by the amendment attempted to be made

respect was created, either by the state or debts and obligations of the corporation is

imposed upon the corporators, pertains to by two-thirds of the stockholders. What the the contract existing between them and the Legislature attempted to do was to confer the state, which is within the power of the Legispower upon two-thirds of the stockholders to lature to alter or amend, and the other reamend the articles in any particular (re-lates only to the contract existing among the stricted only so as not to create a personal corporators themselves, which the state may or individual liability of the stockholders nor not materially alter or modify. alter the alleged purposes of the corpora We have not been cited to any cases where tion, nor diminish the capital stock below a the specific question before us was directly certain amount), even to the extent of chang- | involved, except the cases of Enterprise Ditch ing the very contract existing among the Co. v. Moflit, 58 Neb. 612, 79 N. W. 500, 15 stockholders themselves and by which their L. R. A. 617, 76 Am. St. Rep. 122, and Gardreciprocal rights became vested and defined; ner v. Hope Ins. Co., 9 R. I. 194, 11 Am. Rep. and what two-thirds of the stockholders did 239. In the Nebraska case, under a conby way of amendment was the making of stitutional provision reserving to the state such a change. What they did was not an the right to alter from time to time and to alteration or modification of their relation to

repeal all laws relating to corporations, it the state or the doing of something for its was held that "the fully paid-up stock of a benefit, but was an attempt to compel con corporation is the personal property of the tributions of additional capital to the cor owner, and the articles of incorporation and poration for the benefit of the corporation laws of the state are elemental of the conitself, and for mere corporate purposes. tract existing between the corporation and When the Legislature by law declares that the owner of stock, and may not be so corporators of existing corporations shall in

amended by Legislative enactment as to make dividually be liable to creditors for future

the paid-up stock subject to an assessment debts, or their stock shall be liable therefor, or general or specific assessments, and foror their liability sball be proportional to the feitable, or subject to summary sale by the extent of stock held by them, such legislation corporation, for the nonpayment of such asis something which does not affect some mere sessment.” To do so, the court says, “would relation existing among the stockholders involve too violent an invasion of property themselves, but directly affects their relation and contract rights." This case is cited by to the state, and directly relates to the im Mr. Cook in his work on Corporations (5th munity which the state itself had theretofore Ed.), at section 497, where he approvingly granted to the corporators. Such alteration states the rule, announced in that case, that creates a right in favor of creditors which “a statute which authorizes an additional could be enforced by them against the cor assessment upon existing paid-up stock is porators. Of course, with such an altera- | unconstitutional.” In the Rhode Island case tion of the contract, and with such inceased the court seems to hold a contrary doctrine, burdens imposed upon the corporators, they though in that case it is not made to appear would not be compelled to continue the cor that the full-paid capital stock was made nonporate existence, but they would have the

assessable by the original articles of' incorright to dissolve the corporation and to have poration, and in that respect the case may be its assets distributed. Whether a majority distinguishable from the Nebraska case and of the stockholders could accept such an the case at bar. But, conceding that the holdamendment or alteration, though it relates ing of the Rhode Island court is contrary to alone to the contract existing between the that of the Nebraska court, we think the latstockholders and the state, so as to bind a ter is more in the line with the general prindissenting minority, we need not here con ciples of law as stated by the text-writers. sider. The authorities generally are to the In the discussion of the question it has effect that a majority of the stockholders are been said by counsel that the rule announced not authorized to accept a fundamental by the Nebraska court deprives the majority amendment of a charter and proceed, but un of the management of the corporate property animous consent of the stockholders is neces and of the control of mere administrative sary. They somewhat differ as to what | policies, and prevents the Legislature from amendments are regarded as fundamental, making needful legislation with respect thereand what merely governmental and adminis to. We do not think so. The doctrine antrative. But authorizing the levying of as nounced is no infringement of the exercise sessments to obtain involuntary contributions of such powers. Independently of the reservof additional capital merely for corporate ed power and of the legislative enactment, a benefit and purposes is something which only majority of a corporation may determine the affects the relation of the stockholders among management of the corporate property, adthemselves, and alone affects their agreement minister the affairs of the corporation, and with respect to contributions of capital to the control the conduct of its business. The corporation. Such an amendment, therefore, amendment was not essential to the proper stands upon a different footing. The one, exercise of such powers. When counsel for where a statutory liability for the future respondent in effect concede, as they do, that

