. But it would be entirely optional with each member of the insolvent corporation whether he entered such new corporation. It can at once be seen that he cannot be compelled to do so against his will. Now, the members of the insolvent corporation could in effect accomplish the same result as could be accomplished by the formation of a new corporation and the contribution of new capital, by making voluntary contributions of new capital to the insolvent corporation. But the dissenting corporators cannot. contrary to the agreement as here made by them, be forced to make such contributions against their will, any more than they can be forced against their will into a new corporation. When, therefore, a majority seek to compel additional contributions to a corporation for corporate purposes from a dissenting minority, when by the terms of their original agreement such contributions cannot be exacted, they in effect seek to force them into a new corporation. This neither the Legislature nor a majority are authorized to do.

It may be true, as was suggested by counsel, that in many instances it may be wise and expedient for corporators to make additional contributions of capital to discharge corporate indebtedness, so as to preserve the corporate property, or to make such contributions for the successful conduct of the business. But that is something which the corporators should consider when they make their contracts. Courts are organized to enforce contracts as made, unless they contravene good morals or public policy. They cannot create new contracts, nor can they permit the parties themselves to do so without the consent of all, upon any theory that the original contract was not the most beneficial

or advantageous, or that the enterprise contemplated by the terms of the contract cannot be successfully operated under it. By their solemn agreement the parties have here defined and limited their contributions of capital to the corporation for corporate purposes. Such a fundamental and material stipulation in their contract cannot be changed by the Legislature, nor can it confer power upon a majority of the stockholders to do so without violating the federal Constitution. No one contends that the individual members of a corporation are liable for, nor are they legally bound to assume or pay, the debts or obligations of the corporation. Until the Legislature shall by law declare that such a liability is imposed, which it has not yet done, it does not lie within the power of a majority to reach into the private pockets of a dissenting minority to compel such payments, and then seek to justify such action because a greater calamity may overtake them as a result of an execution sale.

The questions as to whether, under the enactment of 1903, two-thirds of the stockholders, or a majority, under the enactment of 1905, are legally empowered to authorize a levy of assessments on full-paid capital stock against a dissenting minority when the original articles place no prohibition on the levying of assessments, or contain no stipulation on the subject, or the extent that such stockholders of corporations organized since the enactments are legally authorized to amend the articles so as to make such stock assessable, are not now before us. Confined to the question which is before us, we think the demurrer ought to have been overruled.

The judgment of the court below is therefore reversed, and the trial court directed to reinstate the case, to overrule the demurrer, to permit the defendant to answer, if it is so advised, and, pending the action, to restrain the defendant as prayed in the complaint. Costs to appellant.

MCCARTY, C. J., and FRICK. J., concur.

On Rehearing.

FRICK, J. A rehearing is requested in this case upon substantially the following grounds: It is urged that the court erred in its interpretation of the constitutional provision in which the right to alter. amend, and repeal the laws affecting corporations is reserved by the state; that the decision is inconsistent, in that it in effect authorizes a change of the laws with respect to some of the contractual rights of a corporation, while it denies this right as to others; that the court erred in holding that the right to alter and amend the Paws is limited to such matters only in wit the state is interested; and, finally, that the court erred in holding that neither the state nor the public were interested in the amendment involved in this case.

Viewing the question from the standpoint

of counsel, their argument in support of the petition for a rehearing is a learned and able exposition of that side of the question. We are not persuaded, however, that their conclusions are sound. It is urged that we are inconsistent in holding that under the reservation the state may alter or amend some of the provisions of a charter, but may not do so as to others. In our original opinion we endeavored to make clear that the charter forms the basis of a contract between the state and the corporation, as well as a contract between the corporation and the stockholders. We held that the Legislature, under the reservation, may alter or amend the contract with reference to the state and in which it is interested, but that it may not make a material or fundamental change of the contract which alone concerns the corporation and its members. Upon these premises we reached the conclusion that the attempted legislation, and the action taken by the majority of the stockholders in pursuance thereof, did not fall within the reservation. In so holding we see no inconsistency. What counsel in effect do is not pointing out any inconsistency, but is disputing the premises upon which we reached the conclusion; that is, counsel still assert that the reservation in the Constitution is so broad and illimitable that all the provisions of a charter may be altered or amended by the Legislature, regardless of their character, and whether they concern the state or merely the agreement between the corporation and its members. Among the many cases cited, and many others examined by us, we do not find any of them giving the reservation such a construction. If any one thing pertinent to the question under consideration is well settled by the authorities, it is that the power which may be exercised under the reservation is not without limit, and that there is a strong tendency in the decisions to limit the power of the Legislature to amend the charter under the reservation. We fully appreciate the difficulty in defining the extent of such power, and, while we are well aware of the conflict among the authorities in so doing, yet none of them support the contention of counsel that the extent of the power is unlimited, in the sense and to the degree contended for by them. We think the rule stated by us is supported by the great weight of authority and is founded upon well-established legal principles.

