Annotation 55 - Article I

 

  Corporate Charters: Different Ways of Regarding .--There are three ways in which the charter of a corporation may be regarded. In the first place, it may be thought of simply as a license terminable at will by the State, like a liquor-seller's license or an auctioneer's license, but affording the incorporators, so long as it remains in force, the privileges and advantages of doing business in the form of a corporation. Nowadays, indeed, when corporate charters are usually issued to all legally qualified applicants by an administrative officer who acts under a general statute, this would probably seem to be the natural way of regarding them were it not for the Dartmouth College decision. But, in 1819, charters were granted directly by the state legislatures in the form of special acts and there were very few profit- taking corporations in the country. The later extension of the benefits of the Dartmouth College decision to corporations organized under general law took place without discussion.

Secondly, a corporate charter may be regarded as a franchise constituting a vested or property interest in the hands of the holders, and therefore as forfeitable only for abuse or in accordance with its own terms. This is the way in which some of the early state courts did regard them at the outset. 1899 It is also the way in which Blackstone regarded them in relation to the royal prerogative, although not in relation to the sovereignty of Parliament, and the same point of view found expression in Story's concurring opinion in Dartmouth College v. Woodward, as it did also in Webster's argument in that case. 1900  

The third view is the one formulated by Chief Justice Marshall in his controlling opinion in Dartmouth College v. Woodward. 1901 This is that the charter of Dartmouth College, a purely private institution, was the outcome and partial record of a contract between the donors of the college, on the one hand, and the British Crown, on the other, and the contract still continued in force between the State of New Hampshire, as the successor to the Crown and Government of Great Britain, and the trustees, as successors to the donors. The charter, in other words, was not simply a grant--rather it was the documentary record of a still existent agreement between still existent parties. 1902 Taking this view, which he developed with great ingenuity and persuasiveness, Marshall was able to appeal to the obligation of contracts clause directly, and without further use of his fiction in Fletcher v. Peck of an executory contract accompanying the grant.

A difficulty still remained, however, in the requirement that a contract, before it can have obligation, must import consideration, that is to say, must be shown not to have been entirely gratuitous on either side. Moreover, the consideration, which induced the Crown to grant a charter to Dartmouth College, was not merely a speculative one. It consisted of the donations of the donors to the important public interest of education. Fortunately or unfortunately, in dealing with this phase of the case, Marshall used more sweeping terms than were needed. ''The objects for which a corporation is created,'' he wrote, ''are universally such as the government wishes to promote. They are deemed beneficial to the country; and this benefit constitutes the consideration, and in most cases, the sole consideration of the grant.'' In other words, the simple fact of the charter having been granted imports consideration from the point of view of the State. 1903 With this doctrine before it, the Court in Providence Bank v. Billings, 1904 and again in Charles River Bridge v. Warren Bridge, 1905 admitted, without discussion of the point, the applicability of the Dartmouth College decision to purely business concerns.

  Reservation of Right to Alter or Repeal Corporate Charters .--It is next in order to consider four principles or doctrines whereby the Court has itself broken down the force of the Dartmouth College decision in great measure in favor of state legislative power. By the logic of the Dartmouth College decision itself, the State may reserve in a corporate charter the right to ''amend, alter, and repeal'' the same, and such reservation becomes a part of the contract between the State and the incorporators, the obligation of which is accordingly not impaired by the exercise of the right. 1906 Later decisions recognize that the State may reserve the right to amend, alter, and repeal by general law, with the result of incorporating the reservation in all charters of subsequent date. 1907 There is, however, a difference between a reservation by a statute and one by constitutional provision. While the former may be repealed as to a subsequent charter by the specific terms thereof, the latter may not. 1908  

Is the right reserved by a State to ''amend'' or ''alter'' a charter without restriction? When it is accompanied, as it generally is, by the right to ''repeal,'' one would suppose that the answer to this question was self-evident. Nonetheless, there are a number of judicial dicta to the effect that this power is not without limit, that it must be exercised reasonably and in good faith, and that the alterations made must be consistent with the scope and object of the grant. 1909 Such utterances amount, apparently, to little more than an anchor to windward, for while some of the state courts have applied tests of this nature to the disallowance of legislation, it does not appear that the Supreme Court of the United States has ever done so. 1910  