the action taken by the majority was un bers, are forced to part with all their holdauthorized, but for the legislative enactment ings and equities. The argument points to of 1903, they in effect concede that the action inatters of mere utility, not to the rights of taken by such stockholders was something the stockholders. Whether an execution sale more than the exercise of mere administra of the corporate property in satisfaction of tive functions; and it is quite clear that the corporate debts may or may not produced action so taken was not administrative. It more serious result than enforcing contribuwas not confined to the management of the tions from the corporate members is beside corporation, or of its property, or to the the question. Every stockholder has a vestadministration of its affairs; but it extend ed equity in and to the assets of the corporaed to the management of the private affairs tion. The value of his equity is dependent and property of the corporators. It amount upon the value of corporate assets and the ed to a compulsion of contributions for cor extent of corporate liabilities. Dependent upporate purposes, and to au invasion of the on such facts, the value of his equity may be agreement which the stockholders had made much or little. But, whatever it may be, his among themselves that no further or addi right to participate in the distribution of the tional contribution should be exacted beyond assets, when the corporate property has been the full-paid capital stock, and a fundamental sold ou execution, is not disturbed, nor is he change of their contract in that respect. The compelled to personally contribute to the payamount of capital which the corporators ment of the corporate debts. So, if a corwere willing and had agreed to contribute poration becomes insolvent, it may go into and risk in the enterprise was fundamentally liquidation; but the individual members and as important under their contract as was stockholders are not bound to pay such inthe stipulation with reference to the nature debtedness, except out of the assets. In such of the business to be carried on by the cor case a new corporation may be formed, by poration. It cannot be said that changing contribution of new capital, for the purpose the nature of the corporation or the char of taking over the assets of the insolvent coracter of its business is fundamental and can poration and paying its debts. But it would not be accomplished without the consent of be entirely optional with each member of all the stockholders; but another and equally the insolvent corporation whether he entered important stipulation in the articles of in such new corporation. It can at once be corporation relating to the contributions of seen that he cannot be compelled to do so capital for corporate purposes to be exacted against his will. Now, the members of the from the corporate members is nonessential insolvent corporation could in effect accomand nonfundamental. It must be conceded plish the same result as could be accomplishthat the full-paid capital stock became the ed by the formation of a new corporation and private property of the stockholder.

the contribution of new capital, by making tween himself, the corporation, and his co voluntary contributions of new capital to the corporators, he paid the full consideration insolvent corporation. But the dissenting cortherefor, and paid all that was agreed by porators cannot, contrary to the agreement him to be paid. To now say that the Legis as here made by them, be forced to make lature, in face of such an agreement as was such contributions against their will, any here made by the corporators, may authorize more than they can be forced against their a majority to compel a dissenting minority to will into a new corporation. When, therebuy it over again, not only once, but as many fore, a majority seek to compel additional times as they may, in good faith, determine, contributions to a corporation for corporate by the enforcement of additional contribu purposes from a dissenting minority, when tions of capital for mere corporate purposes, by the terms of their original agreement such and to make a sale of their stock, resulting in contributions cannot be exacted, they in effect a forfeiture of all their rights and equities seek to force them into a new corporation. in and to the assets of the corporation, if th: This neither the Legislature nor a majority unwilling members do not see fit to yield to are authorized to do. such compulsion, is conferring a power which It may be true, as was suggested by coungives to the majority the absolute dominion sel, that in many instances it may be wise over the private property of the stockhold and expedient for corporators to make aders, permits a disturbance of rested rights, ditional contributions of capital to discbarge and the impairment of contract obligations, corporate indebtedness, so as to preserve the within the protection of the federal Constitu corporate property, or to make such contribution.

tions for the successful conduct of the busiA further argument is made by counsel

But that is something which the corthat if a corporation becomes indebted when porators should consider when they make it has no funds in its treasury to discharge their contracts. Courts are organized to enthe indebtedness, and if the levy of an assess force contracts as made, unless they contrament such as was here attempted is not per vene good morals or public policy. They canmissible, the whole of the corporate property not create new contracts, nor can they permit may be sold on execution sale, and that by the parties themselves to do so without the reason of such involuntary alienation the un consent of all, upon any theory that the willing members, as well as all other mem original contract was not the most beneficial