Because of counsel's deductions, we are, however, induced to enlarge somewhat upon what is said in the original opinion. We do this, not because the matter was not covered in the original opinion, but because it was not deemed necessary to fully discuss all the reasons that impelled us to the conclusion reached. The matter we shall discuss is touched upon at page 15 of the typewritten copy of the opinion (91 Pac. 374), and we shall limit ourselves to a further elucidation of the matter there touched upon.

In this connection it is quite true, as counsel contend, that all of the matters that must be set forth in the articles of incorporation, as found in section 315, Rev. St. 1898, as amended by Laws Utah 1905, p. 18, c. 22, are contractual. From this counsel infer that, if it be conceded that the state may alter and amend one provision, it logically follows that it may do so, or authorize such to be done, with respect to all provisions found in the articles; the conclusion being that one provision is no more sacred than another, and, if one must yield to the reserved power, all must do so. The argument is, however, more plausible than sound; and the force of the argument is greatly weakened by the fact that both the text-writers and the courts, including the Supreme Court of the United States, clearly recognize a limitation upon the right of the state to alter and amend the laws affecting existing charters, or to authorize such alterations or amendments by the stockholders without the consent of all that are affected thereby. This is aptly stated in the case of Miller v. State, 15 Wall. 498, 21 L. Ed. 98, and in Looker v. Maynard, 179 U. S. 52, 21 Sup. Ct. 21, 45 L. Ed. 79. It is of the utmost importance in this connection to keep in mind the fact that this limitation is not merely to prevent the confiscation of property, or to affect or destroy vested rights without due process of law (as these matters are controlled by other constitutional provisions), but the limitation is expressly based upon the narrower ground, namely, the impairment of contractual rights and obligations. As the United States Supreme Court is the ultimate authority upon the question as to when such rights are invaded, we need not again refer to the state courts or the books of the text-writers. We thus see at a glance that the broad conclusion that, since one matter that inheres in contract may be altered, therefore all may be, is not tenable. There, of course, must be some reason for this distinction. Mr. Justice STRAUP gave what to us seemed an adequate reason. This, however, is attacked as being liable to misconception, because the line of demarcation is not defined when the alteration of a contractual matter is or is not within the reserved power. By a thorough examination of the authorities and the reasons advanced by the courts we were forced to the conclusion that, while the precise point of demarcation when an amendment of the charter comes within or falls without the reserved right of the state is not well defined by the authorities, this case, nevertheless, is one that clearly falls within the class that is outside of the reserved power.

In the original opinion the statutory provisions governing assessments on fully paid up corporate stock are set forth at large. From those provisions it is obvious that unless the stock is made assessable by the articles, or agreement, as it is sometimes called,

of incorporation, then it is immune against any assessments. In order, therefore, to levy an assessment, the incorporators, or stockholders, must agree upon this matter specially, since to remain silent is to forbid assessIf we now examine section 315, supra, we find that that section defines what the incorporators must agree upon and set forth in the articles of incorporation in order to obtain a grant of a corporate franchise from the state. These matters are grouped under eleven heads in the section and comprise the essentials required to obtain a franchise. But there is also subdivision 12 in that section, by the provisions of which the incorporators are permitted to agree upon and insert in the articles any other matter or matters that they may deem necessary or expedient to further the business or enterprise for which the corporation is formed. But these latter provisions are not essential to the grant, and both the right to the franchise from the state and the grant itself are complete without them. The state, therefore, relegates these matters entirely to the judgment and wishes of the incorporators. They may or may not enter into an agreement respecting them, but as to all other matters contained in section 315 the incorporators must agree, and the state bases its grant upon the latter. From this it is only fair to deduce that the state has no interest in these · special agreements, but permits them to be made a part of the articles of incorporation as a matter affecting the stockholders only. In this special agreement the stockholders, no doubt, may agree among themselves respecting the conditions upon which the stock shall be issued to and held by them, to the extent, at least, that such an agreement is not in contravention of law. May they not also agree that the stock, issued and paid for in full, shall be entirely free from all subsequent assessments and forfeitures, and to that end may they not, by such an agreement, impose limitations upon the corporation itself? What interest has the state in such an agreement, and in what way does it come within its reserved power? If we concede that the right to issue the stock is an incident to the corporate franchise, and hence within both the law and the grant of the state, still it does not follow, after the condition is agreed to and the stock is issued, that the state may change or affect the condition itself, or authorize this to be done. If we assume that the corporation had entered into an agreement with the subscribers or purchasers of its stock, when they subscribed for or purchased the stock, that if they would pay the par value therefor the stock should be and remain free from all assessments or claims against it, and to that end the corporation had inserted a clause in the articles of incorporation exempting fully paidup stock from all assessments, could this agreement be changed, so as to place any ad

ditional burdens upon the stock, without the consent of the subscribers or purchasers?

can be changed with record to all these matters; but it does not follow that it may be done so as to affect past transactions or vested rights.