Quite different is it with the distinction pointed out in the cases between the franchises and privileges that a corporation derives from its charter and the rights of property and contract that accrue to it in the course of its existence. Even the outright repeal of the former does not wipe out the latter or cause them to escheat to the State. The primary heirs of the defunct organization are its creditors, but whatever of value remains after their valid claims are met goes to the former shareholders. 1911 By the earlier weight of authority, on the other hand, persons who contract with companies whose charters are subject to legislative amendment or repeal do so at their own risk; any ''such contracts made between individuals and the corporation do not vary or in any manner change or modify the relation between the State and the corporation in respect to the right of the State to alter, modify, or amend such a charter. . . .'' 1912 But later holdings becloud this rule. 1913  

  Corporation Subject to the Law and Police Power .--But suppose the State neglects to reserve the right to amend, alter, or repeal--is it, then, without power to control its corporate creatures? By no means. Private corporations, like other private persons, are always presumed to be subject to the legislative power of the State, from which it follows that immunities conferred by charter are to be treated as exceptions to an otherwise controlling rule. This principle was recognized by Chief Justice Marshall in the case of Providence Bank v. Billings, 1914 in which he held that in the absence of express stipulation or reasonable implication to the contrary in its charter, the bank was subject to the taxing power of the State, notwithstanding that the power to tax is the power to destroy.

And of course the same principle is equally applicable to the exercise by the State of its police powers. Thus, in what was per haps the leading case before the Civil War, the Supreme Court of Vermont held that the legislature of that State had the right, in furtherance of the public safety, to require chartered companies operating railways to fence in their tracks and provide cattle guards. In a matter of this nature, said the court, corporations are on a level with individuals engaged in the same business, unless, from their charter, they can prove the contrary. 1915 Since then the rule has been applied many times in justification of state regulation of railroads, 1916 and even of the application of a state prohibition law to a company that had been chartered expressly to manufacture beer. 1917  

  Strict Construction of Charters, Tax Exemptions .--Long, however, before the cases last cited were decided, the principle that they illustrate had come to be powerfully reinforced by two others, the first of which is that all charter privileges and immunities are to be strictly construed as against the claims of the State, or as it is otherwise often phrased, ''nothing passes by implication in a public grant.''

The leading case was that of the Charles River Bridge v. Warren Bridge, 1918 which was decided shortly after Chief Justice Marshall's death by a substantially new Court. The question at issue was whether the charter of the complaining company, which authorized it to operate a toll bridge, stood in the way of the State's permitting another company of later date to operate a free bridge in the immediate vicinity. Inasmuch as the first company could point to no clause in its charter specifically vested it with an exclusive right, the Court held the charter of the second company to be valid on the principle just stated. Justice Story, presented a vigorous dissent, in which he argued cogently, but unavailingly, that the monopoly claimed by the Charles River Bridge Company was fully as reasonable an implication from the terms of its charter and the circumstances surrounding its concession as perpetuity had been from the terms of the Dartmouth College charter and the ensuing transaction.

The Court was in fact making new law, because it was looking at things from a new point of view. This was the period when judicial recognition of the Police Power began to take on a doctrinal character. It was also the period when the railroad business was just beginning. Chief Justice Taney's opinion evinces the influence of both these developments. The power of the State to provide for its own internal happiness and prosperity was not, he asserted, to be pared away by mere legal intendments, nor was its ability to avail itself of the lights of modern science to be frustrated by obsolete interests such as those of the old turnpike companies, the charter privileges of which, he apprehended, might easily become a bar to the development of transportation along new lines. 1919  

The rule of strict construction has been reiterated by the Court many times. In the Court's opinion in Blair v. City of Chicago, 1920 decided nearly seventy years after the Charles River Bridge case, it said: ''Legislative grants of this character should be in such unequivocal form of expression that the legislative mind may be distinctly impressed with their character and import, in order that the privilege may be intelligently granted or purposely withheld. It is a matter of common knowledge that grants of this character are usually prepared by those interested in them, and submitted to the legislature with a view to obtain from such bodies the most liberal grant of privileges which they are willing to give. This is one among many reasons why they are to be strictly construed. . . . The principle is this, that all rights which are asserted against the State must be clearly defined, and not raised by inference or presumption; and if the charter is silent about a power, it does not exist. If, on a fair reading of the instrument, reasonable doubts arise as to the proper interpretation to be given to it, those doubts are to be solved in favor of the State; and where it is susceptible of two meanings, the one restricting and the other extending the powers of the corporation, that construction is to be adopted which works the least harm to the State.''' 1921  