or advantageous, or that the enterprise con of counsel, their argument in support of the templated by the terms of the contract can petition for a rehearing is a learned and able not be successfully operated under it. By exposition of that side of the question. We their solemn agreement the parties have here are not persuaded, however, that their condefined and limited their contributions of clusions are sound. It is urged that we are capital to the corporatiou for corporate pur inconsistent in holding that under the resposes. Such a fundamental and material ervation the state may alter or amend some stipulation in their contract cannot be chang of the provisions of a charter, but may not do ed by the Legislature, nor can it confer power so as to others. In our original opinion we upon a majority of the stockholders to do so endeavored to make clear that the charter without violating the federal Constitution. forms the basis of a contract between the No one contends that the individual members state and the corporation, as well as a conof a corporation are liable for, nor are they tract between the corporation and the stocklegally bound to assume or pay, the debts or holders. We held that the Legislature, ulobligations of the corporation. Until the Leg der the reservation, may alter or anend the islature shall by law declare that such a lia contract with reference to the state and in bility is imposed, which it has not yet done, which it is interested, but that it may not it does not lie within the power of a majority make a material or fundamental change of to reach into the private pockets of a dis the contract which alone concerns the corposenting minority to compel such payments, ration and its members. Upon these premand then seek to justify such action because ises we reached the conclusion that the ata greater calamity may overtake them as a tempted legislation, and the action taken by result of an execution sale.

the majority of the stockholders in pursuance The questions as to whether, under the thereof, did not fall within the reservation. enactment of 1903, two-thirds of the stock In so holding we see no inconsistency. What holders, or a majority, under the enactment counsel in effect do is not pointing out any of 1905, are legally empowered to authorize inconsistency, but is disputing the preinises a levy of assessments on full-paid capital upon which we reached the conclusion; that stock against a dissenting minority when the is, counsel still assert that the reservation in original articles place no prohibition on the the Constitution is so broad and illimitable levying of assessments, or contain no stipula that all the provisions of a charter may be tion on the subject, or the extent that such altered or amended by the Legislature, restockholders of corporations organized since gardless of their character, and whether they the enactments are legally authorized to concern the state or merely the agreement beamend the articles so as to make such stock tween the corporation and its members. assessable, are not now before us. Confined Among the many cases cited, and many othto the question which is before us, we think ers examined by us, we do not find any of the demurrer ought to have been overruled. them giving the reservation such a construc

The judgment of the court below is there tion. If any one thing pertinent to the ques. fore reversed, and the trial court directed to

tion under consideration is well settled by reinstate the case, to overrule the demurrer, the authorities, it is that the power which to permit the defendant to answer, if ii is so may be exercised under the reservation is advised, and, pending the action, to restrain not without limit, and that there is a strong the defendant as prayed in the complaint. tendency in the decisions to limit the lower Costs to appellant.

of the Legislature to amend the charter un

der the reservation. We fully appreciate the MCCARTY, C. J., and FRICK, J., concur. difficulty in defining the extent of such powOn Rehearing.

er, and, while we are well aware of the con

flict among the authorities in so doing, yet FRICK, J. A rehearing is requested in none of them support the contention of counthis case upon substantially the following sel that the extent of the power is unlimited, grounds: It is urged that the court erred in in the sense and to the degree contended for its interpretation of the constitutional provi by them. We think the rule stated hy us is sion in which the right to alter. amend, and

supported by the great weight of authority repeal the laws affecting corporations is re and is founded upon well-established legal served by the state; that the decision is in principles. consistent, in that it in effect authorizes a l'ecause of counsel's deductions, we are, change of the laws with respect to some of however, induced to enlarge somewhat upthe contractual rights of a corporation, while on what is said in the original opinion. it denies this right as to others; that the We do this, not because the matter was not court erred in holding that the right to al (overed in the original opinion, but because ter and amend the laws is limit:'li to such it was not deemed necessary to fully dismatters only in wil Jie state is interested; cuss all the reasons that impelled us to the aund, tina!li. that tii court erred in Holding conclusion reached. The matter we shall that neither the state nor the public were discuss is touched upon at page 15 of the interested in the amenduent involved in typewritten coliy of the opinion (91 Pac. 371), this case.

and we shall limit ourselves to a further Viewing the questiou from the standpoint elucidation of the matter there touched upon.