As we have attempted to show, the stock was issued by the respondent upon an express condition whereby its rights were limited by the incorporators in a matter which the state did not deem essential to the grant of a corporate franchise and upon which the state permitted the stockholders to agree among themselves. We think, therefore, that in such a case the corporation ought not to be permitted to violate the agreement upon the sole ground that the state has reserved the right to alter and amend all laws relating to corporations. The condition in question is purely voluntary on the part of the incorporators, as contradistinguished from all other provisions in the articles which are made necessary and compulsory. The state simply authorized the incorporators or stockholders to enter into any agreement they saw fit with regard to assessments. Having authorized this to be done unconditionally, the state has suspended its right to affect the agreement entered into by virtue of its authority. This conclusion, we think, is well supported by the case of Detroit v. Detroit Citizens' St. Ry. Co., 184 U. S. 368, 22 Sup. Ct. 410, 46 L. Ed. 592, as that case is interpreted by Mr Justice Sanborn in Omaha Water Co. v. City of Omaha, 147 Fed. 11, 77 C. C. A. 267. In the latter case the state authorized a municipal corporation to enter into certain contracts. After the contracts had been entered into, the city attempted to modify some of the provisions, under the claim that the state had authorized this to be done by subsequent legislation, and that, under this legislation, the modifications were proper, in view of the reserved power of the state to amend the laws in relation to cor

No one would contend, we think, that this could be done after the subscription or sale agreement had been entered into and before. the stock was paid for, so as to add anything to the price pereed upon; and this, we think, would be conceded, although both the law and articles of incorporation had been changed and amended after the agreement was entered into and before the stock was paid for. If this could not be done to the prejudice of the subscribers or purchasers, it must be upon the ground that to do so would impair contractual rights and obligations, in that it would impose conditions contracted against in the subscription or purchase agreement. In what way does the contract above instanced differ from one where the incorporators or stockholders agree among themselves (and make the agreement a part of the articles of incorporation) that the stock shall be issued and paid for upon the condition that it shall be and remain free from assessments and forfeiture? Does not the corporation become a party to this agreement by accepting the charter and by acting under it? And does not the state suspend its right to change it without the consent of all, by authorizing such a contract to be entered into as a matter wholly apart from its governmental supervision over corporations? The state has, in effect, announced to the incorporators or stockholders that, so far as the assessment of corporate stock is concerned, that matter is left entirely with them, to agree upon as they may deem best; that it is not a matter in which the state is concerned. If the instance first mentioned constitutes a condition created by contract which may not be affected, why is not the second precisely the same in principle? In the second instance we have no more than a contractual condition upon which the stockholder relied in sub-porations. The court held that, inasmuch as scribing for or purchasing the stock, and which, we think. the state and the corporation are bound to respect. If the stockholders in the original articles had agreed that they might be changed or amended generally, the case would, no doubt, be different, as pointed out in the case of Nelson v. KeithO'Brien Co., 91 Pac. 30, for the reason that the stockholders thereby consented to amendments of the articles constituting the entire agreement under which the stock was issued to them. But this is not such a case. Here we have an express agreement that the stock is issued and received upon the condition that it shall not be subject to assessment, and therefore be immune against a forced sale or forfeiture. Is it an answer to say that, the reserved power of the state being general, therefore it applies to all changes of every kind and nature that may affect the powers, rights and privileges of the corporation and of the stockholders with regard to their relations with one another? The law no doubt

the state had unconditionally authorized the contract, the state could not authorize a modification thereof without the consent of all the interested parties. In what way do the principles involved in that case differ from the one at bar? The state certainly did authorize the stockholders to enter into an agreement among themselves in a matter in which the state disclaimed any governmental interest, by reason of the fact that it relegated the whole matter to the parties themselves, and would have granted them a charter with or without the agreement. The state, therefore, was indifferent in respect to what the agreement was, but authorized any conditions to be made upon which the stock might be issued and held. This being so, and the matter being outside of governmental regulation, why should the state be permitted to interfere or be permitted to authorize this to be done? We think, therefore, that the corporation is bound, and that all the stockholders are likewise bound, to the ex

« ForrigeFortsett »