An excellent illustration of the operation of the rule in relation to tax exemptions was furnished by the derivative doctrine that an immunity of this character must be deemed as intended solely for the benefit of the corporation receiving it and hence, in the absence of express permission by the State, may not be passed on to a successor. 1922 Thus, where two companies, each exempt from taxation, were permitted by the legislature to consolidate, the new corporation was held to be subject to taxation. 1923 Again, a statute which granted a corporation all ''the rights and privileges'' of an earlier corporation was held not to confer the latter's ''immunity'' from taxation. 1924 Yet again, a legislative authorization of the transfer by one corporation to another of the former's ''estate, property, right, privileges, and franchises'' was held not to clothe the later company with the earlier one's exemption from taxation. 1925  

Furthermore, an exemption from taxation is to be strictly construed even in the hands of one clearly entitled to it. So the exemption conferred by its charter on a railway company was held not to extend to branch roads constructed by it under a later statute. 1926 Also, a general exemption of the property of a corporation from taxation was held to refer only to the property actually employed in its business. 1927 Also, the charter exemption of the capital stock of a railroad from taxation ''for ten years after completion of the said road'' was held not to become operative until the completion of the road. 1928 So also the exemption of the campus and endowment fund of a college was held to leave other lands of the college, though a part of its endowment, subject to taxation. 1929 Provisions in a statute that bonds of the State and its political subdivisions were not to be taxed and should not be taxed were held not to exempt interest on them from taxation as income of the owners. 1930  

Footnotes

[Footnote 1899] In 1806 Chief Justice Parsons of the Supreme Judicial Court of Massachusetts, without mentioning the contracts clause, declared that rights legally vested in a corporation cannot be ''controlled of destroyed by a subsequent statute, unless a power [for that purpose] be reserved to the legislature in the act of incorporation,'' Wales v. Stetson, 2 Mass. 142 (1806). See also Stoughton v. Baker, 4 Mass. 521 (1808) to like effect; cf. Locke v. Dane, 9 Mass. 360 (1812) in which it is said that the purpose of the contracts clause was to provide against paper money and insolvent laws. Together these holdings add up to the conclusion that the reliance of the Massachusetts court was on ''fundamental principles,'' rather than the contracts clause.

[Footnote 1900] 4 Wheat. (17 U.S.), 577-595 (Webster's argument); id., 666 (Story's opinion). See also Story's opinion for the Court in Terrett v. Taylor, 13 U.S. (9 Cr.) 43 (1815).

[Footnote 1901]   17 U.S. (4 Wheat.) 518 (1819).

[Footnote 1902] Id., 627.

[Footnote 1903] Id., 637; see also Home of the Friendless v. Rouse, 75 U.S. (8 Wall.) 430, 437 (1869).

[Footnote 1904]   29 U.S. (4 Pet.) 514 (1830).

[Footnote 1905]   36 U.S. (11 Pet.) 420 (1837).

[Footnote 1906] Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 712 (1819) (Justice Story).

[Footnote 1907] Home of the Friendless v. Rouse, 75 U.S. (8 Wall.) 430, 438 (1869); Pennsylvania College Cases, 80 U.S. (13 Wall.) 190, 213 (1872); Miller v. New York, 82 U.S. (15 Wall.) 478 (1873); Murray v. Charleston, 96 U.S. 432 (1878); Greenwood v. Freight Co., 105 U.S. 13 (1882); Chesapeake & Ohio Railway Co. v. Miller, 114 U.S. 176 (1885); Louisville Water Company v. Clark, 143 U.S. 1 (1892).

[Footnote 1908] New Jersey v. Yard, 95 U.S. 104, 111 (1877).

[Footnote 1909] See Holyoke Company v. Lyman, 82 U.S. (15 Wall.) 500, 520 (1873), See also Shields v. Ohio, 95 U.S. 319 (1877); Fair Haven R.R. v. New Haven, 203 U.S. 379 (1906); Berea College v. Kentucky, 211 U.S. 45 (1908). Also Lothrop v. Stedman, 15 Fed. Cas. 922 (No. 8519) (C.C.D. Conn. 1875) where the principles of natural justice are thought to set a limit to the power.