In this connection it is quite true, as counsel of incorporation, then it is immune against contend, that all of the matters that must be any assessments. In order, therefore, to levy set forth in the articles of incorporation, as an assessment, the incorporators, or stockfound in section 315, Rev. St. 1898, as amend holders, must agree upon this matter specialcd by Laws Utah 1905, p. 18, c. 22, are con ly, since to remain silent is to forbid assesstractual. From this counsel infer that, if it ments. If we now examine section 315, sube conceded that the state may alter and pra, we find that that section defines what amend one provision, it logically follows that the incorporators must agree upon and set it may do so, or authorize such to be done,

forth in the articles of incorporation in orwith respect to all provisions found in the

der to obtain a grant of a corporate franchise articles; the conclusion being that one provi from the state. These matters are grouped sion is no more sacred than another, and, if under eleven heads in the section and comone must yield to the reserved power, all

prise the essentials required to obtain a franmust do so. The argument is, however, more

chise. But there is also subdivision 12 il plausible than sound; and the force of the

that section, by the provisions of which the argument is greatly weakened by the fact

incorporators are permitted to agree upon that both the text-writers and the courts, in

and insert in the articles any other matter cluding the Supreme Court of the United

or matters that they may deem necessary or States, clearly recognize a limitation upon

expedient to further the business or enterthe right of the state to alter and amend the

prise for which the corporation is formed. laws affecting existing charters, or to author

But these latter provisions are not essential ize such alterations or amendments by the

to the grant, and both the right to the franstockholders without the consent of all that

chise from the state and the grant itself are are affected thereby. This is aptly stated in

complete without them. The state, therefore, the case of Miller v. State, 15 Wall. 498, 21

relegates these matters entirely to the judgL. Ed. 98, and in Looker v. Maynard, 179 U. S. 52, 21 Sup. Ct. 21, 45 L. Ed. 79. It is of

ment and wishes of the incorporators. They

may or may not enter into an agreement rethe utmost importance in this connection to

specting them, but as to all other matters keep in mind the fact that this limitation is

contained in section 315 the incorporators not merely to prevent the confiscation of prop

must agree, and the state bases its grant uperty, or to affect or destroy vested rights

on the latter. without due process of law (as these matters

From this it is only fair to are controlled by other constitutional provi

deduce that the state has no interest in these sions), but the limitation is expressly based

special agreements, but permits them to be upon the narrower ground, namely, the im

made a part of the articles of incorporation pairment of contractual rights and obliga

as a matter affecting the stockholders only. tions. As the United States Supreme Court

In this special agreement the stockholders, is the ultimate authority upon the question

no doubt, may agree among themselves reas to when such rights are invaded, we

specting the conditions upon which the stock need not again refer to the state courts or

shall be issued to and held by them, to the the books of the text-writers. We thus see

extent, at least, that such an agreement is at a glance that the broad conclusion that,

not in contravention of law. May they not since one matter that inheres in contract also agree that the stock, issued and paid may be altered, therefore all may be, is not

for in full, shall be entirely free from all tenable. There, of course, must be some

subsequent assessments and forfeitures, and reason for this distinction. Mr. Justice to that end may they not, by such an agreeSTRAUP gave what to us seemed an ad

ment, impose limitations upon the corporaequate reason. This, however, is attacked as

tion itself? What interest has the state in being liable to misconception, because the such an agreement, and in what way does it line of demarcation is not defined when the come within its reserved power? If we conalteration of a contractual matter is or is

cede that the right to issue the stock is an not within the reserved power. By a thor incident to the corporate franchise, and hence ough examination of the authorities and the within both the law and the grant of the reasons advanced by the courts we were state, still it does not follow, after the conforced to the conclusion that, while the pre dition is agreed to and the stock is issued, cise point of demarcation when an amend that the state may change or affect the conment of the charter comes within or falls dition itself, or authorize this to be done. If without the reserved right of the state is we assume that the corporation had entered not well defined by the authorities, this case, into an agreement with the subscribers or lievertheless, is one that clearly falls within purchasers of its stock, when they subscribe! the class that is outside of the reserved for or purchased the stock, that if they power.

would pay the par value therefor the stock In the original opinion the statutory pro

should be and remain free from all assessvisions governing assessments on fully paid ments or claims against it, and to that end up corporate stock are set forth at large. the corporation had inserted a clause in the From those provisions it is obvious that un articles of incorporation exempting fully paidless the stock is made assessable hs the ar up stock from all assessments, could this ticles, or agreement, as it is sometimes called, agreement be changed, so as to place any ad