[Footnote 1910] See in this connection the cases cited by Justice Sutherland in his opinion for the Court in Phillips Petroleum Co. v. Jenkins, 297 U.S. 629 (1936).

[Footnote 1911] Curran v. Arkansas, 56 U.S. (15 How.) 304 (1853); Shields v. Ohio, 95 U.S. 319 (1877); Greenwood v. Freight Co., 105 U.S. 13 (1882); Adirondack Railway Co. v. New York, 176 U.S. 335 (1900); Stearns v. Minnesota, 179 U.S. 223 (1900); Chicago, M. & St. P. R. v. Wisconsin, 238 U.S. 491 (1915); Coombes v. Getz, 285 U.S. 434 (1932).

[Footnote 1912] Pennsylvania College Cases, 80 U.S. (13 Wall.) 190, 218 (1872). See also Calder v. Michigan, 218 U.S. 591 (1910).

[Footnote 1913] Lake Shore & Michigan Southern Railway Co. v. Smith, 173 U.S. 684, 690 (1899); Coombes v. Getz, 285 U.S. 434 (1932). Both these decisions cite Greenwood v. Freight Co., 105 U.S. 13, 17 (1882), but without apparent justification.

[Footnote 1914]   29 U.S. (4 Pet.) 514 (1830).

[Footnote 1915] Thorpe v. Rutland & Burlington R. Company, 27 Vt. 140 (1854).

[Footnote 1916] Thus a railroad may be required, at its own expense and irrespective of benefits to itself, to eliminate grade crossings in the interest of the public safety, New York & N.E. Railroad v. Bristol, 151 U.S. 556 (1894), to make highway crossings reasonably safe and convenient for public use, Great Northern Ry. Co. v. Minnesota ex rel. Clara City, 246 U.S. 434 (1918), to repair viaducts, Northern Pacific Railway v. Duluth, 208 U.S. 583 (1908), and to fence its right of way, Minneapolis & St. L. Ry. v. Emmons, 149 U.S. 364 (1893). Though a railroad company owns the right of way along a street, the city may require it to lay tracks to conform to the established grade; to fill in tracks at street intersections; and to remove tracks from a busy street intersection, when the attendant disadvantage and expense are small and the safety of the public appreciably enhanced Denver & R.G.R. Co. v. Denver, 250 U.S. 241 (1919).

[Footnote 1918]   36 U.S. (11 Pet.) 420 (1837).

[Footnote 1919] Id., 548-553.

[Footnote 1920]   201 U.S. 400 (1906).

[Footnote 1921] Id., 471-472, citing The Binghamton Bridge, 70 U.S. (3 Wall.) 51, 75 (1866).

[Footnote 1922] Memphis & L. R. Co. v. Commissioners, 112 U.S. 609, 617 (1884). See also Morgan v. Louisiana, 93 U.S. 217 (1876); Wilson v. Gaines, 103 U.S. 417 (1881); Louisville & Nashville R.R. Co. v. Palmes, 109 U.S. 244, 251 (1883); Norfolk & Western Railroad v. Pendleton, 156 U.S. 667, 673 (1895); Pickard v. East Tennessee, V. & G.R. Co., 130 U.S. 637, 641 (1889).

[Footnote 1923] Atlantic & Gulf R. Co. v. Georgia, 98 U.S. 359, 365 (1879).

[Footnote 1924] Phoenix F. & M. Ins. Co. v. Tennessee, 161 U.S. 174 (1896).

[Footnote 1925] Rochester Railway Co. v. Rochester, 205 U.S. 236 (1907); followed in Wright v. Georgia R.R. & Banking Co., 216 U.S. 420 (1910); Rapid Transit Corp. v. New York, 303 U.S. 573 (1938). Cf. Tennessee v. Whitworth, 117 U.S. 139 (1886), the authority of which is respected in the preceding case.

[Footnote 1926] Chicago, B. & K.C. R. v. Guffey, 120 U.S. 569 (1887).

[Footnote 1927] Ford v. Delta and Pine Land Company, 164 U.S. 662 (1897).

[Footnote 1928] Vicksburg, S. & P. R. Co. v. Dennis, 116 U.S. 665 (1886).

[Footnote 1929] Millsaps College v. City of Jackson, 275 U.S. 129 (1927).

[Footnote 1930] Hale v. State Board, 302 U.S. 95 (1937).


 

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