[ocr errors]

ditional burdens upon the stock, without the can be changed with soword to all these matconsent of the subscriber's or purchasers? ters; but it does not follow that it may be

No one would contend, we think, that this done so as to affect past transactions or vestcould be done after the subscription or sale ed rights. agreement had been entered into and before As we have attempted to show, the stock the stock was paid for, so as to add anything was issued by the respondent upon an exto the price gereed upon; and this, we think, press condition whereby its rights were limwould be concedeu, although both the law ited by the incorporators in a matter which and articles of incorporation had been chang the state did not deem essential to the grant ed and amended after the agreement was en of a corporate franchise and upon which the tered into and before the stock was paid for. state permitted the stockholders to agree If this could not be done to the prejudice of among themselves. We think, therefore, that the subscribers or purchasers, it must be up in such a case the corporation ought not on the ground that to do so would impair to be permitted to violate the agreement upon contractual rights and obligations, in that it the sole ground that the state has reserved would impose conditions contracted against the right to alter and amend all laws relatin the subscription or purchase agreement. ing to corporations. The condition in quesIn what way does the contract above instanc tion is purely voluntary on the part of the ed differ from one where the incorporators or incorporators, as contradistinguished from stockholders agree among themselves (and all other provisions in the articles which are make the agreement a part of the articles of made necessary and compulsory. The state incorporation) that the stock shall be issued simply authorized the incorporators or stockand paid for upon the condition that it shall holders to enter into any agreement they be and remain free from assessments and saw fit with regard to assessments. Having forfeiture? Does not the corporation become authorized this to be done unconditionally, a party to this agreement by accepting the the state has suspended its right to affect the charter and by acting under it? And does

agreement entered into by virtue of its aunot the state suspend its right to change it thority. This conclusion, we think, is well without the consent of all, by authorizing supported by the case of Detroit v. Detroit such a contract to be entered into as a mat Citizens' St. Ry. Co., 184 U. S. 368, 22 Sup. ter wholly apart from its governmental su Ct. 410, 46 L. Ed. 592, as that case is inpervision over corporations? The state has, terpreted by Mr Justice Sanborn in Omaha in effect, announced to the incorporators or Water Co. v. City of Omaha, 147 Fed. 11, stockholders that, so far as the assessment 77 C. C. A. 267. In the latter case the state of corporate stock is concerned, that matter authorized a municipal corporation to enter is left entirely with them, to agree upon as into certain contracts. After the contracts they may deem best; that it is not a matter had been entered into, the city attempted to in which the state is concerned. If the in modify some of the provisions, under the stance first mentioned constitutes a condi claim that the state had authorized this to be tion created by contract which may not be done by subsequent legislation, and that, affected, why is not the second precisely the under this legislation, the modifications were same in principle? In the second instance proper, in view of the reserved power of the we have no more than a contractual condi state to amend the laws in relation to cortion upon which the stockholder relied in sub

porations. The court held that, inasmuch as scribing for or purchasing the stock, and the state had unconditionally authorized the which, we think, the state and the corpora contract, the state could not authorize a tion are bound to respect. If the stockhold modification thereof without the consent of ers in the original articles had agreed that all the interested parties. In what way do they might be changed or amended general the principles involved in that case differ ly, the case would, no doubt, be different, as from the one at bar? The state certainly pointed out in the case of Nelson v. Keith did authorize the stockholders to enter into O'Brien Co., 91 Pac. 30, for the reason that an agreement among themselves in a matter the stockholders thereby consented to amend in which the state disclaimed any governments of the articles constituting the entire mental interest, by reason of the fact that it agreement under which the stock was issued relegated the whole matter to the parties to them. But this is not such a case. IIere themselves, and would have granted them a we have an express agreement that the stock charter with or without the agreement. The is issued and received upon the condition state, therefore, was indifferent in respect to that it shall not be subject to assessment, and what the agreement was, but authorized any therefore be immune against a forced sale conditions to be made upon which the stock or forfeiture. Is it an answer to say that might be issued and held. This being so, and the reserved power of the state being general, the matter being outside of governmental therefore it applies to all changes of every regulation, why should the state be permitted kind and nature that may affect the powers, to interfere or be permitted to authorize rights and privileges of the corporation and this to be done? We think, therefore, that of the stockholders with regard to their re the corporation is bound, and that all the lations with one another? The ia w no doubt

The ia w no doubt | stockholders are likewise bound, to the ex

« ForrigeFortsett »